Rethinking National Treatment and the Role of Regulatory Purpose:
Lessons from the ‘Theory of Distortions and Welfare’
The article studies the ‘Theory of Distortions and Welfare’ and explains the significance of the theory to the interpretation and application of the GATT national treatment (NT) rule, and in particular, to the issue of whether regulatory purpose should be considered in determining whether an origin-neutral measure is consistent with the NT rule. The article argues that the theory provides important interpretative guidance on the role of regulatory purpose under the NT rule. Essentially, the theory suggests that purpose inquiries are fundamental to the determination of NT-legality of an origin-neutral measure and that in assessing purpose, the World Trade Organisation (WTO) tribunals should take a two-step test by, firstly, identifying the genuine policy objective of the measure and, secondly, evaluating whether the measure contains any discriminatory elements that are unnecessary for the attainment of the given objective. Using this approach, the WTO tribunals can effectively regulate Members’ choice of policy instruments to pursue a chosen policy objective by encouraging the use of economically efficient measures without unduly interfering with Members’ choice of policy objectives. The interpretative guidance drawn from the theory, therefore, provides an effective way to strike a balance between trade liberalization and domestic autonomy.