Internal Fiscal and Regulatory Distinctions Based on Process and Production Methods and GATT Article III: Different ways to argue in favour of their compatibility

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II. GATT DISCIPLINES ON INTERNAL FISCAL AND REGULATORY 
MEASURES: ARTICLES III, XI AND XX 
The whole architecture of the GATT is based on three basic principles: the 
multilateralisation of an automatic and unconditional most favourite nation clause 
(Article I); the respect of tariff concessions and the prohibition of quantitative 
restrictions (Articles II and XI); and the extension of national treatment to all imported 
products with regard to fiscal and regulatory measures (Article III). The text of GATT 
and the protocols of accession contain several derogations to these principles; however, 
the most important exceptions are contained in Article XX, which provides a closed list 
of justifications for the violation of any other GATT provision. 
While the main focus of this paper is Article III, a thorough investigation of the 
GATT-compatibility of a distinction based on process and production methods requires 
also Article XI and XX to be taken into account. 
A. ARTICLE III 
The scope of Article III is very broad and encompasses “internal taxes and other 
internal charges, and laws, regulations and requirements affecting the internal sale, 
offering for sale, purchase, transportation, distribution or use of products, and internal 
quantitative regulations requiring the mixture, processing or use of products in specified 
amounts or proportions”. All these internal measures “should not be applied to imported 
or domestic products so as to afford protection to domestic production” (Article III:1). 
Article III:2 addresses internal (indirect) taxes, and provides that imported 
products “shall not be subject, directly or indirectly, to internal taxes or other internal 
charges of any kind in excess of those applied, directly or indirectly, to like domestic 
products.  Moreover, no contracting party shall otherwise apply internal taxes or other 
internal charges to imported or domestic products in a manner contrary to the principles 
set forth in paragraph 1”. 
Article III:4 provides that imported products “shall be accorded treatment no less 
favourable than that accorded to like products of national origin in respect of all laws, 
regulations and requirements affecting their internal sale, offering for sale, purchase, 
transportation, distribution or use”.  
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An important distinction to be made is between measures affecting imported 
products (falling under Article III) and measures affecting the importation of products 
(falling under Article XI).
2
 The relation between Article III and XI will be discussed 
together with the latter in the next paragraph.  
1. The purpose of Article III: to protect the equality of competitive conditions 
Relying on extensive and consistent GATT practice, the Appellate Body in 
Japan – Alcoholic Beverages II has summarised the purpose of Article III in the 
following terms: 
“The broad and fundamental purpose of Article III is to avoid protectionism in 
the application of internal tax and regulatory measures.  […] Toward this end, 
Article III obliges Members of the WTO to provide equality of competitive 
conditions for imported products in relation to domestic products.”
3
 
The objective of avoiding protectionism is therefore achieved by requiring WTO 
Members to “provide equality of competitive conditions for imported products in 
relation to domestic products”. In applying Article III, three main interpretative issues 
arise: (1) what is the role of the fist paragraph in interpreting Article III; (2) what is the 
meaning of “like products” and “directly competitive or substitutable product”; and (3) 
the exact content of the national treatment requirement in the different paragraphs and 
sentences. 
2. “So as to afford protection”: the role of the first paragraph 
These issues have been addressed by the Appellate Body on various occasions. 
In Japan – Alcoholic Beverages II the Appellate Body held that the “general principle 
that internal measures should not be applied so as to afford protection […] informs the 
rest of Article III”.
4
  
The way in which Article III:1 informs the rest of the article depends on the 
wording of the different provisions: noting that the first sentence of Article III:2 does 
not make explicit reference to Article III:1, while the second sentence of Article III:2 
does, the Appellate Body concluded that, in order to establish a violation of Article 
III:2, first sentence, only two separate issues must be established: (1) domestic and 
                                                 
2
 GATT Panel Report on Canada – Administration of the Foreign Investment Review Act [FIRA], adopted 
7 February 1984, BISD 30S/140, para. 5.14. 
3
 AB Report on Japan – Alcoholic Beverages II, supra note 1, p.16 (emphasis in original, footnotes 
omitted).  
4
 Ibidem, p.18. 
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imported products are “like”, and (2) the taxes imposed on the imported products are “in 
excess” of those applied to the like domestic product.
5
 Conversely, the test for Article 
III:2, second sentence, includes a separate finding of protective application of the 
dissimilar taxation.
6
 
The Appellate Body applied the same reasoning also to Article III:4, confirming 
that the test under this provision does not require a separate finding of domestic 
protection,
7
 but consists simply in verifying whether (1) the products are “like” and (2) 
imported products are accorded “less favourable” treatment than the like domestic 
ones.
8
 
3. “Like products” and “directly competitive and substitutable product” 
The concept of “like product” has been one of the most debated in literature.
9
 
The term appears in different provisions of GATT, and it is well established that it 
should encompass different groups of products according to the provision under which 
it is examined; in any event the practical determination of its content should be done on 
a case-by-case basis. The concept of like product as been described by the Appellate 
Body as a “relative one”, and it has been compared to the image of an accordion that 
“stretches and squeezes in different places as different provisions of the WTO 
Agreement are applied”.
10
 
The Appellate Body has given very detailed guidelines on how the panels should 
proceed in the application of this concept. As far as the determination of likeness under 
Article III:2, first sentence is concerned, the Appellate Body underlined that the concept 
should be construed narrowly. It then endorsed as “helpful” the criteria laid down by the 
GATT Working Party on Border Tax Adjustments. These criteria are: (1) the product’s 
                                                 
5
 Ibidem, p.19; Appellate Body Report on Canada – Certain Measures Concerning Periodicals 
(hereinafter Canada – Periodicals), WT/DS31/AB/R, adopted 30 July 1997, pp.22-23. 
6
 AB Report on Japan – Alcoholic Beverages II, supra note 1, p.24; AB Report on Canada – Periodicals, 
supra note 5, pp.24-25; Appellate Body Report on Chile – Taxes on Alcoholic Beverages (hereinafter 
Chile – Alcoholic Beverages), WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, para. 47.  
7
 Appellate Body Report on European Communities – Regime for the Importation, Sale and Distribution 
of Bananas (hereinafter EC – Bananas III), WT/DS27/AB/R, adopted 25 September 1997, para. 216.  
8
 Appellate Body Report on Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef 
(hereinafter Korea – Beef), WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, para. 133.  
9
 For an critical overview of the issues concerned, see R.E. HUDEC, “‘Like Product’: The Differences in 
Meaning in GATT Articles I and III”, in T. COTTIER, P.C. MAVROIDIS (eds.), Regulatory Barriers and 
the Principle of Non-Discrimination in World Trade Law, Ann Arbor: The University of Michigan Press, 
2000, pp.101-123. 
10
 AB Report on Japan – Alcoholic Beverages II, supra note 1, p.21. 
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end-uses in a given market; (2) consumers’ tastes and habits; and (3) the product’s 
properties, nature and quality.
11
  
The Appellate Body stated that other criteria can be considered as well, and it 
explicitly endorsed the examination of tariff classifications.
12
 The balancing of these 
and other criteria may prove to be difficult in some cases, and panels are called to apply 
their best judgement in determining whether the products under consideration are like or 
not.
13
  
The products falling within the scope of application of Article III:2, second 
sentence, are defined in the interpretative note as being “directly competitive or 
substitutable”. The scope of this concept is broader than the one of “like products” of 
the first sentence, and it has been described as encompassing products which are 
“interchangeable” or offering “alternative ways of satisfying a particular need or 
taste”.
14
 The Appellate Body has underlined on different occasions that the concept of 
“directly competitive or substitutable” is a dynamic one, and that it must be assessed on 
the market, taking into account both the existing and the latent demand for the 
products.
15
 The factors relevant for the assessment of the competitive relation between 
the products include those relating to the definition of “like products”, but also 
“evidence of advertising activities, channels of distribution, price relationships 
including cross-price elasticities, and any other characteristics”.
16
 
The meaning of “like products” in Article III:4 has been discussed at length by 
the Appellate Body in EC – Asbestos. Taking into account the “general principle” 
contained in Article III:1 and the textual differences between article III:2 and Article 
III:4, the Appellate Body concluded that: “the product scope of Article III:4, although 
                                                 
11
 Ibidem, p.20; AB Report on Canada – Periodicals, supra note 5, pp.21-22. 
12
 AB Report on Japan – Alcoholic Beverages II, supra note 1, pp.21-22. The Appellate Body however 
warned against the use of tariff bindings (as opposed to the HS nomenclature) in determining the likeness 
of products, as tariff bindings may be very broad and merely represent the results of the negotiations on 
market access: ibidem, p.22. 
13
 Ibidem, pp.20-21. 
14
 Appellate Body Report on Korea – Taxes on Alcoholic Beverages (hereinafter Korea – Alcoholic 
Beverages),  WT/DS75/AB/R, WT/DS84/AB/R, adopted 17 February 1999, para. 115. 
15
 AB Report on Japan – Alcoholic Beverages II, supra note 1, p.25; AB Report on Korea – Alcoholic 
Beverages, supra note 14, paras. 114-124. The “relevant market” for this analysis would be normally the 
market of the importing country, but the market of another country presenting similar characteristics can 
be considered as significant in analysing the latent demand: ibidem, para. 137. 
16
 Panel Report on Korea – Taxes on Alcoholic Beverages, WT/DS75/R, WT/DS84/R, adopted 17 
February 1999 (as modified by the Appellate Body Report), para. 10.61, implicitly endorsed in AB 
Report on Korea – Alcoholic Beverages, supra note 14, para. 144.