The primary objective of most trade agreements is to restrain members' use of trade policies for protectionist purposes. But it would be pointless to restrict the application of border instruments without regulating the possible use of domestic policies for protectionist purpose. To this end, most agreements include an obligation for National Treatment (NT) of foreign products. The NT provision in the GATT appears in Art. III, which applies to most government actions that have impact trade. It requires that imported products be treated as favorably by domestic policy as similar, indigenous products. This study offers suggestions based on legal and economic analysis about how this vaguely-formulated provision ought to be interpreted.
The study first examines the purposes of Art. III, as it appears from an economic point of view, as well as from its negotiating record. It also examines the case law, arguing that the absence of a coherent methodology implies that it is often unclear whether case law interpretations of the key terms promote the intended objectives of the provision. The study then identifies two alternative approaches that might be used to interpret Art. III, and its interplay with the general exceptions clause in Art. XX GATT.
The first approach only requires that the products are in sufficiently close potential or actual competition in the market, in a case where an imported product is given a less favourable treatment than a domestic product. The second approach requires additionally that the importing country has no policy rationale other than protectionism for treating the two products differently. The main difference between the two approaches is that under the former, the protectionism test occurs if/when an Art. XX exception is requested, while the latter approach mandates that the protectionism test should be performed as part of the evaluation of the alleged violation of Art. III. As discussed in the study, the second, and favored, approach provides a more permissive regime for domestic policy instruments.