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Taxing sugar content in beverages: Do WTO trade rules agree?

Delroy S Beckford

Sunday, April 29, 2018

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Recent efforts to incentivise domestic manufacturers of non-alcoholic beverages to reduce their sugar content has garnered much support as a laudable stance to stave off a looming public health crisis relating to non-communicable diseases.

Moral suasion is the starting point, but there is the real possibility of specific measures being put in place if this strategy does not work. So far, a carrot and stick strategy is proposed — subsidies as incentives to producers and a sugar tax to dissuade the production of beverages with sugar content above a certain level.

This is in keeping with the World Health Organization's (WHO) Global Action Plan for the Prevention and Control of Non-Communicable Diseases 2013-2020, endorsed by the World Health Assembly in 2013, which signals member states to achieve nine voluntary global targets including a 25 per cent relative reduction in mortality from cardiovascular diseases, cancer, diabetes, or chronic respiratory diseases and addressing the rise in diabetes and obesity through evidence-based policy options including food taxes and subsidies to promote healthy diet and discourage the consumption of less-healthy products.

It would not be the first time that such measures are proposed to address these problems. The Philippines has put such measures in place; so too Mexico, Barbados, France, Portugal, Hungary and, more recently the United Kingdom, to name a few.

The effectiveness of such a strategy depends in large measure on whether the tax to be imposed or the subsidy to be granted are designed in such a manner that their magnitude will compel the behaviour desired.

But what has been absent from the discussion so far, but no less important, is whether such proposed measures would be in accordance with international trade rules. We should begin by observing that all domestic laws having an impact on trade must comply with the World Trade Organization (WTO) agreement.

Several disputes have already taken on issues on the interface between public health and trade. Some countries have caved in from the opposition. In Denmark, for example, the world's first saturated fat tax which entered into force on October 1, 2011 had to be later abolished on January 1, 2013 because of allegations, among other reasons, of its discriminatory design and application. The tax was paid based on the weight of saturated fat in foods and on the weight of saturated fat used for food production where the level of saturated fat exceeded a set threshold.

In the Philippines, 2011, the WTO ruled that the country had violated its obligations under the General Agreement on Tariffs and Trade (GATT) by taxing foreign alcoholic beverages at rates 10 to 40 times higher than brands made locally from home-grown materials such as sugar and palm.

Similarly, a tax imposed by Mexico based on the use in beverages of sweeteners other than cane sugar was struck down by the WTO in 2006 for its discriminatory design and application.

Therefore, any such tax may run afoul of WTO rules or the Revised Treaty of Chaguaramas if done in a discriminatory fashion.

Article III of the GATT, for example, prohibits discrimination between the like imported and domestically produced goods regarding internal taxes and other regulations. The same provision is found in Article 90 of the Revised Treaty of Chaguaramas. So there is a risk of complaints from Caricom member states as well as other WTO members who do not have a similar legal regime to deal with this public health issue.

The usual defence or justification that “others have done it why can't we” may not be an effective argument. So too the view that an international organisation or an international agreement requires or recommends such measures. The international agreement may not specify how it is to be applied to ensure that it is in accordance with world trade rules and, more importantly, there is no preference given to an international agreement when the dispute panels interpret WTO rules to determine WTO members' rights and obligations.

A sugar content threshold tax may violate Article III if the tax on imported beverages above the sugar content threshold is in excess of that imposed on like beverages produced in the domestic market. 'Like goods' may refer to goods with identical physical characteristics as well as goods that do not share the same characteristics but are substitutable. But here lies the problem: If the goods are substitutable there is some room for a tax differential between imported and domestic goods, but this discretion also opens the possibility of the tax breaching WTO rules. This arises from the fact that there is a threshold beyond which the tax differential is not permissible, and this threshold is not clearly stated in the WTO jurisprudence, the appellate body merely indicating that each case must be decided on a case-by-case basis.

What we know from the jurisprudence of the WTO is that a tax differential of 10 per cent is too much in the case of substitutable goods. For goods that are alike, in the narrow sense of the term, any tax differential excess (that is, even one per cent) would amount to a breach of WTO rules. In the words of the WTO Appellate Body, “Even the smallest amount of excess is too much.”

Manufacturers of the imported good may complain that there is discrimination against their goods because the goods are like; even if above the sugar content threshold that the regulation demands for the tax to be imposed.

One way to justify such a tax is by virtue of the border tax adjustment provision in Article III, which allows the same internal taxes (or a border tax) to be charged for the imported and domestically produced beverages above the sugar content threshold, and an export tax rebate, for example, for such domestically produced products that are exported.

But border tax adjustments do not solve the problem because there is still the concern of discrimination if the goods are like in the narrow sense of the term, thereby making any tax differential between imported and domestic goods a breach of Article III. This is on the assumption that a substitutable good may, in fact, be regarded as both that and one that is 'like' in the narrow sense of identical physical characteristics, end uses and so on.

Another measure proposed is a subsidy to provide incentives for domestic manufacturers to produce beverages with lower sugar content. This would be on the thinking that the GATT allows the payment of subsidies exclusively to domestic producers.

But this proposal, too, has its limitations. Although such subsidies may not be prohibited under the WTO Subsidies Agreement because, for instance, they are not related to export performance or require use of domestic inputs, such subsidies may amount to a discriminatory measure covered by Article III since this provision governs regulations other than internal taxes.

The argument could be that access to the subsidy is limited to domestic producers, which is ultimately reflected in the price of those goods, and that, by contrast, the like imported goods are negatively impacted with a higher price on the domestic market because they are not permitted the subsidy afforded to domestic producers.

There is no mortal conflict between public health and trade rules so we may find some justification for such a measure in any event if the measure is necessary for the protection of public health.

Here we ask questions like:

• Is this the only measure to achieve the desired health protection?

• Would the measure make a material contribution to the health objective?

• Is there a less trade restrictive alternative?

• How would the measure be applied to avoid discriminating against imported goods?

• Would labelling, or some other measure, help — on the assumption that this may be a less trade restrictive alternative?

The dilemma is that a tax differential of less than 10 per cent may not provide sufficient incentive for the switch by producers to acceptable sugar content level beverages, and this may mean that a tax measure with such a differential would not make a material contribution to the health protection objective and would not be deemed necessary.

Regarding labelling as an option, the WHO, since 2010, has suggested health information labelling to inform consumers of the health risks associated with alcohol. This seems to be in keeping with what may be deemed a less trade restrictive alternative than say a tax or ban on imports and is equally applicable to a proposed sugar tax.

Although the design and application of any tax or incentive measure must bear these factors in mind to avoid possible legal challenges, it is to be expected that introduction of such measures may not escape legal scrutiny by those affected.

It may be that local manufacturers may join forces with exporters to challenge such legislation under international or regional trade rules.

Dr Delroy S Beckford is a Fulbright scholar, attorney-at-law, and adjunct lecturer in the Faculty of Law, The University of the West Indies, Mona. He is the author of Power and Judicial Activism in the WTO: The Appellate Body's Interpretation of Trade Remedy Agreements . Send comments to the Observer or delroy.beckford@gmail.com.


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