INTERNATIONAL TRADE LAW NOTES PRT 1

*DISCLAIMER*

The notes below are adapted from the Kenyatta University, UoN and Moi University Teaching module and the students are adviced to take keen notice of the various legal and judicial reforms that might have been ocassioned since the module was adapted. the laws and statutes might also have changed or been repealed and the students are to be wary and consult the various statutes reffered to herein

   

The Intellectual History Of International Trade

 

Q. Do we need International Trade? Why Trade? Why is the analysis of exchange of goods and services internationally important?

Douglas Irwin in Against the Tide traces the vices and virtues of foreign trade back to the early civilization of the Greek and Roman writers. The views of these early thinkers reflected a high degree of hostility/ambivalence about trading with foreigners but mainly for non-economic reasons:

Foreign merchants and traders were regarded in these civilizations as of an inferior social class. This general hostility to merchants and foreign commercial activities was accentuated by the reasoning that contact with strangers would disrupt domestic life by exposing citizens to the bad manners and corrupt morals of the barbarians.

On the other hand, early writers such as Plato acknowledge the gains from specialization or division of labour although they were reluctant to extend the implications of this acknowledgment explicitly to foreign trade.

Other writers like Plutarch took the view that God created the sea, geographic separation and diversity in endowments in order to promote interactions through international trade between/among the various people of the world. This is the doctrine of universal economy developed by philosophers and theologians in the first few centuries AD although dominant strands in medieval scholastic thoughts are reflected e.g. in the writings of St Thomas Aquinas continue to be suspicious about commercial activities and to worry that contract with foreigners would disrupt a civil life.

Natural law philosophers in the 17^th & 18^th centuries such as Hugo Grotius sought to ressurect the Universal Economy Doctrine justifying a largely constrained freedom to trade on the law of nations or jus gentium.

Around the same time, there emerged a doctrine known as mercantilism. This theory emerged in Britain and Continental Europe in the 17^th & 18^th centuries. Unlike other doctrines which used culture etc, to oppose economic trade, it used or was based on economic rationale. Although mercantilism was not opposed to International Trade in principle it argued for close regulation for two reasons:

1. To maintain favourable balance of trade which argued for aggressive exports but restrictive import policies. This was to ensure the net effect benefited the locals and not the foreigners.
2. To promote the manufacturing of raw materials at home rather than importing manufactured goods which would displace domestic production and employment and hence arguments for export taxes on exported raw materials and import duties on imported, manufactured or luxury goods.

This was to ensure promotion of the manufacturing or raw materials locally rather than exporting them to be manufactured outside. This would be by:

i)                    Taxing exports of raw materials very highly

ii)                  Taxing imports of luxury goods highly so that they are not competitive locally

Adam Smith and his student David Riccardo are regarded as the people who gave an economic rationale to International Trade Law. Adam Smith in his book “The Wealth of Nations” ITT6 mounts a very broad assault on mercantilist theories and their argumentation of restricting International Trade.

He argues for free trade, laissez-faire. He argues for specialization as nations can gain from it. He says the gains from specialization in domestic economic activities apply equally in specialization in international trade. He says:

“What is prudent in the conduct of every private family can scarcely be folly in that of a great kingdom. If a foreign country can supply us with commodities cheaper than we can make, better buy it of them with some part of the produce for our own industry.”

Adam Smith explains this phenomenon using the theory of comparative advantage i.e. a country should produce what it can best, quickly and cheaper and exchange with other countries. Adam Smith uses two countries and two commodities to illustrate this theory. He says: “It is the maxim of every prudent master of a family never to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes but buys them from the shoemaker. The shoemaker does not attempt to make his own clothes but employs a tailor. A farmer attempts to make neither the one nor the other but employs those different artificers. All of them find it for their interest to employ the whole industry in a way in which they have some advantage over their neighbours and to purchase with part of its produce or what is the same thing with the price of a part of it, whatever else they have occasioned for i.e. If P is a country and is more efficient and productive in a given industry say farming, then X and X is more efficient or productive than P in another industry say weaving and that both countries are in need of both products, P should specialize in one, X in the other and trade between the two countries in the two products will be beneficial. It will conserve resources and create value for both.”

In 1817, David Riccardo took the theory of comparative advantage a step further by arguing that even if P is more efficient and produces cheaper products than X, they should find ways of each concentrating on one product i.e. a country may have absolute comparative advantage. Despite this there is also need for specialization as there will always be a need to trade.

He says if England can produce a given quantity of wine with the labour of 100 people and a given quantity of cloth with the labour of 120 people yet Portugal uses 90 people to produce the same quantity of wine and 80 people to produce the same quantity of cloth, in both scenarios, although Portugal has absolute comparative advantage over England with respect to production of both wine and cloth i.e. it could produce the same quantity of products with fewer labour, then trade would still be mutually advantageous.

Therefore, Portugal will need to specialize in one industry as trade is still beneficial.

SOURCES OF LAW

Treaty

Agreement between states in written form and governed by international law whether conveyed in a single instrument or a series of related instruments (e.g. WTO agreements) through whatever its particular designation. International organizations can make treaties also. Treaties must be written.

Treaties are regulated by Vienna Convention on Law of Treaties (with regards to states) and another treaty (regarding agreements between international organizations)

In the Eastern Greenland Case (Norway v Denmark) the ICJ ruled against Norway because it was proceeding from a statement of a Minister over ownership of Greenland – unilateral declaration.

Custom

Custom is formed through state practice and opinio juris. State practice must relate to a considerable number of states coming to constitute a norm; It must however:

i)                    be extensive

ii)                  be consistent

iii)                have an element of duration

General Principles of Law recognized in various nations

International law sometimes borrows from principles developed in national legal systems, but they must be general and appear to be common in many legal systems. They act only as gap filler where there is no treaty provision or rule of custom. For instance, under contract law there is ‘privity of contract’ – restitutio in integrum – the wronged party is entitled to be compensated to restore one to the situation one had been in previously.

Judicial Decisions and Writings of Publicists

They are subsidiary sources of law. International courts and tribunals are not bound by the doctrine of stare decisis – technically/legally they are not bound but in practice they use those decisions. In the short period that WTO has been in international trade there have been many cases and they have similarity whose jurisprudence can be useful.

Teachings of the most highly qualified publicists of various nations refer to eminent scholars who have published authoritative works.

Equity

Article 38, paragraph 2 – Nothing in this article prevents this court from making decisions on the basis of equity. Equity ex aequo bono – principle of the law of equity of the parties. This is what applies in international law – the agreement which the parties agree to be equitable.

Soft law

For example resolutions of councils of ministers, decisions, declarations of political organs of international organizations e.g. UNCTAD.

HISTORY OF INTERNATIONAL TRADE

The modern law of IT can be described as a product of the second world war or to be more precise the product of the pioneers of the planners of the post world war (second).

In the initial years, the law of IT was influenced heavily by the thinking of the major players of the post world war period.

High tariffs, discriminatory trade agreements, input quotas, unilateralism and bilateralism were major characteristics. It was also a period of low economic depression as a result of the war. This is the background through which the development would take place.

Reasons motivating the planners

-          The need to have free trade.

-          The need to have a regime based on non-discrimination (regime that tries to eliminate restrictions/quotas, a regime that is aimed at reducing trade barriers and opening up of markets)

-          There was a perception that the failure of the US to join the League of Nations as well as the failure of the league itself had been a disaster and the prospects for peace and prosperity were linked to the establishment of a multilateral if not a universal negotiation and a guardian for rules.

-          However, while the conclusion of agreements to establish the IMF and World Bank and the UN itself and ICAO had been achieved by the end of 1945; the establishment of a trading regime took a little more time than the others

-          Discussions on trade took place between the US and UK officials from 1943 onwards and the basic assumption in the negotiations remained that

(i)                 Trade across national frontiers was to be increased, encouraged, promoted, enhanced

(ii)               It was to be conducted primarily by private firms as opposed to government enterprises.

(iii)             That government intervention was to be the subject of a code of conduct designed to limit interference with the movement of goods.

-          Until today, the three above remain the areas of convergence amongst countries in ITL.

The Birth of GATT almost by Accident

The USA issued a document entitled Proposals for Expansion of World Trade and Employment. It was for consideration by an international conference on trade and employment purporting to represent consensus resulting from US/UK discussions that had been going on for two years.

The proposals called for a detailed charter or code of conduct relating to governmental constraints to international trade and also called for creation of an organization called International Trade Organisation (ITO). The proposed code affirmed the principle of unconditional Most Favoured Nation (MFN) treatment.

It prohibited quantitative restrictions or quotas with exceptions to specific industries e.g. agriculture, textile and clothing. It also dealt with subsidies and with conforming state trading to market condition, prevention of cartels with a few exceptions for countries with balance of payment problems.

There was explicit mention of economic development. As for the proposed ITO, its role was to administer the code (rules), to provide a forum for the settlement of disputes and perform other transactions such as the collection and dissemination of trade statistics. A few days after the proposal, the USA invited 15 countries to enter into negotiations looking to early conclusion of the multi-lateral agreement (i.e. USA said it is desirable we establish ITO with its functions and at the same it invites other countries to first conclude trade agreements – parallel system – with short-term objectives)

This proposal was then taken up by ECOSOC of the UN and made draft agreements of ITO. At the same time the USA and the other 15 countries were doing their negotiations. These negotiations led to trade agreements revolving around cutting of tariffs (duties imposed on foreign goods by a country)

The negotiations were one-on-one sessions focusing on products for which one side was an important market and the other side was the principle supplier with concessions on such products “paid for” by concessions in which the roles were reversed. A total of 123 such negotiations took place, 22 involving the US and 101 involving the other pairs of countries on various goods. Altogether, more than 1000 meetings took place over a period of six months considering over 50,000 items of trade.

These arrangements negotiated substantial reduction of tariffs. This system was an efficient way of carrying out negotiations. Once a simple bilateral agreement was reached it was supplied to all other parties of the negotiations based on the MFN principle. There was no need for all these negotiations. These became a guiding principle of GATT (1948 – 1995)

The consequences of the Negotiations

The pace and volume of the negotiations could not have been maintained had they not have been held all at the same time. The negotiations set precedence for the next round of discussions from 1947. This was important in shaping trade law.

As understood from the initial invitations, all the concessions i.e. negotiated deductions and by-laws with regard to tariffs were generalized to all participants pursuant to the MFN principle.

All these concessions were put together in a single treaty called the General Agreement on Trade and Tariffs (GATT). GATT not only comprised the schedules of trade by-laws, it also contained a code of conduct designed to safeguard at least provisionally the undertakings given and to commit the participants to a common standard of behaviour with respect to international trade. At the conclusion of GATT, the work of ECOSOC with regard to ITO Charter is also completed at the same time.

By 1947, when GATT was opened for signatures (it entered into force on 1^st January 1948), at the same time, the Havana Conference on Trade and Employment opened and by 24 March 1948, the final Act of the conference was also adopted and a treaty signed by 53 states. The US effort became contentious since it omitted the economic development part as it did not give ways in which trade would promote standards of living. The USA started hitting at the Havana Treaty as a side issue and opted for the Marshall Plan – a blueprint aimed to revitalize US. The Havana Treaty establishing the ITO never saw the light of day and was ratified only by India. GATT therefore took precedence and was the main body dealing with trade from 1948. 

THE ARCHITECTURE OF GATT

Overview

This was dictated by the need for formal ratification. This is because trade is a contentious issue. The agreement was designed in such a way as to avoid from having legally binding norms to avoid submitting it to the national procedures of states – monism and dualism.W The design of GATT has three elements.

Elements of GATT

1).    Unlike other treaty making processes, the GATT process did not end up with a final act. A final act normally records the undertakings by states at the end of a law making international conference. In this instance, a protocol for provisional application was adopted instead. These were therefore like provisional normative guidelines because it would have been difficult to obtain consensus on one agreement – the protocol was to serve before the Havana Charter came into application after which it would have no effect. GATT has thus been a protocol for provisional application for 47 years.

2).    The protocol for provisional application bound the signatories to apply part 1 and 3 of GATT without reservation but to apply part 2 to the fullest extent not inconsistent with existing national legislation. Part 1 deals with the most basic provisions like the MFN treaty provision, scheduled concessions etc. Part 2 contains procedural provisions, customs union, free trade areas etc and Part 3 is about international taxation and regulation. All these provisions of GATT were subject to Grandfather clauses, which provided national measures inconsistent with the GATT provision were not unlawful if they were required by legislation as of 30^th October 1947, for the original members of GATT and as of date of accession for countries that joined the GATT system later.

3).    The aspect that shaped GATT was that it was established without any text suggesting that an international organisation was formed. One would have expected an institutional framework to organize collective action to call meetings to grant waivers, to hire staff, to conduct dispute settlement. Instead, they were entrusted to an entity referred to as CONTRACTING PARTIES. All the members of GATT acting as a collective unit discharge that function.

MAJOR PRINCIPLES OF GATT

The preamble of GATT looks to the raising of standards of living, ensuring full employment and a large and steady growing volume of middle income and effective demand by expanding the production and exchange of goods.

The signatory states aims to accomplish these goals by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers of trade and to the elimination of discriminatory treatment in international commerce.

1.      Universal Most Favoured Nation Treatment

Trade should be conducted on the basis of non-discrimination (Art 1 GATT) whereby states undertake to apply duties and similar charges on the import of goods equally without regard as among contracting parties to the origin of goods.

2.      Trade Barriers should not be increased

Governmental restraints on movement of goods should be kept to a minimum and if changed then they should be reduced not increased (Art 2 GATT – State parties undertake to apply to all other CONTRACTING PARTIES the duties set forth in the schedule submitted at the close of the tariff negotiations i.e. to bind the accepted offers reflected in those schedules. Bound duties may be unbound every three years.

3.      Principle of Tariffs Only

The accepted form of trade restraint is only customs tariff. A tax imposed by the importing state as a condition of allowing importation of goods into its territory. The assumption underlying this principle is although the importer pays the tariffs, the foreign producer/exporter bears the burden, in terms of reduced market for his product in competition with the producers in the importing country or in reduced profits from sales in that country.

Tariff is the easiest restriction to apply, others are complicated such as licence schemes, evaluation requirements, quotas etc. Tariffs may be formulated ad valorem (as a percentage of the value of the goods). Specific tariffs are imposed per unit of measure e.g. Kshs 3,000 per imported fridge. Tariffs measured by the value of competing products of domestic origin are prohibited by article 7.

4.      National Treatment Principle

Internal taxes, charges and other regulations must not be imposed so as to discriminate between domestic and imported products. States are not disabled from imposing sales or consumption taxes or regulatory and labeling requirements on imported goods. But neither in motive nor in effect may there be a distinction between the burden borne by imported and domestic goods. Of course this principle has different nuances/shades.

Together with MFN and Tariffs Only Principle, the entity of National Treatment Principle emphasizes the tariffs as the only accepted form of trade protection and the commitment against discriminatory treatment of goods based on their country of origin. National treatment principle applies not only to tariffs bound in GATT schedules but to all goods.

5.      Regular Negotiations

CONTRACTING PARTIES are to meet regularly in negotiations looking to lowering trade barriers on the basis of reciprocity within the multilateral framework. The GATT text does not prescribe a specific interval between the rounds of multilateral trade negotiations or even duration of the rounds.

QUALIFICATIONS OF THE GENERAL PRINCIPLES

The principles are not absolute but have qualifications

i.                    Preservation of existing preferences

The drafters of GATT qualified the MFN principle in article 1 by explicit authorization for states to maintain the imperial or commonwealth preferences, as well as comparable arrangements for overseas territories or affiliated states of France, Belgium and Netherlands.

ii.                  The Grandfather Clauses or existing legislation

CONTRACTING STATES were not obligated to change existing legislation with respect to the rules contained in part 2 of GATT which had provisions on dumping, quotas etc. The Grandfather clause is the name of this and it made it possible for several countries to join GATT without submitting the document for approval by their national government.

The various GATT panels held in several places that the Grandfather clauses had merit, that state parties were justified to implement a measure which would be contrary to GATT only when such a measure was required by national legislation under pre-existing law as contrasted to merely being authorized.

The effect of Grandfather clauses was that the code of conduct in international trade was something less of a universally applicable set of laws yet the Grandfather clauses were important in surmounting the resistance by a number of countries to join the GATT.

iii.                Political exclusions (article 35)

The idea of GATT rested on the principle of trust and the commitment of countries to treat each other or other parties on the basis of complete equality. In practice however, this is not possible. Article 35 provides that when a state joins the GATT it could announce that it will not enter into tariff negotiations with another state and it intended not to apply the GATT in relation to that state. The decision of revoking article 35 could only be made at the time of becoming a party not ten years into your membership. That decision could be revoked at any time subsequently. Thus you could exclude GATT provisions on basis of politics (issues of cold war)

iv.                National Security Consideration (article 21)

Countries could exclude the application of basic principles of GATT to certain states or all foreign countries on the basis of national security. According to article 21, nothing in the agreement is to prevent a party from taking any action which it considers necessary for the protection of its essential security interests.

v.                  Permissible Quotas

Some quotas are permitted especially in agriculture because all states intervene to some extent as food security has often serious implications. In many cases, the intervention is in the form of limits of output to estimated demand and this raises the price of a given commodity. If the commodity in question was to be imported freely such a program of intervention would collapse.

Accordingly, although article 11 L provides that all quotas, prohibitive restrictions are restricted, paragraph 2c permits state parties to impose quotas of restrictive output on any agricultural or fishing commodity if necessary for a governmental  program that restricts production of that commodity. The permitted quota will not be such as would reduce the total of imports relative to the total of domestic production as compared with the proportion which might reasonably be effected in the absence of restrictions. Thus, increased domestic output or market share are not acceptable motives for the imposition of import quotas.

Several GATT panels have held that Art 11, para 2c authorizes import restrictions not import prohibitions. A second condition permitting import quotas authorizes state parties to impose restrictions in order to safeguard the external financial position and the balance of trade.

vi.                General Exceptions

The GATT allows countries to exempt themselves from GATT principles in the interests or for reasons of health, safety, morals and other similar grounds. Article 20 of GATT provides a country can exclude themselves from principles in for purposes of protecting human, plant or animal life and health – to secure compliance with laws relating to protection of patents, trademarks, copyright and industrial property i.e. IP rights. Also to ensure conservation of the exhaustible natural resources – SPS (sanitary and phytosanitary standards from TRIPS)

Some issues raised in article 20 were addressed in Uruguay Round and addressed in the Agreement on Technical Barriers to Trade and Agreement on Sanitary and Phytosanitary Measures.

ASSIGNMENT

Identify and critically discuss the main areas of contention between developed and developing countries in the areas of agriculture, textile and clothing (20 mks)

OTHER MAIN PROVISIONS OF GATT

Escape Clauses

These were meant to enable states to reverse the process of opening up their markets if it turned out differently from what was expected. In other words it was meant to make trade freer and freer. A state can fail to uphold a treaty where there is a material breach of fundamental provisions by another state in a bilateral treaty for instance – supervening impossibility – rebus sic stantibus. The escape clauses could thus hold back a country from the process of liberalization.

Article 18 – The Open Season Clauses permits parties to withdraw any binding at three-year intervals so long as the overall balance of concessions is maintained.

Article 19 – Safeguard measures which authorizes emergency action imposing restriction on imports of a particular product if as a result of unforeseen developments and the effects of the obligations incurred by CONTRACTING PARTIES to the agreement including tariff concessions, any product is imported into the territory is so imported in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers of like or directly competitive products.

There are provisions on customs union and free trade areas – article 24

The drafters of GATT had mixed feelings about customs unions (CU) and free trade areas (FTA). On one hand, a customs union i.e. an arrangement whereby sovereign states undertake not to impose duties or comparable charges on imports on goods or one another is by definition consistent with the MFN treaty principle. On the other hand, the customs union entails the elimination of barriers to the trade inter se and is thus consistent with the objectives of GATT of eliminating barriers to trade.

Difference between CU & FTA

Under a customs union, member states both eliminate trade barriers inter se and adopt a common set of trade barriers to products emanating from non-member states. In a FTA only the trade barriers inter se are eliminated.

COMESA was initially an FTA, now it’s a common market. An FTA may have around six states and trade barriers though eliminated; each state may have its own individual barriers. A customs adopts common barriers or tariffs.

The compromise was to enact Art 24 which permits more states to enter into customs unions or FTAs subject to:

1)      The arrangement must cover substantially all the trade between or among the parties to avoid aspects of preferential or discriminatory deals

2)      That on the whole, the tariffs and other barriers to trade, be no higher or more restrictive than the average of the tariffs in the constituent territories before the formation of the customs union or free trade area.

3)      If the formation of CU or FTA leads to the unbinding of bound duties, there is an obligation to negotiate with the beneficiaries of the concession in order to re-establish the prior balance (in tariff negotiation, there must always be a balance)

4)      If the CU or FTA is to be phased in (e.g. EAC & EU). Then there must be a plan or schedule to do so within a reasonable period of time.

Provisions on dumping and subsidies

Subsidies refers to intervention by the state cash or otherwise that have the effect of reducing the producers net cost of production. Dumping is the importation of goods into a market which cost very low i.e. these are sales by an exporter at prices less than the home market price.

It is agreed that dumping is an unfair trade practice. Dumping is condemned within GATT but not prohibited. However, there is a remedy for dumping. The importing country is permitted to impose anti-dumping. These will nullify the effect of the low prices. This is a defence by the importing country. The duty is designed to offset the unfair pricing.

Subsidisation is state intervention either directly by cash payments or otherwise indirectly in favour of producers which has the net effect of enabling producers to produce at a lower cost than they would have were it not for the intervention. The remedy for subsidization is to impose a countervailing duty. This can also be called an anti-subsidy.

Waivers

This refers to the exemption of an obligation. A country may be exempted from an obligation by the contracting party. This was the institutional mechanism of GATT.

Under the GATT a waiver of obligations could be granted to a state by the CONTRACTING PARTY call parties acting  in concert by 2/3 majority. The waiver normally is a negotiated document. A state would apply for a waiver and it would be negotiated subject to annual reporting requirements.

Waivers have been retained under the WTO (Post – Uruguay) and can be approved by ¾ majority of the member states subject to the requirement that waivers will have a terminal date and if the waiver extends beyond one year, then it would be subject to annual review.

DISPUTE SETTLEMENT UNDER GATT

There was no dispute settlement body as such, rather disputes were settled by all CONTRACTING PARTIES acting in concert. Under Article 22 GATT each CONTRACTING PARTY should consider that any benefit accruing directly or indirectly under the agreement is being nullified or impaired, the matter may be referred to the CONTRACTING PARTIES which shall give a ruling on the matter as appropriate.

If the CONTRACTING PARTIES (dispute settlement body) consider that the matters are serious, they may authorize the successful complainant state to suspend the application to the GATT agreements, of such preferences, concessions under the agreement as may be appropriate under the circumstances.

There developed with time, out of the rudimentary provisions in Article 22 & 23, a dispute settlement system akin to arbitration. It had four elements:

1.      When it is determined that a challenged measure violates GATT, it would be recommended that the respondent withdraws the measure. This is because retaliation was not favoured as it would result to barriers of trade.

2.      For many years, the disputes would be processed by the contestants delegates making representations to the GATT panels or working parties whose membership was from third parties (non-contestants). The current dispute settlement body of the WTO works in panels. For many years the representatives/delegates were not lawyers but with time more lawyers started representing their countries. Also the panels and working parties were nominated from lawyers. Thus, the system became rule based. Decisions were no longer made for political expediency but based on rules of International Trade.

3.      Until 1995, panels or working parties used to make recommendations only, not decisions. This would be submitted to the GATT council (highest decision making body) for approval, rejection or postponement.

Since the GATT council worked on the basis of consensus, it became frustrating to implement the recommendations of the panels or working parties. This is because under GATT all parties must agree. If there is an opposition then the recommendation would not be passed.

Note: Consensus in International Trade does not mean unanimity but means the absence of a formal objection.

Therefore, the new WTO dispute settlement process uses negative consensus i.e. the recommendation of the panel is automatically binding unless every member agrees to reject it. Note that this creates another extreme.

EVOLUTION OF GATT AND GATT LAW THROUGH TRADE NEGOTIATIONS (1947 TO DATE)

The evolution of International Trade Law has been influenced by the changing political, social, economic and cultural circumstances of the world. In 1947, the cold war was going on, there was communism. Japan was outside the world economy. Majority of states in Africa and the Caribbean were under colonization. This is no longer the case, there are new entrants in International Trade. Their nuances/ideas led to the evolution of GATT.

Globalisation and its effects e.g. Internet, E-commerce, shrinking boundaries, space and time, faster movement of goods have led to the evolution of IT law. The emergence of Middle East countries because of oil is also a major factor, the concretization of the European Union which is a force to reckon in International Trade, changes in technology etc has led to evolving of normative standards in International Trade.

One of the principles of GATT was periodic negotiations which shaped International Trade norms. The first five rounds took place between 1947 and 1961.

The first round – Geneva Round:- It took place contemporaneously with drafting of the GATT agreement. Its main objective was tariff reduction. The two successive rounds i.e. Annecy – France (1949) and Torquay – England (1950 – 1951) (3^rd & 4^th) combined modest tariff cutting with the condition of accession by new entrants into the regime.

The fourth Round – Geneva Round (1955 – 1956) aimed at further tariff cutting.

Note: The pattern in the four rounds was for each country involved to exchange request lists and subsequently exchange offer lists.

After the lists were made, they would be availed to all participants who would take them into account in their own bilateral negotiations and preparation of revised lists. If two countries might benefit from a proposed concession, the importing country might make its offer subject to being “paid” by both of the potential beneficiaries.

Just after the close of the 4^th GATT round in 1956, the Foreign Ministers of the Benelux Countries (France, Germany & Italy) met in Italy to consider and approve the Spaak report which looked to the establishment of a European common market.

Commissioning of the Spaak Committee was informed by the thinking that if GATT could not deliver a significant tariff reduction, then these countries could use Article 24 provisions to achieve this. Some said these countries were turning their back on GATT but this was not so.

On the one hand The Treaty of Rome establishing the EEC on the whole conformed to the requirement of the creation of a customs union and Free Trade Area referred to in Article 24 of GATT. On the other hand, the EEC came to be a principal force within the GATT negotiating and acting as a unit and on substantially equal terms with the USA.

The 5^th Round – The Douglas Dillon Round had two aspects:-

a)      It was aimed at further multilateral tariff cutting like the previous rounds

b)      It involved negotiation between the EEC and other GATT parties pursuant to Article 24 (6) of GATT which deals with compensation for unbinding of duties of member states of the EEC bound in prior GATT rounds.

Whenever a customs union emerges there must be re-negotiation and re-balancing of concessions.

The position of the EEC was that a common external tariff on a given item created by an arithmetic average of the previous duties of the constituent countries as called for by the Treaty of Rome did not require any compensation to third parties e.g. before common external tariff, duty was:

Germany                     15%                 ad valorem

France                         20%                     “

Italy                             25%                     “

The argument was that the Benelux duty would be the average of the three i.e. 18%

The EEC argued that they did not need to compensate anyone because the loss from 25% and 20% to 18% would be cancelled by the increase from 15% to 18%. The position was rejected.

The principle that third parties were entitled to make item by item claims for compensation pursuant to Article 24(6) of GATT was adopted when:

i)                    A customs union was formed or

ii)                  When new members joined the union (expands)

The round was fairly successful and the EEC was integrated into GATT with little friction. There was also tariff reduction however, the actual gains were modest. The process of product by product negotiation was tedious and the question of agriculture remained unresolved.

Kennedy Round

The US Government was at first divided on how to respond to the question of EEC.

Why divided?

1.      From a political standpoint the establishment of the EEC would check German communism from Western Europe.

2.      Economically, even if EEC complied with Article 24, it may deprive outsiders like the USA and others from the benefits of MFN and non-discriminatory principle. This was injurious to the US as it would create trade diversion. (customs union created trade diversion) i.e. If US goods competed on equal terms in the Italian market with goods from Germany, once the CU came into effect, the same product originating from Italy can come into Germany free of duty while the US product came in subject to a common external tariff. Therefore, the US product would become uncompetitive in the Italian market.

The significance of the trade diversion effect will depend, other things remaining constant, on the height of the common external tariff i.e. the higher the tariff the more uncompetitive the good from the third party, the more the trade diversion. Therefore, US negotiated to keep the CET as low as possible. This meant getting away from the prior confinement to article by article negotiation and securing the authority for across the board or linear negotiations.

Therefore, GATT decided to hold further negotiation on the basis of linear negotiations with the exception that product by product negotiations were required to achieve reciprocity.

Tokyo Round

 A striking feature here is an expanded trade agenda. Although article 18 of GATT talks about trade negotiations aimed at reducing tariffs, the Kennedy Round was the last negotiation focusing on tariffs only. Afterwards, the agenda expanded.

By the time the effects of the Kennedy Round were being felt in the early 70s tariffs especially on industrial goods had drastically been reduced and no longer appeared to be a major impediment to trade as they had been initially.

Other barriers to trade collectively known as Non-Tariff Barriers (NTBs) had taken on increasing importance. Therefore, the focus of GATT became how to overcome these NTBs. It was agreed then that NTBs could only be addressed by reforming International Trade Law.

Some of these NTBs were based on statutory constraints such as

·         Bi-national laws;

·         Laws and regulations on government procurement;

·         Subsidy laws

·         Subsidies including export credits and tax rebates

It is in this context that the Tokyo Round was held to integrate the expanded trade agenda into negotiations. It was agreed that although the new talks may not result in an agreement favouring the interests of every party equally, it would still be appropriate if the overall settlement was satisfactory to all the participants i.e. if a country wanted to open up its procurement system to the nationals of other states (non-nationals) even if this was not to be reciprocated by the other state, it would still be a good deal if the state opening up its procurement system would benefit in any other way including latent benefits other than similar confessions.

The Tokyo round was pushed for by mainly industrialized countries. Once this became clear, a majority of industrializing countries took an opposed position and some chose to show no interest in the talks because of this differential opinion, the Tokyo round ended up not developing binding rules but in developing optional codes.

These codes were actually giving flesh to the GATT agreement or principles and also dealing with the problem of NTBs. The codes were open to signature to all states but were optional and would not require any minimum number of signatories before they entered into force.

The codes were criticized as undermining the universality of GATT as an organisation. More particularly the codes were thought to undermine the core principles of GATT especially the MFN principle in article 1 e.g. the anti-dumping or subsidy code was bilateral. It left out other signatories in GATT

Note: It was a conditional MFN i.e. you only benefit if you have signed.

Benefits of the code

1.      In light of the differences that had emerged between industrialized and industrializing countries, this was the only way to come up with a normative framework for international trade in light of the opposition from GATT.

2.      It enhanced the commitment of countries which had started wavering in their commitment to GATT.

In the overall, the codes were negative since they departed from the principle of universality, liberalization of trade and application to everyone. This same dilemma faced the Uruguay negotiations. However here, there was an in between i.e. the core multilateral agreements became compulsory. However, plurilateral agreements became optional for countries.

The Tokyo codes can be seen as a major gap filler between GATT 1947 and GATT 1994. Though weak, they enabled international regulation of trade to go on between those years.

Although there was discontent on the results of the Tokyo round (73 –77) especially with industrializing countries, its main achievements was to re-affirm unity and consistency in matters of international trade and after negotiations, a resolution was adopted reaffirming that the existing rights of contracting parties would not be affected by not being parties to the specialized agreements i.e. the codes including the rights emanating from the Article 1 principle i.e. MFN. The codes remained a substantive body of law, much of it technical but nonetheless important.

One great failure of the Tokyo Round was failure to develop a code on safeguards. Safeguards are measures a country can take to relieve itself of sudden or unforeseen importation of given products normally in the form of quantitative restrictions.

The Uruguay Round

While the salient development of the Tokyo Round was the expanded agenda, that of the Uruguay Round was an exploded agenda. The agenda moved from trade in goods (the focus of all the other rounds). As early as 1982, before even the effects of Tokyo had been implemented, some countries started advocating for other talks. This was because of:

1.      The problem of US protectionism occasioned by trade deficits between itself, Japan and other countries.

2.      GATT was only restricted to trade in goods yet there was need to cover trade in services. IP rights and international regulation of investment measures.

In 1985, a preparatory committee was formed to prepare an agenda for the 1986 ministerial meeting held in Punta d’el Este in Uruguay. The ministers set an agenda for a new round of talks – Uruguay round which would concentrate on:

·         Trade in goods

·         Trade related aspects of IP rights including patents, trademarks, copyrights and counterfeiting

·         Trade in services e.g. banking, insurance, shipping and legal services

·         Trade related aspects of international investments

·         The question of reforming agriculture and how to deal with the problem of subsidization (oversubsidisation) which had developed in developed countries leading to overproduction of goods whereas other countries had famine/acute food shortages

·         Safeguard measures to rescue clothing and textile industries falling in many developing countries.

The ministers committed themselves to standstill and rollback measures. Standstill measures involve not taking any trade restrictive or distorting measures inconsistent with GATT or to take measures in exercise of GATT rights that would go beyond that which is necessary to remedy a specific situation.

Rollback measures involve the elimination of any trade restrictive or distortive measures previously taken without asking for GATT concessions instead.

The final item in the agenda brought by US was the need to have an effective dispute settlement system to settle disputes taking into consideration an enlarged complicated agenda. A dispute system that would be responsible for overseeing, monitoring and implementation of the recommendation.

GATT – WTO LAW AFTER THE URUGUAY ROUND

The final act of the Uruguay Round was formally signed at a ministerial meeting on 15^th April 1994 in Marakesh, Morocco. The ministers representing third world countries declared the Uruguay discussions complete and committed themselves to the establishment of a new trade institution, World Trade Organisation (WTO) by 1^st January 1995. This was met.

In the same way, the Uruguay Round and WTO constitute a new start in ITL. There is no doubt however, that it is in some respect a continuation of the GATT 1947 system. Therefore, it simply formalized and put in writing rules discussed in the past 50 years i.e. both continuity and novelty. See Article 16(1) WTO

“Except as otherwise provided under this agreement or the multilateral trade agreements, the WTO shall be guided by the decisions, procedures and customary practices followed by the CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of GATT 1947.”

Thus in a real sense what the world agreed in the Uruguay Round was to subject a great many aspects of International Economic activities to the principles that had been agreed to half a century earlier by far fewer states and in the context of far smaller agenda (WTO’s first problem) i.e. rubberstamping norms of a smaller context and applying them to the expanded agenda. Even in the expanded AG, certain aspects were left out: e.g.

i)                    Competition law

ii)                  Nexus between international trade and the environment

See:

Dolphin and Tuna cases

Mexico accused US of harvesting fish using instruments that depleted the endangered species:

iii)                Human rights question

Impact of trade on Socio-economic rights has not been appropriately addressed.

iv)                Development and trade

Trade and development is controversial. Therefore, two schools of thoughts emerge i.e.

a)      Trade is business and not charity

b)      Trade must be fair for it to lead to empowerment

In 2001, the Doha development agenda set out proposals of how to integrate development and trade. However, in post Doha, this has not been successful.

Note: Post Uruguay:-

1.      Not all areas were covered

2.      Even the areas covered were not adequately covered (skeleton)

3.      The unfinished agenda was to be discussed in the next round

Note:

The principles of GATT remain. For example, MFN, binding commitments that can only be bound against compensation, National treatment with regard to most internal regulations regarding trade, regular joint negotiations to reduce barriers to trade, more international scrutiny than ever before over acts of individual states that may distort trade flow and a system of settling trade disputes focused both on requirements of compliance on trade with the decisions of impartial tribunals establishing legal interpretations as contrasted with merely diffusing controversies.

Therefore, the Post-Uruguay GATT – WTO system has four pillars i.e.

1.      The traditional GATT system focusing on trade in goods fortified by renewed commitments and augmented by 12 multilateral agreements that are binding on all member states and two plurilateral agreements binding on only those states that have accepted it. Some agreements expired in 1997 i.e. the International Dairy Agreement and Bovine Agreement

2.      Separate from the GATT but embraced within the WTO, all the WTO system members are parties to the GATS (General Agreement on Trade in Services). This is an agreement to begin to apply within the regime of trade in services. The same principles of GATT e.g. non-discrimination, progressive liberalization but subject to exceptions contained in the schedule.

3.      TRIPS brings for the time being IP rights within the ambit of public international law of trade. Therefore, MFN etc is applicable to IP. It provides the WTO enforcement system to the application of century old treaties in the area of IP developed under WIPO e.g. Paris Convention, Berne etc., i.e. TRIPS ties to consolidate other treaties on IP.

4.      The understanding on dispute settlement (DSO). This is a treaty that builds on the system of settlement of trade disputes that had developed earlier on under Article 22 and 23 of GATT with exceptions and additions e.g. negative consensus a more affecting mechanism. At the institutional level the Marrakech agreements establish a new body known as the Trade Policy Review Body which provides systematic surveillance of oversight on measures taken by states that may affect a multilateral system i.e.

a)      Four greatest economies under review every two years

b)      Next sixteen economies under review every four years

c)      The rest of the countries of the world under review every six years

1)      This body pre-empts trade disputes and solves them.

2)      The reviews also help a country to understand trade policies and laws of the rest of the world

3)      It helps the country being reviewed get a feedback on its performance with regard to WTO rules.

All of the Tokyo codes were considered during the Uruguay Round and four of them were renegotiated as plurilateral agreements – optional i.e. Agreements on civil aircrafts, government procurement, dairy products, bovine meat

All the other agreements i.e. multilateral agreements are an integral part of the GATT – WTO system and all members of GATT – WTO have to be parties to them.

SUBSIDIES AND COUNTERVEILING MEASURES

The 1979 subsidies code had been built as the greatest achievements of the Tokyo Round. The code established that apart from primary products, export subsidies were unacceptable. The code also confirmed that a country could not impose counterveiling duties on imported products unless it could justify:

i.                    The imports had been subsidized and

ii.                  There was material injury or threat of injury to a domestic industry as a result of the subsidized imports

The code also established a dispute settlement procedure designed to afford remedies not only to importing countries but also to exporting countries ascertaining injuries to their industry as a result of other countries imposing subsidies on their goods.

The subsidies code proved disappointing because the outcome of complaints under the dispute settlement procedure had been inconclusive and also because the subsidies that caused most controversy were not export subsidies as defined but existed/consisted in large part of government measures regarded as justifiable by many countries.

Uruguay

The Uruguay round departs from the distinction between exports and domestic subsidies defined in the Tokyo Round. It defines subsidies in terms of financial contribution by government conferring a benefit on the recipient and then divides subsidies into three categories i.e.

-          Prohibited subsidies (red light subsidies)

-          Non-actionable subsidies (green light subsidies)

-          In-between subsidies (yellow light subsidies)

Furthermore, whereas the Tokyo round subsidies code exempted developing countries from application of the code. The Uruguay Round revised the code to exempt only the least developed countries (LDCs) from the prohibition of subsidies and makes most of its other provisions with some modifications and a grace period applicable to other developing countries.

The prohibited  subsidies include the previously condemned subsidies (“export subsidies”) contigent on export performance but also substitution subsidies i.e. subsidies contigent upon the use of domestic over imported goods.

The yellow light subsidies i.e. “actionable subsidies” are not defined except that they must meet the test of specificity. They must meet this test de jure and de facto and they should not come within the other two categories.

Green-light/non-actionable subsidies are the major innovation in the 1994 subsidies code. They are subsidies that may not be challenged in the WTO dispute settlement mechanism or be subject to countervailing measures under national law reflecting a recognition that many governments undertake certain kinds of expenditure in the production of goods which is not prohibited.

Note: Not every kind of subsidization is lawful.

The 1994 Uruguay agreement on subsidization provides that no member should cause through the use of any subsidy adverse effect to the interest of other members. It provides for a system of challenging subsidization through

o   An international trade dispute settlement system.

o   Under national law through countervailing duty proceedings

The Uruguay agreement divides adverse effects into three categories:

i)                    Traditional injury to the domestic industry of another member which is upto the complainant to establish

ii)                  Nullification on impairment of benefits accruing to other members. Burden of proof is on the complainant.

iii)                The dark “amber” subsidies. These are four types of subsidies presumed to cause serious prejudice with the burden shifted on the respondent state to show that long adverse effects were caused by the challenged measures.

      They include:

a)      Total subsidization of a product exceeding 5% ad valorem

b)      Subsidies to cover operating losses sustained by an industry/enterprise

c)      Direct forgiveness of a debt

Tokyo Round concentrated on export subsidies

Uruguay Round expanded this to include domestic subsidies

Dumping and Anti-Dumping

The GATT anti-dumping code dates back to the Kennedy Round and was amended to conform as closely as possible to the subsidies code. The WTO or Uruguay Code on anti-dumping has no striking innovations. It follows a scheme of prior versions but spells in no more details terms that had been left out in 1969 & 1979.

Note: The definition of dumping set out in Article 6(1) of GATT remains i.e. contrary to the layman’s conception that dumping means getting number of overproduction, or oversupply at whatever price available, dumping means introduction of a product into the commerce of another country at less than normal value.

Normal value means in the first instance, home market price. If home market price is not available or is insignificant, the comparison of challenged import price is with sales for export to a third country or with cost of production to the country of origin plus a reasonable addition of overheads and profits.

Article 6(1) of GATT says that dumping as thus defined is condemned if it causes or threatens material injury to an established industry in the importing country. The traditional remedy in dumping and injury are found typically by (administrative authorities) is an anti-dumping duty equal to the margin of dumping applied to the products of the exporter against which the finding runs.

The margin of dumping is the difference after various adjustments between the price at which a product is sold at importing country and the normal value. Motive is not important in dumping both under GATT and WTO anti-dumping agreement and therefore in dumping proceedings predatory intent need not be proved.

The Uruguay Round/WTO anti-dumping code, building on its predecessors (Tokyo & Kennedy) instructs on how to arrive at a conclusion that dumping has taken place. It also contains provisions on how to gather evidence in anti-dumping proceedings and on introducing transparency into the process.

Like the previous codes the WTO anti-dumping code sets out provisions for determination of injury to an industry. It also sets out how to establish the link between importation and injury (causal link). It sets out how an evaluation of all the relevant economic factors can be carried out.

The 1979 Tokyo anti-dumping code stated that the anti-dumping duties were to remain in force as long as they were necessary to counterveil dumping that was causing injury. The WTO agreement repeats the provision and states that in addition anti-dumping duties shall be terminated not later than three years from their imposition or from a review unless a new determination is made that removal of the duty is likely to lead to the continuance or renewal of dumping that causes injury.

Note: these are timeless under the WTO anti-dumping code

In addition to the anti-dumping duties imposed by importing countries, the WTO anti-dumping code makes like the Tokyo Code provision for dispute settlement but whereas under Tokyo code disputes not resolved by consultation can be referred to the committee on anti-dumping practices, under the WTO, disputes on dumping are to be referred to the Dispute Settlement Mechanism.

RULES ON/OF INTERNATIONAL TRADE LAW IN DETAIL

AREAS:

1.      Tariffs

2.      Quotas or quantitative restrictions and import licensing

3.      Customs clearance and related provisions

4.      The issue of subsidies

5.      State trading enterprises - their role in international trade

6.      Technical regulations and production standards e.g. standardization of goods

7.      Sanitary and phytosanitary measures

8.      TRIPs

9.      Trade Related Investment Measures

Tariffs

A tariff is a tax levied on products when passing  a customs body/border. Governments levy tariffs on imports and exports although  in practice import tariffs are the most common and the most important.

Customs tariffs are of various types:

a)      Ad valorem

Tax which is a percentage of the value of imported products

b)      Specific

Tax is a given amount of money per physical unit

c)      A combination of (a) and (b)

The WTO agreements do not favour any one type of tariff. In practice however most tariffs are ad valorem.

Each of these types of tariffs may have its own advantages in specific situations e.g.

1.      Ad valorem taxes are more transparent

2.      If the value of the product increases e.g. due to inflation, then tariff revenue will keep pace with the increased prices.

Specific tariffs have the advantage of not requiring customs authorities to determine the value of their imports when entering the country. They are also not sensitive to changes in the value of the goods.

The customs tariff is in principle the only instrument of protection allowed in WTO trade law. The rest are principles of free trade liberalization. The preference of tariffs  is consistent with economic theory in that tariffs are superior to quantitative restrictions.

Why Tariffs are preferable to Quotas

1.      Tariffs maintain an automatic link between domestic and foreign process ensuring that the most efficient supplier continues to supply (serve) the market. This link is cut by quotas.

2.      It is easier to ensure non-discrimination of foreign sources of supply using tariffs but under a quota it is more difficult. Officials usually base quotas on arbitrary decisions. This is why agriculture and textiles suffer from these quotas.

3.      Tariffs are transparent once established every trader knows the price of market access for specific products. This is not the case under a quota, where the conditions of market access depend on timing e.g. on a first come first served allocation scheme, the quotas may depend on past performance or historical utilization rates. Thirdly quotas can involve corruption where it involves bribery to the officials.

4.      Economic rationale for tariffs. Tariffs are also more transparent in that the level of nominal protection under tariff is easily calculated while the nominal protection is difficult under quotas.

Tariffs generate revenue for governments while under quotas the tariff equivalent may go to intermediaries or exporters depending on allocation. Tariffs reduce lobbying incentives. They benefit the whole industry reducing returns for individual firms to lobby for protection. If quotas are an option, traders may seek individual  quota allocation that are as large as possible for themselves.

WTO Rules or Tariffs

1.      Tariffs must be non-discriminatory pursuant to Article 1 MFN Principle. Remember there are exceptions to MFN.

2.      Tariffs must be bound. WTO members must not raise tariffs above the level they are bound in their schedules – Article 3 GATT’94

By binding its tariff a member undertakes not to impose a tariff on a specific product that is higher than the bound rates. A binding may be identical to the currently applying rates or may consist of a negotiated rate that is lower than the currently applied rate.

WTO members are constrained regarding the imposition of fees and other charges on imports which have the same effect as tariffs – called para-tariffs and are prohibited. Note that tariffs only are permissible. Para-tariffs e.g. taxes on forex transactions, internal taxes on imports and service fees affecting importers. Para-tariffs are prohibited because they are non-transparent and subject to arbitrary application.

In contrast to GATT ’47, GATT ’94 WTO requires the nature and level of other duties and charges be listed by tariff line in each WTO members schedule i.e. para-tariffs are not permitted but could be allowed i.e. by imposing certain fees for specific services e.g.  consular services, statistics services, documentation, certification, inspection fees e.g. on imports. However, allowance is made for the imposition of either fees, charges as long as they are commensurate with the service rendered e.g. consular fees from consulate, statistical data from government, transaction fees. All such service fees must be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products. The prohibition on para-tariffs (Art 8 – GATT 94) applies even if a country has not bound its tariffs.

Tariff Escalation

It is a situation where duty rates on raw materials and intermediates are lower than rates on processed commodities that embody the relevant inputs. The more escalated the tariff structure maintained in export markets, the greater the difficulties for such markets to generate value added at home, as low tariffs on raw materials usually duty free provide an incentive not to process commodities before they are exported. This has been a major problem in developing countries especially with regard to natural resource based products e.g. fish, fisheries products, non-ferrous metals, minerals etc.,

Quantitative Restrictions (QRs)

Quantitative restrictions are opposite to tariffs. Article 11 to 14 GATT ’94 prohibits QRs except for agricultural commodities. QRs in agriculture are permitted if concurrent measures are taken to restrict domestic production. Article 12 provides for further exception to be able to solve the balance of payment problems. Article 13 needs to ensure that QRs are non-discriminatory in cases where they are permissible.

Import licensing is a separate agreement of GATT, which applies, to all member states of WTO. QRs are enforced through licensing hence Import licensing is a means of enforcing quotas.  The agreement develops the licensing code of GATT ’47 as developed in the Tokyo Round. It establishes requirements to enhance transparency of licensing systems including the:

-          need to publish licensing

-          the right of importers to appeal against decisions of licensing and

-          length of license validity

Customs Clearance and Related Provisions

CC requires the evaluation and classification of imports for purposes such as levying tariffs to determine origin of these goods to enforce foreign exchange controls and to collect trade statistics etc. Customs procedures may become non tariff barriers to trade if officials for instance will collect and classify the goods or assign the goods value greater than expected to them (over value).

Classification of goods for customs purposes is less troublesome than valuation because most countries use internationally established systems of classification. The Tokyo Round negotiated the customs valuation codes but as all codes it remained optional as not all parties were party to it. This code has been supplemented by WTO provisions, which include conditions on pre-shipment inspection and rules of origin.

PSI involves inspection of goods by specialized firms before they are shipped to country of importation. Governments engage services of PSI firms in order to reduce the scope or chances for importers and exporters to engage in over-invoicing or under-invoicing. Under invoicing will lead to under-taxation on the product. Over-invoicing to transfer of foreign exchange by evading foreign exchange controls.

 Under WTO rules on PSI, member states that use PSI firms must ensure that their activities are carried out in an objective, transparent and non-discriminatory manner. Verification of contract prices must be based on a comparison with the prices of identical or similar goods offered for export from the same country for importation at the same time.

Rule of Origin

A rule of origin is a criterion used by customs officials to determine the nationality of a product or producer. It is important to know origin of goods for purposes where discrimination is allowed lawfully and using the sources of supply. WTO contains an agreement concerning rules of origin. Goods should be considered to originate from a country because they wholly originate from there i.e. do not contain an imported material.

Where two or more countries are involved in producing a product the country of origin is the country in which the last substantial transformation took place. “Significant/substantial” are defined as ‘sufficient to give its product its essential character’.

Subsidies

The approach taken  in WTO Agreement On Subsidies And Counterveiling Measures is to concentrate on subsidies narrowly defined i.e. policies that directly impact on government’s budget and affect the production of goods. WTO law on subsidies has two objectives and it tries to strike a balance between them:

(i)                 To establish rules to avoid or reduce adverse effects on members and to prevent the use of subsidies to nullify or impair trade concessions

(ii)               To regulate the use of countervailing duties by members seeking to offset the injurious effect of foreign subsidization of products.

A key aspect of WTO rules is that certain subsidies are defined as non-actionable i.e. cannot be countervailed by members even if they perceive the subsidies to have a negative impact on their interests.

Uruguay Round defines subsidies to be deemed to exist if there is a financial contribution by government or a public body. This may involve an actual or potential transfer of funds such as grants, loans, loan guarantee or foregoing government revenue e.g. tax concessions, credit.

Government funding of a private body to carry out a function which would normally be vested on government and any form of income or price support is ordinarily vested in government is also covered in the subsidies definition. In all these cases, a benefit must be conferred by measure to the recipient. It applies to non-agricultural products.

There is a separate provision for agricultural products. There are three types of subsidies – actionable – can be countervailed – red light – non-actionable not contested – prohibited.

Actionable measures are permitted but may, if they create adverse effects on WTO members give rise to consultation or invocation of dispute settlement procedures or imposition of countervailing measures. Adverse effects include injury to a domestic industry, nullification or impairment of tariff concession or serious threats to countries.

Prohibited – these are contingent formally on or in effect upon performance or on use of domestic over imported goods.

Non-actionable subsidies – cannot be contested – permitted

These include specific subsidies – that do not target a specific firm, industry or group of industries.

State Trading Enterprises

From its inception, GATT CONTRACTING PARTIES were unconstrained with regard to ownership of productive assets. However it was recognized that enterprises  granted exclusive trading rights and privileges would restrict  trade and circumvent liberalization commitment. The ways in which STE’s may circumvent are:

1.      Could circumvent the MFN treatment principle by discriminating among trading partners in their purchasing or selling decisions

2.      Could limit or expand above free level quantities of imports or exports.

3.      They might impose price markups that exceed bound tariff levels

4.      They could contravene the National Treatment Principle by discriminating against imported products in matters affecting e.g. internal conditions of distribution/sale

5.      They might affect competition on export markets if their exclusive privileges allow them to undercut other supplies

In the WTO law, the council for trade in goods established a working party on STEs to work under the council for trade in goods. Governments are required to notify all STEs for review whether or not they are importing or exporting. Any WTO member that believes another member has not adequately met its notification obligation may raise the matter bilaterally and if this doesn’t work, it may make a counter notification and this working party aims at regulating the works of STEs and is supposed to report the council on trade in goods.

Technical Regulations

Production standards (P.S), Technical Regulations  (T.R.) & Certification Systems (C.S.) are essential to the functioning of modern economies.

Standards and Regulations distinction:

Standards are usually voluntary, generally being defined by the industry or by non-governmental standardization bodies. They are defined in WTO as documents established by consensus and approved by a recognized body that provide for common and repeated use, rules, guidelines or characteristics for activities of their results aimed at the achievement of the optimum degree of order in a given context.

In contrast Technical Regulations are legally binding and are usually imposed to safeguard public, animal health or the environment. C.S. comprise the procedures to establish that products or production processes conform to the relevant standards/regulations.

WTO rules do not require that members must have product standards. It doesn’t also write/ develop product standards. “94 agreement on Technical Barriers to Trade aimed to ensure that mandatory technical regulations, voluntary standards and testing and certification of products do not constitute unnecessary barriers to trade, should not restrict the flow of international trade.

Sanitary and phytosanitary measures

SPS measures are requirements imposed by governments to ensure the safety of products for human or animal consumption to protect plant life or environment generally. Most governments establish minimum standards that plants, animals and humans must meet before entry into the country. The standards apply equally to foreign and domestically produced goods, plants and animals.

WTO agreement on application of SPS measures applies to all SPS measures that may affect International Trade. SPS measure is any measure applied to protect human, animal or plant health from risks arising from the establishment or spread of pest and disease from additives or contaminants in food stuffs or to prevent other damage from establishment or spread of pests.

SPS measures include all relevant regulation and procedures including product criteria, processing and production methods, testing, inspection, certification and approval procedures, quarantine treatments, provisions on relevant statistical procedures and risk assessment methods and packaging and labeling requirement directly related to food safety. There is no requirement that WTO members adopt SPS measures nor has WTO drafted SPS laws. All it does is to require countries who wish to adopt SPS measures to comply with certain norms.

SPS agreement stipulates that SPS measures may not unjustifiably discriminate against WTO members. The measures should not be more trade restrictive than required to achieve their objectives and may not constitute a disguised restriction on international trade. They should be based on international standard guidelines or recommendations if they exist unless it can be proved scientifically that an alternative to the guidelines is preferable.

SPS measures must be based on scientific principles including an assessment on the risk to human, animal and plant life or health taking into consideration risk assessment techniques, which have been developed by relevant international organisations. The risk assessment must identify the diseases the member wants to prevent in his territory, the potential biological and ecological consequences associated with such diseases, an evaluation of the likelihood of entry establishment or spread of these diseases and the associated potential biological or economic consequences.

Risk assessment must use available scientific evidence as well as relevant processes and production methods, inspection, sampling and testing methods and the prevalence of certain diseases or pests and environmental conditions.

Read on TRIPs on investment measures

SECTOR SPECIFIC MULTILATERAL TRADE AGREEMENTS

It applies to all merchandise trade in all sectors but industry specific pressures for protection in major trading countries created strong incentives for governments to grant special treatment to different sectors. These were mainly agriculture, textiles and clothing and there has been pressure to reintegrate them into GATT.

Agriculture

Poor agrarian economies have a tendency of taxing agriculture higher relative to other sectors. As nations become richer, their policy regimes often change from over taxing farmers to assisting farmers. The post 1950 period saw substantial growth in agriculture protection and insulation in advanced  industrial economies and this spread to newly industrialized economies.

This protectionist tendencies accelerated in the eighties to the point where some protectionist countries went beyond self-sufficiency to generate food surpluses. This led to budgetary pressures and increasing opposition to the cost of agricultural support policies. It also led traditional agricultural exporting countries to insist that multilateral trade negotiations should focus on reducing agricultural protection. The rationale for intervention in agriculture is:

i)                    To stabilize and increase farm incomes

ii)                  To guarantee food security

iii)                To support the development of other sectors of the economy

iv)                To increase agricultural output

Food is political and this is illustrated by the fact that many of these reasons are non-economic. Why do countries have different forms of intervention?

The Anderson Model

Protection for industry decreases as the capital to labour ratio increases thus, industrialized countries with large capital stocks relative to labour are more open to trade than countries with large stocks and labour (poor countries). However, in the case of agriculture the opposite happens; in rich countries they end up supporting domestic production and closing off market to foreign competition. While poor countries promote imports explicitly or implicitly through import subsidies. They may waive duty if for relief. They also do this indirectly by over taxing domestic production. In poor countries, food takes a large amount of household expenditure while in rich countries it takes a very small percentage.

Agriculture is also the main source of employment in poor countries while in rich countries it accounts for less than 5%. Agriculture is less capital intensive in poor countries.  If agriculture is protected in  a poor country, the resulting  increases in food prices have a large impact on the demand for labour and thus on wages. At the same time, the wage increase puts upward pressure on the price of services and has a negative impact on industry  by lowering profit. As the gains per farmer is low in a protectionist  poor economy and the loss per industrialist is high the latter will be reduced to invest resources to support agricultural support policies and therefore protecting agriculture in poor countries does not make political sense. This is the Anderson Model.

WTO rules are contained in the WTO Agreement on Agriculture which is sector specific with four focal points:

1)      Market access

2)      Domestic Support

3)      Export Competition

4)      Sanitary and Phytosanitary measures

 By 2000 export subsidies on agriculture were to be reduced by 36% in value terms and 21% in volume terms from their 1986 to 1990 base; the rates applying in both cases on a commodity by commodity basis. For some commodities, only the agreed cost of 21% in the volume of subsidized taxes was achieved. For market access it was agreed in the Uruguay Round that NBTs would immediately be converted into tariffs and the industrialized countries would reduce them by an average of 36% over 6 years and 24% over 6 years for developing countries. All agricultural tariffs are bound and the tariff bindings that were implemented by the WTO were in many cases higher than the actual tariffs equivalent of NTBs that applied in 1986 – 1990 base period. Some being up to 60% higher for developed countries and in developing countries over 150%.  This is referred to as tariff overhang.  (It was higher for developing countries because such countries often have more non-tariff barriers to trade)

In recognition of the fact that for some products bound and applied tariffs were set at prohibitive levels, negotiation sought to impose minimum market access restrictions. This required that the share of imports in domestic consumption for products subject to prohibitive import restrictions increase to at least certain levels which are less in the case of developing countries because of preferential treatment. The vehicle used to ensure minimum market access is attained is the tariff rate quota – TRQ under which a certain volume of imports (quota) enters at a lower tariff and out of quota imports are subject to a much higher tariff.

Market access rules formally introduced scope or room for discrimination in the allocation of TRQs. Also  the administration of such quotas tend to legitimize the role for state trading agencies.

A second major element for Uruguay was a provision that a domestic production support was to decline by 20% by 2000.

Textile & Clothing

Trade policies towards trade and clothing were exempted from GATT disciplines from 1950s. Being labour intensive and requiring relatively low technological inputs, the production of textile and clothing is an activity in which many developing  countries have a comparative advantage.

As domestic industries in high income nations come under pressure from cheaper imports initially from Japan and subsequently from other Asian countries, the rich countries successfully lobbied for trade restrictions. It resulted in bilateral discriminatory trade restriction which steadily expanded in terms of products and in terms of countries coverage. This led by the 1990s to a global web of quantitative restrictions or quotas in the area of textiles and clothing. Protectionism was driven by the desire to maintain in employment unskilled and semi-skilled workers.

It was on occasion of Japan’s accession to GATT in 1955, when it was still a developing country and a major exporter of textiles and clothing, that the concept of market disruption by textiles was first discussed extensively in the GATT. The first steps towards formalization of a system of managed trade in this sector was the short-term arrangement (STA) on cotton textiles introduced in the Dillon Round (1961). This rapidly evolved into the long-term arrangement (LTA) which led into four successful multi-fibre arrangements which were successive from 1974 to 1994. The discriminatory character of the MFN was progressively intensified and entry and product coverage considerably extended. Initially, it was limited to cotton fabrics, but over time, wool, man-made fabrics, vegetable fibres and silk blends were added. As is the case with agriculture, it was only in the Uruguay Round that textiles and clothing were first discussed in Multilateral Trade Negotiations.  The main common element was the pressure from importers, in particular those countries who perceived they would do better under a liberalized competitive trade regime. Negotiations were difficult and the following were the areas of disagreement:

·         The application of general GATT rules

·         Modalities of phasing out MFAs

·         Duration of transitional period

·         Poor GATT coverage

·         The need for special safeguards

The WTO agreement on textile and clothing sets out the rules for the transitional period/process which expected to result in 1 January 2005 in the full integration of the textile and clothing sector to the GATT system. ATC was to terminate on 1 Jan 2006. The review of the implementation of the ATC was put in the hands of the Textile Monitoring Body (TMB). Full implementation of the ATC would result not only in the abolition of quotas but also in the demise of special bilateral safeguard measures allowed under the ATC.

Trade in Services

Services which include activities as different as transport of goods and people, financial intermediation, communication distribution, hotels, education, healthcare, construction, accounting, legal services etc are vital to the function of that economy. As in the GATT, the first principles of GATS is MFN (article 2) although many countries are not really ready to commit themselves to MFN across the board. Article 2(2) has a clawback clause:

“a member may maintain  a measure inconsistent with paragraph 1 provided that such a measure is listed in and it meets the conditions of the Annex of Article 2 exemptions. The right to a derogation from MFN treatment is unilateral and requires no approval from any committee. Article 3 in GATS requires prompt publication of all relevant measures of general application which pertain to or affect trade in services. Whether or not they pertain to sectors for which commitments have been made under part 3.

Barriers to the supply of services in many instances are not border controls as in respect to trade in goods. The main barriers are regulations e.g. what it takes for a foreigner to practice law in Kenya, licensing requirements, red-tape (bureaucracy). For administrative decisions to trade in services, GATS requires states to provide for prompt and impartial review  of administrative decisions by judicial or administrative tribunals - Article 6(2).

On market access with regard to services, access by service providers of one state to the markets of the other state is a central focus of GATS although access is not granted automatically. The GATS adopts  a positive list approach whereby members are bound to only specific commitments i.e. what you have accepted positively is what you will be committed to.

In a sector for which a country has made market access commitment, a state is required to refrain from imposing any limitation on the number of service suppliers whether in form of numerical quotas, monopolies, exclusive service supplies or the requirement of an economic needs test. Further, member states may not impose restrictions/limitations on the total value, total number or total output of service operations.

The state may not restrict the number of persons that may be employed by a service supplier or by a particular service sector who are necessarily for and directly  related to the supply of a specific service. A state may not restrict or require specific type of legal entity, joint venture through which a service is applied or limit participation of foreign capital by a maximum percentage of shareholding or total value of that investment.

TRIPS

1.      Each member state of WTO is regarded not only to be a party but must also give effect to the principal provisions of the Paris and Berne Conventions and others now included in the WIPO system, whether or not the state is a party to those conventions – articles 2-9 TRIPS

2.      Members are obligated with a few exceptions to accord both National Treatment – article 3 and MFN treatment – Art 4 of TRIPS to the nationals of all other states with regard to protection of Intellectual Property rights.

3.      The agreement covers virtually all aspects of IP i.e. copyright related rights (9-14), Trademarks (15-21), Geographical Indications (Art 22- 24), Industrial Designs (25-26), Patents (27-34) Layout designs of integrated circuits (35-38) Trade secrets (39). For each of these categories, member states are supposed to provide protection i.e. to prevent unauthorized persons from using the property.

4.      Each member state shall ensure that there is an enforcement procedure of IP rights. Procedures depend on a country’s judicial and administrative system but they have to be fair and equitable, not unnecessarily complicated and costly and they shall not entail unreasonable time limits  or unwarranted delays. Decisions should be made in writing and they should be subject to judicial review.

5.      Although TRIPS agreement to the Preamble  makes it clear that IP rights are private rights, it seems clear that failure by a member state to comply with this procedure could be a subject of state to state dispute settlement.

6.      States must provide adequate remedies to right holders by giving injunctions including injunctions against the sale or use of infringing products, monitoring damages and forfeiture of infringing goods (article 44 – 46, 50)

7.      In several parts, TRIPS goes beyond the traditional GATT approach to avoid discrimination and avoid trade e.g. with regard to patents, protection is available –article 27 (1):

  “ For any inventions whether products or processes in all fields of technology provided that they are new; involve an inventive step; and are capable of industrial application”

This is subject to exceptions on various grounds and grace periods for developing countries patents shall be available and patent rights enjoyable without discrimination as to place of invention, field of technology or locally or imported products.

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W Dualism as in Kenya requires that a treaty ratified be enacted first into national legislation before taking effect.