Principle of Non-Discrimination

Non-discrimination is a fundamental principle of the World Trade Organization (WTO) and

is embodied in the:
 Most Favoured Nation Treatment; and,
 National Treatment.
We can see different multilateral rules and principles which were set up in 1947 to govern
International trade relating to goods between member nations of GATT, 1947. After the great
development in the Uruguay Round which leads the Marrakesh Agreement and established
the World Trade Organisation on 1 January 1995, the basic principle of non-discrimination
principle formed in 1947 is consistently same to the latest organisation between member
nations. The only things which are amended in these principles were the scope otherwise the
objective of these principles is the same as of framed in 1947.
Article I and Article III of the GATT 1994, deals with Most Favoured Nation Principle and
National Treatment Principle respectively. With further development in the scope of these
principles, now these principles not only deal with the trade in goods practices rather now
they also govern the trade in services and trade in IPR.

Most Favoured Nation

 Scope of the Principle under GATT

The MFN treatment principle is enshrined in Article I of the GATT, which also strives to
forbid discrimination between comparable products with different origins or destinations.
According to the MFN principle, WTO members must accord like products of other WTO
members preferential treatment with regard to tariffs, export and import regulations, internal
taxes and fees on imported goods, and internal rules.
To fully comprehend the breadth of the principle, Article 1:1 of the GATT can be separated
into the following segments:
"With respect to customs duties and charges of any kind imposed on or in connection with
importation or exportation or imposed on the international transfer of payments for imports or
exports,
 and with respect to the method of levying such duties and charges,
 and with respect to all rules and formalities in connection with importation and
exportation,
 and with respect to all matters referred to in paragraphs 2 and 4 of Article III,
  any advantage, favor, privilege or immunity granted by any member
 to any product originating in or destined for any other country
 shall be accorded immediately and unconditionally
 to the like product originating in or destined for the territories of all other members."
The following criteria must be taken into account to prove that a Member has violated the
MFN principle, according to a comprehensive reading of the aforementioned article:

I. Like Products
The requirement for MFN treatment only applies to similar products. A benefit provided to a
product coming from or going to another nation must be extended to similar items coming
from or going to the territory of all other WTO Members. The term "like product has been
subject to various and conflicting interpretations, and the GATT Panels have not used a
consistent set of standards to determine what qualifies as a "similar product.".
Cases
In Spain-Unroasted Coffee, the Panel had to decide whether several varieties of unroasted
coffee qualified as "like" under GATT Article 1:1. When determining the matter, the Panel
used the attributes of the items, their intended use, and the tariff policies of other Members as
criteria. The Panel found that the four coffee bean varieties were similar products because
they were frequently sold as blends, consumers viewed them as a single product meant for
drinking, and many GATT contracting parties did not apply different tariff rates to the four
varieties under their respective tariff regimes. It came to the conclusion that the MFN
treatment mandate was broken by setting different tariff rates for specific varieties of
unroasted coffee beans.

II. Any advantage, favour, privilege or immunity

Any benefit given by a Member to a product coming from or going to another nation through
a variety of means is covered by the MFN treatment obligation. The requirement to give
MFN treatment extends beyond tariffs. The measures include internal taxes and charges on
imported goods, internal laws, regulations, and requirements affecting sales, as well as any
tariffs or charges of any kind imposed in connection with importation and exportation, the
method of levying such tariffs and charges, rules and formalities in connection with
importation and exportation. It is crucial to stress that the MFN treatment duty takes into
account benefits awarded to any other country as well as benefits given to products coming
from or going to WTO. As a result, if a WTO Member gives a benefit to goods coming from
or going to a non-Member, they must also give that benefit to all other WTO Members.
Cases
In the EC-Bananas-III, only if imports of bananas from certain countries met standards that
were different from those imposed on importers of bananas from other countries did those
imports qualify for distribution of the tariff quota. While accepting the Panel's findings that
the activity function rules for importing third-country and non-traditional ACP bananas differ
from and go above those required for importing from traditional ACP bananas, the Appellate
Body of the WTO held that the method is discriminatory as the rules discriminate between
like products coming from different Members.

III. Immediately and Unconditionally

Once a WTO Member has given a country an advantage, it is not permitted to place
restrictions on other WTO Members in order for them to enjoy the same advantage. The
WTO Member must immediately and unconditionally transfer the advantage to all WTO
Members.
Cases
In Indonesia Autos, the Panel discovered that under the Indonesian car programmes, tax and
customs duty breaks were dependent on meeting a minimum level of local content for the
finished vehicle. The Panel came to the conclusion that these conditions were in conflict with
Article 1:1's provisions, which state that tax and duty advantages granted to products of one
Member (in this case, products from the Republic of Korea) must be granted to imported
goods of a similar nature from other Members immediately and unconditionally."
A 1992 panel report considered the United States-Denial of MFN treatment as to non-rubber
footwear from Brazil and ruled that balancing more favourable treatment under some
procedures against a less favourable treatment under others is not permitted under Article 1:1.

IV. Discrimination
De jure and de facto discrimination are both possible. It would be obvious that Article 1:1
was broken if different tariff rates were set for "similar items of one country as opposed to
another. De facto discrimination, on the other hand, is characterised as discrimination that is
less obvious yet constitutes a violation.
Cases
One such instance concerned Canada's automotive safety standards. In this situation, the
system in Canada, which under certain circumstances reduced tariffs on imported autos from
the United States, was in question. Companies from other nations were welcome to use the
system as long as they complied with specific requirements
However, after the US-Canada Free Trade Agreement was signed, the acceptance of new
applications was suspended, thereby leaving US corporations the only ones who could use it.
Both the Panel and the Appellate Body came to the conclusion that the actions violated
Article 1:1 because they were de facto discriminatory
In Canada- Autos, the Appellate Body found the prohibition of discrimination under Article
1:1 to include both de jure and de facto discrimination- "The words of Article 1:1 do not
restrict its scope only to cases in which the failure to accord an 'advantage' to like products of
all other Members appears on the face of the measure, or can be demonstrated on the basis of
the words of the measure. Article 1.1 does not cover only in law', or de jure, discrimination.
As several GATT panel reports confirmed, Article 1:1 covers also in fact, or de facto,
discrimination. Like the Panel, we cannot accept Canada's argument that Article 1 does not
apply to measures that, on their face, are 'origin-neutral." Hence, discrimination that is either
in the form of explicit provisions of laws or regulations or by means of conduct is prohibited.
The Belgian Family Allowances dispute comprehensively elucidates the scope of
discrimination and the phrase "any advantage, favor, privilege or immunity for the purpose of
understanding the nature and scope of discrimination prohibited by the MFN principle.

 Exceptions to the General Principle of MFN treatment

A general set of exceptions (Article XX) and security exceptions apply to the GATT
requirements (Article XXI). Additionally, there are several unique exceptions to the MFN
rule.

a) General Exceptions:

Nothing in the Agreement shall be interpreted to prevent any contracting party from
adopting or enforcing the measures or exceptions listed in paragraphs (a) through (j) of
the Article, subject to the restriction that these exceptions or measures should not be
applied arbitrarily or unjustifiably between the nations where the same conditions exist.
Furthermore, these exemptions or actions shouldn't be construed as covert limits on
global trade. The measures relating to public morals, life and health, conservation of
exhaustible natural resources, etc. are included under this Article's exceptions.
In order to use an Article XX defence and enact a trade-restrictive measure, an importing
WTO member must first demonstrate that the action falls under one of the Article's ten
paragraphs. If it does, the proposal must satisfy the criteria outlined in the Chapeau to
Article XX.

b) Security exceptions:

The most contentious GATT exclusions are those related to security because Article
XXI's phrasing implies that each country is the only arbiter of issues pertaining to its
own security. Although it is admirable that Article XXI respects the political and
economic sovereignty of nations, in circumstances involving security exceptions,
political reasons ultimately outweigh economic considerations.

c) Specific exceptions:

i. Customs Union/Free Trade Areas (Article XXIV)

A customs union or free trade agreement is a permitted exemption to the MFN
principle under Article XXIV because it is widely acknowledged that such
arrangements and agreements are beneficial for promoting economic integration
without hurting the economic interests of other nations. If the following requirements
 are met, regional integration may be permitted as an exception to the MFN principle:
tariffs and other trade barriers must be eliminated with respect to nearly all trade
within the region, and the tariffs and other trade barriers applied to outside countries
may not be higher or more restrictive than they were prior to regional integration.

ii. Preferential treatment to developing countries (Enabling clause)

Certain items with origins in qualifying developing nations are given preferential
tariff treatment under the Generalized System of Preferences (GSP) programme as
opposed to those that are typically given MFN status. It is essential for fostering
commerce as a way to promote economic development and growth. The GSP
preference may be granted under the 1979 GATT Decision on Differential and More
Favourable Treatment, Reciprocity, and Fuller Participation of Developing Countries,
sometimes known as the "Enabling Clause." Only when the requirements outlined in
the Enabling Clause are met is the divergence from the MFN mandate permitted.

National Treatment

 Reasons Behind NTP

The main reason why GATT/ WTO drafter has proposed NTP was after imposing so much
restriction with regard to MFN principles, the drafter considered that the member nation can
discriminate the imported product indirectly and to prevent such indirect acts of member
nations NTP was introduced to prevent and restrict the domestic government from imposing
any internal regulation that may create scope for discrimination to imported products over
domestic product.
Illustration- Let’s assume that India is manufacturing a certain mobile phone for Rs. 10k and
on the other hand China is manufacturing a certain mobile phone with the same
configurations and quality for just Rs.7k. In that case, being both the countries a member
nation of GATT/ WTO, India can’t impose any restrictions on exporting Chinese Mobile
phones from China to India, but India may impose certain heavy taxes to protect its domestic
market. To protect such measures the drafter of GATT/ WTO introduced NTP which prohibit
any member nation from doing such activities.
Now it can be assumed that the main purpose of Article III of the GATT 1994 was to prohibit
or limit the use of trade-restricting by requiring non-discriminatory treatment between
imported and domestic goods.
For better understanding, we may classify NTP into 3 different categories:
 To avoid protectionism measure by the domestic country.
 To maintain equality between imported and domestic products.
 To protect the imported products from unjust tariffs.
 Scope of NTP
Just like the MFN principle, the scope of the NTP also covers the scope of de jure and de
facto discrimination of imported products. A stance is de jure discriminatory when
discrimination can clearly be seen between imported and domestic like products in term of a
legal manner. And when the discrimination is very much clear on the face of a legal
instrument that it doesn’t have any complexity to understand, then it can be de facto
discrimination. The most important part of NTP is that it only applies to internal measures,
and it does not at the border on imported goods.
Illustration- Let’s assume a case when India imposes a 10% tariff on importing automatic
machines and but on the other hand India only imposes 7% tariff on Indian manufacturer of
automatic machines. Then it can be clearly seen that India is discriminating against imported
products and protecting its domestic products. And any tariffs imposed on imported products
collected at the time of importation in the country are not considered as against the NTP, as
Article III only deals with internal taxes which are discriminating against imported products
over domestic products.

 Interpretation of Article III

Article III:1 General Obligation- It talks about the general obligation of Article III and lays
tells about the concept of NTP that how it works and what the essentials of it.
Article III:2 Internal Taxation- It tells about the non- discriminatory principle through
internal taxation.

1. Article III:2 – First Sentence (Two-Tier Test)

This part of Article III gives a platform for testing if the action of importing nation is
discriminatory, for testing such action a two-tier test has to be passed to check the
consistency of importing nation with NTP which are:
 If the imported and domestic products are like products- It explains the consistency of
‘Like Product’ essentials with domestic & imported products. And explains a
condition if both domestic and imported products are ‘Like Product.
 If the imported products are taxed in excess of the domestic products.- It explains the
condition when the imported products are taxed excessively compared to like
domestic products.
Here in the NTP the definition and essentials of ‘Like Products’ are the same as discussed in
MFN principles.
2. Article III:2 – Second Sentence
It has another test of checking if the action of importing country is against NTP or not.
Therefore, if there is no violation of Article III:2, first sentence, and if can still be considered
that there is an infringement of Article III:2, then another three-tier test of the second
sentence can be applied.
Three – Tier test prescribed under Article III:2 of 2nd sentences:
 If the imported and domestic products are directly competitive or substitutive- This
means if domestic and imported products are directly or closely competitive or
substitutive like tea- coffee, roasted- unroasted coffee etc.
 If the domestic and imported products are not similarly taxed or if the imported
products are taxed excessively over domestic product- This means if the importing
country is imposing more taxes on imported products and less tax on domestic
products.
 If the importing nation is doing anything which causes protectionism of their domestic
products over imported products- This means a condition when the domestic
government is trying to protect their domestic product by implementing certain rules
and regulations in any manner.

3. Article III:4 (Internal Laws, Regulations and Requirements Related to Internal Sale,
Transportation, Distribution or Use)
This article is again providing another platform to test if the importing country is violating
any NTP and if such violation can’t be tested by either of the two tests explained above then,
the test expressed in this article can help to test if any nation is violating NTP. The test
follows three conditions which are:
 The imported and domestic products at issue are like products.
 The measure at issue is a law, regulation, or requirement affecting their internal sale,
offering for sale, purchase, transportation, distribution, or use- It means that if the
importing country is using any of such measures to protect its domestic products by
using its intern power of imposing new rules and regulations etc.
 The imported products are afforded less favourable treatment than domestic products- It
is a condition when the government is trying to market its domestic product and doing
unfavourable practices in providing less favourable treatment to imported goods.

 Exception to NTP

Just like the exception to the MFN principles NTP also has various exceptions which provide
the nation from following the NTP blindly and grants any of the nations the power to refuse
on implementing such principles on their trade. Some specific exceptions which deal with the
national treatment principle can be summarized as follows:
a) Government Procurement (Article III:8A)
It explains a concept or principle that when government agencies hire or purchase any
imported goods for their benefit or for government purpose, then the domestic
government can give preference to domestic products over imported products, it is also
considered that the purpose of government procurement should only be subjected to
government use and not for commercial utility.

b) Subsidies to Domestic Producers (Article III:8B)

Governments have the power and can provide subsidies even including subsidies to
domestic manufacturers for aiding those manufacturers from a tax benefit and can
impose some restrictions on the kind of trade or business they can carry for the
purpose of exempting from tax. And such subsidies granted by domestic government
are not considered necessarily be legal by GATT/ WTO members. And also in the
Tokyo and Uruguay Rounds, a provision for the additional subsidy was introduced
and now Subsidies and Countervailing Measures are dealt with SCM Agreement.

c) Internal Maximum Price Control Measures (Article III:9)

d) Cinematograph Films (Articles III:10 and IV of the GATT 1994)
A wide concept of discrimination between international and nation fils are discussed
under this article which says that the possibility of giving preferences to products
emerging from the national movie industry can be granted and it will not be covered
under NTP. National preferences are governed by the provisions of Article IV, and
the domestic country can impose internal quantitative regulations in “screen quotas”.