Draft. Please do not distribute or quote.
Regulatory Purpose in GATT Article III et Ubique: The Test that
Dare Not Speak Its Name
Donald H. Regan
“This third inquiry under Article III:2, second sentence, must determine whether
‘directly competitive or substitutable products’ are ‘not similarly taxed’ in a way that
affords protection. This is not an issue of intent. It is not necessary for a panel to sort
through the many reasons legislators and regulators often have for what they do and
weigh the relative significance of those reasons to establish legislative or regulatory
intent. If the measure is applied to imported or domestic products so as to afford
protection to domestic production, then it does not matter that there may not have
been any desire to engage in protectionism in the minds of the legislators or the
regulators who imposed the measure. It is irrelevant that protectionism was not an
intended objective if the particular tax measure in question is nevertheless, to echo
Article III:1, ‘applied to imported or domestic products so as to afford protection to
domestic production’.
Appellate Body Report in Japan – Alcohol, § H.2(c) 1
“We emphasized [in Japan – Alcohol] that . . . [t]he subjective intentions inhabiting
the minds of individual legislators or regulators do not bear upon the inquiry, if only
because they are not accessible to treaty interpreters. It does not follow, however,
that the statutory purposes or objectives – that is, the purpose or objectives of a
Member’s legislature and government as a whole – to the extent that they are given
objective expression in the statute itself, are not pertinent. To the contrary, . . .
[Emphases in the original.]
“We called [in Japan – Alcohol] for examination of the design, architecture and
structure of a tax measure precisely to permit identification of a measure’s
objectives or purposes as revealed or objectified in the measure itself. Thus, we
consider that a measure’s purposes, objectively manifested in the design,
architecture and structure of the measure, are intensely pertinent to the task of
evaluating whether or not that measure is applied so as to afford protection to
domestic production.” [Emphasis in the original.]
Appellate Body Report in Chile – Alcohol, ¶¶62, 71 2
1
2
Cite.
Cite, ¶71.
I. Introduction
The reader can be forgiven for seeing some inconsistency in the two quoted
statements by the Appellate Body, although the inconsistency is more apparent than
real. The Appellate Body in Chile – Alcohol (the more recent case, which one might
expect to control in case of genuine conflict) in fact tells us how the cases can be
understood as consistent. But most tribunals and scholars have taken a different
approach. Instead of learning from Chile – Alcohol how to understand Japan –
Alcohol, they have just ignored the quoted portions of Chile – Alcohol. This is
surprising, or it should be.
The quotations above from Chile – Alcohol address a central issue of GATT
interpretation. They form the kernel of the reasoning in Chile – Alcohol. Although
they directly contradict what most people think they learned from Japan – Alcohol
(that we are not to inquire into the regulator’s purpose), they are explicitly put
forward as a statement of what Japan - Alcohol did.3 Despite all of that, these
passages from Chile – Alcohol have barely been mentioned in later Panel or
Appellate Body reports.4 Indeed, they have rarely been noticed at all by anyone.5
The reason is clear. This is the only time the Appellate Body has uttered the truth
about regulatory purpose in GATT Article III. I cannot help but believe that everyone
knows the real, operative test under Article III (for origin-neutral measures) is
If the reader objects that the quoted passage speaks of the measure’s purposes, not
the regulator’s purposes, notice that these are explicitly equated earlier in the Chile
report, where the Appellate Body refers to “the statutory purposes or objectives –
that is, the purpose or objectives of a Member’s legislature and government as a
whole”. (¶62) The Appellate Body is unequivocally directing our attention to the
regulator’s purpose.
4 The only discussion of these passages that I am aware of, and almost the only
mention, is in [ROA case]. [CHECK researcher’s notes, and CHECK Korea –
Alcohol.]
5 They are absent from WTO Legal Service compendium of quotes. Check again.
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whether the tribunal thinks the tax or regulation manifests a protectionist purpose.6
And yet, it is forbidden to say so. Regulatory purpose is the test that dare not speak
its name.7
Because I want discuss both the leading cases on regulatory purpose and
some theoretical considerations about the relevance of regulatory purpose – all in a
moderate compass – this essay will meander a bit, with fairly general theoretical
observations dropped into the middle of discussion of cases, and vice versa. Neither
the discussion of the jurisprudence nor of the theory will be complete or entirely
systematic. In section II, I continue the discussion of Chile – Alcohol we have begun,
and extend it encompass Japan – Alcohol and the “so as to afford protection” idea in
general. In section III, we will discuss the treatment in EC – Asbestos of “like
products” in GATT Article III:4. Section IV takes up “less favorable treatment” in
Asbestos and Dominican Republic – Cigarettes. Section V is more theoretical in its
focus, discussing exactly what I mean by “protectionist purpose” (which the first
four sections assume we understand intuitively), and how we prove it, and why
purpose matters to efficiency. Section VI demonstrates, by an incomplete survey,
that issues of regulatory purpose are ubiquitous in the WTO agreements. Section
VII concludes.
II. “So As To Afford Protection”: Chile – Alcohol and Japan - Alcohol
[CITE HUDEC.] And of course the best explanation for why origin-specific
measures automatically violate Article III is that they raise an extremely strong
presumption of protectionist purpose.
7 The claim in the text is a bit hyperbolic. Sometimes there is an issue about
regulatory purpose other than the issue of whether the purpose is protectionist (for
example, whether something is an SPS measure), and there is no reluctance to talk
about that. And in at least one instance a Panel has been willing to talk about
protectionist purpose explicitly, as one variety of “trade motivation” under the Rules
of Origin Agreement. [CITE PANEL.]
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3
Since Chile – Alcohol is the regularly overlooked case, let us look at it just a bit
more closely. One feature of the opinion that may have derailed readers is the
statement that the relevant purposes must be “revealed or objectified in the
measure itself,” or “objectively manifested in the design, architecture and structure
of the measure,” or “given objective expression in the statute itself”. These
references to objective manifestation and expression might lead the reader to think
that what the Appellate Body is proposing is not really a purpose test after all, since
purpose is not “objective” in the way nice, solid, empirical effects are. But that
reading makes no sense of the fact that the Appellate Body talks about purpose,
again and again. And the discussion surrounding the various references to
“objective” purpose makes it perfectly clear that what the Appellate Body is
rejecting (and what they rejected in Japan – Alcohol) is an approach to the
identification of purpose that tries to ascertain the motives of all the individual
legislators and then aggregate those individual motives into a collective purpose. As
the Appellate Body says, “[t]he subjective intentions inhabiting the minds of
individual legislators or regulators do not bear upon the inquiry, if only because
they are inaccessible to treaty interpreters.” But what is pertinent (or in ¶71,
“intensely pertinent”) is “the purposes or objectives of a Member’s legislature and
government as a whole”. Plainly, the Appellate Body thinks the notion of the
purpose of a collective body makes sense (I agree, and I shall say more about what
“legislative purpose” is and how to identify it below); and it is this collective purpose
that they are interested in.
It is striking that, despite all its talk about purpose, the Appellate Body never
says flatly, “We think the evidence here justifies a finding that the Chilean tax
scheme was motivated by protectionist purpose.” The code of silence is powerful.8
But the Appellate Body says something equally “revealing” (to use one of their
favorite words in this context). They endorse the Panel’s inquiry into whether
They may have been inhibited by the fact that the Panel, tiptoeing around Japan –
Alcohol, also never expressly found protectionist purpose, although their concern
with purpose was equally clear. [CHECK]
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Chile’s attempt to explain the “design, architecture and structure” of the measure by
reference to putative non-protectionist purposes was persuasive. And they endorse
the Panel’s finding that it was not. Finally, at the end of ¶71, the Appellate Body
says: “The conclusion of protective application reached by the Panel becomes very
difficult to resist, in the absence of countervailing explanations by Chile.” Now, the
“countervailing explanations”, as we have noted, are explanations in terms of
putative non-protectionist purposes. The only thing that these could plausibly be
said to “countervail” is the explanation in terms of protectionist purpose that is
strongly suggested by the structure of the tax scheme. What becomes “difficult to
resist” when these alternative purposive explanations are rejected is precisely the
explanation in terms of protectionist purpose. So protectionist purpose is what the
code phrase “protective application” must refer to.9
This is also the inevitable conclusion from the last sentence of ¶72: “It appears to
us that the Panel did no more than try to relate the observable structural features of
the measure with its declared purposes, a task that is unavoidable in appraising the
application of the measure as protective or not of domestic production.”
Horn and Mavroidis [CITE] suggest that the finding of bad purpose in Chile –
Alcohol is wrong, or at least unjustified. I think the finding is right, and I shall
explain why very briefly in a moment. But whether the Appellate Body got the right
answer is not the important point for now. What is important is that the Appellate
Body states and applies a purpose test. To the extent Horn and Mavroidis suggest
the Appellate Body is not actually applying a purpose test, that flies in the face of
everything the Appellate Body says. Of course I recognize that courts often say one
thing and do another; elsewhere I have insisted on that point. But almost invariably
where such a disjunction exists, the court says what is expected (an effects test) or
what is easy and habitual (“balancing”), and then it does the opposite (applying a
purpose test, or less restrictive alternative analysis). But in Chile - Alcohol, the
Appellate Body says what is unexpected. There is no explanation for this unless
they really mean what they say.
As to whether they got the right answer, the biggest objection to a claim of
protectionist purpose is that there was probably more Chilean spirits than imported
spirits even in the high-alchol-content/high-ad-valorem-tax bracket. But notice: (1)
even in the high-alcohol bracket, the domestic spirits were generally much less
expensive than the imported spirits, and so arguably less hurt by an ad valorem tax;
(2) much of the domestic high-alcohol spirits was produced by the same companies
that produced the low-alcohol spirits, and their support for protectionism obviously
depends on their overall interest in both low-alcohol and high-alcohol spirits; and
(3) since imports have a much bigger market share of the high-alcohol bracket than
the low-alcohol bracket, any shift of consumer purchases to high-alcohol spirits
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5
There is one case under GATT Article III:2, second sentence, [CHECK] in
which it seems reasonable to say the Appellate Body explicitly finds protectionist
purpose, and that is Canada – Periodicals. But even here the super-literalist might
say they don’t quite do it. The Appellate Body never says flatly, “Therefore we find
that the tax scheme was motivated by protectionist purpose.” Instead, they do a
curious two-step around the point. They point out repeatedly that various
government ministers said (also repeatedly) that the object of the scheme was to
protect Canadian publishers from United States competition. And they round off
the discussion thus: “We therefore conclude on the basis of . . . [inter alia] the
several statements of the Government of Canada’s explicit policy objectives . . . that
the design and structure of [the measure] is clearly to afford protection to the
production of Canadian periodicals.”10 This seems as clear a statement of
protectionist purpose as one could want, but it is not ipsissimis verbis.
Now, in Chile – Alcohol and Canada – Periodicals, the Appellate Body was
applying Article III:2, second sentence, and the specific passages we have been
discussing were about the “so as to afford protection” prong of the analysis under
III:2, second sentence. The specific structure of analysis under III:2, second
sentence, that the Appellate Body applies in Chile – Alcohol and Canada - Periodicals
was created by the Appellate Body in Japan - Alcohol, and it is worth thinking about
would tend to increase the overall market share of imports, so the big domestic
producers have an incenive to inhibit the development of the high-alcohol part of
the market. Remember finally that the question is not posed ex ante: “Given the
facts of the Chilean market for spirits, would we expect a protectionist tax scheme
from a government constrained to use origin-neutral means?” (To this question the
answer might well be no; and perhaps it must be no, if we presume good faith.)
Rather, the question arises ex post: “Is there any plausible explanation of the tax
sheme actually in place other than protectionism?” The bizarre, kinked graph of ad
valorem tax rate versus alcohol content seems totally inexplicable except as
purposeful protectionism; and the facts noted above make that more
comprehensible then one might at first think.
10 Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R (adopted 30
July 1997), p. 35 (last sentence of §VI.B.3.)
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precisely what it does. The Japan Appellate Body said that even after it has been
decided that foreign goods are “directly competitive or substitutable” with the
domestic product and that the products are “not similarly taxed”, there is a third,
distinct required step of the analysis, which is to consider whether the measure is
applied “so as to afford protection” to the domestic product. Notice that once we
have completed the first two steps, we know already that there is disparate effect. If
a foreign product that competes with a domestic product is differently taxed, it faces
unequal competitive conditions (and proof of actual trade effects has never been
required). So if there is a further step that must be completed before a violation of
Article III is found, that step must be about something other than the effect of the
measure. It must be about purpose. This is further confirmation that even in Japan Alcohol, the “so as to afford protection” step of the analysis was about regulatory
purpose.
The next question is, does this tell us anything about provisions other than
Article III:2, second sentence? Article III contains three distinct core operative
provisions, III:2, first sentence, III:2, second sentence, and III:4, all written
differently. It is not obvious why there are these three distinct provisions, or why
they are written they way they are, but that is the text we have. In Japan - Alcohol,
the Appellate Body felt obliged to try to make something of the differences – as for
example in its holding that the “so as to afford protection” language of Article III:1
had no direct relevance to the interpretation of III:2, first sentence, but was directly
relevant to III:2, second sentence. [CHECK] Notice, the fact that the Japan Appellate
Body required no separate “so as to afford protection” analysis under III:2, first
sentence does not mean regulatory purpose was irrelevant. Rather, it means that
the Appellate Body’s test of “likeness” was so narrow that any difference in taxation
between “like” foreign and domestic products indicated protectionist purpose. In
support of this suggestion, note two points: (1) After finding vodka and shochu
“like” and finding a violation of III:2, first sentence, the Appellate Body said the
result would have been the same even if they had not found likeness but had
decided the vodka/shochu under III:2, second sentence [CHECK]; but this means
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they had to believe there was protectionist purpose, since that is what they would
have had to find to complete a violation under the “so as to afford protection” prong
of III:2, second sentence. (2) The difference between “like” in III:2, first sentence,
and “directly competitive or substitutable” in III:2, second sentence, is not just that
“like” is narrower, as is often suggested. Rather, they are categorically different
concepts. “Directly competitive or substitutable” is unambiguously an empirical,
economic concept, and it cannot be read to include any reference to regulatory
purpose, which is why purpose must be considered in a separate step. In contrast,
“like” is not unambiguously purely empirical; it can be read to contain an implicit
reference to regulatory purpose, and that is how the Japan – Alcohol Appellate Body
obviously read it (in addition to reading it narrowly in other ways as well).
So, in Japan- Alcohol, the Appellate Body seems to have suggested that
different wording of III:2, first and second sentences, makes a difference; but it
turned out to make no difference to the substance of the inquiry, only to the format.
More recently, in EC – Asbestos, the Appellate Body seems to have acknowledged
more openly that the real object of all three core provisions is the same, and they
should be interpreted with that in mind.11 Perhaps most importantly for present
purposes, they have said that Article III:4 must be interpreted in the light of the “so
as to afford protection” language of III:1, even though that language is not repeated
in III:4.12 Notice also that “so as to afford protection” must mean the same thing in
III:1 and in III:2, second sentence, if only because the words themselves are not
repeated in III:2, second sentence; they “appear” there only by virtue of a reference
to III:1. In consequence, what the Appellate Body says in Chile – Alcohol about the
meaning of “so as to afford protection” is highly relevant to the interpretation of
III:4, and not just to III:2, second sentence. The terms of Article III:4 , specifically
“like products” and “treatment no less favorable”, must be interpreted in light of a
principle which has been explicitly held to be about regulatory purpose.
11
12
Cite Asbestos, ¶¶93, 99.
Id., ¶93.
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It is a pity that Article III:1, first sentence, and Article III:4 are structured the
way they are. The format of III:2, second sentence, is the most conducive to
transparent discussion of the real issues. It is useful to have the “so as to afford
protection” inquiry, understood as about regulatory purpose, as a distinct stage of
the analysis. Still, we must deal with Article III:4 as it is written (with the same
structure as III:2, first sentence); to find a violation of III:4, we need only to find that
“like products” of foreign origin are accorded “less favorable treatment” than their
domestic counterparts.13 But we should be aware that this creates a possible trap
for the unwary. As we shall see, it is easily possible, and indeed quite natural, to
read a “regulatory purpose” component into either the “likeness” prong of III:4 or
the “less favorable treatment” treatment prong. And in my opinion, the best
interpretation finds a regulatory purpose component in both. But there is some
danger that we might leave regulatory purpose out of our “like products” analysis,
thinking it will be dealt with under in the “less favorable treatment” prong, and that
we then leave it out of the “less favorable treatment” analysis because we think that
ideally it really should come into the decision on “likeness”. The effect would be to
cut off Article III:4 entirely from the anti-protectionism principle of III:1.
We should remember that there is nothing magical about either the concept
of “like products” or the concept of “less favorable treatment” taken alone. The
drafters of the treaty did not start out with distinct ideas of “like products” and “less
favorable treatment” and then just happen to notice that if they combined these
ideas, the phenomenon so identified was one they wanted to forbid. Rather, they
started out with the idea of protectionism as the thing they wanted to forbid (when
carried out by internal measures), and then they went looking for a way to spell out
that idea in treaty language that would give Members and other treaty interpreters a
bit more guidance on how to approach the inquiry. So, given the treaty language,
we must proceed within the “like products”/”less favorable treatment” framework;
but we should not become fixated on the words and lose sight of what Article III,
“Like products” of course has a broader meaning in III:4 than in III:2, first
sentence. Asbestos, ¶ ____.
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and consequently Article III:4, is about.14 What I am recommending is not the
dreaded “teleological interpretation” in any problematic sense. It is just interpreting
the words in the light of the object and purpose of the treaty, as the Vienna
Convention on the Law of Treaties commands.15 [CHECK “QUOTE” from VCLT]
III. “Like Products” in GATT Article III:4: EC - Asbestos
It is a pity that the only major case on the meaning of “like products” under
Article III:4 is EC – Asbstos, which is difficult to make sense of in important respects,
and which produced one of the few separate opinions in the WTO jurisprudence.
Although the Asbestos Appellate Body says that Article III:4 is to be interpreted in
light of the “so as to afford protection” language of III:1, they seem, at least on the
Joost Pauwelyn has argued that, after Asbestos, we should just resign ourselves to
a broad definition of “likeness” and concentrate on using “less favorable treatment”
as the place to see whether the regulation is motivated by protectionism (although
he does not say that quite so baldly). [Cite “The Unbearable Lightness . . .”]
Insofar as Pauwelyn is suggesting a cure for what is superficially a purely marketbased approach to “likeness” in Asbestos, I am in complete sympathy. But if
Pauwelyn also means to suggest that the “less favorable treatment” idea is
intrinsically more apt as a vehicle for inquiry into protectionist purpose than the
idea of “likeness”, I disagree. After all, the French prohibition of asbestos but not
PCG fibers (for example) was obviously less favorable treatment in an ordinary
language sense; the reason we believe it was not explained by the national origin of
the products, and thus was not “less favorable treatment” in the legal sense, is that
asbestos and PCG fibers are so obviously unlike, because of the health dangers of
asbestos. All of this is discussed in more detail below.
15 VCLT, ______. If we want to remind ourselves of what bad teleological
interpretation is, an example is the original Panel report in US – Shrimp. [CITE]
There the Panel fastens on the idea that the GATT is intended to protect trade; and it
suggests that if measures based on production methods are allowed, the trading
system will collapse; and it concludes that such measures are completely beyond the
possibility of justification under Article XX. [CHECK] As the Appellate Body
recognized, this was not interpreting the text of the treaty in light of the treaty’s
purpose; this was ignoring the text entirely and imposing the Panel’s own vision of
how its own conception of the treaty’s purpose should be realized. [CITE?] [Think
about whether this is a bit too hard on Panel?]
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10
surface, to have forgotten what they said about the point of that language in Chile –
Alcohol. They do not discuss, or even mention, what Chile – Alcohol says about
regulatory purpose. With regard to the definition of “like products” in GATT Article
III.4, the Asbestos Appellate Body says products are “like” if and only if they compete
with each other in the market.16 Their argument for this is that Article III:1 tells us
Article III as a whole is about protectionism, and there is no possibility of the
domestic product being protected against the foreign product unless the products
are in market competition. Now, this an incontrovertible argument for the
proposition that market competition is necessary for likeness. But it is no argument
at all for the proposition that market competition is sufficient for likeness. So far as
this argument goes, “likeness” could require market competition, plus something
else – such as the absence of any difference between the products that supports a
plausible explanation of the regulation in terms of a non-protectionist purpose.
After one has taken note of this argument for competition as a necessary
condition for likeness (and observed that it does not establish sufficiency), it is
difficult to feel that one understands Asbestos, or to know what to say about it,
because there is a striking incongruence between the nominal ground of decision
and the length and focus of the opinion. Technically, all the Appellate Body holds on
the topic of “like products” is that Canada failed to carry its burden of making a
prima facie case. Since the Appellate Body says that Canada introduced no evidence
at all on consumer preferences and habits regarding asbestos and PCG fibers,
(¶¶139, 145) the opinion could have been limited to the Appellate Body’s brief
argument for the necessity of a competitive relationship, plus one more sentence. In
fact, of course, there is a lengthy and detailed discussion of the health dangers of
asbestos. The Appellate Body says this is relevant because the health dangers make
it less likely that there is a market for asbestos and therefore increase Canada’s
“[A] determination of ‘likeness’ under Article III:4 is, fundamentally, a
determination about the nature and extent of a competitive relationship between
and among products.” Asbestos, ¶99.
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burden of production of evidence.17 But the health dangers will not prevent the
existence of a significant demand for asbestos unless most people are informed
about the health dangers and choose to avoid the risk – both propositions one might
well doubt. (I discuss these points further below.)
To my mind, the way the opinion is written suggests that the Appellate Body
wants to make as strong a case as it can for the substantive conclusion (not just a
burden of proof decision) that asbestos and PCG fibers are not like; but they also
don’t want to give up the idea that likeness is a matter of market competition. The
problem, of course, is that while it seems obvious to most people, including the
concurring Member of the Division that decided Asbestos, that asbestos is not like
PCG fibers, the reason is the health dangers; and most people would say the health
dangers are relevant because they suggest a persuasive non-protectionist
explanation for why a regulator would distinguish between asbestos and PCG fibers.
But that is just what the Appellate Body cannot say. What the Appellate Body needs
to say is that, perhaps because of the health dangers, asbestos simply does not
compete with PCG fibers; no one will buy it. But the common sense view is that
there is a market for asbestos. France obviously thinks people would buy asbestos if
it were not prohibited, else there would be no point to the prohibition. Canada
obviously thinks people would buy asbestos if it were not prohibited, else there
would be no point to challenging the prohibition. Does the Appellate Body actually
doubt an empirical proposition that seems plain to everyone else? The burden of
proof argument provides a convenient way to finesse this difficulty, but it doesn’t
seem to account for the form of the opinion as a whole. So it is worth looking to see
whether the opinion suggests some subtler way of saying asbestos and PCG fibers
are unlike, while basing the test purely on the existence of a competitive
relationship. Two possibilities suggest themselves.
The discussion of health dangers is also part of the Appellate Body’s criticism of
the Panel’s use of the Border Tax Report’s criteria for likeness, but the principal
explanation of why the Panel should have considered the health dangers seems to
be the same point about effect on market choices.
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First, it may seem that I have been unfair to the Appellate Body, at least by
innuendo. It might be said that to argue for non-likeness, they do not have to claim
no one would buy asbestos if there were no prohibition. They explicitly say they are
not claiming that just any competitive relationship is enough to establish likeness; it
depends on the “nature and extent” of the competitive relationship. (¶99).
Unfortunately, they decline to say more about just what “nature and extent” of
competition are necessary to establish likeness, or even about why the “nature and
extent” of the competition matter. Remember that their argument for the relevance
of competition was that in the absence of competition, protectionism was logically
impossible. That suggests that all that matters is the existence of some competition
(and that all it proves if it exists is that protectionism is logically possible). But if the
“nature and extent” of the competition are relevant, it seems it must be because we
are actually interested, not just in whether protectionism is logically possible, but in
whether it is plausible or likely. Furthermore, so far as I can see, there can be no
abstract, context-independent answer to the question, “How much and what sort of
competition does it take to make protectionism plausible or likely?” The only
question that makes sense is whether protectionism is plausible or likely as the
explanation of a particular regulation adopted in a particular context. And while the
nature and extent of the competitive relationship are relevant to answering that
question, there is a great deal else that is relevant, such as the existence of health
dangers whether or not they have any effect on consumers’ actual purchasing
behavior. In sum, we cannot explain why we are interested in the “nature and
extent” of the competition, without explaining at the same time why we are
interested in much more than the facts about competition. We are led back
ineluctably to a question about regulatory purpose.
Second, some people have found in the Asbestos opinion the suggestion that
asbestos and PCG are not in competition in the sense relevant to likeness, because,
given the dangers to health, no fully informed and rational consumer would buy
asbestos. Now, even this claim about informed and rational consumers seems
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doubtful, as I shall explain in a moment, but notice first that if we said this, it would
constitute a complete abandonment of the idea that the test of likeness is grounded
in the actual, empirical market. Rather, the test for likeness would now be found in
an idealized market. Consequently, this move would also require us to give up the
idea, which is popular in some quarters, that the test for “likeness” can be lifted from
antitrust law’s approach to market definition, and that “likeness” can be identified
by econometric techniques for estimating cross-elasticities. It should have been
clear all along that antitrust law is not an adequate model for Article III. Antitrust
law attempts to identify private behavior that reduces competition through
combination or monopolization; and although we occasionally allow such private
behavior that reduces competition, because we expect consumers to benefit in other
ways, there is excellent ground for presuming that private combinations or
monopoly behavior that reduce competition are bad. In contrast, there is no
adequate ground for presuming that all governmental acts that reduce competition
between foreign and domestic products are bad. Government ideally pursues a
variety of social interests that we do not normally count on private actors to pursue
sua sponte. And although government may be captured by domestic producers for
protectionist purposes, that needs to be shown in particular cases by something
more than mere “anti-competitive” effect.
Now, picking up the thread we temporarily dropped above, is it true that
informed and rational consumers would not buy asbestos? Not obviously.
Rationality, as it usually understood, is compatible with a substantial range of
attitudes to risk, and perhaps with a range of attitudes to time-discounting. A
consumer with high risk tolerance might reflect that the chance of his being harmed
by using asbestos-containing materials was small and distant in time, and that he
was willing to take that chance, in return for the lesser cost or greater convenience
or effectiveness of asbestos. Alternatively, a house-builder considering whether to
use asbestos-containing materials might decide that it will use asbestos to lower its
costs, and by the time the bill comes due many years later, it may be out of business,
or it may have accumulated such large asbestos-related liabilities that it will just go
14
bankrupt (while managers and many of the current investors continue to enjoy their
distributed asbestos-based gains). Of course, we might say that if purchasers or
renters from such home-builders were fully informed and rational, they would not
buy asbestos-containing houses. But of course some of those consumers may be
very risk-tolerant. In sum, to sustain the claim that no one will buy asbestos, we
must idealize the market still further, both constraining the risk (and time?)
preferences of ultimate consumers and assuming full information on the part of all
ultimate consumers, not just initial purchasers of asbestos.
Clearly, the only claim we might make with any plausibility is that asbestos
would not compete in a highly idealized market. That raises the question: Why
would the fact that asbestos would not compete with PCG fibers in such a highly
idealized market mean that asbestos is not “like” PCG? The obvious answer is that
we think it reasonable for the government to try to regulate in such a way as to
mimic the results we would get from the idealized market. Regulating to try to
mimic an ideal market is not protectionist, even if it makes a foreign product that
competes in the empirical market worse off.
Once we have recognized that it is proper for the government to try to mimic
the behavior of an ideal market, and that a product that would not be purchased in
such a market is not “like” another product that would be purchased, further
idealization suggests itself. Suppose the facts about asbestos are such that even a
fully informed and rationally self-interested consumer with a “proper” attitude
towards risk might still actually buy asbestos or asbestos-containing materials,
either directly or through some intermediate producer. It still does not follow that
anyone would buy asbestos in a fully ideal market. After all, in a fully ideal market,
the consumer would take into account (either sua sponte or because he is forced to
do so by regulations or tax measures) the effects of his asbestos use on others – the
health-care and disability costs he externalizes onto a social insurance scheme, the
health dangers to his spouse or children if he buys a house containing asbestos, and
so on. There seems no reason not to idealize so that the consumer internalizes these
15
externalities as well. If we now add the point that the precise content of the relevant
idealization must largely depend on the societal preferences and cultural
commitments of the polity whose regulation is in question (certainly with regard to
externalities, but presumably also with regard to such matters as an acceptable
attitude to risk), we have reached the point of saying in effect that the foreign
product is not “like” the domestic product if the government has a non-protectionist
reason for regulating, taxing, or banning it. Or conversely, the foreign product is
“like” if treating it differently indicates protectionist purpose. In sum, the
“competition in an ideal market” approach to likeness turns out to be equivalent to
the regulatory purpose test.
Before we leave the topic of “like products”, let me say a word about the
special problem of so-called “unincorporated PPM’s” – taxes or regulations that
distinguish between physically identical products on the basis of the way they were
produced. Many people believe that the products distinguished by such a PPM are
automatically “like”. They are after all, physically identical – how could they be
more “like” than that? In my view, this is a mistake. Article III does not say the test
of likeness is based in the physical constitution of the products any more than it says
likeness is based in market competition. Sometimes there is a sound regulatory
reason to distinguish between physically identical products that have been
produced in different ways: conservation of species provides one sort of example;
climate change provides another. The basic analysis of likeness is exactly the same,
whether we are dealing with a PPM or an “ordinary” regulation that distinguishes
products on the basis of their own physical properties. The PPM problem does have
some special wrinkles concerning the location of the harm to be avoided, but even
here, the basic issue, whether the law can be presumed to be motivated by
preference for domestic producers, is the same. In US – Shrimp the Appellate Body
established that PPM’s can be justified under Article XX, and that takes some of the
pressure off the issue of whether PPM’s violate Article III. But as I shall explain
16
below, we should not stop caring about the correct interpretation of Article III just
because Article XX is (sometimes) there as a backstop.18
Summing up the main discussion of Asbestos, we have been looking for a way
to interpret the Appellate Body’s “competition” test that can find asbestos and PCG
fibers unlike, despite the common sense view that they do compete empirically to
some degree. But both ways we have considered (focusing on the “nature and
extent” of competition, and idealizing the market) turn the competition test into a
regulatory purpose test. There is no middle ground between a purely empirical
competitive relationship test (which the Appellate Body rejected in Japan – Alcohol,
when it required a distinct “so as to afford protection” inquiry), and a test based on
regulatory purpose.
IV. “Less favorable treatment”: EC – Asbestos and Dominican Republic –
Cigarettes
The second element of an Article III:4 violation is “less favorable treatment”.
The first significant discussion of this issue is in Korea – Beef, and it is an interesting
discussion, but not really germane to our purposes. The issue was whether the
distinct treatment of domestic and foreign beef by an origin-specific measure should
be regarded as different treatment (and of course the Appellate Body decided it
should in this instance). But because it concerned an origin-specific measure, this
was the sort of case where, once different treatment (worse for the foreign product)
was established, a protectionist purpose could be presumed. As it happens, there
was other evidence of protectionist purpose, which the Appellate Body seems to
have been moved by in their Article XX discussion. The Appellate Body says Korea
could have achieved all the protection it wanted against fraudulent passing off of
foreign beef as domestic by spending more on policing, without the dual distribution
18
CR-REF
17
system. Korea objects that this would not achieve their desired level of protection,
which is zero fraud of this sort. Curiously, the Appellate Body says they don’t think
that could be Korea’s actual goal, since the natural way to achieve that goal would be
a total import ban. But they could hardly have meant to encourage a total import
ban, or to suggest it would be acceptable in these circumstances. Surely the point
was that Korea was not entitled to have such a goal with regard to fraudulent
passing off of foreign beef, in view of the fact that they limited themselves to
policing, and thus to less-than-perfect enforcement, when the issue was passing off
domestic dairy beef for Hanwoo beef. There is no other explanation for the
Appellate Body’s noting specially the Panel’s qualification in US – Section 337
[CHECK, AND CITE] that a Member is entitled to its own level of protection under
Article XX, provided it seeks the same level of protection when the danger comes
from a domestic source as from a foreign. Since Korea appeared to want a higher
level of protection when the danger of fraud came from foreign beef, that was a
distinction that disadvantaged foreign products with no non-protectionist
explanation.
Asbestos also discusses “less favorable treatment”, briefly. Their discussion,
in the context of an origin-neutral measure, is fully germane to our inquiry, but it is
not clear what they mean to say. After observing that their interpretation of “like
products” is relatively broad, they remind us that Article III:4 is violated only if
“like” foreign products are subjected to “less favorable treatment” than domestic
products. Then they say in ¶100: “[A] Member may draw distinctions between
products which have been found to be ‘like’, without, for this reason alone,
according to the group of ‘like’ imported products ‘less favourable treatment’ than
that accorded to the group of ‘like’ domestic products.” [Emphases in original.] They
do not discuss the matter further, since the Panel’s findings on “less favorable
treatment” were not appealed.
There are two very different ways to take this statement by the Appellate
Body. It may be that all they mean to do is to reject what is known as the “diagonal
18
approach”, which says there is “less favorable treatment” of foreign products if any
foreign product (e.g., foreign asbestos) is treated worse than any domestic product
(e.g., domestic PCG fibers), even if the overall market share of foreign products in
the market is unaffected by the prohibition (as, for example, if Canadian asbestosplus-PCG fibers start out with 50% of the market before the prohibition, and
Canadian PCG fibers end up with 50% of the market after the prohibition). The
Appellate Body is surely right to reject the diagonal approach, if that is what they
are doing. Absent possible special circumstances concerning effects on the price
and profitability of the foreign versus domestic goods, there is no protectionism
when the market share of foreign products is unaffected. (Even if the regulation is a
purely political effort to help PCG producers vis-à-vis asbestos producers, there is
no protectionism – no preference for domestic producers as such – when foreign
PCG producers benefit equally with domestic.)19 To my mind the diagonal
approach has so little to recommend it that it is hard to see why the Appellate Body
would go out of its way to deny it. But that may be what they were doing.
But notice that just rejecting the diagonal approach is not enough to
guarantee that “less favorable treatment” of “like” foreign products results from
protectionism, at least if the test for “likeness” is a pure market test. If the test for
likeness is a pure market test, then most people would accept that asbestos and PCG
fibers are “like”, because they do compete in the real-world market for insulating
and fire-retardant materials. And almost certainly, the French prohibition of
asbestos will reduce Canada’s market share in that market. Even so, given the wellestablished health dangers, it would be perverse to suggest that the French
regulation, assuming it is motivated by health concerns, is protectionist.
There is only one kind of case where the diagonal approach has any intuitive
appeal at all, and even that case is better analyzed in other ways. An example of the
sort of case is where a state of the United States discriminates in some market
against all products from out-of-state, so that national products from other states
are disadvantaged along with products from other countries. Here we want to be
able to say that foreign products receive “less favorable treatment”, even though
they are treated the same as most national products. See [HOWSE AND REGAN].
19
19
There is a more interesting reading of ¶100 in Asbestos which sees it as
importing regulatory purpose into the “less favorable treatment” test. The idea is
that there is no “less favorable treatment” of “the group of ‘like’ imported products”
vis-à-vis “the group of ‘like’ domestic products” unless the foreign products are
treated worse on account of their being foreign. With this reading of “less favorable
treatment”, Article III:4 would be able to distinguish genuinely protectionist originneutral regulations from non-protectionist measures pursuing health, or safety, or
other goals, even with a purely economic interpretation of “likeness”. Much as I
would like to think this is what the Appellate Body is suggesting, I am far from
confident that it is. Perhaps best to think they really aren’t trying to settle the
meaning of “less favorable treatment”, but just flagging an open issue.
Before we consider the most recent important case about “less favorable
treatment”, notice a possible irony in the Appellate Body’s position in Asbestos. In
response to the Panel’s suggestion that health risks cannot be considered at all
under Article III:4, because that would render Article XX(b) inutile, the Appellate
Body quite rightly insists that III:4 must be interpreted on its own terms, and not
manipulated to send more measures to XX(b). But if the Appellate Body really
means to take a purely empirical, competition-based view of “likeness”, and also a
purely empirical, market-share-based view of “less favorable treatment”, it is going
to send large numbers of non-protectionist original-neutral measures to Article XX
after all. This seems inconsistent with the implications of the title of Article XX,
“General Exceptions”, which suggests that Article XX is meant to deal with
exceptional cases. It is not meant to do the primary work of sorting out
protectionist and non-protectionist measures. That is to be done mostly by Articles
III and XI. But on a purely market-based approach to Article III, Article XX will have
to do almost all of the work with regard to origin-neutral measures.
The reader might wonder, of course, why we should not send all originneutral cases involving disparate effect to Article XX. Even if that seems
20
inconsistent with the implication of the title of Article XX, maybe it would be a good
idea. One problem, of course, is that Article XX has a nominally closed list of
purposes, which excludes a number of perfectly reasonable governmental purposes
– environmental goals other than those named in XX(b) and XX(d), avoidance of
public offense, protecting religious values, sumptuary purposes, and so on. [CHECK
MY LIST SOMEWHERE] Of course, it may be that the “closed list” of purposes in XX
will in practice exclude nothing, if we consider the Panel’s (unappealed) decision in
US – Reformulated Gasoline that clean air is an “exhaustible natural resource” and
the very broad interpretation of “public morals” under GATS Article XIV in US –
Gambling. [CHECK BOTH] But the regulating government should not have to rely
on this. Indeed, and this is the most important point, the regulating government
should not be dragged into dispute proceedings at all unless the complainant can
make a plausible case that the challenged regulation is protectionist. A mere
showing of disparate impact on foreign products does not necessarily do this, as the
example of asbestos regulation makes clear.20
Whatever the Appellate Body intended in Asbestos, they seem to have
introduced regulatory purpose into the “less favorable treatment” analysis in
Dominican Republic – Cigarettes. The particular issue of interest to us was whether
the requirement of a bond of DR$5 million (the same amount for any manufacturer
or importer of cigarettes) constituted “less favorable treatment” of an importer of
Honduran cigarettes because he had a lower market share in the Dominican market
than two large Dominican manufacturers, and thus a higher per-unit cost of the
bond requirement. Both the Panel and the Appellate Body concluded that there was
no less favorable treatment. Conceding the difference in per-unit costs of the bond
requirement, the Appellate Body wrote: “However, the existence of a detrimental
effect on a given imported product resulting from a measure does not necessarily
imply that this measure accords less favorable treatment to imports if the
detrimental effect is explained by factors or circumstances unrelated to the foreign
Notice incidentally, there is no danger of making Article XX inutile as long as both
origin-specific internal measures and border measures go to XX automatically.
20
21
origin of the product, such as the market share of the importer in this case.” (¶96)
And a bit further on, “the difference between the per-unit costs of the bond
requirement alleged by Honduras is explained by the fact that the importer of
Honduran cigarettes has a smaller market share than two domestic producers.”
(¶96) And further on, “the difference between the per-unit costs of the bond
requirement alleged by Honduras does not depend on the foreign origin of the
imported cigarettes.” (¶96) These excerpts, and the full paragraph in which they
appear, are not a model of expository clarity. Certain phrases could be read to
suggest that even here, the Appellate Body is merely rejecting the diagonal approach
(e.g., “effect on a given imported product”, “smaller market share than two domestic
producers” [emphases added]). But that is not the impression given by the passage
as a whole, and that would not account for the references to what “explains” the
difference in per-unit cost (or what the difference “depends on”). The interesting
question is, just what sort of “explanation” (or “dependence”) does the Appellate
Body have in mind?
Consider again the facts of Chile – Alcohol, and suppose that we are applying
to those facts a legal analysis structured by Article III:4 instead of by Article III:2,
second sentence. If we focus just on the formal operation of the Chilean law, we
might say the higher ad valorem tax on most imported liquor (as compared to most
comparably prestigious domestic liquor) is “explained” by the higher alcohol
content of the imported products; and obviously their higher alcohol content is a
different fact from their foreign origin. But that does not mean the higher ad
valorem tax is not “explained by” or does not “depend on” the foreign origin of the
liquor, if the alcohol content criterion itself was chosen precisely because of its
correlation with foreign origin. If we read the references to “explanation” in the DR
– Cigarettes opinion as concerned solely with the formal operation of the law, then
an origin-neutral regulation will never accord “less favorable treatment”, because
there will always be a formal legal explanation for the different treatment other
than the origin of the products. But if we recognize, as we must, that the less
favorable treatment is “explained” by the foreign origin of the products when the
22
legal criterion itself was chosen as a proxy for foreign origin, then we find ourselves
inquiring into regulatory purpose.
Once again, of course, the Appellate Body avoids saying explicitly that the
issue is protectionist purpose. But there is no other reading of this part of the
opinion that makes nearly as good sense of it. To tell the truth, I am not certain
whether the Panel and Appellate Body got the right answer here. I wish they had at
least shown more awareness of the discriminatory tendency of all kinds of flat-rate
financial impositions, which can be expected to bear more heavily on foreign
producers or service providers for just the sort of reason we see in DR – Cigarettes.
But as we said about Chile – Alcohol, the important question for now is not whether
the Appellate Body applied their test correctly; the question is what test the opinion
indicates they were applying. In this case, as in Chile – Alcohol, the answer is
regulatory purpose. [Q: Mention that DR – Cigs “explanation” test is picked up
in Biotech?]
Summing up, it is a pity that Japan – Alcohol and EC – Asbestos are the two
best-known cases on Article III. Japan – Alcohol has been persistently
misunderstood, as the Appellate Body confirmed in Chile – Alcohol, when it said that
Japan – Alcohol called precisely for an inquiry into regulatory purpose. Asbestos is
opaque in important respects; and to the extent it may seem to advance a purely
empirical, market-based approach to both elements of Article III:4, it is an outlier.
Cases both before and after Asbestos reflect an understanding that the over-arching
anti-protectionism principle asserted in Article III:1 makes regulatory purpose
central.
V. Protectionist Purpose: What It Is, How To Prove It, Why It Matters
I have been talking for many pages about “protectionist purpose”, and I
assume that the reader actually has a sufficiently clear idea what I mean by it. The
23
Appellate Body in Chile – Alcohol did not feel obliged to discuss what it meant by the
purpose of a regulation, beyond saying it was concerned with “the purposes or
objectives of a Member’s legislature and government as a whole”. Still, it is worth
saying just a bit more. First, notice that the practice of attributing purposes to
collective bodies is one we engage in all the time. It may be problematic, if we ask
for a completely precise account of how collective purposes are assembled out of
individuals’ purposes by institutional processes; but problematic or not, the practice
is indispensable, and all we need is an understanding which is “good enough”.
First, we observe that the collective purpose of a legislature (for example) in
passing a bill cannot be constituted by simple aggregation of individual legislators’
purposes in voting for a bill. This is not simply because, as the Appellate Body said
in Japan – Alcohol, many of those individual purposes are inaccessible. It is also
because many individual legislators’ puposes have nothing directly to do with the
substance of the bill. A legislator may vote for a bill just to please her party higherups, or to return a favor from another legislator, or to please some campaign donor,
or even just to keep the family peace with her sister-in-law. In the extreme case, the
legislator may vote as she does because she has misread the bill and thinks it does
the opposite of what it actually does.
Now, that last, extreme case we can do nothing with; it is a random event,
and hopefully not common. But in all the other cases, even if the legislator’s vote
does not reflect her views on the merits of the bill, it does represent somebody’s
views, for which the legislator has chosen to make herself a conduit (in this
instance). Of course, the party higher-ups may themselves be operating as conduits
for the views of constituents or influential donors. But there must be an end of each
chain, where we come to the people who have substantive views, and whose views
are being given political effect by the legislators’ votes. The “purpose” of the
legislature as a whole is constructed out of the purposes of these influential people
or blocks. We can think of it as constructed out of political forces, and the political
24
forces behind a measure are usually easy enough to identify (admittedly not
always), if we are prepared to use our political sense.
So, jumping over some intermediate details, what I mean by saying there is
“protectionist purpose” is, roughly, that the political interest of producer groups in
suppressing foreign competition, magnified by organization and political
contributions in cash or kind (such as volunteers for canvassing), was a but-for
cause of the adoption of the measure in question.21 Why do we focus on producer
groups as a special problem, when other interest groups are struggling in the
political process as well? The main practical reasons are: (1) producer groups’
relative ease-of-organization makes it specially likely that they will exercise political
influence disproportionate to their numbers, thus distorting the political process,
and (2) whereas we can say that any degree of preference for domestic producers as
such over foreign producers as such is objectionable, we cannot say the same about
“any degree” of protection for human health, or endangered species, or against
money-laundering. The legal reason for singling out protectionism as a special
problem is that protectionism is the main thing the WTO is about – which confirms
the practical reasons. Protectionism is not just mentioned as the problem in GATT
Article III:1. Restraining protectionism is the very first objective mentioned in the
Punta del Este Declaration. [CHECK. CITE.]
I just claimed we could do a reasonable job of identifying protectionist
purpose if we used our political sense. (A reasonable job, not perfect; no useful test
can be applied easily and conclusively to every case.) So we are led to the question
of how to prove protectionist purpose. First, remember a forgotten line from the
Appellate Body Report in Japan – Alcohol. After the famous bit about the “design,
the architecture, and the revealing structure” of the measure, the Appellate Body
goes on to say: “Most often, there will be other factors to be considered as well. In
conducting this inquiry, panels should give full consideration to all the relevant facts
21
Consumer protectionism, for example by export restraints, is possible but rare.
25
and all the relevant circumstances in any given case.”22 So, we are allowed, indeed
adjured, to look at all relevant facts and circumstances.
That includes, for example, Ministerial statements,23 which are not just the
assertions of ordinary individual legislators, but come rather from legislators or
office-holders specifically charged to speak for the government as a whole.24 It
includes also the unexplained suppression or alteration of government reports.25 It
even includes facts about the existence or absence of lobbying.26 Despite what the
Appellate Body has said about not presuming that a new regulation is protectionist
just because an old one was,27 it surely includes the fact that a new regulation seems
like nothing more than a transparent reformulation of one just invalidated.28 It surely
includes facts about timing, for example, if a new regulation with protective effect is
adopted just when competition from the disfavoured foreign source appears or
becomes serious. It includes facts about whether innocent (non-protectionist)
explanations for the measure are available. It includes facts about whether less traderestrictive measures that achieve the same putative goal are clearly available.29 And
sometimes the structure of the measure is so bizarre that in conjunction with
disparate impact on competitive conditions, it is enough to show protectionist intent
all by itself, as in Chile – Alcohol.
Japan – Taxes on Alcoholic Beverages, WT/DS8&10&11/AB/R (adopted 1
November 1996), p. 29 (§H.2(c)).
23 Canada – Periodicals.
24 Even statements of non-Ministers should presumably be considered, especially if
there is reason to think they are representative, although it is important not to give
isolated statements too much weight, because an individual legislator may speak for
no one but himself. The Appellate Body in Japan – Alcohol did not say we must ignore
the intentions of individual legislators (and certainly there is no problem of the
accessibility of an individual legislator’s intentions, when he announces his view).
[They may seem to say this in first sentence of my epigraph? Discuss or drop?]
What the Appellate Body said was that we do not have to construct the purpose of the
legislature simply out of the individual legislators’ views.
25 Australia – Salmon.
26 EC – Hormones.
27 Chile – Alcohol.
28 US – FSC 21.5.
29 See further discussion of the less-restrictive-alternative idea in the text below.
22
26
Related to the issue of proof of purpose is a worry about whether tribunals will
be willing to explicitly find protectionist purpose. There probably is some reluctance;
indeed, it is evidence of such reluctance that tribnals are much more willing to say the
test is protectionist purpose in cases where they do not actually find such purpose
than in cases where they plainly do find it. Why tribunals should be reluctant, I am
not certain. Surely it is clear that the Panel and Appellate Body thought they saw
protectionist purpose in Chile – Alcohol or Japan – Alcohol, for example. Why not say
so? No Member is immune to the protectionist impulse, and I doubt there are any
that can honestly claim not to have engaged in illegal purposeful protectionism.
Restraining protectionism is the main thing the WTO treaties are about.30 So it is odd
that, judging from the face of the opinions, one might think it never happens. To be
sure, we have found ways to inhibit protectionism that do not require consideration
of purpose at all – for example, the administrative procedure requirements of the
Antidumping Agreement and of the Subsidies Agreement with regard to
countervailing duties, and the scientific justification requirements of the SPS
Agreement. But the SPS Agreement may have turned out to be more restrictive than
it should be, as the price of deflecting attention from the real issue. In any event, in
GATT Article III cases or (when we get some) GATS Article XVII cases, transparency,
and clarity, and effective Appellate Body guidance for Panels and litigants would be
best served if the Appellate Body would talk openly about protectionist purpose and,
when they find it, say so. Better to strive for this than to argue that purpose should
not be the test because tribunals won’t find it. Practically speaking, it is the test, and
they do find it. The only issue is whether they will admit it.
The final question for this section is why the regulations we want to suppress
are those motivated by protectionist purpose. Most people understand that
protectionism is inefficient. And most people’s everyday conception of protectionism
is regulation whose purpose is to advance the interests of domestic economic actors
30
Again, see the opening of the Punta del Este Declaration.
27
vis-à-vis their foreign competitors. But it may nonetheless seem puzzling, once we
notice the question, why regulatory purpose should have any bearing on efficiency.
Isn’t efficiency determined by effects? Yes and no. Efficiency is about satisfying
preferences. So it is about effects, but about effects as they are valued. Consider an
example based on an American “dormant commerce clause” case. Imagine that in
Utopia, milk produced in Utopia is sold both in cardboard cartons and in plastic jugs.
Some consumers prefer the one packaging, some the other, but there is high
substitutability. Plastic jugs are more damaging to visual amenities and to the
environment because they do not biodegrade. (Once we take into account the whole
life-cycle, it may actually be less clear that plastic is more problematic, but for now,
we hypothesize that plastic is more of an environmental problem.) Finally, cardboard
cartons are produced in Utopia, and plastic jugs are produced abroad. Now, imagine
two scenarios. In one, the Utopian legislature imposes a 10% internal tax on plastic
jugs to internalize the environmental externality (and we assume the tax is exactly
calculated to accomplish the desired internalization.) In the other scenario, the
legislature does not care about the environment, but it imposes a 10% internal tax on
plastic jugs as a protectionist measure.
These two taxes will have exactly the same effects – on prices, on how many
cartons are sold and how many jugs are sold, on quantity of imports, and even on the
environment. And yet, we are trained to believe the Pigovian tax is efficient, while the
protectionist tax is not. The difference is that in the Pigovian case, the society values
the environmental effects of the tax, whereas in the protectionism case, it does not. So
in the Pigovian case, the tax creates valuable effects to set against the production and
consumption distortions from the protectionist tax – or more accurately, those
“distortions” are not distortions at all, when Utopia cares about the environment and
hence regards the environmental effects from using plastic jugs as a cost. We do not
assume that the protectionist tax represents society’s valuation, because we
understand too well how protectionism is likely to result from a distorted political
28
process.31 In contrast, we do assume that the Pigovian tax represents society’s
valuation. In sum, regulatory purpose is an indicator of society’s valuation of effects;
and the social value of the effects (which of course includes, but is not limited to,
consumer value) determines efficiency.
There is one final topic to consider that bridges the questions of what
protectionist purpose is, how we prove it, and why it matters. Suppose a regulation is
adopted without protectionist purpose, so it reflects a genuine social valuation, but it
overlooks a less trade-restrictive means of achieving the same benefit (or in a special
case of that, circumstances have changed since the adoption of the regulation, so that
it is no longer necessary or appropriate).32 A measure that fails to use the least
restrictive means of achieving the same benefits is obviously inefficient. It is not just
globally inefficient, but also irrational from the point of view of the regulating country;
it hurts unnecessarily not only foreign exporters, but also the domestic purchasers
who would like to deal with them. Now, failure to use the least restrictive means is
not the same as protectionist purpose. So it may seem that GATT Article III, which
clearly does not establish a free-standing less restrictive alternative test, leaves a kind
of loophole. And yet, the structure makes sense, if we consider it closely.
First, notice that if the existence of a less restrictive alternative is clear enough,
then the failure to use the less restrictive alternative is itself persuasive evidence of
protectionist purpose. Even in the case of changed circumstances, although failure to
use what is now a clearly less restrictive alternative is no evidence of protectionist
purpose in the original adoption of the measure, failure to change the measure, once
its clearly unnecessary trade-restrictiveness is brought to the attention of the
regulator, could be regarded as demonstrating protectionist purpose for any
If the society as a whole actually had a preference for autarky, or for autarky with
respect to particular sectors or products, then the protectionist tax also would be
efficient. But such a society would not have joined the WTO.
32 An example of such changed circumstances that has often been put to me as a
problem for my protectionist purpose view is the centuries- old German
Reinheitsgebot, before the European Court of Justice got hold of it. [CHECK]
31
29
continued enforcement of the measure – in which case, the measure can just be
forbidden.
But now, suppose a plausible case can be made that there is a less restrictive
alternative, but the existence of such an alternative is not so clear as to establish
protectionist purpose by itself? In these circumstances, the result depends on
whether the challenged measure is origin-specific or origin-neutral. If the measure is
origin-specific, it will go to Article XX, which imposes a less-restrictive alternative test.
This is explicit in those particular provisions like XX(b) that begin with “necessary”.33
But even for a provision such as XX(g), beginning with “relating to”, the Appellate
Body in US – Shrimp effectively created a less restrictive alternative test. It did so
when it held that requiring turtle-excluder devices of countries where the absence of
turtles or the particular methods of shrimp-fishing made them unnecessary was (one
aspect of the) “unjustified discrimination”.34 On the other hand, if the measure is
origin-neutral, and the existence of the less restrictive alternative is not so clear as to
establish protectionist purpose, the respondent country will prevail. As we have
noted, Article III simply does not establish a free-standing less restrictive alternative
test (as the SPS and TBT agreements do, for example). And why should there be this
difference between GATT Article III and the SPS and TBT agreements? It may reflect
an appropriate degree of deference to the regulator over a variegated range of
possible problems. The willingness to establish a free-standing less restrictive
CITE SELF ON “NECESSARY” IN XX.
[Cite, CHECK] One might ask why we are willing to impose the least-restrictivemeans requirement at all, since even in conjunction with origin-specificity, it does not
logically entail protectionist purpose. One reason, of course, is that the combination
of origin-specificity and use of an unnecessarily restrictive means is strong evidence
of protectionist purpose. But beyond that, it seems plausible to say that use of an
origin-specific measure is enough to justify calling in a neutral decision-maker to
consider whether there are less restrictive means available, and then to require the
use of such means, if the decision-maker finds they exist. Remember that failure to
use least-restrictive means is always inefficient. The issue is when to rely on the
third-party decision-maker to investigate whether they exist: when it is worth the
intrusion on the national regulatory process, and when we think the outside decisionmaker’s view is more reliable than the regulator’s. One plausible answer is “when the
measure is origin-specific”.
33
34
30
alternative test in the SPS and TBT agreements [CHECK BOTH] may reflect the fact
that in these relatively well-defined areas, we have more faith in the competence of
the reviewing tribunal to judge the situation, and so the balance between greater local
familiarity with the problem and greater impartiality of the tribunal comes out
differently.
VI. . . . Et Ubique
In this final section, I want to point out the range and variety of cases where
regulatory purpose is a central issue. I shall discuss just one or two cases from each of
four categories: (1) In some cases (under the SPS and TBT) there is a threshold issue
of classification of measures by regulatory purpose, which is raised explicitly by the
text and talked about openly, presumably because it is not an issue of protectionist
purpose (although it may effectively determine the outcome of the case). (2) In at
least one case (under the Rules of Origin Agreement), the issue is protectionist
purpose, and it is raised explicitly by the text (although in other equivalent words)
and discussed openly. (3) In some cases (MFN cases from GATT days, involving
origin-neutral tariff distinctions), there is an issue of objectionable purpose, but the
issue is not protectionist purpose, and the opinions are murky because of uncertainty
about just what the relevant objectionable purpose is. (4) Finally, and most
interestingly, there are cases (under the Subsidies Agreement and under nonthreshold provisions of the SPS Agreement) where the issue is plainly protectionist
purpose, but neither the text nor the Appellate Body says so openly. This section is
not intended to be an exhaustive survey of cases and issues involving regulatory
purpose. The point is to just to show that issues of regulatory purpose crop up
everywhere we look. [Note to self: Probably drop US – Poultry from China, and
add US – FSC 21.5 on SCM footnote 59 and purpose to avoid double taxation]
First, the SPS Agreement defines SPS measures in terms of purpose, and the
results of a case might turn on this classificatory issue. Consider China’s curious
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volte-face in their characterization of the U.S. measure they challenged in US – Poultry
from China. At the beginning of the litigation, China claimed the U.S. measure was not
an SPS measure; at some point along the way, they began insisting that it was an SPS
measure. The U.S. feigned horror at this inconstancy, but they were not
disadvantaged, and it is perfectly clear what was going on. At first, China hoped to
argue the U.S. measure was not a health measure at all (in which case, it could not be
an SPS measure, given the context). When it became clear that this argument was not
going to succeed, in part because the U.S. insisted the measure was a health measure,
China claimed that it was an SPS measure, because that was the way to get the
strictest discipline on health measures. The U.S. insisted all along that the measure
was a health measure, but not an SPS measure. In the end, the Panel found that the
measure was an SPS measure, a finding that was indispensable to some of the
violations found, and that may have influenced all of them.
Or consider the TBT Agreement. The definition of “technical regulation” in
TBT Annex 1.1 contains no reference to purpose. Nonetheless, the complete
definition of a TBT measure does contain a reference to purpose, because TBT Article
1.5 says that SPS measures are not TBT measures, and of course SPS measures are
defined by purpose. In order to be a TBT measure, a measure must have some
purpose other than an SPS purpose. Obviously, it will often be in the regulation
country’s interest to claim its measure is a TBT measure (or to claim, under a holding
of Biotech,35 that a set of operative words in a regulation or statute that creates an SPS
measure also creates a TBT measure), so that the measure (or a measure) will not be
subjected to the particularly stringent disciplines of the SPS. Here the result in the
case may turn on whether the tribunal believes or does not believe the assertion of a
particular (non-SPS) regulatory purpose.
Next, the Rules of Origin Agreement. Article 2(b) says that rules of origin shall
not be “used as instruments to pursue trade objectives directly or indirectly”. In the
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CITE.
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only decision under this Agreement, [CHECK] the Panel said that this language
prohibited the use of rules of origin to achieve protectionist purposes, and they
modelled their inquiry into the purpose in the actual case on the Appellate Body’s
opinion in Chile – Alcohol.
Returning to GATT, and to Article I thereof, let us consider Japan – SPF Lumber,
a pre-WTO case involving origin-neutral tariff classifications (that is, classifications
that did not discriminate de jure between foreign countries). The Panel said: “[A]
tariff classification going beyond the Harmonized System’s structure is a legitimate
means of adapting the tariff scheme to each contracting party’s trade policy
interests, comprising both its protection needs and its requirements for the
purposes of tariff and trade negotiations. . . . Tariff differentiations being basically
a legitimate means of trade policy, a contracting party which claims to be prejudiced
by such practice bears the burden of establishing that such tariff arrangement has
been diverted from its normal purpose so as to become a means of discrimination in
international trade.” 36 Here the reference to purpose, and to the need for the
complainant to prove a bad purpose (a “diversion” from “normal purposes”), is
completely explicit. What is not explicit is what an impermissible purpose might be.
(This presumably explains the incongruity of Japan – SPF Lumber, finding no
violation, and Spain - Unroasted Coffee,37 finding a violation, and the end-run around
the problem in Gemany – Imports of Sardines.38) Of course, the sorts of regulatory
purpose that would establish non-likeness under GATT Article III also suffice to
establish non-likeness here; a distinction based on such purposes is obviously not
objectionably discriminatory. But under Article III, it is clear what purpose is
forbidden, namely protectionism; and we also understand the political pathology
Japan – Tariff on Import of Spruce-Pine-Fir (SPF) Dimension Lumber, GATT Panel
Report adopted 19 July 1989, 36th Supp. BISD 167 (1990), ¶¶5.9, 5.10. [CHECK
WHETHER QUOTE IS CONTINUOUS.]
37 Spain – Tariff Treatment of Unroasted Coffee, GATT Panel Report adopted 11 June
1981, 28th Supp. BISD 102 (1982).
38 Treatment by Germany of Imports of Sardines, GATT Panel Report adopted 31
October 1952, 1st Supp. BISD 53 (1953).
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that generates the forbidden purpose. In contrast, we don’t have a clear idea what
the (or any) forbidden discrimination is under GATT I; and hence we do not have a
clear understanding of the political pathology that produces the forbidden
discrimination. Of course, some possible examples come to mind: the excessive
political influence of Cuban immigrants in Florida on the question of whether to
retain the United States trade embargo against Cuba; or a different sort of political
pathology in Congress’s overreaction to a genuine health concern about Chinese
poultry products because of general irritation over China’s trade behavior (if that’s
what we think produced the measure in US – Poultry from China).39 But even these
examples leave us with a much less satisfactory understanding of what the MFN
principle forbids than what the national treatment principle forbids – because we
have no clear specification of the forbidden purpose.
Finally, the most interesting cases: non-GATT cases where the issue seems
plainly to be protectionist purpose, but neither the text nor the opinions say so
explicitly. I shall discuss two cases under the Subsidies Agreement and two under
the SPS Agreement. First, consider the U.S. – FSC 21.5 decision, on the issue of
whether the exclusion from taxation of extraterritorial income attributable to export
sales was a financial contribution under Article 1.1(a)(1)(ii) in the form of foregoing
“revenue that is otherwise due”.40 The Appellate Body opinion manages skate past a
host of interesting issues in a remarkably bland opinion, but what they say has an
interest of its own. Once they have asserted that Members get to choose their own
approach to what to tax, and that the test of whether revenue is “otherwise due”
must be grounded in the commitments of the Member’s own tax system, it is clear
that they will never be able to find that revenue is “foregone” which is “otherwise
due” unless they are going to find some kind of internal inconsistency in the
Member’s tax system. In a striking echo of GATT Article III, they say that Panels
must “compar[e] the fiscal treatment of the income subject to the contested measure
and the fiscal treatment of certain other income. In general terms, in this
39
40
[CITE]
Agreement on Subsidies and Countervailing Measures, Article 1.1(a)(1)(ii).
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comparison, like will be compared with like.” (¶90) Panels “should seek to
compare the fiscal treatment of legitimately comparable income.” (¶91) And again,
“the normative benchmark for determining whether revenue foregone is otherwise
due must allow a comparison of the fiscal treatment of comparable income, in the
hands of taxpayers in similar situations.” (¶98) So, revenue otherwise due is
foregone when the fiscal rule treat comparable situations differently.
This is progress, but it still does not solve the problem that the grounds for
comparability or likeness must themselves be found in the Member’s own tax
system. How can we distinguish a system that is internally inconsistent from one
that is merely very complex? It is clear that the real question must be whether the
Member is “fiddling” its tax rules to achieve some problematic or prohibited end.
And it is clear also that in this context, the problematic or prohibited end must be
specificity in a non-export subsidy, or export-contingency (technically a mode of
specificity). This is revealing in two ways. First, specific subsidies (non-export or
export) are akin to classical protectionism in that they improve the competitive
position of domestic producers vis-à-vis foreign producers, and they are usually
adopted for just that purpose, as a result of some political pathology. Second, it
means that when the type of subsidy is that defined by SCM 1.1(a)(1)(ii), we cannot
separate the issue of the existence of the subsidy from the issue of specificity. We
can separate these issues in connection with other types of subsidy (except for the
aspect of 1.1(a)(1)(iv) that incorporates 1.1(a)(1)(ii) by reference), but not with this
type. The issue of whether the regulating country is “fiddling” its tax system
requires us to consider whether the relevant foregoing of revenue can be plausibly
explained by general tax principles the country is committed to, and this
corresponds to the fact that under GATT Article III, the issue of protectionist
purpose (whether in connection with “like products”, in either III:2 or III:4, or “so as
to afford protection”, or “less favorable treatment”) can usually only be decided by
asking about the relative plausibility of the attribution of protectionist purpose and
the attribution of some claimed innocent purpose, given the actual measure in its
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full context. In sum, the issue whether revenue is foregone that is “otherwise due” is
essentially an issue about protectionist purpose.
Protectionist purpose also lurks unnamed behind the Appellate Body’s
treatment of “contingent in fact upon export performance” in Canada – Aircraft. The
whole section of the opinion about this issue sounds like it is about purpose, but this
is made clearest in ¶167. The Appellate Body says the point of the prohibition of
subsidies that are “contingent in fact upon export performance” is to “prevent
circumvention of the prohibition against subsidies contingent in law upon export
performance”. (Emphases in original.) But to talk about “circumvention” in this
context is to talk about covert pursuit of a prohibited, protectionist purpose.41 Later
in that same paragraph, the Appellate Body says that proving contingency in fact is a
“difficult task”, and that contingency in fact “must be inferred from the total
configuration of the facts”. (Emphasis in original.) Now, difficult inferences are not
always to a hidden purpose, but in this case, it seems perfectly clear that that is what
is going on. Once again, export subsidization is a form of protectionism, and the
problem of finding export subsidization is a version of the problem of finding
protectionist purpose.
Finally, let us consider SPS Agreement Article 5.5, on consistency in levels of
protection (and eventually Australia – Salmon and EC – Hormones). Now,
consistency is almost always a good thing, but it should be clear even before we look
at the cases that the only reason for creating a treaty obligation on consistency in
levels of protection, backed up by an intrusive international dispute settlement
process, is that we want to test a regulating government’s claim that it genuinely
cares about a certain risk by asking whether it cares about that risk, or that kind of
risk, as much when protecting against it does not enhance the competitive situation
Export subsidies are sometimes referred to as “export promotion”, which might
seem like something distinct from protectionism; and indeed classical protectionism
is different insofar as it involves raising barriers around the home market. But the
essence is the same – seeking to improve the competitive position of domestic
producers by distortionary measures.
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of domestic producers as when it does. That is why Article 5.5 is not violated just by
the existence of arbitrary or unjustifiable distinctions between the levels of
protection in comparable situations, but requires in addition that the distinction
should result in “discrimination or a disguised restriction on international trade”.
Notice how similar the structure here is to the structure of GATT III:2, second
sentence. “Comparable situations” (note that phrase is the Appellate Body’s not
directly from the Agreement, ¶217 ) corresponds to “directly competitive or
substitutable”; “arbitrary or unjustified distinctions” corresponds to “not similarly
taxed”; and “discrimination or disguised restriction on international trade”
correspond to “so as to afford protection”. That structure alone suggests that the
issue of “discrimination or disguised restriction on trade” is an issue of purpose, just
as it did under GATT III:2. And the very phrase “disguised restriction” tells the same
tale. If the issue were just one of effects on trade, or on competitive opportunities, it
would make no sense to talk of “disguise”. What is going to be disguised, if it exists,
is protectionist purpose. So the “disguised restriction” language must be about
protectionist purpose. And then the parallelism between “discrimination” and
“disguised restriction” in the text (the former about MFN-type issues, the later about
national treatment) indicates that “discrimination” also is about bad purpose
(whatever sort of bad purpose is relevant in the MFN context).
All of this is borne out by the opinions on SPS 5.5 in EC – Hormones and
Australia – Salmon. In Hormones, the Appellate Body concludes its discussion of 5.5
by saying they cannot share the Panel’s conclusion that the EC’s ban on hormones
for growth promotion purposes in beef was “not really designed to protect its
population from the risk of cancer, but rather to keep out US and Canadian
hormone-treated beef and thereby to protect the domestic beef producers in the
European Communities.” (¶245) Along the way, remarkably, they find it relevant to
say that “[n]o suggestion has been made that the import prohibition of treated meat
was the result of lobbying by EC domestic producers of beef.” (¶244) In sum, it is
about protectionist purpose. Similarly, in Australia – Salmon, the Appellate Body
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says: “We note that a finding that an SPS measure is not based on [a risk
assessment] – either because there was no risk assessment at all or because there is
an insufficient risk assessment – is a strong indication that this measure is not
really concerned with the protection of human, animal or plant life or health but is
instead a trade-restrictive measure taken in the guise of an SPS measure, i.e., a
“disguised restriction on international trade.” (¶166) And further on, the Appellate
Body approves of the Panel’s treating an unexplained change in the conclusion of a
draft report on the risks from ocean-caught Pacific salmon (which originally
recommended against a complete import ban) as evidence of a “disguised
restriction”, and they also apparently say it is not a problem that the Panel
speculated the change in the report may have been the result of lobbying in favor of
protectionism. (¶¶170-173) Again, it can hardly be doubted that the issue under
SPS 5.5, as the Panel and Appellate Body see it, is protectionist purpose.
VII. Envoi
I have nothing new to say in conclusion, and there is no need to summarize in
any detail. Issues of regulatory purpose are everywhere. When they are threshold
issues, as in determining whether something is an SPS or TBT measure, they can be
discussed openly. When they are ultimate issues of improper purpose, they may be
discussed openly, but much more often, they are not. They are cloaked in
periphrasis and prevarication. But they are there nonetheless, in GATT Article III, et
ubique.
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