*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 the laws and statutes might also have changed or been repealed and the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 17th
& 18th 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 17th & 18th 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:
- 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.
- 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 1st 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 30th 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) (3rd & 4th)
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 4th
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 5th 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 15th 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 1st
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.
W Dualism as in Kenya requires that a
treaty ratified be enacted first into national legislation before taking
effect.
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