This is from Australia's first written submission in the Canada - Sale of Wine (DS537) WTO dispute:
3. Article III requires treatment no less favourable than the "most favoured" domestic product within the territory of a Member
117. The majority of the Canadian measures that Australia is challenging are provincial government measures. In most cases those measures not only draw a distinction in treatment between the relevant province's domestic products and imported products, but also against products from other Canadian provinces. Previous WTO and GATT panels have considered the application of Article III in this situation. Those panels have confirmed that the national treatment provisions in Article III require a Member to accord to imported products treatment no less favourable than that accorded to the "most-favoured domestic products" within the territory of that Member. As the panel in Canada – Wheat Exports and Grain Imports explained:
…it is clear from GATT/WTO jurisprudence that where an origin-based difference in regulatory treatment is made between products originating in one area, region or administrative unit of a country and all other like products - that is, like products originating in other areas of the same country or originating in foreign countries - Article III:4 requires that the foreign product be granted treatment no less favourable than that accorded to the most-favoured domestic product239.
118. Similarly, the GATT Panel Reports Canada – Provincial Liquor Boards (US) and US – Malt Beverages considered measures of provincial liquor boards which applied both to alcoholic beverages from outside Canada and the US respectively and to alcoholic beverages from other provinces within Canada and the US respectively. In considering whether differential excise taxes levied by US states breached Article III of the GATT 1947, the US – Malt Beverages Panel noted that it:
…did not consider relevant the fact that many of the state provisions at issue in this dispute provide the same treatment to products of other states of the United States as that provided to foreign products. The national treatment provisions require contracting parties to accord to imported products treatment no less favourable than that accorded to any like domestic product, whatever the domestic origin. Article III consequently requires treatment of imported products no less favourable than that accorded to the most-favoured domestic products240. (emphasis added)
119. Accordingly, the fact that many of the provincial measures at issue draw regulatory distinctions between products of that province and products of other Canadian provinces as well as imported products does not preclude a finding of a breach of Article III:4 or III:2. The comparison of treatment for the purposes of these articles will be between the treatment accorded to imported products and the treatment accorded to the "most-favoured" domestic products within the relevant provinces.
(footnotes omitted)
I want to focus on para. 119. The first sentence says: "the fact that many of the provincial measures at issue draw regulatory distinctions between products of that province and products of other Canadian provinces as well as imported products does not preclude a finding of a breach of Article III:4 or III:2." That is undoubtedly true. Discriminating against products of other sub-national regions cannot preclude a finding that a measure discriminates against imported products.
But then the second sentence says: "The comparison of treatment for the purposes of these articles will be between the treatment accorded to imported products and the treatment accorded to the 'most-favoured' domestic products within the relevant provinces." In my view, this sentence does not follow at all from the previous one. In fact, applying this standard could lead to findings of violation where the measures would properly be considered to treat imported and domestic goods equally favorably. Imagine the following scenario. A sub-national measure imposes a variable tax, based on objective criteria, that applies to (1) sub-national products from that state/province, (2) products from other sub-national states/provinces, and (3) imported products. Each of these three product groupings has individual products that fall into various tax categories under the measure. As a result, there are some imported products that are taxed less than some sub-national / other state/province products, and some imported products that are taxed more. Can a violation be found on the basis that an individual imported product is taxed more than an individual sub-national / other state/province product, regardless of how the three groupings of products are taxed overall? If you take the second sentence of para. 119 literally, it could be. To me, though, the better approach is to look at the overall breakdown of imported and national products (sub-national products from the regulating state/province vs. other state/province products is irrelevant here) into the different tax categories, to see if there is an appreciable discriminatory impact on imported products. Under this approach, you have satisfied the concerns of the first sentence of para. 119, but not created an overbroad standard as in the second sentence of para. 119. (And as far as I can tell, there would be no difference in outcome in the Canada - Sale of Wine case under the two standards).
The EU third party submission in the dispute is here. Along the same lines as what I said above, the EU argues the following:
46. The EU considers that certain findings of the panels in US-Malt Beverages and Canada – Wheat Exports and Grain Imports, should be considered in the light of the above clarifications of the Appellate Body and the facts prevailing in those cases. In particular, the panels in those cases essentially rejected the contention that a Member, to shelter a measure from Article III, could invoke the fact that like domestic products from other domestic regions were treated the same way as (all) imported products and that, for this reason, both were accorded less favourable treatment than that accorded to the domestic products from the region whose measure was at stake. In their findings, those panels however overshot the objective by making the most favoured domestic product the commanding benchmark and expressly suggesting that Article III:4 of the GATT 1994 obliges an importing Member that treats some domestic products better than other domestic products to accord the better of these two treatments to the entirety group of the like imported products.53 It is one thing, and correct, to say that a Member breaches Article III:4 if it treats some domestic products more favourably than all imported like products. It is quite another thing, and incorrect, to suggest that this violation, always and as a matter of principle, stops only when all imported like products enjoy the more favourable treatment which only some of the domestic like products receive. A correct assessment under Article III:4 must focus on a comparison of the treatment afforded to the entire group of domestic and entire group of like imported products. So, for instance, if a Member grants better treatment to some domestic products within the group but a similar subset of imported products enjoys the same treatment, that measure might not grant the imported product less favourable treatment.
