Introduction

Measures by countries that require goods to contain locally produced inputs come in the way of free flow of goods across national borders. When examined from the perspective of the General Agreement on Tariffs and Trade (GATT), these measures can be held to be inconsistent with the provisions therein from two independent standpoints, namely: (a) imported inputs experience less favourable treatment than locally manufactured ones (Article III:4) or, (b) creating an internal quantitative regulation on the processing of products (Article III:5). This binary examination is a purely conceptual discussion and may yield identical results, namely, in local content requirements being held to fall foul of the obligations under GATT. Yet as I shall argue in this piece, it is conceptually more appropriate to adopt the Article III:5 approach over the Article III:4 one. In this regard, I shall first examine how local content requirements will be treated under Article III:4 and then proceed to the treatment of the same under Article III:5 before analyzing the appropriateness of the latter over the former.

Article III:4 

Article III:4 of GATT requires that imported products “shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements ……”. When domestic input requirements are examined in this backdrop, it is fairly obvious that according less favourable treatment to imported inputs in comparison to domestically manufactured inputs isa clear violation of Article III:4. This approach is typified by the WTO Panel Report in India-Measures Affecting the Automotive Sector (2001) wherein local content requirements were held to be inconsistent with Article III: 4 as they accorded “imported parts and components treatment less favorable than … to like domestic items.” In addition to Article III:4, as will be discussed hereinafter, local content requirements can also be held contrary to Article III:5.

Article III:5 

Article III:5 of GATT forbids contracting parties from establishing or maintaining “any internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources.” Further, Article III: 5 read with Article III: 1 also states that internal quantitative regulations ought not to afford protection to domestic production. Scholarly work has categorized local content requirements as internal quantitative regulations under Article III:5.

 A plain reading of Article III:5 it may appear that local content requirements may not be inconsistent therein unless there is a “specified amount or proportion” of a product required to be domestically supplied. However, the WTO Panel Report in EEC – Measures on Animal Feed Proteins (1978) proceeded to apply Article III:5 despite there being no numerical specification of the amount or proportion of the local content requirements in the concerned measure. This is fair because local content requirements may not always be worded in numerical terms. For instance, if country A requires all furniture sold within its borders to contain domestically manufactured screws, despite the absence of any specification or proportion of the amount of domestically manufactured screws, a local content requirement is present. In other words, the lack of specification will not make a case for the application of Article III:4 over Article III:5. Hence as far as local content requirements are concerned, to hold them inconsistent with GATT, Articles III:4 and III:5 are equally applicable. Nevertheless, as will be argued in the next section, there is more reason in theory to use Article III:5 over Article III:4 to hold local content requirements inconsistent with GATT.

Analysis 

While it is true that Articles III:4 and III:5 of GATT are equally applicable to local content requirements, the reasons for holding them to be inconsistent with GATT are independent of each other. Typically, local content requirements will be contrary to Article III:4 owing to the less favourable treatment accorded to like imported contents whereas they will be ipso facto invalid under Article III:5. The following are the reasons why Article III:5 is more well-suited than Article III:4 to hold local content requirements to be inconsistent with the GATT:

Firstly, as noted by the WTO Panel Report in United States – Measures Affecting the Importation, Internal Sale and Use of Tobacco (1994), the words of Article III:5 is more specific than Article III:4 and an examination of a local content requirement under the former can dispense the same under the latter.

Secondly, when it comes to the impairment of benefits so as to initiate a dispute against a party having local content requirements under Article XXIII of GATT, the aggrieved party may not have a locus under Article III:4 of GATT. This argument can be explained with an illustration. If Country X bans the sale of furniture that does not contain domestically manufactured screws, Country Y (which exports furniture to Country X) may not be aggrieved for not being able to export its own screws to Country X. For all we know it could be possible that Country Y imports its own screws to manufacture furniture. Rather Country Y would be aggrieved at Country X as the latter’s domestic-screw-requirement could significantly increase the costs of the production of furniture in the former.

Finally, the real motives and effects of local content requirements may not always be to accord like imported contents less favourable treatment (prohibited under Article III:4) as much as they would be to make it harder for importers to manufacture goods with inputs that are easily available to their domestic counterparts. In other words, such requirements would aim to protect domestic production of certain inputs which fall foul of Article III: 5 read with Article III: 1 that prohibits the use of internal quantitative regulations “so as to afford protection to domestic production.” Hence, (examined in the backdrop of local content requirements), while Article III: 4 seeks to curb discriminatory treatment qua imported inputs, Article III: 5 prohibits local content requirements by virtue of them being local content requirements regardless of their motive.

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Surya Rajkumar is a final-year law student at the Jindal Global Law School.

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Image: Dallas Morning News (modified).