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Thailand–Cigarettes (Philippines): A More Serious Role for the ‘Less Favourable Treatment’ Standard of Article III:4

  • WILLIAM J. DAVEY (a1) and KEITH E. MASKUS (a2)

This paper analyzes a number of economic and legal issues raised by the Appellate Body Report in the Thai–Cigarettes case. The paper suggests two improvements that could be made to Panel procedures; supports the Appellate Body's interpretation of Article XX(d) in the present case, which seems to discard an earlier mistaken approach to Article XX; and examines, in some detail, whether the Appellate Body's application of the ‘less favourable treatment’ component of GATT Article III:4 in this and other cases is consistent with its jurisprudence under GATT Article III:2 and TBT Article 2.1. From an economics perspective, the case is straightforward on its face. However, the Appellate Body's rigorous application of the ‘less favourable treatment’ principle might not survive a fuller market analysis in terms of policy impacts on conditions of competition. Further, while we agree with the rejection of Thailand's Article XX claim, we raise the question of whether a strict national-treatment rule may be an unwarranted constraint on policy where there is a clear trade-related external cost to address.

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1 The Panel and Appellate Body Reports were adopted on 15 July 2011. The reasonable period of time for implementation was set at ten months (expiring 15 May 2012), except in respect of the VAT exemption for resellers of domestic cigarettes, in which case it was set at 15 months (expiring 15 October 2012). WT/DS371/14 (27 September 2011). It appeared that, as of June 2012, Thailand had not completed implementation. WT/DS371/15/Add.2 (15 June 2012).

2 In three instances, Thailand in effect did not contest that a different methodology was used for imports, and, in one further instance, the Panel found a difference in how the tax base for imports was calculated. These findings were not appealed.

3 The notice of appeal was delayed by 40 days and the Appellate Body report was delayed 20 days beyond its normal 90-day deadline because of the Appellate Body's workload. WT/DS371/7 (7 December 2010); WT/DS371/9 (26 April 2011).

4 World Health Organization, Report on the Global Tobacco Epidemic 2011, Geneva.

5 Pavananunt, Pirudee (2009), ‘Empirical Analysis of Cigarette Tax Avoidance in Thailand’, research report to Tobacco Control Research and Knowledge Management Center, Mahidol University, November.

6 Thailand Tobacco Monopoly, Annual Report 2009, Bangkok.

7 The only other WTO Panel Report ruling on the Customs Valuation Agreement was Panel Report, Colombia – Indicative Prices and Restrictions on Ports of Entry, WT/DS366/R, adopted 20 May 2009. The Appellate Body has yet to consider the agreement.

8 Appellate Body Report, Thai–Cigarettes, paras. 164–171.

9 Ibid., para. 170.

10 Ibid., para. 171.

11 See Section 3.3 infra.

12 To the extent that having the Appellate Body ask a Panel a question might suggest that it was engaged in some sort of remand procedure not authorized by the DSU, the Appellate Body could take the position that it is incumbent on the party claiming that a typographical error is involved in a case to ask the Panel to correct the Report.

13 US Federal Rules of Civil Procedure, Rule 60(a). When an appeal is pending, such a mistake may be corrected only with the appellate court's leave.

14 UNICITRAL Arbitration Rules, Article 38, published by the United Nations Commission on International Trade Law, UNCITRAL Arbitration Rules as revised in 2010, at 24 (2011); ICSID Arbitration Rules, Rule 49, published by the International Centre for the Settlement of Investment Disputes, ICSID Convention, Regulations and Rules, ICSID/15, at 123 (April 2006); American Arbitration Association, Commercial Arbitration Rules, Rule 46 (2009).

15 Panel Report, Thai–Cigarettes, paras. 6.122–6.128.

16 Appellate Body Report, Thai–Cigarettes, paras. 141–161.

17 Ibid., para. 159.

18 Ibid., para. 160.

19 Panel Report, Thai–Cigarettes, Annex A-1, para. 15.

20 An alternative approach would be to adopt working procedures that specify that no new evidence may be submitted in comments on the answers to Panel questions. This would ensure that parties have a last chance to comment on any evidence offered in a case, although it might prove to be unnecessarily constraining in some situations.

21 The Thai tax regime is described in detail in Section 4 and in the Appellate Body Report, Thai–Cigarettes, paras. 83–103.

22 Panel Report, Thai–Cigarettes, paras. 7.568–7.644.

23 Ibid., paras. 7.645–7.738.

24 Appellate Body Report, Thai–Cigarettes, paras. 117–118.

25 Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97, p. 23. If the products at issue were not like products, but rather were competitive products, there would be a possibility that a relatively minor difference in tax liability would not violate Article III:2, since the test would be whether the competing products were taxed similarly or not. Ibid., pp. 26–27.

26 Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001:I, 5, paras. 137–138, relying on GATT Panel Report, US–Section 337.

27 This evidence had been presented to show that certain imported and domestic brands of cigarettes were like products.

28 There was also a question of whether any administrative costs might be offset by a VAT registrant's ability to take additional credits for other VAT it had paid, such as for utilities and other services. These financial advantages could effectively reduce or negate any additional administrative costs. The Appellate Body ruled that Thailand had failed to produce evidence to support this argument, which it noted arose only in response to the Panel's questions. Appellate Body Report, Thai–Cigarettes, para. 139.

29 Ibid., para. 129.

30 Ibid., para. 130.

31 Ibid., para. 134.

32 Ibid., para. 135.

33 Ibid., para. 139.

34 Appellate Body Report, Japan–Alcoholic Beverages II, pp. 15–18.

35 Ibid., pp. 18–31.

36 Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591, para. 216.

37 Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, 3243, para. 99.

38 Ibid., para. 100.

39 Panel Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/R and Corr.1, adopted 19 January 2010, as modified by Appellate Body Report WT/DS363/AB/R, DSR 2010:II, 261, para. 7.1537.

40 Panel Report, Thai–Cigarettes, para. 7.735.

41 Appellate Body Report, Dominican Republic – Measures Affecting the Importation and Internal Sale of Cigarettes, WT/DS302/AB/R, adopted 19 May 2005, DSR 2005:XV, 7367, para. 96.

42 Relying on Dominican Republic–Import and Sale of Cigarettes, Thailand tried to argue before the Panel that the additional administrative requirements served the legitimate purpose of combating tax evasion, fraud, and counterfeiting of foreign cigarettes, but the Panel ruled that the purpose of the measure was irrelevant under Article III:4 and should be considered, if at all, under Article XX. Panel Report, para. 7.746. This instant case differed from Dominican Republic–Import and Sale of Cigarettes in that the measure at issue was not origin-neutral on its face.

43 Appellate Body Report, United States – Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/AB/R, adopted 24 April 2012 (US–Clove Cigarettes), para. 179 and n.372.

44 This is quite plausible given the differences in taste between competing brands and the jurisprudence that has developed in alcohol-tax cases.

45 Appellate Body Report, US–Clove Cigarettes, paras. 180–182.

46 The Appellate Body did not distinguish between de facto and de jure discrimination in its recent Report in United States – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products, WT/DS381/AB/R, adopted 13 June 2012 (US–Tuna II (Mexico)).

47 Appellate Body Report, US–Tuna II (Mexico), paras. 403–405.

48 There have long been calls for giving more prominence to the ‘less favourable treatment’ language of Article III:4 and interpreting it in light of Article III:1. See William J. Davey and Joost Pauwelyn (2000), ‘MFN Unconditionality: A Legal Analysis of the Concept in View of its Evolution in the GATT/WTO Jurisprudence with Particular Reference to the Issue of “Like Product”’, in Thomas Cottier and Petros C. Mavroidis (eds.), Regulatory Barriers and the Principle of Non-discrimination in World Trade Law: Past, Present and Future, Ann Arbor, MI: The University of Michigan Press, chapter 1, pp. 38–41. For a recent review of literature critical of the Appellate Body's Article III:4 jurisprudence, see The American Law Institute (2012), Legal and Economic Principles of World Trade Law: The Genesis of the GATT, the Economics of Trade Agreements, Border Instruments, and National Treatment, Report to ALI, Philadelphia, PA: ALI, at pp. 300309.

49 Appellate Body Report, Thai–Cigarettes, para. 170.

50 Ibid., para. 177.

51 Ibid., para. 179.

53 Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3 (US–Gasoline), p. 16.

54 Appellate Body Report, US–Gasoline, p. 19.

55 See generally Davey W. (2012), ‘Non-Discrimination in the World Trade Organization: The Rules and Exceptions’, Recueil des Cours, vol. 354, Leiden, The Netherlands: Martinus Nijhoff Publishers, pp. 368408, also published in 2012, by the same publisher, in book form, under the same title.

56 Appellate Body Report, Thai–Cigarettes, paras. 197, 199.

57 Ibid., para. 215.

58 Ibid., para. 221.

59 The rejection of the relevance of (i) the lack of such a provision in the only detailed WTO agreement dealing with customs valuation – the CVA, which only requires review of valuation decisions, and (ii) the fact that preliminary anti-dumping decisions, which can have a very large trade impact, need not be appealable, was somewhat arbitrary, but it is true that Article X:3 does not refer to ‘final’ decisions.

60 See discussion in Panel Report, Thai–Cigarettes, paras. 1084–1087.

61 Denise Eby Konan and Maskus Keith E. (2012), ‘Preferential Trade and Welfare with Differentiated Products’, 20:5, Review of International Economics, 884892.

62 Saggi Kamal and Sara Nese (2008), ‘National Treatment at the WTO: The Roles of Product and Country Heterogeneity’, 49:4, International Economic Review, 13651394.

63 Horn Henrik (2006), ‘National Treatment in the GATT’, 96:1, The American Economic Review, 394404.

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