Market Definition in World Trade Organization Law

A.) Introduction

The Appellate Body of the World Trade Organization (WTO) engages in market definition

whenever it determines the sets of “like” and “directly competitive or substitutable” products and

“like” services and service providers. Being in a competitive relationship, “like” products under a

specific provision of the Marrakesh Agreement Establishing the World Trade Organization (WTO

Agreement) and its Annexes are included in the same relevant market. The same can be said about

“directly competitive or substitutable” products, although the competitive relationship among these,

notwithstanding the label, is less intense. It is also true of “like” services and service providers.

However, the Appellate Body has not explicitly categorized the procedure it undertakes in ruling on

this issue as defining the relevant market.

It is submitted that in WTO law, the relevant market should be defined as the good or service

in question and all other goods or services which, if sold or made available in a member state at the

world price, will lead to a decrease in the price thereof by a certain percentage. The intuition behind

this is as follows: if the sale or availability of a good or service at the world price in a member state

will lead to a decrease in the price of the subject good or service, then the former is in a competitive

relationship with the latter to such a degree that protectionist measures will likely be imposed.

The main features of WTO law, such as the theory of comparative advantage, the rule on

non-discrimination, the Most-Favored Nation (MFN) and national treatment principles, and the

concepts of “like” and “direct competitive or substitutable” products and “like” services and service

providers, which have a profound bearing on the definition of the relevant market, will first be

discussed. The relationship of the idea of a relevant market to the notions of “like” and “directly

competitive or substitutable” products and “like” services and service providers will also be

explored. The economic underpinnings and legal applications of the definition of the relevant

market in WTO law proposed above will then be given attention.

B.) Main Features of World Trade Organization Law 1.) The Theory of Comparative Advantage a.) Goods

The primary objective of the General Agreement on Tariffs and Trade 1994 (GATT 1994) is the removal of barriers to the free movement of goods such as tariffs, quotas, and voluntary export restraints. The theory of comparative advantage, which David Ricardo set forth in his book “The Principles of Political Economy and Taxation,” is the cornerstone of this policy. A country has a comparative advantage in the production of a good if its opportunity costs are lower than those of others. The opportunity costs of a good are equal to the value of the best alternative use of the resources that went into its production. Even if a country is absolutely less efficient than others in the production of all goods, there would still be gains from trade, given that relative prices differ in autarky. This can be seen by thinking of trade as an indirect method of production. Instead of producing all goods for itself, a country should specialize in the production of the good in which it has a comparative advantage and buy the others. Hence, trade liberalization should be promoted.

b.) Services

The same considerations animate the General Agreement on Trade in Services (GATS). The logic of the proof given by Ricardo supporting the theory of comparative advantage applies with equal force to trade in services. As pointed out by Brian Hindley and Alasdair Smith1, had Ricardo in his classic example specified wine and insurance policies instead of wine and cloth, his demonstration of the gains from trade would still have succeeded, since it depends only on one country being able to produce insurance policies at lower costs relative to wine than the other country. Indeed, the argument for the removal of barriers to the free movement of services is possibly even stronger than that for liberalization of trade in goods, in view of the fact that quotas, which increase costs without generating revenue, are common in trade in services, while tariffs, which yield income, are pervasive in trade in goods. 1See Comparative Advantage and Trade in Services, 8 THE WORLD ECONOMY 369 (1984).

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2.) The Rule of Non-Discrimination a.) The Most-Favored Nation (MFN) Treatment Principle However, World Trade Organization (WTO) law aims not merely at the removal of barriers to the free movement of goods and services, but also that this will be done on a non-discriminatory basis. The rule of non-discrimination has two aspects, the Most-Favored Nation (MFN) and national treatment principles. In general, the MFN treatment principle requires member states of the WTO to apply measures affecting trade equally on similar goods and services from other member states. The national treatment principle imposes the analogous obligation with respect to similar goods and services of domestic origin and those from other member states.

Article I:1 of the GATT 1994 on the MFN treatment principle as applied to goods provides:

“With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.”

The corresponding provision on services is Article II:1 and 2 of the GATS:

“1. With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country.

“2. A Member may maintain a measure inconsistent with paragraph 1 provided that such a measure is listed in, and meets the conditions of, the Annex on Article II Exemptions.”

The MFN treatment principle in the GATS differs from the parallel concept in the GATT 1994 in two respects. First, the MFN treatment principle in the GATS applies not only to services but to service providers as well. Second, it is subject to a negative list of exceptions indicated by particular member states.

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b.) The National Treatment Principle

On the national treatment principle concerning fiscal measures as applied to goods, Article III:2 of the GATT 1994 reads:

“The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.”

The national treatment principle with respect to fiscal measures applies not only to “like” products but also to the broader group of “directly competitive or substitutable” products. Ad Article III, Paragraph 2 on the national treatment principle regarding fiscal measures as applied to “directly competitive or substitutable” products states:

“A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed.”

In the case of Japan - Alcoholic Beverages2, the Appellate Body of the World Trade Organization analyzed the distinctions between applying this principle to “like” and “directly competitive or substitutable” products. The European Union, Canada, and the United States filed complaints against Japan on the ground that the latter violated its obligations under Article III:2 of the GATT 1994 through the adoption of the Japanese Liquor Tax Law, which taxed the domestically produced shochu less onerously than allegedly “like” or “directly competitive or substitutable” products such as vodka, whisky, rum, gin, and genever. The Appellate Body ruled that on the one hand, Article III:2, first sentence of the GATT 1994, which pertains to “like” products and mentions the phrase “in excess of”, is infringed by the slightest difference in the applicable tax rates. On the other, Article III:2, second sentence of the GATT 1994, which refers to “directly competitive or substitutable” products and uses the words “not similarly taxed”, is violated only when such difference is more then de minimis and it has been shown that a particular measure was applied “so as to afford protection to domestic production”.

2 WT/DS8, 10, and 11/AB/R, 4 October 1998.

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On the national treatment principle with respect to regulatory measures, Article III:4 of the GATT 1994 provides:

“The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. …..”

The analogous provision on services is Article XVII:1 of the GATS: “1. In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.”

The national treatment principle in the GATS differs from the corresponding idea in the

GATT 1994 in three ways. First, the national treatment principle in the GATS covers both external and internal measures. Second, like the MFN treatment principle in the GATS, it applies not only to services but to service providers as well. Third, it is limited to a positive list of sectors included by particular member states and by specific measures exempted therefrom. c.) Economic Rationales There are several arguments in support of the rule of non-discrimination. First, when member states apply barriers to the free movement of goods uniformly without regard to origin, the market system for the production and allocation thereof functions at maximum efficiency. Second, the MFN treatment principle often causes trade liberalization to be generalized. Third, the MFN treatment principle helps minimize transaction costs, since it reduces the difficulty of negotiating a multitude of bilateral agreements between member states, and customs officials at the border need not ascertain the origin of goods to carry out their tasks. Fourth, the MFN treatment principle serves as a constraint on the ability of special interests to obtain discriminatory trade measures.3 Finally, the national treatment principle is necessary to prevent the negation of the intended effects of the removal of barriers to the free movement of goods. For example, if a member state agreed to reduce its tariffs on imported widgets from 20% to 10%, and then imposed differential domestic sales taxes on domestic and imported goods of 5% and 15% respectively, the tariff concession would have been

3 J. JACKSON, THE WORLD TRADING SYSTEM 158-59 (2nd ed., 1997).

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effectively neutralized. More subtle forms of discriminatory treatment of imports relative to domestic goods may equally set tariff concessions at naught.4

Generally, the arguments for the rule of non-discrimination in trade in goods applies to trade

in services. For instance, the MFN treatment principle in the GATS helps minimize transaction costs, since it lessens the duty of immigration officials to ascertain the citizenship of natural persons entering their territory to render services. However, the differences in the natures of goods and services require some qualifications, which are reflected in the particular forms of the MFN and national treatment principles in the GATS. Considering that rendering a service often requires the proximity of the provider with the consumer, i.e., the movement of a service presupposes that of the provider, there is greater demand for reciprocity during negotiations on the liberalization of trade in services and more concern about the free-rider problem. This is reflected in the weakened version of the MFN treatment principle in the GATS. For the same reason, member states fear that the removal of barriers to the free movement of services will lead to greater adjustments in their domestic markets. This can be seen from the relatively innocuous form of the national treatment principle in the GATS. What many critics of the GATS fail to realize is the fact that the mild versions of the MFN and national treatment principles in the GATS had to be adopted to bring on board otherwise reluctant member states; an insistence on the original forms of the said principles would most probably have led to a collapse of the negotiations. Thus, the present differences between the rule of non-discrimination in the GATS and that in the GATT are justified. Hopefully, the rule of non-discrimination in the GATS will be strengthened as liberalization of trade in services progresses. 3.) “Like” and “Directly Competitive or Substitutable” Products and “Like” Services and Service Providers As can be seen from the above, central to the application of the MFN and national treatment principles are the notions of “like” and “directly competitive or substitutable” products. The term “like” products appears, besides in Articles I:1 and III:2 and 4 of the GATT 1994 respectively on the MNF and national treatment principles, in Article VI:1 thereof on antidumping; in ArticleIX:1 on marks of origin; in Article XIII:1 on non-discrimination in the application of quantitative restrictions; in Article XVI:4 on subsidies; and in Article XIX:1 on safeguards. It also appears in several other Annexes of the WTO Agreement, for example in Article 5:5 of the Agreement on Trade-Related Investment Measures (TRIMs Agreement); Articles 2.1, 2.2, 2.6, and 4.1 of the Agreement on the Implementation of Article VI of the GATT 1994 (Antidumping Agreement); Articles 6.3, 11.2, and 15.1 and Note 46 thereto of the Agreement on Subsidies and Countervailing 4 T. TREBILCOCK AND R. HOWSE, THE REGULATION OF INTERNATIONAL TRADE 116 (2nd ed., 1999).

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Measures (SCM Agreement); Articles 2:1 and 4:1 of the Agreement on Safeguards; and Article 2.1 of the Agreement on Technical Barriers to Trade (TBT Agreement).

Apart from Ad Article III, Paragraph 2 of the GATT 1994, the term “directly competitive” products appears in Article XIX:1 thereof on safeguards and in Articles 2:1 and 4:1 of the Safeguards Agreement.

The term “like” services and service providers appears in Articles II:1 and XVII:1, 2, and 3 of the GATS. Significantly, the term “like” products is not defined in the Annexes of the WTO Agreement, except in Article 2.6 of the Antidumping Agreement and Note 46 to Article 15.1 of the SCM Agreement, which apply only to the provisions of these agreements. The terms “directly competitive or substitutable” products and “like” services and service providers are not defined anywhere at all in the Annexes of the WTO Agreement. The coverage of “like’ and “directly competitive or substitutable” products is one of the issues in Japan – Alcoholic Beverages. According to the Appellate Body, there are no fixed definitions of the terms “like” and “directly competitive or substitutable” products that uniformly apply throughout all the Annexes of the WTO Agreement. As the Appellate Body put it:

“No one approach to exercising judgement will be appropriate for all cases. ..... The concept of ‘likeness’ is a relative one that evokes the image of an accordion. The accordion of ‘likeness’ stretches and squeezes in different places as different provisions of the WTO Agreement are applied. The width of the accordion in any one of those places must be determined by the particular provision in which the term ‘like’ is encountered as well as by the context and the circumstances that prevail in any given case to which that provision may apply. ..... “If imported and domestic products are not ‘like products’ for the narrow purposes of Article III:2, first sentence, then they are not subject to the strictures of that sentence and there is no inconsistency with the requirements of that sentence. However, depending on their nature, and depending on the competitive conditions in the relevant market, those same products may well be among the broader category of ‘directly competitive or substitutable products’ that fall within the domain of Article III:2, second sentence. How much broader that category of ‘directly competitive or substitutable products’ may be in any given case is a matter for the panel to determine based on all the relevant facts in that case. As with ‘like products’ under the first sentence, the determination of the appropriate range of ‘directly competitive

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or substitutable products’ under the second sentence must be made on a case-by-case basis.”5

It seems reasonable to infer by analogy that the above is also true of “like” services and service providers. 4.) Comparisons with European Union Law The European Union (EU), in contrast with the WTO, seeks not only the removal of barriers to the free movement of goods and services, but also the creation of a common market, i.e., an economic system where there exist the same competitive relationships among these. The formation of the common market has two aspects, namely negative and positive integration.6

Negative integration pertains to the discipline of trade restrictive measures. This is

embodied primarily in Articles 25, 28, and 29 of the Treaty Establishing the European Community (EC Treaty) on the prohibition of customs duties and quantitative restrictions on imports and exports. Negative integration is to be achieved, like trade liberalization in the WTO system, through the application of the rule on non-discrimination.7

Positive integration refers to the facilitation of convergence of the regulatory systems of

member states. The basis of positive integration is Article 94 of the EC Treaty on the approximation of laws. Positive integration is to be completed by harmonization and mutual recognition through measures adopted under the co-decision procedure, where the Council acts at the initiative of the Commission and with the approval of the Parliament. Therefore, the EU aims for a deeper form of integration than the WTO.8

Parallel to the raison d’être of Article III:2 and 4 of the GATT 1994 of preventing the circumvention of Article II thereof on schedules of concessions, Article 90 of the EC Treaty in order to preserve the efficacy of Articles 25, 28, and 29 thereof reads:

“No Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products.

5 Id., at 21-25. 6 P. Demaret, The Establishment of the Single European Market: Internal and External Aspects, manuscript (2000), pp. 5-8. 7 Id., at 9. 8 Id. at 10.

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“Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford indirect protection to other products.”

Analogous to the concept of “like” products in the GATT 1994, the idea of “similar” products in Article 90, first paragraph of the EC Treaty refers to products among which the competitive relationship is particularly intense. Taxes on such “similar” products must be equal. Corresponding to the notion of “directly competitive or substitutable” products in the GATT 1994, the category of products contemplated by Article 90, second paragraph of the EC Treaty are, without being “similar,” nonetheless substitutable. Taxes on these products need not be equal, but must not have a protective effect. C.) The Relevant Market and “Like” and “Directly Competitive or Substitutable” Products and “Like” Services and Service Providers

1.) Market Definition in Antitrust Law a.) The Primary Objective of Antitrust Law

It should be noted that determining the existence of likeness, direct competition, and substitutability is actually an exercise in market definition, a procedure first developed in antitrustlaw. This field of law seeks to promote efficiency by disciplining acts of firms which restrictcompetition in the market. For instance, the crucial issue in merger control is whether the proposedconcentration will give rise to a firm with market power, i.e., the ability to increase price byrestricting output. As a preliminary step, the United States Department of Justice and theCommission of the European Union define the relevant market. On the basis of this, the marketshares of the firms participating in the contemplated merger are determined. The approval of theproposed concentration depends on whether the resulting firm will likely have a dominant position in the market as indicated by a large market share and high barriers to entry into the market.9

b.) The Relevant Product and Geographic Markets The relevant market in antitrust law is defined according to products and geographical locations. The relevant product market is defined as the smallest range of products which a hypothetical monopolist must control to be able to permanently increase price by some percentage. There is a parallel definition of the relevant geographic market: the smallest set of locations where

9 See W. Landes and R. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937 (1980-81).

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such products are sold which the said hypothetical monopolist must control to achieve the same objective. For this to happen, the gains from the price increase must outweigh the losses due to the decrease in quantity sold. The said effect will occur if: 1.) the products which consumers view as substitutes are included in the relevant product market; and 2.) the relevant geographic market encompasses the convenient locations where such products are sold. The hypothetical monopolist has market power because of the lack of alternatives. c.) Cross-price Elasticities of Demand In defining the relevant market, the concept of cross-price elasticity of demand, which measures how much the quantity demanded of a product changes as the price of another varies, is very important. The cross-price elasticity of demand of a product with respect to another is equal to the percentage change in quantity demanded of the former divided by the percentage change in the price of the latter. If the quotient is greater than, equal to, or less than 1, a product is respectively cross-price elastic, unit elastic, or inelastic with respect to the another. Since consumers view the products belonging to a relevant market as substitutes, these must be cross-price elastic with each other, i.e., in a competitive relationship. In contrast, since consumers do not consider the products outside the relevant market to be alternatives, these must be cross-price inelastic with respect to those within. d.) Procedure for Defining the Relevant Market It is not surpising that the criteria applied by the United States Department of Justice and the Commission of the European Union in defining the relevant product and geographic markets are actually indicators of cross-price elasticities of demand. The procedure basically involves determining which products are in a competitive relationship with each other.

In defining the relevant product market, the United States Department of Justice takes into account: 1.) the shifting of buyers to other products in response to changes in relative prices or other competitive variables; 2.) decision-making of sellers based on such shifting of buyers; 3.) the influence of downstream competition faced by buyers in their output markets; 4.) the timing and costs of switching products; and 5.) evidence of price discrimination. The United States Department of Justice consider analogous factors in defining the relevant geographic market.

In defining the relevant product market, the Commission of the European Union looks into:

1.) product characteristics; 2.) intended uses; 3.) reactions to shocks in the market, such as changes in relative prices and launches of new products; 4.) quantitative tests; 5.) views of customers and

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competitors; 6.) marketing studies commissioned by undertakings; and 7.) evidence of price discrimination. The Commission of the European Union applies the following criteria in defining the relevant geographic market: 1.) indications as to the distribution of market shares; 2.) price differences at the national or European Union level; 3.) demand characteristics, such as importance of national or local preferences, current patterns of purchases of customers, and product differentiation; 4.) supply factors, such as requirements for a local presence in order to sell in a particular area, conditions of access to distribution channels, costs associated with setting up a distribution network, and the presence of regulatory barriers arising from public procurement, price regulations, quotas, and tariffs limiting trade or production, technical standards, requirements for administrative authorizations, packaging regulations, and others; 5.) the actual pattern and evolution of trade flows, particularly the impact thereon of transport costs; 6.) the continuing process of market integration in the European Union; and 7.) views of customers and competitors. 2.) Competitive Relationship Among “Like” and “Directly Competitive or Substitutable” Products and “Like” Services and Service Providers “Like” products are included in the same relevant market, since these are in a competitive relationship, as shown by their cross-price elasticities of demand with respect to each other. This can be inferred about “like” products from the case of European Union - Asbestos.10 Canada filed a complaint against the European Union alleging that Decree No. 96-1133 adopted by France, which imposed prohibitions on sales of asbestos and products containing this substance, but did not apply to allegedly “like” domestic products such as polyvinyl alcohol, cellulose, and glass fibres and products containing these substances, is inconsistent with Article III:4 of the GATT 1994 on the national treatment principle concerning regulatory measures. The Appellate Body held that the national treatment principle can be relevant only with respect to products in a competitive relationship, because protectionist measures can be conceivably applied solely to such products. In the words of the Appellate Body:

“As products that are in a competitive relationship in the marketplace could be affected through treatment of imports ‘less favourable’ than the treatment accorded to domestic products, it follows that the word ‘like’ in Article III:4 is to be interpreted to apply to products that are in such a competitive relationship. Thus, 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.”11

10 WT/DS135/AB/R, 12 March 2001. 11 Id., at 37.

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That this is also true of “directly competitive or substitutable” products, although to a lesser extent, can be seen in the case of Korea - Alcoholic Beverages.12 The European Union and the United States filed complaints against Korea on the ground that the latter violated its obligations under Article III:2 of the GATT 1994 on the national treatment principle regarding fiscal measures through the implementation of the Liquor Tax Law of 1949 and the Education Tax Law of 1982, which taxed the domestically produced soju less onerously than allegedly “like” or “directly competitive or substitutable” products such as whisky, cognac, vodka, gin, rum, and tequila. The Appellate Body ruled that products which are not in a sufficiently competitive relationship as to be “like” products may nevertheless be “directly competitive or substitutable” products. The Appellate Body said:

“The term ‘directly competitive or substitutable’ describes a particular type of relationship between two products, one imported and the other domestic. It is evident from the wording of the term that the essence of that relationship is that the products are in competition. This much is clear both from the word ‘competitive’ which means ‘characterized by competition,’ and from the word ‘substitutable’ which means ‘able to be substituted.’ The context of the competitive relationship is necessarily the marketplace since this is the forum where consumers choose between different products. ..... “Thus, according to the ordinary meaning of the term, products are competitive or substitutable when they are interchangeable or if they offer, as the Panel noted, ‘alternative ways of satisfying a particular need or taste.’ ..... “The words ‘competitive or substitutable’ are qualified in the Ad Article by the term ‘directly.’ In the context of Article III:2, second sentence, the word ‘directly’ suggests a degree of proximity in the competitive relationship between the domestic and the imported products. ..... “Our reading of the ordinary meaning of the term ‘directly competitive or substitutable’ is supported by its context as well as its object and purpose. As part of the context, we note that the Ad Article provides that the second sentence of Article III:2 is applicable ‘only in cases where competition was involved.’ ..... “The first sentence of Article III:2 also forms part of the context of the term. ‘Like’ products are a subset of ‘directly competitive or substitutable’ products: all ‘like’ products are, by definition, ‘directly competitive or substitutable’ products, whereas not all ‘directly competitive or substitutable’ products are ‘like.’ The notion of ‘like’ products must be construed narrowly but the category of ‘directly competitive or substitutable’ products is broader. While perfectly substitutable products fall within Article III:2, first sentence, imperfectly substitutable products can be assessed under Article III:2, second sentence.”13

12 WT/DS75 and 84/AB/R, 18 January 1999. 13 Id., at 32-34.

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“Like” services and service providers also belong to the same relevant market, since consumers view them to be substitutes, as shown by their cross-price elasticities of demand with respect to each other. “Like” services and service providers, in the same way as “like” products, are in a competitive relationship with each other. 3.) Criteria Applied in Determining “Like” Products a.) Conceptual Framework As discussed above, the crux of the matter in determining the coverage of “like” products, as in market definition for purposes of antitrust law, is whether these are in a competitive relationship. The criteria applied by panels and the Appellate Body, like that used by the United States Department of Justice and the Commission of the European Union in defining the relevant market, are indicators of cross-price elasticities of demand. In the case of European Union - Asbestos,14 it was most recently reiterated that in determining whether two products are “like,” panels and the Appellate Body take into account: 1.) properties, nature, and quality; 2.) end-uses; 3.) tastes and habits of consumers; and 4.) tariff classifications.15 Indeed, the said case involved the interpretation of the term “like” products only under Article III:4 of the GATT 1994, and the scope of “like” products changes within the Annexes of the WTO Agreement. However, it should be noted that only the degree of the competitive relationship varies for two products to be considered “like” under the different Annexes of the WTO Agreement; the panels and the Appellate Body consider the same factors in all cases. b.) Physical Characteristics Physical characteristics, including health risks, can signal a competitive relationship or the lack thereof between products:

“Panels must examine fully the physical properties of products. In particular, panels must examine those physical properties of products that are likely to influence the competitive relationship between products in the marketplace. In the case of chrysotile asbestos fibres, their molecular structure, chemical composition, and fibrillation capacity are important because the microscopic particles and filaments of chrysotile asbestos fibres are carcinogenic in humans, following inhalation. ..... This carcinogenicity, or toxicity, constitutes, as we see it, a defining aspect of the physical properties of chrysotile asbestos fibres.”16

14 WT/DS135/AB/R, 12 March 2001. 15 Id., at 32. 16 Id., at 43-44.

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c.) End-uses and Tastes and Habits of Consumers End-uses and tastes and habits of consumers, which to a certain extent are defined by physical characteristics, such as health risks, also reflect a competitive relationship or its absence:

“Before examining the Panel’s findings under the second and third criteria, we note that these two criteria involve certain of the key elements relating to the competitive relationship between products: first, the extent to which products are capable of performing the same, or similar, functions (end-uses); and, second, the extent to which consumers are willing to use the products to perform these functions (consumers’ tastes and habits). Evidence of this type is of particular importance under Article III of the GATT 1994, precisely because that provision is concerned with competitive relationships in the marketplace. If there is - or could be - no competitive relationship between products, a Member cannot intervene, through internal taxation or regulation, to protect domestic production. Thus, evidence about the extent to which products can serve the same end-uses, and the extent to which consumers are - or would be - willing to choose one product instead of another to perform those end-uses, is highly relevant evidence in assessing the ‘likeness’ of those products under Article III:4 of the GATT 1994.”17

In effect, the health risks of a product are not per se germane to the determination of whether it is “like” another; such are only relevant insofar as these affect the competitive relationship thereof.18 As discussed above, the main concern of the GATT 1994 is the removal of barriers to the free movement of goods. Non-economic values, such as protection against the health risks of a product, enter the picture in the WTO system only under Article XX of the GATT 1994 on general exceptions, which enumerate several grounds for justifying measures that would otherwise be inconsistent with the commitments of member states. Panels and the Appellate Body are often accused of not giving sufficient attention to such factors; however, these criticisms are unjustified considering the limitations in the texts of the WTO Agreement and its Annexes. d.) Tariff Classifications Tariff classifications likewise indicate whether there is a competitive relationship or not:

“Finally, we note that chrysotile asbestos fibres and the various PCG fibres all have different tariff classifications. While this element is not, on its own, decisive, it does tend to indicate that chrysotile and PCG fibres are not ‘like’ products under Article III:4 of the GATT.”19

17 Id., at 45. 18 Id., at 43-45. 19 Id., at 53.

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Perhaps not surprisingly, the European Court of Justice also examines physical characteristics20, end-uses21, tastes and habits of consumers22, and previously, tariff classifications23 in determining whether products are “similar.” 4.) Criteria Applied in Determining “Directly Competitive or Substitutable” Products a.) Conceptual Framework Likewise, the crux of the matter in determining the range of “directly competitive or substitutable” products, as in market definition for purposes of antitrust law, is whether these are in a competitive relationship. The criteria applied by panels and the Appellate Body, again like that used by the United States Department of Justice and the Commission of the European Union in defining the relevant market, are indicators of cross-price elasticities of demand. According to the Appellate Body in several cases, the factors to be considered in determining whether two products are “directly competitive or substitutable” are: 1.) quantitative data as to cross-price elasticities of demand; 2.) the existence of trade barriers to protect one product from competition with another; and 3.) potential competition. b.) Quantitative Data In the case of Japan -Alcoholic Beverages,24 the Appellate Body quoted with approval the following passage from the report of the panel on the use quantitative data as to cross-price elasticities of demand in determining whether two products are “directly competitive or substitutable”:

“In the Panel’s view, the decisive criterion in order to determine whether two products are directly competitive or substitutable is whether they have common end-uses, inter alia, as shown by elasticity of substitution.”25

20 See Case 243/84, John Walker v. Ministeriet for Skatter [1986] ECR 875. 21 See Case 170/78, Commission v. United Kingdom [1983] ECR 2265. 22 Id. 23 See Case 27/67, Fink-Frucht Gmbh v. Hauptzollamt München-Landsbergerstrasse [1968] ECR 327. 24 WT/DS8, 10, and 11/AB/R, 4 October 1998. 25 Id., at 25.

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c.) Existence of Trade Barriers Another illustrative case on determining the set of “directly competitive or substitutable” products is Canada - Periodicals.26 The United States filed a complaint against Canada alleging that: 1.) Part V.1 of the Excise Tax Act, which imposes an excise tax on split-run editions of periodicals, i.e., periodicals with the same or similar editorial content as those published in foreign countries, but which contain advertisements directed to the Canadian market, is inconsistent with Article III:2, first sentence, of the GATT 1994; and 2.) the application of the Canada Post Corporation of reduced postal rates to certain periodicals published in Canada violates Article III:4 of the said Agreement. The Appellate Body held that the existence of trade barriers to insulate two products from each other indicates whether these target the same consumers. As the Appellate Body put it:

“..... the very existence of the tax is itself proof of competition between split-run periodicals and non-split-run periodicals in the Canadian market. As Canada itself has acknowledge, split-run periodicals compete with wholly domestically-produced periodicals for advertising revenue, which demonstrates that they compete for the same readers. The only reason firms place advertisements in magazines is to reach readers. A firm would consider split-run periodicals to be an acceptable advertising alternative to non-split-run periodicals only if that firm had reason to believe that the split-run periodicals themselves would be an acceptable alternative to non-split-run periodicals in the eyes of consumers.”27

d.) Potential Competition The Appellate Body ruled in the case of Korea - Alcoholic Beverages28 that not only actual, but also potential, competition is relevant in determining whether two products are “directly competitive or substitutable”:

“Competition in the market place is a dynamic, evolving process. Accordingly, the wording of the term ‘directly competitive or substitutable’ implies that the competitive relationship between products is not to be analyzed exclusively by reference to current consumer preferences. In our view, the word ‘substitutable’ indicates that the requisite relationship may exist between products that are not, at a given moment, considered by consumers to be substitutes but which are, nonetheless, capable of being substituted for one another. .....

26 WT/DS31/AB/R, 30 July 1997. 27 Id., at 29. 28 WT/DS75 and 84/AB/R, 18 January 1999.

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“..... The object and purpose of Article III confirm that the scope of the term ‘directly competitive or substitutable’ cannot be limited to situations were consumers already regard products as alternatives. If reliance could be placed only on current instances of substitution, the object and purpose of Article III:2 could be defeated by the protective taxation that the provision aims to prohibit.”29

Evidence from markets of other member states can shed light on such potential competition:

“..... It seems to us that evidence from other markets may be pertinent to the examination of the market at issue, particularly when demand on that market has been influenced by regulatory barriers to trade or to competition. Clearly, not every other market will be relevant to the market at issue. But if another market displays characteristics similar to the market at issue, then evidence of consumer demand in that other market may have some relevance to the market at issue.”30

5.) “Like” Services and Service Providers Since no dispute properly under the GATS has yet arisen, the case law on “like” services and service providers is still embryonic. However, this was a peripheral issue in the case of European Union – Bananas31, where Ecuador, Guatemala, Honduras, Mexico, and the United States filed complaints against the European Union alleging that the tariff, allocation, and import licensing regimes embodied in the common market organization for bananas of the latter are inconsistent with various Annexes of the WTO Agreement. According to the panel, services relating to “like” products are “like,” and that providers of such are also “like.” In the words of the panel:

“….. in our view, the nature and the characteristics of wholesale transactions as such, ….. are ‘like’ when supplied in connection with wholesale services, irrespective of whether these services are supplied with respect to bananas of EC and traditional ACP [African, Caribbean, and Pacific] origin, on the one hand, or with respect to bananas of third-country or non-traditional ACP origin, on the other. Indeed, it seems that each of the different service activities taken individually is virtually the same and can only be distinguished by referring to the origin of the bananas in respect of which the service activity is being performed. Similarly, in our view, to the extent that entities provide these ‘like’ services, they are ‘like’ service suppliers.”32

29 Id., at 33–35. 30 Id., at 39. 31 WT/DS27/R/USA, 25 September 1997. 32 Id., at 1051-52.

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D.) Defining the Relevant Market in WTO Law 1.) Express Characterization of “Like” and “Directly Competitive or Substitutable” Products and “Like” Services and Service Providers as Belonging to the Same Relevant Markets As shown above, determining the existence of likeness, direct competition, and substitutability is an exercise in market definition. However, the Appellate Body has not expressly categorized the procedure it undertakes in ruling on this issue as defining the relevant market. The closest the Appellate Body has come to an open recognition of this are its statements in the case of European Union - Asbestos33 that “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”34 and in the case of Japan - Alcoholic Beverages35 that “it does not seem inappropriate to look at competition in the relevant markets as one among a number of means of identifying the broader category of products that might be described as ‘directly competitive or substitutable.’”36 Remarkably, the European Court of Justice has explicitly characterized “similar” products as belonging to the same market.37

It is proposed that the Appellate Body should expressly hold that: 1.) being in a competitive relationship, “like” products under a specific provision of the WTO Agreement and its Annexes are included in the same relevant market; 2.) the same can be said about “directly competitive or substitutable” products, although the competitive relationship among these is less intense; and 3.) it is also true of “like” services and service providers. This will provide a conceptual framework to the procedure for determining the coverage of “like” or “directly competitive or substitutable” products and “like” services and service providers. Clearly, such a development will lead to a more rigorous approach to the said issue. Significantly, Article 3.2 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (Dispute Settlement Understanding) states: “the dispute settlement system of the WTO ….. serves ….. to clarify the existing provisions of ….. [the covered] agreements in accordance with customary rules of interpretation of public international law.” Articles 31 and 32 of the Vienna Convention on the Law of Treaties (Vienna Convention) embody these customary rules of interpretation, which include the object and purpose of the treaty being construed. Since the

33 WT/DS135/AB/R, 12 March 2001. 34 Id., at 37. 35 WT/DS8, 10, and 11/AB/R, 4 October 1998. 36 Id., at 25. 37 See Case 168/78, Commission v. France [1980] ECR 347.

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rulings mentioned above are based on the primary objective of the GATT 1994 to promote trade liberalization, the Appellate Body has the competence to adopt the same. Indeed, Article IX.2 of the WTO Agreement reads: “the Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements.” Furthermore, adopted Appellate Body reports do not constitute binding precedents. However, such reports are parts of the GATT acquis.38 In addition, panels and the Appellate Body consider these in resolving subsequent disputes to ensure the uniformity of rulings.39 Finally, in view of the fact that a definitive interpretation by the Ministerial Conference and the General Council of the WTO Agreement and its Annexes requires a formidable three-fourths majority vote of the member states40, reports of the Appellate Body de facto have the character of finality.41 An examination of some key holdings of the Appellate Body suggests that incorporating the doctrines set forth above will not give rise to problems. For instance, in the case of Japan – Alcoholic Beverages, the Appellate Body declined to apply the “aims and effects” test, an approach followed by several pre-WTO panels42 which interprets the phrase “so as to afford protection” in Article III:1 of the GATT 1947 as referring to intent on the part of national authorities to discriminate against imports. The Appellate Body stressed that the application, rather than the design, of a measure is relevant in assessing its consistency with Article III:2, second sentence of the GATT 1994. Since the conceptual framework recommended above is relevant only to the process of determining whether two products are “like,” and not to the evaluation of protection, the same is consistent with current WTO law. 2.) A Proposed Definition of the Relevant Market for Purposes of World Trade Organization Law However, caution should be exercised against the mechanical importation to WTO law of the procedure for market definition in antitrust law. Although the idea of the relevant market in WTO law is related to the corresponding notion in antitrust law, the two are distinct in view of the separate concerns of these regimes. The primary objective of WTO law is the removal of barriers to the free movement of goods and services. Antitrust law seeks to promote efficiency by disciplining acts of firms which restrict competition in the market. Intuitively, for these purposes to be achieved, the

38 Japan – Alcoholic Beverages, WT/DS8, 10, and 11/AB/R, 4 October 1996, at 12-15. 39 See M. Bronckers and N. McNelis, Fact and Law in Pleadings Before the WTO Appellate Body, 5 INTERNATIONAL TRADE LAW AND REGULATION 118 (1999). 40 Article IX.2, WTO Agreement. 41 See R. Howse, The Most Dangerous Branch? WTO Appellate Body Jurisprudence on the Nature and Limits of the Judicial Power, forthcoming in THE ROLE OF THE JUDGE: LESSONS FOR THE WTO (2001). 42 E.g., see United States – Taxes on Automobiles, DS31/4, 11 October 1994 (not adopted).

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relevant market should be defined more broadly in WTO law than in antitrust law. In this case, the rule of non-discrimination will be applied more extensively in WTO law, and the control of market power will be more effective in antitrust law. It is submitted that in WTO law, the relevant market should be defined as the good or service in question and all other goods and services which, if sold or made available in a member state at the world price, will lead to a decrease in the price thereof by a certain percentage. As explained above, the Appellate Body has the mandate to adopt this doctrine. In a case involving the application of the MFN treatment principle, the subject good or service is a particular imported good or service and the candidates for inclusion in the relevant market are other imported goods or services alleged to be “like” thereto. A specific domestic good or service and the imported goods or services claimed to be in a competitive relationship therewith take these roles respectively in a case involving the application of the national treatment principle. This also applies in cases involving antidumping, countervailing duties, and safeguards. The intuition behind this is as follows: if the sale or availability of a good or service at the world price in a member state will lead to a decrease in the price of the subject good or service, then the former is in a competitive relationship with the latter to such a degree that the imposition of protectionist measures is likely. Mathematically, the above can be expressed in this way: suppose the relevant market is defined as the good or service in question and all other goods or services which, if sold or made available in a member state at the world price, will lead to a decrease in the price thereof by ∆p/p1 percent, where ∆p is the change in price and p1 is the price ex ante. In order for this to occur, there must have been a decrease in the quantity demanded of the subject good or service by ∆q/q1 percent, where ∆q is the change in quantity demanded and q1 is the quantity demanded ex ante. Assume that

the price of the product alleged to be “like” or “directly competitive or substitutable” with or the service claimed to be “like” the product or service in question decreased as a result of trade liberalization by ∆a/a1 percent, where ∆a is the change in price and a1 is the price ex ante. Hence,

for a product to be “like” or “directly competitive or substitutable” with or a service to be “like” the subject product or service, the cross-price elasticity of demand of the latter with respect to the former must be at least equal to ∆q/q1/∆a/a1. In other words, all goods and services with respect to

which the cross-price elasticity of demand of the good or service in question is equal to or greater than this expression are within the same relevant market for purposes of WTO law. The above definition of the relevant market in WTO law differs from its counterpart in antitrust law in three respects. These reflect the separate concerns of the two regimes. First, a decrease in the price of the good or service in question by a certain percentage is the benchmark for market definition in WTO law. Considering the primary objective of WTO law to promote trade

liberalization, and since a decrease in the price of the subject good or service by a certain percentage might serve as a trigger for the imposition of protectionist measures, it is logical to have such a benchmark. In antitrust law, the benchmark is an increase in the price of the products included in the relevant market by a certain percentage. As antitrust law seeks to promote efficiency by disciplining acts of firms which restrict competition in the market, and because these usually take the form of abuse of a dominant position such as restricting output to increase price, it is also reasonable to have this benchmark. Second, the relevant market in WTO law covers, together with the subject good or service, all other goods or services which, if sold in a member state at the world price, will lead to a decrease in the price thereof by the benchmark. In antitrust law, the relevant market is the smallest set of products which a hypothetical monopolist must control to permanently increase price by the benchmark. This is consistent with the intuition that for the said purposes to be achieved, the concept of the relevant market should be understood more broadly in WTO law than in antitrust law43. Third, market definition in WTO law assumes the existence of a competitive environment, while its parallel in antitrust law posits that a monopoly situation obtains. This throws in bolder relief the effect in WTO law of the more extensive application of the rule of non-discrimination and the need in antitrust law for more effective control of market power. 3.) Revising the Approach to Market Definition in World Trade Organization Law An explicit ruling that “like” or “directly competitive or substitutable” products and “like” services and service providers under a specific provision of the WTO Agreement belong to the same relevant markets as defined above will necessarily affect the type of evidence submitted by parties and the assessment thereof by panels in cases involving the interpretation of these terms. As panels and the Appellate Body decide such cases, the criteria applied in determining the range of “like” or “directly competitive or substitutable” products and “like” services and service providers in line with this conceptual framework will be gradually refined. It is suggested that the Appellate Body should expressly hold that cross-price elasticities of demand are decisive in determining the existence of likeness, direct competition, and substitutability. Again, the Appellate Body has the power to adopt this method. Econometric techniques and customer surveys must be adopted as first-best methods for obtaining such data.

43 An illustration of this from EU law is the conflict between the results in United Brands v. Commission (Case 27/76, [1978] ECR 207), which arose under Article 82 of the EC Treaty on abuse of a dominant position, and Commission v. Italy (Case 184/85, [1987] ECR 2013), which involves Article 90 thereof. On the one hand, in United Brands v. Commission, the European Court of Justice concluded that bananas are in a separate product market from other fruits for purposes of competition law. In Commission v. Italy, on the other hand, the European Court of Justice found that bananas and other fruits are “similar” products in the context of negative integration.

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In cases involving goods, the other factors panels and the Appellate Body now consider in determining whether two products are “like” (properties, nature, and quality; end-uses; tastes and habits of consumers; and tariff classifications) or “directly competitive or substitutable” (the existence of trade barriers to protect one product from competition with another and potential competition) can be resorted as supplementary indicators. In general, these are also applicable to services, with the obvious exception of physical characteristics.

Panels and the Appellate Body may also look at indicators taken into account in defining the

relevant product market in antitrust law by the United States Department of Justice (the shifting of buyers to other products in response to changes in relative prices or other competitive variables; decision making of sellers based on such shifting of buyers; the influence of downstream competition faced by buyers in their output markets; the timing and costs of switching products; and evidence of price discrimination) and the Commission of the European Union (reactions to other shocks in the market, such as launches of new products; the views of customers and competitors; and marketing studies commissioned by undertakings). This expanded repertoire of analytical tools will lead to greater coherence in the interpretation of the terms “like” and “directly competitive or substitutable” products by panels and the Appellate Body.

It should be pointed out that the task of analysing evidence relating to the above will

primarily belong to panels. This will not impose an undue burden on panels, which after all are accustomed to considering similar types of data. For example, in the case of Japan – Alcoholic Beverages44, the panel looked at product characteristics, reactions to shocks in the market, and quantitative tests. In the said case, the panel concluded that notwithstanding the difference in appearance between shochu and whisky, the cross-price elasticity of demand of the former with respect to the latter, as indicated by statistics on the increase in the consumption of shochu after a higher tax was imposed on whisky, shows that the same are “directly competitive or substitutable” products. 44 WT/DS8, 10, and 11/R, 11 July 1996, at 112-115; 116-119.

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4.) Applications in the WTO Agreement and its Annexes

a.) The Varying Extent of the Relevant Market in World Trade Organization Law In the case of Japan-Alcoholic Beverages,45 the Appellate Body held that the sets of “like” and “directly competitive or substitutable” products vary within the Annexes of the WTO Agreement. The extent of the relevant market in WTO law, i.e., the required degree of the competitive relationship between products as shown by their cross-price elasticities of demand for these to be considered “like” or “directly competitive or substitutable,” changes depending on the specific provisions being interpreted. Figure 1 below shows four circles representing the different possible scopes of “like” and “directly competitive or substitutable” products.

Figu

4

3 2

Article 2.6 of the Antidumping Agreement

Article III:2, first sentence of the GATT 1994

Article III:2, second sentence of the GATT 1994

Article III:4 of the GATT 1994

b.) Article 2.6 of the Antidumping Agreement

The first circle represents the coverageAntidumping Agreement, which provides that:

“….. throughout this Agreement tto mean a product which is identical, i.e.,consideration, or in the absence of such a not alike in all respects, has characteristicunder consideration.”

45 WT/DS8, 10, and 11/AB/R, 4 October 1998.

2

1

re 1

Article I:1 of the GATT 1994

of “like” products under Article 2.6 of the

he term ‘like’ product shall be interpreted alike in all respects to the product under product, another product which, although s closely resembling those of the product

3

It is clear from the above definition of a “like” product as “identical” or at least having “characteristics closely resembling those of” the product in question that under the Antidumping Agreement, the relevant market is to be understood narrowly, i.e., the required degree of competitive relationship between products for the rule of non-discrimination to apply is extremely high. This also applies to Article VI:1 of the GATT 1994 on antidumping. Since Note 46 to Article 15.1 of the SCM Agreement has an identical wording, the range of “like” products under this Agreement is the same. This also holds for Article XVI:4 of the GATT 1994 on subsidies.

c.) Article III:2, First Sentence of the GATT 1994

The second circle represents the set of “like” products under Article III:2, first sentence of the GATT 1994 on the national treatment principle with respect to fiscal measures, which the Appellate Body ruled in the case of Japan – Alcoholic Beverages includes only a limited number of products. The Appellate Body said that “in Article III:2, first sentence of the GATT 1994, the accordion of ‘likeness’ is meant to be narrowly squeezed.”46

As Article XIX:1 of the GATT 1994 on safeguards has the same architecture as Article III:2 of the GATT 1994 in that both provisions mention “like” and “directly competitive” products, the coverage of such products must be the same under both provisions. This also applies to Articles 2:1 and 4:1 of the Agreement on Safeguards. d.) Article III:4 of the GATT 1994 The third circle represents the range of “like” products under Article III:4 of the GATT 1994 on the national treatment principle concerning regulatory measures, which according to the Appellate Body in the case of European Union – Asbestos47 must be broader than that in Article III:2, first sentence of the GATT 1994 if the national treatment principle is to be given effect. As the Appellate Body put it:

“….. we recognize that the relationship between these two provisions is important, because there is no sharp distinction between fiscal regulation, covered by Article III:2, and non-fiscal regulation, covered by Article III:4. Both forms of regulation can often be used to achieve the same ends. It would be incongrous if, due to a significant difference in the product scope of these two provisions, Members were prevented from using one form of regulation – for instance, fiscal – to protect

46 Id., at 21. 47 WT/DS135/AB/R, 12 March 2001.

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domestic production of certain products, but were able to use another form of regulation – for instance, non-fiscal – to achieve those ends. This would frustrate a consistent application of the ‘general principle’ in Article III:1. For these reasons, we conclude that the scope of “like” in Article III:4 is broader than the scope of “like” in Article III:2, first sentence.”48

Significantly, the TRIMs Agreement in its current form pertains to the relationship of

measures affecting investment to Article III:4 of the GATT 1994 and Article XI:1 thereof on the general elimination of quantitative restrictions. It follows that the set of “like” products under Article 5:5 of the TRIMs Agreement when applied to measures affecting investment inconsistent with Article III:4 of the GATT 1994 is the same as in the latter provision. It should be noted that similar to Article III:4 of the GATT 1994, the TBT Agreement limits the discretion of member states to adopt regulatory measures to promote values other than the removal of barriers to the free movement of goods and services. This explains why complaints brought under Article III:4 of the GATT 1994 also frequently invoke the TBT Agreement. At least from the pragmatic standpoint, there is much to be said for the hypothesis that the coverage of “like” products under Article III:4 of the GATT 1994 and Article 2.1 of the TBT Agreement are the same. As the member states were allowed to indicate exceptions to the MFN treatment principle in the GATS in a positive list, there is a presumption that they intended it to be strictly applied in the sectors not so specified. Evidently, Article II:1 of the GATS contemplates a definite constellation of services and service providers. Since the meaning of likeness in Article III:4 of the GATT has the most general application, it is reasonable to infer that Article II:1 of the GATS contemplates a similar degree of competitive relationship. e.) Article I:1 of the GATT 1994

The first, second, and third circles can alternately represent the range of “like” products

under Article I:1 of the GATT 1994 on the MFN treatment principle, which under subsequent practice has been interpreted very flexibly. The basis for this is as follows: the explicit mandate of the MFN treatment principle in the GATT 1994 notwithstanding, member states have tacitly agreed that they may give less favorable treatment to free-riders by making fine product distinctions calculated to limit the benefits of tariff reductions to other member states which have granted reciprocal concessions in negotiations.49

48 Id., at 37 – 38. 49R. Hudec, “Like” Product: The Difference in Meaning in GATT Articles I and III, in REGULATORY BARRIERS AND THE PRINCIPLE OF NON-DISCRIMINATION IN WORLD TRADE LAW 104-112.

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For the same reason, the above also holds for Article XIII:1 of the GATT 1994 on non-discrimination in the application of quantitative restrictions.

Furthermore, the set of “like” products is the same under Article 5:5 of the TRIMs

Agreement when applied to measures affecting investment which violate Article XI:1 of the GATT 1994.

The coverage of “like” services and service providers under Article XVII:1, 2, and 3 of the

GATS is likewise flexible. Member states should be given leeway to adopt measures for the validation of services or service providers of other member states, which they may deem to be not sufficiently similar to domestic services or service providers in terms of quality or qualifications, but can be converted, upgraded, or modified to fulfill local requirements. Examples of such measures are mutual recognition agreements. f.) Article III:2, Second Sentence of the GATT 1994

The fourth circle represents the range of “directly competitive or substitutable” products

under Article III:2, second sentence of the GATT 1994, which the Appellate Body in European Union – Asbestos50 held to be broader than the range of “like” products not only under Article III:2, first sentence of the said Agreement but also under Article III:4 thereof. In the words of the Appellate Body:

“….. Nonetheless, we note, once more, that Article III:2 extends not only to ‘like products’, but also to products which are ‘directly competitive or substitutable’, and that Article III:4 extends only to ‘like products’. In view of this different language, ….. we do conclude that the product scope of Article III:4, although broader than the first sentence of Article III:2, is certainly not broader that the combined product scope of the two sentences of Article III:2 of the GATT 1994.”51 Again in view of the identical structures of Article III:2 of the GATT 1994 and Article

XIX:1 of the Agreement on Safeguards, the set of “directly competitive” products must be the same under these provisions.

50 WT/DS135/AB/R, 12 March 2001. 51 Id., at 38.

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E.) Conclusions

The Appellate Body should explicitly hold that: 1.) being in a competitive relationship,

“like” products under a specific provision of the WTO Agreement and its Annexes are included in

the same relevant market; 2.) the same can be said about “directly competitive or substitutable”

products, although the competitive relationship among these is less intense; and 3.) it is also true of

“like” services and service providers.

In WTO law, the relevant market should be defined as the good or service in question and all

other goods or services which, if sold or made available in a member state at the world price, will

lead to a decrease in the price thereof by a certain percentage.

Cross-price elasticities of demand should be decisive in determining the coverage of “like”

and “directly competitive or substitutable” products and “like” services and service providers.

The extent of the relevant market in WTO law varies depending on the specific provision

being interpreted.

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