REGULATION OF INTERNATIONAL TRADE WITHIN THEFRAMEWORK OF THE WORLD TRADE ORGANIZATION
Tashkent 2011
Foreword
This textbookon the course “Regulation of International Trade within the framework of theWTO” is designed for students of higher education institutions, specializing inInternational Economics and Foreign Trade.
The textbookincludes basic notions of lectures, questions for self-control and classdiscussions, case-studies, illustrations, and reference books on relevanttopics.
The aim of the course is to introduce students tobasics of WTO regulation on trade in goods and services, intellectual propertyrights and investments.
The objectives of the course are:
— to familiarize students with the basicinstitutional mechanisms regulating International Trade;
— to introduce students to basic principles andconcepts of the World Trade Organization;
— to develop students’ analytical abilities onissues of foreign trade regulation;
— to enable students to evaluate compatibilityforeign trade regime of Uzbekistan with WTO rules.
Throughout theclasses students will be required to engage in classroom and group discussions,prepare an individual research paper on particular issues of WTO, and passcomputer based test.
Classes will betaught using advanced teaching methods such as interactive education, class andsmall group discussions, case studies, role playing, presentations with usageof up-to-date IT technologies.
Content
Lecture 1. Introductionto the course “Regulation of International Trade under WTO rules”
1. Reasons for imposingtrade restriction – individual country perspective
2. Historical backgroundof the WTO
3. Reasons for replacingthe GATT by the WTO
Questions
References
Lecture 2. WTO – structure,aims and principles
1. Objectives, mainfunctions, principles
2. Organization structure
3. Accession andDecision-Making procedure
4. Trade policy reviewmechanism (TPRM) of the WTO
5. Plurilateral tradeagreements of the WTO
6. Main differencebetween the WTO and GATT
Questions
Reference
Lecture 3. Regulation ofTrade in Goods (GATT system)
1. Trade withoutDiscrimination
2. Progressive tradeliberalization and Transparency
3. Rules on FairCompetition
4. Encouraging Developmentand Economic Reform
5. Single undertaking
Questions
References
Lecture 4. Issues onmarket access
1. Tariffs
2. Safeguards
3. Balance-of-PaymentsProvisions
4. Technical Barriers toTrade
5. Sanitary andPhytosanitary Measures
6. Trade-RelatedInvestment Measures (TRIMs)
Questions
References
Lecture 5. Measuresagainst Unfair Trade
1. Subsidies
2. Dumping andAnti-dumping
Questions
References
Lecture 6. Trade inServices
1. Significance of Liberalizationof Trade in Services
2. Main Purpose of theGATS
3. Frame of Commitmentsof GATS
4. Specific Commitmentsof GATS
5. General Obligationsand Disciplines
6. The Annexes: ServicesAre Not All The Same
Questions
References
Lecture 7. TRIPS
1. Intellectual propertyrights – basic concepts
2. Trade related aspectsof IPRs
3. Copyright and relatedrights
4. Industrial property
5. Enforcement of IPRs
Questions
Reference
Lecture 8. Rules andProcedures Governing the Settlement of Disputes (DSU)
1. WTO Dispute settlementsystem – main definitions
2. Dispute settlementsystem in the WTO – basic concepts
3. Procedures for disputesettlement process
4. Case study: thetimetable in practice
Questions
References
Lecture 9. Regulation ofAgricultural Trade
1. Background for theAgreement
2. Areas of Commitmentsunder the Agreement on Agriculture
3. Market Access
4. Export Subsidies
Questions
Reference
Lecture 1. Introduction to the course “Regulation of InternationalTrade within the framework of the WTO”1. Reasons for imposing traderestriction – individual country perspective
Within thecourse of International Economics you have learnt that free trade maximizesworld output and benefits all nations. In theory, international trade canresult in full utilization of natural and social resources and increase thewelfare of all nations in trade.
Internationaltrade is a bridge for a nation towards prosperity, advancement andcivilization. Today, no civilized nation can isolate itself from the rest ofthe world. Processes of globalization and economic integration have made theworld a global village, and international trade plays an irreplaceable role inthis process. In this respect, the WTO constitutes international trade policy,including general trade policies, trade rules and regulations of individualnations. International trade policy examines the reasons for and effects oftrade restrictions because nations usually impose some restrictions on the flowof goods, services, and factors across their borders.
Despite thetheory of international trade explains free trade to be the paretto optima,practically all nations (except for some free trade harbors like Hong Kong, Panama)do impose some restrictions on the free flow of international trade. In orderto explain this phenomenon, it is necessary to understand effects of traderestrictions on production, consumption, trade and welfare.
Traderestrictions include tariffs and non-tariff measures. The most important typeof trade restriction has historically been the tariff. The WTO/GATT haspredominantly been devoted to the tariff reduction negotiations. The only issuediscussed in the first 6 rounds of negotiations of the GATT is how to reducetariff rates.
A tariff is atax or duty levied on the traded commodity as it crosses a national boundary.An import tariff is a duty on the imported commodity, while an export tariff isa duty on the exported commodity. Import tariffs are more important than exporttariffs. Export tariffs are usually applied by developing countries on theirtraditional exports (such as Ghana on its cocoa and Brazil on its coffee) toget better prices and raise revenues. The main objectives of an import tariffare to protect domestic market or domestic infant industries such as autoindustry in Uzbekistan against foreign competition and to raise revenues of thecentral government of a country.
Tariffs can bead valorem, specific, or compound. The ad valorem tariff is expressed as afixed percentage of the value of the traded commodity. The specific tariff isexpressed as a fixed sum per physical unit of the traded commodity. A compoundtariff is a combination of an ad valorem and a specific tariff.
Tariffs,though generally declined in industrial nations since World War II (with anaverage nominal tariff rate of 3.8%), are still rendering tremendous effects onproduction, consumption, trade and welfare in the nation imposing the tariffand on its trade partners. While tariffs are invariably rationalized in termsof national welfare (such as the protection of infant industry or nationalindustries), in reality they are usually advocated by those special groups inthe nation that stand to benefit from such restrictions.
In short,consumers pay a higher price for the commodity and producers receive a higherprice as a result of the tariff. A tariff leads to inefficiencies, which arereferred to as protection cost, because some domestic resources are transferredfrom the more efficient production of exportable commodities to the lessefficient production of importable commodities. Consumers’ welfare has beensacrificed for jobs or employment saved in less efficient industries. Impropertariff rates can only hamper the growth and development of so called infantindustry. Auto industry in Uzbekistan is a typical example. It is somethingbeyond economics. If you want to know more about the effects of tariffs, youcan refer to partial and general equilibrium analysis of a tariff inInternational Economics written by Dominick Salvatore.
Nevertheless,tariffs are legal and the only preferred trade restriction in the WTO. This willbe discussed in detail later.
Non-tarifftrade barriers refer to all the other trade restriction measures other thantariffs, including import quota or licensing (automatic and non-automaticimport licensing), voluntary export restraints, technical barriers to trade,sanitary and phytosanitary measures, anti-dumping, subsidies and countervailingmeasures, customs valuation, pre-shipment inspection, rules of origin, fees andformalities, etc.
Case — effectsof non-tariff trade barriers: Voluntary Export Restraints on JapaneseAutomobiles to the US.
From 1977 to1981, US automobile production fell by about one-third, the share of importsrose from 18 to 29 percent, and nearly 300,000 autoworkers in the US lost theirjobs. In 1980, the Big Three US automakers suffered combined losses of 4billion $US. As a result, the US negotiated an agreement with Japan thatlimited Japanese automobile exports to the US to 1.68 million units per yearfrom 1981 to 1983 and to 1.85 million units for 1984 and 1985. Japan “agreed”to restrict its automobile exports out of fear of still more stringent importrestrictions by the US. As a result of this agreement, US automakers reapedprofits of about 6 billion $US in 1983, 10 billion $US in 1984, and 8 billion$US in 1985. Japan gained by exporting higher-priced autos and earning higherprofits. The big loser was the American public, who had to pay substantiallyhigher prices for domestic and foreign automobiles. It was estimated that theagreement resulted in a price 660 $US higher for US made automobiles and 1300$US higher for Japanese cars in 1984, and the total cost of the agreement to USconsumers was 15.7 billion $US from 1981 through 1984, and that 44,000 USautomaker’s jobs were saved at the cost of more than 100,000 $US each, 2 or 3times the yearly earnings of a US autoworker.
As the exampleabove shows, neither tariffs nor non-tariff measures are reasonable orjustified to be imposed on because of the high cost of trade protectionpractice. There are, however, still some fallacious or questionable argumentsfor trade protection.
Traderestrictions are needed to protect domestic labor against cheap foreign labor.
· Scientific tariff rates could make the price of imports equal todomestic prices and allow domestic producer to meet foreign competition.
· Protection is needed to reduce domestic unemployment and to cure adeficit in the nation’s Balance of Payments or trade deficit.
· Trade restrictions are needed to protect infant industries indeveloping countries and to acquire a comparative advantage in crucialhigh-technology industries in developed countries (Strategic Trade Policy).
The firstthree arguments are to be questions for students. Below, the fourth argument isconferred.
Infant-industryargument: A nation may have a potential comparative advantage in a commodity,but because of lack of know-how and the initial small level of output, theindustry will not be set up or, if already started, cannot compete successfullywith more established foreign firms. Temporary trade protection is thenjustified to establish and protect the domestic industry during its “infancy”until it can meet foreign competition, achieve economies of scale, and reflectthe nation’s long-run comparative advantage. At that time, protection is to beremoved. However, for this argument to be valid,
1) the returnin the grown-up industry must be sufficiently high to offset the higher pricespaid by domestic consumers of the commodity during the infancy period;
2) there is anobjective standard to identify which industry or potential industry qualifiesfor this treatment;
3) there is aschedule to remove the protection.
Strategictrade policy: A nation can create a comparative advantage (through temporarytrade protection, subsidies, tax benefits, and cooperative government-industryprograms) in such fields as semiconductors, computers, telecommunications, andother industries that are deemed crucial to future growth in the nation. Thesehigh-technology industries are subject to high risks, require large-scaleproduction to achieve economies of scale, and give rise to extensive externaleconomies (a benefit to society at large, say, by training workers who thenleave to work in other industries) when successful. Strategic trade policysuggests that by encouraging such industries, the nation can reap the largeexternal economies that result from them and enhance its future growthprospects. Semiconductors (such as computer chips) and steel industry in Japanare a good example. Other examples are the Concorde supersonic aircraft and theAirbus in Europe. However, there are serious difficulties in carrying out thisargument: 1) It is extremely difficult to choose the industries that willprovide large external economies in the future and devise appropriate policiesto successfully nurture them; 2) Since most leading countries undertakestrategic trade policies at the same time, their efforts are largelyneutralized, so that the potential benefits to each may be small; 3) When acountry does achieve substantial success with strategic trade policy, thiscomes at the expense of other countries and so other countries are likely toretaliate.
All in all,trade production usually increases the commodity price, benefits producers andharms consumers and usually the nation as a whole. For example, it is estimatedthat removing all quantitative restrictions (QRs) on textile and apparelexports to the US would result in a gain of 11.92 billion $US for the US at1984 prices. Removing QRs also leads to employment losses in the industry losingthe QRs, but these employment losses are matched or more than matched byeconomy-wide employment gains. Removing QRs on exports of textile, automobiles,and steel to the US leads to a total welfare gain of 20.28 billion $US for theUS. Also eliminating all tariffs on industrial products after the above QRshave been removed results in a further gain of 0.6 billion $US for the US.However, since producers are few and stand to gain a great deal fromprotection, they have a strong incentive to lobby the government to adoptprotectionist measures. On the other hand, since the losses are diffused amongmany consumers, each of whom loses very little from the protection, they arenot likely to effectively organize to resist protectionist measures. Thus,there is a bias in favor of protectionism. For example, the sugar quota raisesindividual expenditures on sugar by only a few dollars per person per year inthe US. But with about 250 million people in the US, the quota generates morethan 600 million $US in rents to the few thousand sugar producers in the US. 2. Historical background of the WTO
The WorldTrade Organization, established on 1 January 1995, is the umbrella organizationgoverning the international trading system. It oversees international tradeagreements and provides the secretariat for GATT, based in Geneva.
The members ofthe WTO now account for well over 90% of the world’s trade and virtually all ofits investment; by the end of 2005, the organization’s membership had increasedto 149, from the 76 founding members of 1995. Nearly all the developed, andmost of the developing countries, have joined.
Themultilateral framework of international trade originated from the end of theWorld War II. The earlier experience with the Great Depression of the latetwenties and early thirties, followed in its wake by the trade protectionimposed by major trading nations, made governments aware of the need for amultilateral discipline in the field of international trade. This awarenessassumed a new urgency with the devastation caused by the World War II and withthe need for the expansion of international trade as an important tool fordevelopment and growth. The WTO’s origins can be traced back to the AtlanticCharter of 1941, developed by then US President Franklin Roosevelt and BritishPrime Minister Winston Churchill. In order to counter US isolationism, theprinciple of the Atlantic Charter was for an international trading system withequal access to trade for all nations. This was seen as a complement to aneffective world political forum, the United Nations, established in 1946 withits permanent headquarters in New York City. The United States organized aninternational conference on trade and employment which resulted in the HavanaCharter of 1948, in which it was proposed to establish the International TradeOrganization (ITO). Twenty-three countries agreed to a set of tariff cuts andthese were ratified by the GATT, which was set up as a transitory arrangementto be subsumed under the ITO. However, the ITO was never ratified because theUS government announced in 1950 that it would not seek Congressionalratification of the Charter, and the GATT, though never intended to be an“organization”, continued for 47 years, until the WTO finally emerged in thelast stages of the Uruguay Round to take on the role originally designed forthe ITO. The WTO now stands with the World Bank and the International MonetaryFund as the third leg of the global economic system. The Bretton Woodsconference and the GATT.
In July 1944,a meeting of Allied ministers was held in Bretton Woods, New Hampshire, the US.The institutions created there remain at the core of the global economy today:IMF, World Bank. In December 1945, the US invited 14 countries to beginnegotiations on liberalizing international trade. The negotiations wereintended to create an International Trade Organization that would facilitatetrading relations as Bretton Woods facilitated monetary relations and toimplement quickly an agreement to reduce tariff levels. In March 1948, thedraft charter for the ITO, known as the Havana Charter, was drawn up. Thischarter contained sections on employment and economic activity, economicdevelopment and reconstruction, restrictive business practices,inter-governmental commodity arrangements and subsidies. It was more wideranging than the GATT, which focused on tariffs in manufactured goods. Innegotiating the Havana Charter the US push for a pure free trade system waslimited by its own internal commitment to agricultural protection. With echoesof the Senate’s refusal to endorse Woodrow Wilson’s effort to have the US jointhe League of Nations following the First World War, the US Congress refused togive its agreement to the ITO. More influential than isolationists in rejectingthe agreements were liberal forces which heartily condemned concessions the USnegotiators made to other countries. The GATT was actually created two years laterto replace the abortive ITO. The original 23 GATT countries were among over 50which agreed a draft Charter for an ITO — a new specialized agency of the UN.The Charter was intended to provide not only world trade disciplines but alsocontained rules relating to employment, commodity agreements, restrictivebusiness practices, international investment and services.
The disastrousstate of the global economy — especially the collapse of trade markets — contributedto the belief that the international system required greater management alongliberal lines. It also convinced policymakers everywhere that a prosperousnational economy was impossible without a well-designed international system.In an effort to give an early boost to trade liberalization after the World WarII, and to begin to correct the large overhang of protectionist measures whichremained in place from the early 1930s because of the Great Depression, tariffnegotiations were opened among the 23 founding GATT contracting parties in 1946.The tariff concessions and rules together became known as the GATT and enteredinto force in January 1948.
Throughout its48-year history, the GATT provided the structure for a global process of steadytrade liberalization through eight “rounds” of multilateral trade negotiationssponsored by its Contracting Parties. In the first six Rounds, the focus was onthe reduction of tariffs. The last two Rounds have covered wider areas (seetable below).The Uruguay RoundNegotiations and establishment of the WTO.
The seeds ofthe Uruguay were sown in November 1982 at a Ministerial meeting of GATT membersin Geneva. Though the meeting stalled on the issue of agriculture, the workprogram formed the basis of the Uruguay negotiation agenda. With four moreyears of exploring and clarifying issues and painstaking consensus-building,Ministers met again in September 1986, in Punta del Este, Uruguay. Thenegotiation was expected to be completed in four years. In December 1990,however, disagreement on the nature of commitments to future agricultural tradereform led to a decision to extend the round. For the following three years,the negotiations lurched continuously from impending failure to predictions ofimminent success. Several deadlines came and went; farm trade was joined byservices, market access, anti-dumping rules and the proposed creation of a newinstitution as the major points of conflict. It took until 15 December 1993 forevery issue to be finally resolved. On 15 April 1994, the deal was signed byMinisters from most of the 125 participating governments at a meeting inMarrakesh, Morocco. The agreements of the Uruguay came into force on 1 January1995. 3. Reasons for replacing the GATT by the WTO
There is popularbelief, that the WTO replaces the GATT. In fact, the WTO did not replace theGATT. An amended GATT remains as one of the legal pillars of the world’s tradeand, to a lesser extent, investment systems. The other pillars, set up in theUruguay Round’s Marrakesh agreement of 1994, include the General Agreement onTrade in Services (GATS) and the Agreement on Trade-Related Aspects ofIntellectual Property Rights (TRIPs). So, what has been replaced is not theGATT as an international agreement but the GATT as an internationalorganization. In other words, GATT as an international agency no longer exists.It has been replaced by the WTO. But, GATT as an agreement still exist, and hasbeen updated. The updated GATT is called GATT 1994, and the replaced GATT iscalled GATT 1947. The GATT always dealt with trade in goods, and it still does.It has been incorporated into the new WTO agreements, living alongside the GATSand the TRIPs.
As a matter offact, the 1986 Ministerial declaration of Punta del Este, containing the agendaand objectives for the Uruguay negotiation, did not include any explicit callfor a new charter or organization. Despite this hesitancy, however, by 1990there was considerable discussion of the need for an improved organizationalstructure for effective implementation of the Uruguay results. The first publiccall for a world trade organization to be established was a proposal by theCanadian Government in early 1990. The Canadian proposal built on the work ofProfessor John Jackson (Hessel E. Yntema Professor of Law at the University ofMichigan) and others at an informal meeting in Geneva in 1989. It was thenincorporated into the “Dunkel Text” of 1991 (Arthur Dunkel was then the GATTDirector General), which eventually became the final text of the Uruguay Roundadopted at Marrakesh in April 1994. In approving the Uruguay Round on its “fasttrack” system, the United States insisted on the name World Trade Organization,rather than the European Community’s preference for Multinational TradeOrganization.
The GATT hasundertaken eight “rounds” of multilateral trade negotiations, which haveachieved major cuts in tariffs and, since the 1970s, some reductions in relatednon-tariff barriers to trade. The latest round, the Uruguay Round, lasted sevenyears, as its agenda broadened to include trade in services and intellectualproperty, and a revised system of dispute settlement mechanisms.
In spite ofthe remarkable success during its nearly five decades of history, the GATTsystem was being increasingly challenged by the changing conditions ofinternational economic activity, including the greater ‘interdependence’ ofnational economies, and the growth in trade in services. Anxiety developed thatthe GATT was too handicapped to play the needed role of complementing theBretton Woods system as the “third leg”, alongside the IMF and World Bank.Problems and ‘birth defects’ included.
Provisionalapplication and Grandfather rights exceptions embraced by the Protocol ofProvisional Application. The GATT was designed to be a multilateral trade andtariff agreement and would depend on the ITO for its organizational context andsecretariat services. The GATT never definitively came into force; instead itwas legally applied by a Protocol of Provisional Application originallydesigned to last until the ITO came into force. Grandfather clause providedthat the rules in Part III of the GATT 1947, which essentially dealt withnon-tariff trade measures, need be applied only to the extent that they werenot inconsistent with legislation in effect when a country acceded to the GATT.
There wereexceptions from GATT rules for textiles, agriculture, regional trading groups,developing countries and safeguards to prevent serious injury to domesticproducers.
Another reasonfor the need to reform GATT was ambiguity about the powers of the ContractingParties to make certain decisions. The GATT dispute settlement process had twomajor weaknesses. The first was the ability of a Contacting Party to veto theprocess at numerous stages. A dissatisfied party could block the creation of apanel, block adoption of the report by the Council or fail to undertake theobligations outlined in the report. The second problem was that even if thecountry accepted a panel report in question, it could choose to keep theoffending policy, leaving the injure party to suspend benefits in kind. Thedispute then fell back on to unilateral action by the aggrieved party. Theparty which had its complaint supported by a panel would have to undertakeretaliation through its own domestic legislation. This could take the form oftariffs or suspension of trade benefits to the offender. Offenders were not sanctioned;they just had benefits of equal value withdrawn by the complaint. Theunilateral nature of the process raised serious problems for the whole system.The countries able to take unilateral measures tended to be the economicallypowerful such as the US, Japan and the EU. Smaller states were less likely totake action against the giants because they feared a trade war that would costthem dearly. One of the purposes of having an international legal framework fortrade is to facilitate relations based on rules rather than power. Law shouldrestrain powerful states from abusing their economic power to the cost ofsmaller states. Since the GATT process relied so heavily on unanimity, thisgoal was difficult to achieve.
Also, murkylegal status leading to misunderstanding by the public, media, and evengovernment officials lead to negotiating a new solution – establishment of aninternational institution. As described above, there were certain seriousdefects in the dispute settlement procedures, there was lack of institutionalprovisions generally, so constant improvisation was necessary. All thesecontributed to the reform of GATT system and creation of the WTO.Questions
1. Explain the reasons for trade restrictions. What are traderestrictions and what do you think about them?
2. Why are the following three arguments fallacious orquestionable?
a) Trade restrictions are needed to protect domestic labouragainst cheap foreign labour.
b) Scientific tariff rates could make the price of imports equalto domestic prices and allow domestic producer to meet foreign competition.
c) Protection is needed to reduce domestic unemployment and tocure a deficit in the nation’s Balance of Payments or trade deficit.
3. Outline the major results of the Uruguay Round. Why should theGATT and the WTO be established?
4. What is the relationship between GATT 1947 and GATT 1994?
5. What happened to the ITO?
6. Was the GATT/Is the WTO an international organization?References
1. Robert H. Folsom, International Trade and Investment in a Nutshell(2nd ed., St. Paul, Minn.: West Pub. Co., 2000)
2. Jackson, World Trade, Principles, IV EPIL (2000), p. 1529-1542
3. John H. Jackson, The World Trading System: Law and Policy ofInternational Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p… 32-36,82-84, 103-105.
4. Trading into the Future – WTO, 3rd edition, Revised August 2003.p. 7-20.
Lecture 2. WTO – structure, aims and principles 1. Objectives, main functions, principlesObjectives.
The objectivesof the WTO include the followings:
- To raise standards of living
- To ensure full employment of members’ economies
- To promote the steady growth of real incomes and effective demandin their markets
- To expand the production of and trade in goods and services
- Sustainable development and environmental protection
- To ensure developing countries, and especially the least developedto secure a share in the growth in international trade commensurate with theneeds of their economic development Main functions.
There are fivemain functions of the WTO:
To facilitateformulation, implementation, administration and operation of the coveredAgreements
Modern marketeconomy must rely on international regulations or standardized global economicoperations. Who should be the one to formulate these regulations? Should it bethe US simply because of its strong economy? No single country is appropriateto make the rules. Only an international organization, like the GATT in thepast and now in the form of the WTO, should formulate rules through many roundsof negotiations. Once the regulations and rules are set, there must be anorganization to supervise and facilitate the implementation, administration andoperation of these regulations and rules.
To provide theforum for negotiations on multilateral trade
The WTOprovides the forum for negotiations on multilateral trade relations in matterscovered by its various agreements. It may also, on decision by the MinisterialConference, provide a forum for further negotiations, and a framework for theimplementation of their results, on other issues arising in the multilateraltrade relations among its Members. To put it simply, this is a matter ofopening up the market. The founding of GATT in 1948 was based on the historicallessons of World War I and II, with the purpose of avoiding fighting forresources and market shares as a result of countries being divided up bydifferent groups and because of closed markets. It was believed that openingmarket to each other could avoid the breakout of new wars. So far, this openingprocess has been extended from trade in Goods to trade in Services (finance,banking, insurance, securities, telecommunications, air shipment, accounting,law, and tourism), trade-related aspects of intellectual property rights, andtrade-related investment measures or mutual opening of the investment market.The WTO is the direct result of multilateral negotiations, and will provide theforum for further negotiations on multilateral trade.
To administerthe integrated dispute settlement system.
Along withincreasing international exchanges, countries cannot avoid frictions in theirtrade business, and disputes will also become more frequent. For a long time,the situation was that big countries bullied the small ones that had no meansto go to court to win their cases. This is why the US often used the “specialclause 301”and “super-301”(introduced in 1988, under which the US couldunilaterally find other countries’ trade practices as ‘unfair’ and impose tradesanctions if the offending country did not reach a satisfactory settlement withthe US Trade Representative) to solve disputes. Now, the WTO has provided amore effective dispute settlement system.
To reviewnational trade policies (see p.14. TPRM).
To achievegreater coherence in global economic policy-making by cooperating with the IMFand with the World Bank
The World Bankis the world’s biggest development bank, providing finance, research and policyadvice to developing countries, with an annual turnover in new loan commitmentsto developing nations of over 20 billion $US. The Bank loans are primarily forspecific development projects. Like the World Bank, the IMF emerged from theUnited Nations Monetary and Financial Conference, held at Bretton Woods, NewHampshire, in July 1944. According to its constitutional instrument, the Fundexists:
(a) to promoteinternational monetary cooperation;
(b) tofacilitate the expansion and balanced growth of international trade;
(c) to promoteforeign exchange stability;
(d) to createa multilateral system of payments between members;
(e) to assistin the correction of maladjustments in members’ balance of payments; and
(f) to reducethe duration and severity of disequilibria in members’ balance of payments.
During thefirst quarter-century after it started operations in 1945, the Fund was mainlyconcerned to establish and manage the international regime of fixed (butadjustable) exchange rates. Its interventions were mainly restricted tomonetary and trade policy measures. The IMF lost much of its old role with theend of the dollar-centered fixed-rate system in 1971; however, the rapidglobalization of money and finance since the 1960s has prompted the Fund toreinvent itself with an expanded agenda: First, the Fund has since the late1970s exercised comprehensive and detailed surveillance, both of the economicperformance of individual member states and of the world economy as a whole.Second, the Fund has since the 1970s intervened more intensely in manycountries by designing for them not only traditional stabilization measures forshort-term corrections of the balance of payments, but also structuraladjustment packages for medium- and long-term economic reconstruction. Third,the ‘second-generation’ IMF has undertaken major training and technicalassistance activities, largely in order to provide poorly equipped states withstaff and tools that can better handle the policy challenges of contemporaryglobalization. Fourth, the IMF has pursued various initiatives to restorestability to global financial markets. The IMF has its membership risen from 62states in 1960 to 182 states in 1998.Principles.
WTOestablishes the following key principles, which occur in all agreements underthe umbrella of WTO. These are:
· Trade without discrimination: 1) Most-favored-nation treatment, 2)National treatment;
· Transparency
· Predictable and growing access to markets
· Single undertaking 2. Organization structure
HighestAuthority: the Ministerial Conference
MinisterialConference is the supreme body of the WTO, composed of representatives of allMembers. The Ministerial Conference is authorized to carry out the functions ofthe WTO, take the actions necessary to this effect, and take decisions onmatters under any of the Multilateral Trade Agreements if so requested by aMember. The Ministerial Conference is to meet at least once every two years.The first WTO Ministerial Conference was held in Singapore in December, 1996(the Ministerial Declaration on Trade in Information Technology Products), thesecond in Geneva in May, 1998 (Declaration on Global Electronic Commerce), theThird in Seattle, Washington State, US between 30 November and 3 December 1999,and the Fourth in Doha, Qatar from 9 to 13 November 2001.
Second Level:General Council
GeneralCouncil, also composed of representatives of all WTO members, is in charge ofthe daily business of the WTO and normally meets once every two months. GeneralCouncil acts on behalf of the Ministerial Conference in the periods between itsmeetings, and reports directly to it. The General Council convenes also as theDispute Settlement Body (DSB) and the Trade Policy Review Body (TPRB).
Third Level:Councils for each broad area of trade, namely, the Council for Trade in Goods(Goods Council), the Council for Trade in Services (Services Council), theCouncil for Trade-Related Aspects of Intellectual Property Rights (TRIPsCouncil). The three councils, consisting of all WTO members, deal with theirrespective areas of trade.
Sixcommittees, also consisting of all WTO members, report to the General Councilfor different issues such as trade and development, the environment, regionaltrading arrangements, and administrative issues.
Fourth Level:Committees and working party dealing with specific subjects
The GoodsCouncil has 11 committees. They consist of all WTO members. The TextilesMonitoring Body also reports to the Goods Council.
It should benoted that important breakthroughs are rarely made in any of these formal bodies.With consensus and without voting, informal consultations play a vital role inbringing a vastly diverse membership round to an agreement. Occasionally adeadlock can only be broken in a small group of two, three or four countries;sometimes at meetings they have organized themselves in their own countries. Amultilateral package of commitments is usually the result of numerousbilateral, informal bargaining sessions. These informal consultations, however,are not separated from the formal meetings which are necessary for makingformal decisions. Nor are the formal meetings unimportant. They are the forumsfor exchanging views, putting countries’ positions on the record, andultimately for confirming decisions. The art of achieving Agreement among all WTOMembers is to strike an appropriate balance, so that a breakthrough achievedamong only a few countries can be acceptable to the rest of the membership.
The WTOSecretariat: In Article VI of the WTO Agreement, provision is made for theestablishment of a Secretariat and the appointment of its Director-General. Atpresent it has approximately five hundred staff members. The Secretariat, basedin Geneva, Switzerland, has no decision-making powers. Its main duties are tosupply technical and professional support for the various councils andcommittees, to provide technical assistance for developing countries, tomonitor and analyze developments in world trade, to provide information to thepublic and the media and to organize the ministerial conferences. It alsoprovides some forms of legal assistance in the dispute settlement process andadvises governments wishing to become Members of the WTO. The WTO Secretariatis organized into 24 Divisions with functional, information and liaison, andsupport roles. Divisions are normally headed by a Director who reports to aDeputy-Director General or directly to the Director General. The professionalstaff is composed mostly of economists, lawyers and others with aspecialization in international trade policy. The working languages of the WTOare English, French and Spanish. 3. Accession and Decision-Making procedureThe accession.
Any state orseparate customs territory possessing full autonomy in the conduct of itsexternal commercial relations and of the other matters related with its tradepolicies is eligible to accede to the WTO on terms agreed between it and WTOMembers. Accession to the WTO is essentially a process of negotiation—quitedifferent from the process of accession to other international entities, likethe IMF, which is largely an automatic process.
The accessionprocedure:
Commencementof the Accession Process: An applicant submits a communication to theDirector-General of the WTO, expressing its desire to accede to the WTO underArticle XII. The General Council then considers the application and establishesa working party. Any member of the WTO can join the working party. The workingparty is chaired by a Chairperson selected after consultation with WTO Membersand the applicant.
Thefact-finding process: The applicant provides a Memorandum describing in detailits foreign trade regime, together with information on the currently applicabletariff schedule and copies of relevant laws and regulations in one of the WTOofficial languages. Members of the working party then ask questions about theMemorandum, examine the Memorandum and the questions and answers to study theconformity of the regime with the requirements of the WTO Agreements. Technicalassistance at each stage of the accession process can be obtained from theSecretariat.
Bilateralnegotiations: Bilateral market access negotiations between the applicant andMembers of the working party on goods and services, as well as on the otherspecific terms of accession constitute the most critical element of theaccession process. The phase commences either by the applying governmenttabling its initial offer on goods or services or interested WTO Memberssubmitting their request lists to the applicant. The resulting market-accesscommitments of acceding governments can be considered to be the payment for theentry ticket into the WTO.
Report,Protocol of Accession and Entry into Force: Following the conclusion ofbilateral negotiations between interesting Members and the Applicant, theworking party prepares a Report and a draft Decision and Protocol of Accession,containing the terms of accession agreed by the Applicant and members of theworking party. As part of the draft Protocol of Accession, the Schedule ofConcessions and Commitments on Goods and the Schedule of Specific Commitmentson Services are prepared. When the Draft Report, Draft Protocol and Schedule onGoods and Services have been finalized, the working party submits the packageto the WTO General Council/ Ministerial Conference for approval. Following thedecision of the General Council/ Ministerial Conference to adopt the package,the Protocol of Accession enters into force. Thirty days after acceptance bythe applicant, it becomes a WTO member.
Now, the WTOhas around 30 applicants negotiating membership. They are WTO observers.Besides, the WTO has 7 international organizations observers: UN,UNCTAD (UnitedNations Conference on Trade and Development), IMF, World Bank, Food andAgricultural Organization, World Intellectual Property Organization,Organization for Economic Co-operation and Development.Decision-making
Unlike otherinternational organizations, the WTO normally makes decisions by consensus.Consensus is defined as the situation where no member, present at a meetingwhere a decision is taken, formally objects to the proposed decision. It shouldbe noted that this is not the same as unanimity, since consensus is defeatedonly by a formal objection by a member present at the meeting. Thus, thoseabsent do not prevent a consensus, nor does an abstention prevent a consensus.The main advantage is that decisions made this way are more acceptable to allMembers. In case of trade sanctions, the sanctions are imposed by Members, notby the organization.
The WTOAgreement envisages four specific situations involving voting:
1) Aninterpretation of any of the multilateral trade Agreements can be adopted by amajority of three-quarters of WTO Members.
2) TheMinisterial Conference can waive an obligation imposed on a particular memberby a multilateral Agreement through a three-quarters majority.
3) Decisionsto amend provisions of the multilateral Agreements can be adopted throughapproval either by all Members or by a two-thirds majority depending on thenature of the provision concerned. But the amendments only take effect forthose WTO Members which accept them.
4) A decisionto admit a new Member is taken by a two-thirds majority in the MinisterialConference, or the General Council in between conferences. 4. Trade policy review mechanism (TPRM) of the WTO
TPRM wasintroduced into GATT in 1989 following the Mid-term Review of the Uruguay. Thereview covers the full range of individual Members’ trade policies andpractices and their impact on the functioning of the multilateral tradingsystem in order to encourage governments to follow closely the WTO rules anddisciplines and to fulfill their commitments.
The TPRB isformally the General Council. The frequency of reviews of a Member is relatedto its weight in the multilateral trading system, as defined by the Member’sshare of world trade in goods and services. On this principle, the frequency ofreview for individual Members, based on trade flows in October 1995, is asfollows:
· every four years for the four largest trading entities, countingthe European Communities (as one trading entity), the US, Japan and Canada;
· every four years for the next sixteen Members;
· every six years for other Members, with provision for a longerinterval for least-developed countries.
Variations intrade in goods and services flows may alter the ranking of Members and thustheir review cycles. The accession of new Members to the WTO could also affectthe position of existing Members in all the three review cycles.Procedures forReview:
A TPRM reviewconsists of several steps whose timing is agreed between the Secretariat andthe country under review.
Collection ofinformation: The Secretariat prepares and sends a detailed countryquestionnaire to the Member under review and the Member has four weeks toprepare and provide replies.
Visit to thecapital: A Secretariat team consisting of 2 or 3 staff members of the TradePolicy Review Division undertakes a visit of one week or ten days to thecountry under review for discussion with government ministers and agencies, aswell as private enterprise (Chamber of Commerce) and research institutes.
The TPRBmeeting: Preparation and publication of documents. For each review, twodocuments are prepared: a detailed report written independently by the WTOSecretariat and a policy statement by the government under review. TheSecretariat report focuses on the trade policies and practices of the Memberunder review in the context of the evolution of overall macro-economic andstructural policies in a representative period up to the present date. Thegovernment’s policy statement by Members aims to outline the objectives andmain directions of trade policies, as well as a succinct presentation of recenttrends and problems, including those encountered in foreign markets. 5. Plurilateral trade agreements of the WTO
For the mostpart, all WTO members subscribe to all WTO agreements. There remain, however,two agreements, originally negotiated in the Tokyo Round, which have a narrowergroup of signatories and are known as “plurilateral agreements”. All otherTokyo Round agreements became multilateral obligations when the WTO wasestablished in 1995. The two are:
1) Agreementon Trade in Civil Aircraft
2) Agreementon Government Procurement
The other twoplurilateral agreements, namely, International Dairy Agreement and InternationalBovine Meat Agreement, were scrapped at the end of 1997 and incorporated intothe Agriculture and Sanitary and Phytosanitary agreements. 6. Main difference between the WTO and GATT
Nature: TheGATT was ad hoc and provisional. The WTO and its agreements are permanent. TheWTO has a legal man status.
Scope: TheGATT rules applied to trade in goods. The WTO Agreement covers trade in goods,trade in services and trade-related aspects of intellectual property rights.
Approach:Though the GATT was a multilateral instrument, a series of new agreements wereadopted during the Tokyo Round on a plurilateral — that is, selective-basis,causing a fragmentation of the multilateral trading system. The WTO has beenadopted and accepted by its members, as a single undertaking: the agreementsare all multilateral.
DisputeSettlement: The WTO dispute settlement procedure reversed the unanimityprinciple which had hindered acceptance of reports. The WTO dispute settlementmechanism has specific time limits and is therefore faster than the GATTsystem; it operates more automatically, thus ensuring less blockages than inthe GATT; for example, panel reports are now automatically adopted sixty daysafter being issued unless there is a consensus that it be rejected (Since theside benefiting from the report would be unlikely to agree to reject, it seemsmost probable that a consensus to reject would very rarely be achieved.); andit has a permanent appellate body to review findings by dispute settlementpanels. There are also more detailed rules on the process of the implementationof findings.Questions
1. Describethe basic structure and tasks of the WTO.
2. Discuss themajor principles of the WTO.
3. Who maybecome a member of GATT/WTO?
4. What arethe main differences of WTO from the GATT system?
5. Explaindecision-making rules of the WTO.References
1. John H. Jackson, The World Trading System: Law and Policy ofInternational Economic Relations (2nd ed., Cambridge, MA: MITPress, 1997). P. 31-78.
2. Petersmann, World Trade Principles, IV EPIL (2000), 1529-1542.
3. Trading into the Future – WTO, 3rd edition, Revised August 2003.p. 100-112
Lecture 3. Regulation of Trade in Goods (GATT system)
The WTOagreement contains some 29 individual legal texts covering everything fromagriculture to textiles and clothing, and from services to governmentprocurement, rules of origin and intellectual property. Added to these are morethan 25 additional Ministerial declarations, decisions and understandings whichspell out further obligations and commitments for WTO members. However, anumber of simple and fundamental principles run throughout all of theseinstruments which, together, make up the multilateral trading system.1. Trade without Discrimination
For almostfifty years, key provisions of GATT outlawed discrimination among members andbetween imported and domestically-produced merchandise. This basic principle ofthe multilateral trading system is embodied in the WTO Agreement, derivingmostly from the principles that constituted the foundations of the GATT. Thisprinciple is guaranteed through the operation of various clauses included inthe multilateral agreements on the trade in goods, in the GATS, and in theTRIPs Agreement.
The principleof non-discrimination consists of three aspects:
The first isthe most-favored-nation status, the cornerstone of multilateral trade. Itemphasizes that no matter which country or region a product, service orprovider of the service comes from, the items should be treated equally uponentering customs. The most-favored-nation status oversees equality andfairness, but not the depth of trade.
The second isnational status, which means a product, service or provider of the service istreated as its own national by the government of the country upon whose customshouse the items reach, or into which they enter, according to the foreigninvestment policy of that given country.
The third ismutual benefit, which means an equal degree of opening to each other, and equalrates of tariff duties.
There are fourimportant exceptions to the key GATT principle of non-discrimination.
1. Developed countries can give tariff preference to developingcountries.
2. Countries entering into regional free trade agreements do not needto extend the preferences negotiated in this context on an MFN basis.
3. A country can invoke temporary «safeguard» protection to one ofits industries suffering serious injury due to a surge of imports.
4. Temporary quantitative restrictions can be invoked by a countrywith serious balance of payment problems.
In the lattertwo cases, these measures are temporary exceptions to the member’s commitmentto the GATT, and a public investigation has to be undertaken to allow forlimited relief from GATT obligations. Most-Favored-Nation(MFN) Treatment.
Themost-favored-nation clause has been the pillar of the system since theinception of the GATT in 1947 and is equally the cornerstone of the new WTOmultilateral trading system. The provision of MFN treatment essentially meansnon-discriminatory treatment among the Members. Article I of GATT 1994 statesthat “any advantage, favor, privilege or immunity granted by any contractingparty (Member) to any product originating in or destined for any other countryshall be accorded immediately and unconditionally to the like productoriginating in or destined for the territories of all other contracting parties(Members)”.
Thiscommitment is the starting-point of the WTO system of rights and obligations.It is fundamental to all the multilateral trade agreements annexed to the WTOAgreements. Quite contrary to its name, this provision does not mean anyspecial favor to any country; in fact, it prohibits special favors even to the friendliestcountry. What this principle actually means is that any benefit in connectionwith exporting or importing given to a product of a most favored nation(whether a member or not) has to be given to the like product of all Memberswithout discrimination. According to Article I of both GATT1947 and GATT1994,the famous “most-favored-nation” clause, members (or the Contracting Parties tothe GATT 1947) are bound to grant to the products of other members (ContractingParties) treatment no less favorable than that accorded to the products of anyother country. Besides, members of the WTO have entered into this commitmentunder the GATS (Article II) in relation to treatment of service suppliers andtrade in services, and under the TRIPs (Article 4) in regard to the protectionof intellectual property. No reason whatsoever is sufficient to justify anydeviation from MFN treatment. Thus, no country is to give special tradingadvantages to another or to discriminate against it. All are on an equal basisand all share the benefits of any moves towards lower trade barriers.
The principleof MFN treatment applies to both imports and exports, i.e., when a Member:
· imports like products originating in the territories of otherMembers, and
· exports like products destined for the territories of otherMembers.
For example,if Member country A has been imposing a customs duty of 10% on steel bars, andif it now starts charging only 6% duty on the steel bars of any particularcountry (whether a Member or not), it has to reduce the duty to 6% for thesteel bars of all Member countries. Similarly, if a Member had earlier bannedthe export of coal, and now allows its export to a particular country (whethera Member or not), it has to allow export to all Member countries.
Of course, aMember is not bound to give MFN treatment to a country which is not a Member ofthe WTO. The treatment given to non-Member countries depends on the Member’sbilateral agreements with each one of them. However, if a Member gives acertain trade benefit to a non-Member, then that benefit has to be extended toall Members in accordance with the principle of MFN treatment.Forms of Benefit.
The benefitscovered by MFN treatment may be in the form of advantages, favors, privilegesor immunities granted by a Member in respect of a product. For example, anadvantage may be in the form of a reduced tariff level; a favor may be extendedby allowing the export of a raw material which was not allowed earlier; aprivilege may be in the form of exemption from a tax; and immunity may be givenby exemption from a health hazard test. The obligation on a Member is to givethese benefits immediately and unconditionally to the like products of allMembers once these have been given to a product of any country.Coverage ofBenefit
The benefitswhich have to be extended to all Members may be with respect to the followingitems:
· Customs duties, i.e., the tariff imposed at the time ofimportation;
· Charges of any kind imposed on importation or exportation, e.g.,import surcharge, variable levy, excise duty or export tax;
· Charges of any kind imposed in connection with importation orexportation, e.g., customs fee, consular fee, quality inspection fee;
· Charges imposed on the international transfer of payments forimports or exports, e.g., some tax or fee charged by governments at the time ofthese transfers;
· The method of levying such duties and charges, e.g., the method ofassessing the base value on which the duty or charge is calculated, or the typeof forms seeking information which will help in calculating the amount to becharged;
· All rules and formalities in connection with importation andexportation, e.g., requirement of giving specific information or declarationsat the time of import or export;
· Internal taxes or other internal charges, e.g., sales tax, chargesimposed by local bodies;
· Laws, regulations and requirements affection internal sale,offering for sale, purchase, transportation, distribution or use of anyproduct, e.g., requirement of quality certificates, restrictions relating tomovement, transport, storage or retailing channels, need for particular type ofpackaging, restriction on use.
The simplestimplication of MFN treatment is that a Member cannot apply different rates ofcustoms duty on a product imported from different Member countries. Similarly,in any of the matters mentioned above, a Member cannot give different treatmentto different Member countries, nor can it give better treatment to a non-Membercountry.
For example,if a Member charges a 10% import duty on a product, say textile machinery,imported from Member countries, it will not be permissible to charge only a 5% dutyon the textile machinery coming from a Member country which has allowed aid tobuy this product. Similarly, if a Member charges a 3% customs duty on a productcoming from Member countries in general and now wishes to raise it to 5% for anunfriendly Member, it is not permitted to do so. Similar discipline applies tothe other matters listed above.Some ImportantConcepts.
Two importantconcepts have emerged in defining the scope of obligation of MFN treatment. Asdescribed above, the obligation of a Member is to give this treatment to the“like product” of all Members ‘unconditionally’. It is important to understandthe implication of these terms.
Like Product:This phrase has not been specifically defined, thus has different meanings indifferent contexts. On several occasions, serious consideration has been givento this phrase as it has presented problems of interpretation. Some of the broadpoints which have been considered while determining whether two products arelike products are:
· listing of products in the tariff schedule
· duties applied to the products
· process of production
· composition and content
· chemical and synthetic origin.
For example,Spain had divided unroasted coffee into five tariff classifications: Colombianmild, other mild, unwashed Arabica, Robusta and other. The first two wereduty-free and the other three were subject to a 7% duty. Brazil claimed thatall these were like products and that different rates of duty were inconsistentwith Article I. The Panel on Spain’s Tariff Treatment of Unroasted Coffee (June1981) noted that the arguments given for differentiation were based on geographicalfactors, cultivation methods, the processing of the beans and genetic factors.The Panel did not consider such grounds as sufficient for differentiation andnoted that no other Member made such a classification. It concluded that theseshould be considered like products within the meaning of Article I.
UnconditionalApplication of Benefits: MFN treatment has to be extended to Membersimmediately and unconditionally. If a Member formulates an improved set ofrules on the trade of goods within the framework of GATT 1994, it cannot limitthe application of these rules to only those Members that fulfill someconditions. For example, it cannot say that the improved rules will beapplicable only to those that undertake to adopt similar rules. Such a limited applicationwill be treated as a conditional application, and will not be allowed.
For example,the Working Party on the accession of Hungary examined in 1973 the practice ofproviding certain benefits of tariff treatment only to countries which had acooperation contract with Hungary. During the course of examination of thismatter, the GATT Secretariat gave, on request, a legal opinion that theprerequisite of having a cooperative contract in order to get beneficial tarifftreatment appeared to imply conditional MFN treatment and would not appear tobe compatible with Article I.
Anotherexample is the US. Before China’s accession to the WTO, the US Congressreviewed annually the MFN treatment to China. This treatment was alwaysconnected with non-business issues such as the Taiwan Question, the Tibetanminority nationality, the Tiananmen Square Incident, and human rights. AfterChina’s WTO accession, these practices are not allowed any longer.SomeConsiderations.
Coverage ofunbound duty. If a Member is committed not to raise the customs duty on aproduct beyond a particular level, the duty is said to be bound, otherwise, theduty is unbound. The MFN treatment obligation applies equally to bound andunbound customs duties.
Balancing oftreatment not permissible. Each relevant measure or step has to satisfy thecondition of MFN treatment by itself. A Member is not allowed to give lessfavorable treatment in one case to balance more favorable treatment in anothercase.
Goodstransited through several countries. The benefits apply to products“originating in” the territories of Members. This phrase signifies that even ifthe product might have passed through some other countries on the way, it hasto be given the particular benefit in the importing Member country based on itscountry of origin.
Possibility ofcircumvention. There may be cases where the rules and procedures appearnon-discriminatory and yet the application of these rules and procedures causesdiscrimination in actual practice. For example, the Panel report on EEC’ Importsof Beef from Canada (March 1981) examined an EEC regulation imposing alevy-free tariff quota on high-quality grain-fed beef. The suspension of importlevy was conditional on the production of a certificate of authenticity. ThePanel found that the only authorized certifying agency was a US agencyauthorized to certify only meat from the US. The Panel concluded that theregulation had the effect of preventing access of like products from othercountries and was thus inconsistent with Article I.Exceptions.
Someprovisions of GATT 1994 and some decisions of Members have provided forexceptions to MFN treatment.
Enablingclause: A measure agreed at the end of the Tokyo Round in 1979 and normallyreferred to as the «enabling clause», provides a permanent legal basis for themarket access concession made by developed to developing countries under thegeneralized system of preferences (GSP). GSP is a system of tariff preferencesaccorded by developed countries to developing countries. It allows developedMembers to accord differential and more favorable treatment to developingcountries without according such treatment to other Members and, to thatextent, it is a relaxation of the MFN clause.
The treatmentcovered by this exception is specified as follows: Differential and morefavorable treatment in respect of non-tariff measures governed by theprovisions of instruments multilaterally negotiated earlier under the auspicesof the GATT and now within the framework of the WTO. Through this exception,special treatment was given to developing countries in various Codes whichemerged after the Tokyo Round and in various agreements resulting from theUruguay Round. Arrangements among developing countries as a whole or among afew of them on tariff preferences. Special treatment of the least developedcountries in the context of general or special measures in favor of developingcountries.
Free-TradeArea, Customs Union: A group of Members may constitute themselves into acustoms union or a free-trade area, and have totally free trade or reducedlevels of duties and of other trade-restrictive regulations among themselveswithout the obligation of extending such treatment to other Members.
A free-tradearea is a group of two or more countries in which duties and othertrade-restrictive regulations are eliminated on substantially all the tradebetween these countries. A customs union is a group of countries formingthemselves into one customs territory in which duties and other trade-restrictiveregulations are eliminated with respect to substantially all the trade betweenthe countries or, at least, with respect to substantially all the trade inproducts originating in these countries. Further, the Members constituting thecustoms union should apply substantially the same duties and other traderegulations to the products of countries outside the union.
Disciplinesfollowed while forming a free-trade area or a customs union:
1) At the timeof the formation of a customs union, the duties and other trade regulationsapplied to Members outside the union must not be, on the whole, higher or morerestrictive than what were applicable in these countries prior to the formationof the union.
2) In respectof a free-trade area, the duties and other trade regulations in the countriesforming the area should not be higher or more restrictive at the time offormation of the area than what they were in these countries prior to theformation of the area.
FrontierTrade: Advantages accorded by a Member to adjacent countries in order tofacilitate frontier traffic are permitted (Article XXIV.3 of GATT 1994).
GovernmentProcurement: The MFN obligation of Article I does not apply to the import ofproducts for immediate or ultimate consumption in government use and nototherwise for resale or use in the production of goods for sale. There is aspecial plurilateral agreement governing such purchases.
GeneralExceptions: Article XX of GATT1994 allows Members to restrict imports or exportfrom/to specific sources. Such measures can be taken for some specifiedpurposes, for example, for the protection of public morals, protection ofhuman, animal or plant life or health, etc.
SecurityException: Restrictions on imports and exports from/to specific countries canbe imposed for security reasons in accordance with Article XXI of GATT1994.
The basicobjective of the MFN treatment principle is to strengthen the multilateralprocess in international trade policy. When two countries exchanging tariffconcessions between themselves extend these new tariff levels to all Members,the principle that gets emphasized is that all Members have an expectation ofsharing the benefits of the system. In the same way, when a Member gets intosome difficulty, for example, because of a balance-of-payments problem orincreased imports, all Members get prepared to share the burden of reducedexport opportunities into the territory of that Member.
Themultilateral process is further eroded by the formation of large regionaltrading blocs. If the world is divided into a few very large trading blocs, therelevance of the multilateral system will be very much reduced. Another risk tothe multilateral process comes from unilateral action or the threat of suchaction from economically strong Members of the system. It reduces theconfidence of the weaker Members in the efficacy and effectiveness of thesystem.National Treatment.
National treatmentis also an important basic principle in the WTO agreements. MFN essentiallymeans non-discrimination as among Members, while NT means non-discrimination asbetween domestic products or services and imported products or services.Basically, the principle of NT prescribes the obligation that an importedproduct, after entering the country of import, should be treated as a nationalproduct. The national treatment principle condemns discrimination betweenforeign and national goods or services and service suppliers or between foreignand national holders of intellectual property rights. Imported goods, onceduties have been paid, must be given the same treatment as like domesticproducts in relation to any charges, taxes, or administrative or other regulations.With regard to the protection of intellectual property rights, and subject toexceptions in existing international conventions, Members of WTO are committedto grant to nationals or other Members treatment no less favorable than thataccorded to their own nationals. GATS, however, due to the special nature oftrade in services, deals with national treatment under its Part III, SpecificCommitments, where national treatment becomes a negotiated concession and maybe subject to conditions or qualifications that Members have inscribed in theirschedules on specific commitments in trade in services.
The mainobjective of this principle is to ensure that the effects of tariff concessionsare not frustrated by providing indirect protection to domestic products. Thesedisciplines aim at establishing competitive conditions for imported products inrelation to domestic products and at providing equal opportunities to importedproducts and domestic products in the domestic market.Basic Disciplineof NT.
Importedproducts must not be subject to internal taxes or other internal charges inexcess of those applied to like domestic products. For example, an exercise taxwhich is applicable to a domestic product cannot be applied to an importedproduct at a rate higher than that applicable to the domestic product.Similarly, an imported product cannot be subject to a charge which, forexample, is in the nature of a contribution to a fund meant for facilitatingimports, if such a charge is not levied on the like domestic product.
Importedproducts must not be accorded treatment less favorable than that accorded tolike domestic products with respect to laws, regulations and requirementsaffecting their sale, purchase, transportation, distribution or use. Forexample, it is not permissible to lay down a condition that an imported productmust be stored in particular types of warehouses or must be transported byparticular types of vehicles, when no such conditions apply to a like domesticproduct.
A Membercannot have any quantitative regulation requiring compulsory utilization of aproduct from a domestic source in preference to using a like imported product. Forexample, it cannot be prescribed that in the manufacture of a chemical, acertain quantity or proportion of a constituent must be obtained from domesticsources.
A Membercannot apply internal taxes or other internal charges or internal quantitativeregulations in a manner so as to afford protection to domestic production.Here, “domestic production” does not mean only the production of thatparticular product; it also means the production of directly competitive orsubstitutable products. This means that even if the taxes or charges areapplied at the same rate on the imported and like domestic products, the mannerof application should not afford protection to domestic production. Clearly, adistinction is to be drawn between a ‘like product’ and a ‘directly competitiveor substitutable product’. For example, a country may apply a very highinternal tax rate on oranges which is applicable to both imported and domesticproducts, but if this country does not produce oranges, this tax, in effect,goes to raise the price of only imported oranges. And in this manner, thiscountry may be affording protection to its own production of apples, in so faras oranges are directly competitive or substitutable with apples.ImportantConcepts.
Two conceptsneed elaboration, that is, what constitutes the “like product”, and what arethe determinants for concluding that “discrimination’ against an importedproduct has taken place or that the domestic product has been “protected”.
Like Product:product with similar qualities, not necessarily an identical or equal product.Some of the factors to be considered are: properties, nature, quality and enduse. While deciding whether an imported product is a like product in relationto a domestic product, one has to be guided by the basic objective thatimported products should not be exposed to more rigorous competitive conditions,and domestic products should not enjoy a more favorable situation ofcompetition.
Sample caseson “like products”
1) The Panelon US-Taxes on Petroleum and Certain Imported Substances (June 1987) examinedthe differential internal taxation on domestic and imported petroleum and somepetroleum products. It found that the domestic products were crude oil, crudeoil condensates and natural gasoline, and the imported products were crude oil,crude oil condensates, natural gasoline, refined and residual oil, and certainother liquid hydrocarbon products. It concluded that either the domesticproducts and imported products were identical or they served substantiallyidentical end uses. The Panel considered them like products.
2) The Panelon US-Measures Affecting Alcoholic and Malt Beverages (June 1992) consideredthe exercise tax exemption on wine made from a particular type of grape, i.e.,scuppernong grapes. On the complaint of Canada that this practice wasinconsistent with Article III, the US argued that the tax provision wasuniformly applicable to all wines produced from this particular variety ofgrape. The Panel examined this question based on the usual criteria of end use,consumer tastes and habits, and the properties, nature and quality of the products,and also on the objective of Article III. The Panel found it relevant toconsider whether the differentiation of the products was being made so as toafford protection to domestic production. It observed that tariffclassification and tax laws in the US did not claim any public policy purposefor this tax provision except the purpose of subsidizing the small localproducers. The Panel concluded that unsweetened still wines were like productsand that the differentiation in the tax regulation was affording protection tolocal products and was therefore inconsistent with Article III.
Discriminationagainst Imported Products, Protection of Domestic Products:
Discriminationagainst imported products or protection of domestic products can often beeasily detected if done through differential internal taxes or differentialinternal charges. However, it is not easy if the discrimination or protectionis alleged in respect of laws, regulations and requirements affecting sale,purchase, transportation, distribution and use. This matter has been thesubject of a large number of disputes in the past. Certain principles haveevolved in the course of the consideration of this issue by the various panels.Some of these important principles are given below.
Any requirementon the imported product going beyond the obligation to indicate the origin ofthe product would be considered inconsistent with Article III 1994 if it dosenot also apply to the domestic product. For example, there was a Hawaiianregulation that firms which sold imported eggs had to display a placard stating“we sell foreign eggs”. Australia complained that this requirement affectingsale was inconsistent with Article III.4. The regulation was later withdrawn.
Grantingfinancial facilities, e.g., special credit facilities, tax refunds or taxremission or exemption, for the purchase of domestic products would beconsidered discriminatory against imported products and as protection ofdomestic products. For example, the Panel on US Measures Affecting Alcoholicand Malt Beverages (June 1992) examined the US tax measure providing excise taxexemption for domestic producers of beer and wine, which was not available forimported products. The Panel found that the tax law operated to create a lowertax rate on domestic beer and wine than on like imported products and that thusit was discriminatory.
If investorsor local industry or importers are obliged to purchase domestic products, thereis a denial of opportunity to the like imported products for competing in thisparticular market. Hence, it would be considered discriminatory against theimported products. For example, the Panel on Canada-Administration of ForeignInvestment Review Act (June 1983) examined the Canadian system of writtenundertakings on purchase and export. Investors were required to give anundertaking to purchase goods of domestic origin. The Panel held that such arequirement clearly meant that imported goods were less favorably treated thandomestic goods and that hence, this provision was not consistent with ArticleIII. Further, even if the undertaking was conditional on the goods beingcompetitively available in Canada, the less favorable treatment still held asit resulted in giving preference to domestic products when imported anddomestic products were available on equivalent terms.
Importedproducts cannot be subjected to any special processing requirement which is notobligatory for the domestic product. For example, the UK had a regulation thatdomestic poultry, after slaughter, could be chilled by any method, whereasimported poultry was to be cooled by only the spin-chill method. The UScomplained about it and a panel was formed, but the matter got settled in themeantime.
If importedproducts are required to pass through certain specified wholesale or retailchannels or some specified means of transport and if this requirement is notapplicable to domestic products, such a requirement will be held to bediscriminatory against the imported products. For example, the Panel on US MeasuresAffecting Alcoholic and Malt Beverages (June 1992) considered a requirement insome states of the US that imported beer and wine be sold only through in-statewholesalers or other middlemen, while some in-state like products werepermitted to be sold directly to retailers. The US argued that in-statebreweries and wineries bore the same costs as did the wholesalers in respect ofrecord-keeping, auditing, inspection and tax collection. It also said that mostin-state beer and wine producers preferred to use wholesalers rather than tomarket their products directly to retailers. The Panel held that Article IIIrequires relative competition opportunities in the market, irrespective of theactual choices made by enterprises, and that denial of such opportunitiescreates less favorable treatment to the imported products. This Panel alsoexamined the requirement of some states in the US that alcoholic beveragesimported into the state be transported by common carriers authorized to operateas such within the state, whereas in-state producers of alcoholic beveragescould deliver their products to customers in their own vehicles. The Panelconcluded that such a requirement resulted in less favorable treatment toimported products.
A regulationthat domestic products and imported products should both adhere to aminimum-price requirement is not consistent with Article III of GATT 1994, eventhough the regulation is equally applicable to both domestic and importedproducts. For example, the Panel on Canada-Import, Distribution and Sale ofCertain Alcoholic Drinks by Provincial Marketing Agencies (February 1992). ThePanel was of the opinion that this practice did not necessarily accord equalconditions of competition to imported and domestic products in the sense thatthe imported product was prevented from being supplied at a price below that ofthe domestic product.ImportantConsiderations.
Products withunbound duty: A Member cannot justify a higher internal tax rate on an importedproduct on the grounds that it could, in any case, apply a higher tariff on theproduct not subject to tariff binding.
Balancing notallowed: The obligation of national treatment has to be undertaken asapplicable to each individual case of imported products. Thus less favorabletreatment accorded to an imported product cannot be justified on the groundsthat it has received more favorable treatment in another way, or that anotherproduct from the exporting country has received more favorable treatment.
Differentregional treatment: When a domestic product is given different treatment indifferent regions of a country, the treatment which is the most favorable amongthese is to be accorded to the like imported product.
Measure havingnegligible effect: Some countries, while defending measures which seeminglyviolate the obligations of national treatment, have argued that the measureshad only a negligible effect on trade and that, therefore, they cannot becausing adverse effects on the imported products. In the course ofconsideration of this issue in the past, the position which is well establishedby now is that the actual trade effect is not an important point to beconsidered; what is crucial to the issue is whether competitive conditions forthe imported products in relation to domestic products have been adverselyaffected. A measure is considered inconsistent with Article III of GATT 1994 ifit disturbs the competitive conditions of the imported products getting morefavorable treatment compared to the imported products may be negligible inquantity or even if the domestic products might not have effectively receivedany advantage from the measure. Thus, even in the absence of a trade effect, acase of violation could occur.
For example,the Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992)examined a complaint regarding the reduction of excise duty for some domesticproducts. In the Panel hearing, the US argued that only 1.5% of domestic beerwas eligible for the reduction in the excise tax on beer and less than 1% benefitedfrom the reduction, hence, the tax neither discriminated against imported beernor provided protection to domestic production. The Panel was of the opinionthat Article III protects competitive conditions between imported and domesticproducts and that this protection is not conditional on trade effects. Exceptions.
The obligationof national treatment does not apply to laws, regulations or requirementsgoverning government procurement where products are purchased for the use ofthe government and not for commercial resale nor for use in production of goodsfor commercial resale.
The obligationof national treatment does not prevent payment of subsidies exclusively todomestic producers. In this connection, a US tax measure providing creditagainst excise taxes to domestic producers of beer and wine came up forconsideration in the Panel on US-Measures Affecting Alcoholic and MaltBeverages (June 1992). The US argued for exemption from the obligation ofnational treatment on the grounds that the measure in question was in thenature of a subsidy. The Panel noted that the word “payment” of subsidies inArticle III refers only to direct subsidies involving payments and not to othermeasures like tax credits or tax reduction.
A newexception appears in the Uruguay Round Agreement on Subsidies andCountervailing Measures. Subsidies contingent on the use of domestic goods overimported goods are allowed, in the case of developing countries, for five yearsfrom the date of the coming into force of the WTO Agreement. For the leastdeveloped countries, they are allowed for eight years from that date.
The localcontent requirement (requirement that permission for investment will beconditional on the use of domestic products to some extent) and the limitationon the use of imported products (related to the value or volume of the domesticproducts that the firm exports) have been declared to be inconsistent with theobligations of Article III of GATT 1994 in the Agreement on TRIMs. Developedcountry Members have, however, been given two years from the coming into forceof the WTO Agreement to eliminate these measures if they have them. Fordeveloping Members, this period is five years and for least developed countryMembers, it is seven years. Emerging Problems.
So far, thecriteria of determining like products have been based on the characteristics ofthe products; attempts have been initiated to broaden the scope so as toinclude in the criteria even the method of production of the products. This isthe emerging problem. For example, suppose the imported product is produced infactories which pollute the environment by discharging harmful fluids into theneighboring river. At present, this aspect of the production will be totally irrelevantin comparing this imported product with the domestic product having similarcomposition, use and other characteristics. The domestic product and theimported product will be considered like products, and, as such, the importedproduct will have the benefit of national treatment.
Now, attemptsare being made to distinguish the imported product from the domestic product onthe grounds of whether the production process of the former causes pollution tothe environment. If this is accepted as a criterion for determining the likeproduct, the imported product will be declared as not being a like product, andthus will not have the benefit of national treatment. 2. Progressive trade liberalization and TransparencyIncreased marketaccess.
Themultilateral trading system is an attempt by governments to provide investors,employers, employees and consumers with a business environment which encouragestrade, investment and job creation as well as choice and low-prices in themarket place. Such an environment needs to be stable and predictable,particularly if businesses are to invest and thrive. Predictable and growingaccess to markets for goods and services is an essential principle of the WTO. Binding oftariffs:
The existenceof secure and predictable market access is largely determined by the use oftariffs, or customs duties. While quotas are generally outlawed, tariffs arelegal in WTO and are commonly used by governments to protect domesticindustries and to raise revenues. However, they are subject to disciplines — for instance, that they are not discriminatory among imports — and are largely“bound”. Binding means that a tariff level for a particular product becomes acommitment by a WTO member and cannot be increased or raised beyond the boundlevel without compensation negotiations with its main trading partners. Thus,it can be the case that the extension of a customs union can lead to highertariffs in some areas for which compensation negotiations are necessary. Thebound tariff on a product can be higher than the tariff actually applied. Thedeveloped countries have normally bound their tariffs at the applied levels.Developing countries, however, have adopted commitments on “ceiling bindings”,that is, bindings at levels higher than the applied rates. This has alloweddeveloping countries to substantially increase their bound commitments, thusunderpinning their open markets policies, while keeping a certain margin forprotection in case of need. Prohibition ofquantitative restrictions:
While tariffsare legal in WTO and are commonly used by governments to protect domesticindustries and to raise revenues, quotas are generally outlawed. Article XI ofGATT 1994 sets out a general prohibition of quantitative restrictions, whetheron imports or exports. In some special cases and for specific reasons, such assafeguard action, balance-of-payment, protection of public health or nationalsecurity, quantitative restrictions can be introduced under strictly definedcriteria.
Article XIIIof GATT 1994 stipulates that prohibitions and quantitative restrictions, whenapplied, should be administered on a non-discriminatory basis, i.e. to alltrading partners equally. In applying import restrictions, Members should aimat a distribution of trade approaching as closely as possible the sharesvarious supplying countries would have obtained in the absence of therestrictions. Furthermore, quotas should be allocated among supplying countriesbased upon the proportions supplied by the various supplying countries during aprevious representative period.
The“tariffication” of all non-tariff import restrictions for agricultural productsprovided a substantial increase in the level of market predictability foragricultural products. More than 30% of agricultural produce had been subjectto quotas or import restrictions. Virtually all such measures have now beenconverted to tariffs which, while initially providing substantially the samelevel of protection as previous non-tariff measures, are being reduced duringthe six years of implementation of the Uruguay Round agricultural agreement.The market access commitments on agriculture will also eliminate previousimport bans on certain products. Tariffnegotiations and progressive reduction in protection:
Following theestablishment of the GATT in 1948, average tariff levels fell progressively anddramatically through a series of seven trade rounds. The Uruguay Round added tothat success, cutting tariffs substantially, sometimes to zero, while raisingthe overall level of bound tariffs significantly. The commitments on marketaccess through tariff reductions made by over 120 countries in the UruguayRound are contained in some 22,500 pages of national tariff schedules.
Tariff reduction,for the most part phased in over five years, will result in a 40% cut indeveloped countries’ tariffs on industrial products, form an average of 6.3% to3.8%, and a jump from 20 to 44% in the value of imported industrial productsthat receive duty-free treatment in developed countries. At the higher end ofthe tariff structure, the proportion of imports into developed countries fromall sources that encounter tariffs above 15% will decline from 7 to 5% and from9 to 5% for imports from developing countries.
The UruguayRound increased the percentage of bound product lines from 78 to 99% fordeveloped countries, 21 to 73% for developing economies and from 73 to 98% foreconomies in transition results which are providing a substantially higherdegree of market security for traders and investors. Tariffrenegotiations and compensation:
Thecontractual nature of a bound tariff concession lies in the fact that thetariff rate cannot be increased beyond the bound level. However, countrieswould not enter into this kind of commitment without the possibility ofrevision when the situation of a domestic industry so requires. The GATT 1994allows for the possibility of renegotiations. A Member desiring to withdraw ormodify tariff bindings has to renegotiate them with other interested Membersand provide compensation, that is, substantially equivalent tariff concessionson other products. Transparency.
The principleof transparency is realized through four schemes:
1) Theobligation of notification: A WTO Member should notify the relevant WTOcommittees and explain any changes in trade policy, legislation and judicialdecisions so long as they fall within the administration of the WTO.
2) Consultation:When a Member brings a charge against another over a trade dispute, the disputeshould first be solved through consultation, political decision and mediationand then be handled by expert groups. For example, if the commodity tradingcouncil of the WTO discovers a change in the rise of tariff duties of carimports to Japan or more difficulties in auto importing by its sale networks,the council will conduct consultation among its members so as to demand thatthe Japanese government make changes within a rational time limit.
3) Transparencyin domestic law making: Transparency should be reflected in domestic lawmaking. Whenever a domestic law or regulation is created, opinions of therelevant departments should be solicited extensively. In addition, the opinionsand suggestions concerning the same trades and industries abroad should also beconsidered. The Chinese government, for example, has begun housecleaning ofrules, regulations, administrative documents, and internal documents of everydepartment in line with the requirements of the basic rules of the WTO.
4) Unifiedimplementation: Laws and regulations affecting trade are to be implementeduniformly in every region of the Member-state. Treatment has to benondiscriminatory, enabling equal conditions for market participants to engagein fair competition.3. Rules on Fair Competition
The WTO is notthe “free-trade” institution as it is sometimes described — if only because itpermits tariffs and, in limited circumstances, other forms of protection. It ismore accurate to say it is a system of rules dedicated to open, fair andundistorted competition. Rules on non-discrimination are designed to securefair conditions of trade and so too are those on dumping and subsidies.
Dumping refersto such a trade practice that enterprises export products at very low prices inorder to capture markets abroad and to eliminate competition. Article VI ofGATT 1994 defines dumping as the introduction of a product into the commerce ofan importing country at less than its normal value, that is, less than thecomparable price, in the ordinary course of trade, for the like product whendestined for consumption in the exporting Member.
Subsidies arebenefits provided by governments to producers and exporters of products whichimprove their competitiveness in international trade and thereby distortcompetition.
Both dumpingand subsidies are considered to be unfair practices; the difference is that theformer is adopted by firms and enterprises, whereas the latter, by Membergovernments. Anti-dumping duties may be applied in order to offset or preventdumping, and countervailing duties for the purpose of offsetting any subsidy onthe manufacture, production or export of any merchandise. In both cases, suchduties may only be imposed if imports of dumped or subsidized products cause orthreaten to cause material injury to an established industry in the importingcountry or materially retard the establishment of a domestic industry.4. Encouraging Development and Economic Reform
Overthree-quarters of the WTO Members are developing countries and countries in theprocess of economic reform from non-market systems. During the seven-yearcourse of the Uruguay—between 1986 and 1993 — over 60 such countriesimplemented trade liberalization programs. Some did so as part of theiraccession negotiations to the GATT while others acted on an autonomous basis.At the same time, developing countries and transition economies took a muchmore active and influential role in the Uruguay negotiations than in anyprevious round.
This trendeffectively killed the notion that the trading system existed only forindustrialized countries. It also changed the previous emphasis on exemptingdeveloping countries from certain GATT provisions and agreements. With the endof Uruguay, developing countries showed themselves prepared to take on most ofthe obligations that are required of developed countries. They were, however,given transition periods to adjust to the more unfamiliar and, perhaps,difficult WTO provisions particularly so for the poorest, «least-developed»countries. In addition, a Ministerial decision on measures in favor of least-developedcountries gives extra flexibility to those countries in implementing WTOagreements; calls for an acceleration in the implementation of market accessconcessions affecting goods of export interest to those countries; and seeksincreased technical assistance for them. Thus, the value to development ofpursuing, as far as is reasonable, open market-oriented policies, based on WTOprinciples, is widely recognized. But so is the need for some flexibility withrespect to the speed at which those policies are pursued.
Nevertheless,the provisions of the GATT intended to favor developing countries remain inplace in the WTO. In particular, Part IV of GATT 1994 contains three articles,introduced in 1965, encouraging industrial countries to assist developingnation members “as a matter of conscious and purposeful effort” in theirtrading conditions and not to expect reciprocity for concessions made todeveloping countries in negotiations. A second measure, agreed at the end ofthe Tokyo Round in 1979 and normally referred to as the “enabling clause”,provides a permanent legal basis for the market access concession made bydeveloped to developing countries under the generalized system of preferences(GSP).5. Single undertaking
Singleundertaking implies that WTO members must accept all of the obligations of theGATT, GATS, TRIPs and any other corollary agreements. This ends the «free ride»of some developing countries which under the old GATT could receive thebenefits of some trade concessions without having to join in and undertaketheir full obligations.
Questions
1. Which techniques may be employed bystates to lower imports?
2. Are export controls compatible withGATT?
3. What are like products for MFNpurposes?
4. Discuss the major exceptions to theGATT’s MFN obligation.
5. Describe the national treatmentobligation under the GATT.References
1. John H. Jackson, The World Trading System: Law and Policy ofInternational Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p.139-228
2. Jackson/Davey/Sykes,372-435, 436-463, 501-558, 596-665, 941-950, 983-988.
3. Trading intothe Future – WTO, 3rd edition, Revised August 2003. p.21-55.
4. “Domestic Administration of Tariffs”, Trebilcock & Howse, TheRegulation of International Trade, 2005, (Supplement, Volume II, pages 6 — 9)
Lecture 4. Issues on market access
WTO envisages regulatesinstruments countries may use under strict conditions to regulate access totheir markets. These instruments can be in form tariff and nontariffrestrictions. In this respect WTO sets up rules on usage of tariffs,safeguards, measures under balance of payment provisions, technical barriers totrade, sanitary and phytosanitary measures, trade-related investment measures.1. Tariffs
A tariff is atax or duty levied on the traded commodity as it crosses a national boundary.Purpose of tariff is, that governments get revenue through tariffs, and animportant source of income for developing countries in particular.
Tariffsprovide protection to local industry, for domestic products become relativelycheaper than like imported products after the imposition of tariffs. Differentialtariffs can be used to bring about a rational allocation of foreign exchange ifit is scarce, for example, high tariffs on luxury goods and low tariffs onindustrial machinery.
There arethree basic types of tariff:
· Ad valorem, levied as a percentage of the value of the importedproduct
· Specific, levied on the basis of the quantity of an importedproduct
· Combined
For example,the ad valorem tariff on a bicycle is 6% and, in addition, $30 specific tariffper bicycle. If the imported value of 5 bicycles is $1,000, the cost ofimporting the five bicycles will be $1,210.
Earlier,various Members had different systems of tariff classification, which made itdifficult for a country to assess the impact of the tariffs of another countryon its own export prospects. Now, Members are required to convert their customstariff to the Harmonized Commodity Description and Coding System (HS). In HSclassification, broad categories of products are assigned numbers going fromone to two digits. Thereafter, further divisions and subdivisions are made onthe basis of the decimal system. For example:
85 Electricalmachinery and equipment and parts thereof; sound recorders and reproducers,television image and sound recorders and reproducers, and parts and accessoriesof such articles
8501 Electricalmotors and generators (excluding generating sets)
8501.10 Motorsof an output not exceeding 37.5W
8501.10 10 Synchronousmotors of an output not exceeding 18W
8501.10 93 AC(alternating current) Motors
8501.20 UniversalAC/DC motors of an output exceeding 37.5 W
Through theaddition of numbers on the right, more and more subdivisions can be made, andthe products can be further differentiated. In this way, comparison of tariffsamong different countries becomes easy.Binding of tariffs.
The GATTagreement establishes the rule for countries to bind their tariff rates. Implicationsof tariff binding are that, countries can bind tariffs on some products atparticular levels through multilateral or bilateral trade negotiations. AMember normally cannot raise the levels of tariffs beyond the bound levels, butis free to apply the tariff on a product at a level lower than the bound level.
There are twomajor of approaches of tariff binding – ‘formula approach’ and ‘request-offerapproach’:
Formulaapproach: In the Multilateral Trade Negotiations, this approach is preferred.
· reducing tariffs by a certain percentage over a period of time;
· laying down a peak level beyond which a Member would not applytariffs on the bound items;
· prescribing an overall reduction of the average tariff level by acertain percentage, with a minimum percentage reduction in each tariff line;
· laying down a minimum percentage of the tariff lines to be coveredby binding.
Once theformula is decided, Members work out their charts of reductions, which areexamined by other Members and then recorded in the “schedule”.
Request-offerapproach: Two countries sit down and each gives its own request list and offerlist to the other for tariff reduction. An attempt will be made to achievereciprocity as far as possible, that is, equalizing the reduction of totalcustoms duty on each side. For example, if the average value of the export ofproduct P from country A to B is US$200,000 and the tariff is proposed to bereduced by 3%, the loss of revenue to B is US$6,000. This would be the measureof the concession which A should made for B. The final results will be appliedto all Members of the WTO.
If country Ahas to decide on the product to be included in the request list to be presentedto country B, A would normally choose a product on the followingconsiderations:
· the existing and potential production prospects for this productin A should be good;
· there should be a good demand or high potential of demand for thisproduct in B;
· the tariff on this product in B should be high, adverselyaffecting the export of A at present.
Similarly,while choosing a product for inclusion in the offer list, A will take thefollowing points into consideration:
· the product should be needed in A;
· the product should be of export interest to B;
· the reduction of the tariff on this item should not have thepossibility of damaging the prospects of the firms producing the product in A.
Increase intariff beyond binding:
If a Memberwishes to raise the tariff on a product above the bound level, it has to offercompensatory concession on some other items.
The Memberinforms the Council for Trade in Goods about its proposal, and the Councilauthorizes a negotiation for this purpose;
Thenegotiation will take place specifically with the following members:
· the member with which the tariff binding concession was initiallynegotiated, that is initial negotiating rights (INR)
· the member having principal supply interest
· the member having the highest ratio of export of the product inquestion into the modifying Member country compared to its total export of thatproduct
· other members having a significant share in the market of themodifying Member
Negotiationwill take place to decide on the products which will be subjected to tariffreduction and the depth of the reduction in order to offer an almost equivalentconcession to the proposed withdrawal or modification of the concession inquestion, and the final results will apply to all Members;
If agreementis not reached, the modifying Member will be free to take the action asproposed by it, and other Members will be free to withdraw substantiallyequivalent concessions. The withdrawal has to take place within six months ofthe action of the modifying Member. A notice of withdrawal has to be given andwithdrawal can be effected after 30 days of the notice.
Tariff quota:
The quantityof import up to which a lower level of tariff is applied, and beyond that limitof quantity, the normal tariff in the schedule applies. The tariff quotasincluded in the schedule are binding. For example, the EC provided for anannual tariff quota of 1.5 million tons of duty-free import of newsprint;beyond that quantity, a duty of 7% was applicable.
Preferentialtariff: Concessional rates of tariff applied by developed Members to developingcountries under GSP and those applied in a free-trade area.
Tariffescalation: The rate of tariff in a country is higher on a product with ahigher level of processing than on one with a lower level of processing or onthe basic raw material in a product chain.Countries/Products Raw material Leather Leather products Canada 0.0 6.6 12.6 EU 0.0 3.7 4.3 Japan 0.0 7.0 9.4 US 0.0 3.1 9.0
Tariffescalation has an important implication for the development ofindustrialization of developing countries. If major developed countries do notapply higher tariffs on products with a higher level of processing, theprocessing of raw materials in developing countries can be encouraged. 2. Safeguards
Article XIX ofGATT 1994 provides for emergency action on imports of particular products, andcontains the basic principles upon which the WTO Agreement on Safeguards wasnegotiated during the Uruguay.
Safeguardmeasures or escape clause are emergency trade measures taken temporarily by aMember to provide relief to its domestic industry in the situation of itsgetting hurt from an increase in imports. It is an important exception to thegeneral prohibition of quantitative restraints on imports.
Purpose ofsafeguard measures is to lighten the burden on the country whose domesticindustry is facing acute problems due to imports. Safeguards’ objective is todisperse the burden over all the Members to enable the affected Member toadjust smoothly to the new situation of international competition in thatparticular product line.
MFN treatmentresults in the sharing of the benefits of multilateralism, while a Safeguardmeasure is about sharing the burdens. Taking safeguard measures meanswithdrawal of concession by raising the tariff on a product above the boundlevel, or modification of the concession by raising the tariff level forimports beyond a particular value or volume, or the imposition of quantitativerestrictions to limit the import of a product.
If the tariffis not bound, or if the applicable tariff is lower than the bound level, aMember is free to raise the tariff (up to the bound in the latter case). Preconditions:
· Imports of the product should have increased either absolutely orrelatively.
· The imports should be to cause or threaten to cause serious injuryto domestic producers of like or directly competitive products.
· The increased imports should be the result of unforeseendevelopments.
· The increased imports should be the effect of the obligations ofthe Member in GATT 1994, such as the result of a tariff concession given by theMember in respect of that product.
Relativeincrease: Suppose that the domestic production and import of a product in thepast were, respectively 9,000 and 1,000 units, and now, these are, respectively4,000 and 800 units. Therefore, earlier, the import was 11% of domesticproduction, and now, it has risen to 20%. This is a case of relative increase,because the actual volume of import has decreased.
Seriousinjury: There is no specific criteria for serious injury, thus a case-by-caseexam is needed. Some guidelines have, however, been provided:
· the rate and amount of the increase in imports of the product, inabsolute terms or relative to domestic production;
· the share of the domestic market taken by increased imports;
· changes in the levels of sales, production, productivity, capacityutilization, profits and losses, and employment.
The threat ofserious injury means serious injury being clearly imminent on the basis offacts and not merely on allegation, conjecture or remote possibility.
Domesticindustry: means all the producers of like or directly competitive products inthe country, or at least, those whose collective production of like or directlycompetitive products forms a major proportion of the total domestic productionof those products. Thus, if only a small number of producers having a smallshare in domestic production have suffered serious injury, the cause of actionwould not arise.Procedure for takingsafeguard measures:
A competentauthority has to be designated to hold investigations on the existence of thepreconditions for taking safeguard measures.
Investigation:
A Member hasto notify the Committee on Safeguards, and give public notice to all interestedparties, that is importers, exporters and others. Public hearings will beconducted so that interested parties are able to present evidence, views andresponse accordingly.
The competentauthority determines whether there has been an increase in the import of theproduct, whether serious injury or threat of such injury to a domestic industryhas been caused, or whether there is a causal linkage between the increasedimports and the serious injury or its threat.
Application ofsafeguard measures:
Once there isa finding of serious injury or threat of serious injury caused by increasedimports, the Member has to notify the Committee on Safeguards about it. Beforeapplying or extending a safeguard measure, a Member has to give notice to allthose Members that have a substantial export interest in the product and invitethem for consultation, such as reviewing the information provided by the Memberproposing safeguard action, exchanging views on the proposed measure.
Types ofsafeguard measures:
· a tariff measure: increase in import duty beyond the bound level,imposition of surcharges or surtaxes, compensatory taxes on the product
· a non-tariff measure: fixing global quotas for import, introducingdiscretionary licensing, etc
· Provisional measure: When there is a sudden surge of imports, orwhen the domestic industry needs immediate relief because of a rapidly emergingadverse situation as a result of the increased imports, a Member can takeurgently provisional safeguard measures in the form of a tariff increase for amaximum duration of 200 days. The provisional measures should be withdrawn iffurther investigation finds no evidence of serious injury or there is no linkbetween the imports and such injury.Special disciplinesregarding quantitative restrictions:
When takingquantitative restrictions, a Member has to enter into consultations with theMembers having substantial interest in the export of the product and decide onthe global quota as well as on the shares of individual Members havingsubstantial interest.
Members havingsubstantial interest: Members having 10% share in the market of the importingMember, or having the highest ratio of exports of the product in question toits total exports.
Generaldiscipline in fixing quota and shares: The quantity of imports is not reducedbelow the average level of imports in the last three representative years forwhich statistics are available.
The previousrepresentative years exclude from the average the imports of a year which isabnormal for some reason or another. For example, the Panel on EEC-Restrictionson Imports of Apples from Chile (November 1980) considered representative yearsprior to 1979, left out 1976 as there were some restrictions in that year.Hence, the Panel chose the years 1975, 1977 and 1978.
One effectiveway of applying quantitative restrictions is to decide on a global quota forimports and then allocate this quota among supplying countries based on theirproportions of the total quantity or value of imports of that product in thecountry during a previous representative period.Duration of safeguardmeasure.
Generalprovision: safeguard measure will apply only for the period which is necessaryto remedy or prevent serious injury, and to facilitate adjustment of thedomestic industry. Moreover, the safeguard measure should be reviewed duringthe period of application and be liberalized at regular intervals.
Specificlimitations: The duration of a provisional measure must not exceed 200 days;
In othercases, the duration will initially be up to four years, but it can be extendedto eight years if the competent authority of the Member country has determinedthat the safeguard measure continues to be necessary and that there is evidencethat the domestic industry is adjusting.
The totalperiod of the measure, including the duration of the provisional measure, mustnot exceed 8 years. A developing country Member can extend the measure for 2more years, beyond the general limit of 8 years.Repeated applicationof measures:
A safeguardmeasure cannot be applied again to the import of a product for a period of timeequal to that during which the measure had previously been applied or half ofthe earlier duration for developing country Members. But the period ofnon-application will be at least 2 years. For example, if a Member had applieda safeguard measure on certain basic chemicals and had continued it for 5years, it cannot again take safeguard measure against these products for atleast five years from the date of discontinuance of the initial measure.
A safeguardmeasure up to 180 days can be applied again if such a measure has not beenapplied on the product more than twice in the five years immediately precedingthe introduction of the measure.Compensation andretaliation:
When a Memberintroduces a safeguard measure on a product, it has to enter into consultationwith the Members having substantial interest in the export of the product forthe purpose of equivalent tariff reduction on some other products in whichthese Members may have an export interest. If the safeguard measure is in thenature of a quantitative restriction, equivalence may be calculated based on anapproximate estimate of the imports foregone as a result of the restriction.The selection of products and the extent of the tariff reduction on each ofthese products will have to be worked out in detailed consultations with theaffected Members in order to meet their specific interest.
If theaffected Members are not satisfied with the measures taken or the compensationgiven, they have the option to suspend substantially equivalent concessions orother obligations. But, the right to such suspension cannot be exercised forthe first three years of the safeguard measure, provided that:
· the safeguard measure had been taken as a result of an absoluteincrease in imports;
· the safeguard measure conforms to the provisions of the Agreementon Safeguard;
In othercases, the stipulation of deferment for three years does not apply. In suchcases, suspension can be effected on the expiry of 30 days after the notice ofsuspension has been received by the Committee on Safeguards.Termination ofpre-existing measures:
A Member mustterminate a pre-existing measure, i.e. Grey-Area Measures, within 8 years ofthe date on which it was first applied or within 5 years of 1 January 1995,whichever comes later.
Grey-AreaMeasures refer to voluntary export restraints (VER) and orderly marketingarrangement (OMA). VER means an affected country consults with the exportingdeveloping countries and persuades them to limit their export of a product to aspecified quantity or value so as to avoid the normal procedure and compensationnegotiation. The exporting countries would generally agree to restrain theirexports of the particular product in order to avoid more severe unilateralimport restraint by the importing country. In fact, there is nothing voluntaryabout it.
OMA meansseveral importing and exporting countries would arrive at arrangements of thesame nature together, under almost similar situations, such as the Multi-FibreArrangement (MFA). Sometimes, enterprises of two countries enter into their ownagreements resulting in restrictions on exports or imports. Members arerequired not to encourage or support the adoption or continuance of suchnon-governmental measures.Non-discrimination orselectivity:
The raising oftariffs or the use of other tariff-type charges as a safeguard measure has tobe applied to all Members. While applying quantitative restrictions, thesafeguard measures shall be applied to a product being imported “irrespectiveof its source”, that is, safeguard measures cannot target only a few selectedMembers supplying the product. Though a quantitative restriction has to beapplied globally, that is, to all exporting countries, under certainconditions, the shares of the quota may be reduced in the case of somecountries and increased in the case of others.
In the past,restraints have been applied as a safeguard measure to the import of productsbelow a particular price level. Though apparently the measures were applied ona non-discriminatory basis, in actual practice, these measures might have had aselective impact on low-cost suppliers. So far, there is no decisive view as towhether or not measures linked to prices are in conformity with Article XIX ofGATT 1994.Notification:
A Member hasto notify its laws, regulations and administrative procedures as well as theirmodification regarding safeguard measures. A Member may send a notification ifit finds that another Member has not fulfilled its obligations.
Notificationshave to be sent when:
· an investigation is started;
· existence of serious injury or its threat is determined;
· a decision is taken to apply or extend a safeguard measure
· before taking a provisional safeguard measure
All in all,everything a Member has done in the process of taking safeguard measures shouldbe notified to the Council for Trade in Goods.
Provisions fordeveloping countries:
No safeguardaction will be taken against a product originating in a developing countryMember as long as its share of imports of the product in the importing countryconcerned does not exceed 3%.
If severaldeveloping country Members are exporting the product to this particular Membercountry and their individual shares are less than 3% each, safeguard measureswill not be taken against the product concerned from these developing countryMembers so long as their shares collectively account for not more than 9% ofthe total import of the product in the importing Member country proposing totake safeguard measures.
Specialsafeguard provisions: There are special safeguard measures in the Agreement onAgriculture and Textiles.
Summary: Asafeguard measure is an import restriction which can be adopted in emergencycircumstances, when imports have increased in such quantities and conditionsthat they are the cause of serious injury or threat of such injury to adomestic industry producing a like or directly competing product. An agreementon safeguards, setting out conditions and criteria for these actions, is one ofthe multilateral trade Agreements. Measures affecting prices, i.e., tariffs,are preferable to quantitative restrictions. However, quantitative restrictionscan be applied as safeguard measures in specific cases.
In case ofemergency, the importing Member will be free to suspend the obligation orwithdraw or modify the concession provided it fulfills certain requirements,i.e.
The suspensionof the obligation, or the withdrawal or modification of the concession, shallbe temporary, that is, “…to the extent and for such time as may be necessary toprevent or remedy such injury…”.
Action canonly be taken after written notification and opportunity for consultation withthe WTO (in practice, with its Committee on Safeguards) and with the countrieshaving a substantial interest as exporters of the product concerned. Incritical circumstances, where delay would cause damage difficult to repair,action can be taken provisionally without prior consultation, on condition thatconsultation take place immediately afterwards.
If noagreement is reached during consultations, the Member proposing the actionshall be free to do so, and the affected Member or Members shall also be freeto suspend the application of substantially equivalent concessions or otherobligations under the Agreement to the trade of the party taking the action.The suspension of substantially equivalent concessions or other obligations hasto be notified previously to the WTO, and not be disapproved by it.3. Balance-of-Payments Provisions
The Balance ofPayment is a summary statement in which, in principle, all the transactions ofthe residents of a nation with the residents of all other nations are recordedduring a particular period of time, usually a calendar year. Obviously, themillions of transactions of the residents of a nation with the rest of theworld cannot appear individually in the balance of payments. As a summarystatement, the balance of payments aggregates all merchandise trade into a fewmajor categories. The balance of payments includes some transactions in whichthe residents of foreign nations are not directly involved, for example, when anation’s central bank sells a portion of its foreign currency holdings to thenation’s commercial banks. Gifts are also included in a nation’s balance ofpayments. Diplomats, military personnel, tourists, and workers who temporarilymigrate are residents of the nation in which they hold citizenship.International institutions such as the United Nations, IMF, the World Bank, andthe WTO are not residents of the nation in which they are located.
Article XII ofGATT 1994 allows a Member to restrict the quantity or value of merchandisepermitted to be imported in order to safeguard its external financial positionand its balance of payments. Article XVIII sets out a separate provision onrestrictions for balance-of-payments purposes in relation to developingcountries.
In the 1979Tokyo Round Declaration on Trade Measures Taken for Balance-of-Payment Purposes,it was recognized that restrictive trade measures are in general an inefficientmeans to maintain or restore the balance-of-payments equilibrium. It was alsoprovided that in applying restrictive import measures preference should begiven to the measure which has the least disruptive effect on trade.
ArticleXVIII:B of GATT 1994 permits the use by developing countries of measures tocontrol the general level of imports by restricting the quantity or value ofmerchandise permitted to be imported in order to safeguard their externalfinancial position and to ensure a level of reserves adequate for theimplementation of their programs of economic development. The UruguayUnderstanding on Balance-of-Payments Provisions of GATT 1994 encourages allMembers, including developing countries, to give preference to “price-basedmeasures” such as import surcharges, import deposit requirements or otherequivalent trade measures with an impact on the price of imported goods.
Membersadopting, maintaining or intensifying such measures have the obligation tonotify and to consult with the Committee on Balance-of-Payments Restrictions.Consultations with Members maintaining balance-of-payments restrictions underArticle XII have to be held annually; for those maintained under Article XVIII:B, they are held every two years. The IMF also participates in theseconsultations and presents findings of statistical and other facts relating toforeign exchange, monetary reserves and balance of payments.
Purpose: Toprovide developing countries with some relief and flexibility when they faceproblems of low inflow and small reserves of foreign exchange.
Provisions:Article XVIIIB permits limiting the quantity or value of imports in order to:
· safeguard the country’s external financial position, and
· ensure a level of reserves needed for economic developmentprograms.
Permissibleactions:
Price-basedmeasures: The Uruguay Understanding on Balance-of-Payments Provisions of GATT1994 encourages all Members, including developing countries, to give preferenceto “price-based measures” such as import surcharges, import depositrequirements or other equivalent trade measures with an impact on the price ofimported goods. If the duty on a product is not bound, a Member is free toraise the duty.
Quantitativerestrictions: A Member may totally stop the import of a product or limit theimport of a product to a specified volume or value. While applying quantitativerestrictions on imports, Members have to justify why price-based measures arenot adequate to deal with the problem.
Choice ofproducts: A Member has to justify which products should be covered by themeasures. Essential products such as basic consumption goods, capital goodsshould normally be out of the coverage.
Limitations onBOP:
· Not more than one type of restrictive measure may be applied onthe same product.
· The restrictions should not be excessive.
· The measure for BOP reasons should not be taken to protectdomestic production.
· Unnecessary damage to the commercial or economic interests of anyother Member should be avoided.
· The restriction should not be applied to prevent the import ofcommercial samples or the import of any product in minimum commercialquantities.
· A member must progressively relax the restrictions as conditionsimprove and must eliminate the measures when conditions no longer justify theirexistence.
Notification:A Member applying measures because of BOP difficulties has to sendnotifications to the WTO Secretariat every year to indicate the types ofmeasure applied, the criteria used for their application, the product coverageof the measures and the trade flows affected by the measures. Besides, a Membermust notify the General Council when a new measure is introduced or any changeis made in the application of existing measures or any modification is made inthe time schedule for the elimination of the measures taken to address BOPdifficulties. Significant changes must be notified prior to or not later than30 days after their announcement.
Consultation:The Member explains the details of the measures and the justification fortaking these measures. Other Members ask questions, seek clarifications andmake comments.
Simplifiedconsultation: this process may be applied when
· least developed country Members are involved;
· other developing country Members are pursuing liberalizationefforts in conformity with the schedule presented in previous consultations;
· the trade policy review of a developing country Member isscheduled for the same calendar year in which the consultation is fixed.
Fullconsultation: more detailed Plan of Consultations is needed, including BOPposition and prospects, alternative methods to restore equilibrium, system andmethods of restriction and effects of the restrictions.4. Technical Barriers to Trade
Definition:Governments lay down mandatory technical regulations on products or formulateor encourage the formulation of non-mandatory standards for products forreasons of security, health, environment or easy utilization. However, theseregulations and standards may sometimes operate as barriers to imports, andthereby distort international trade.
Objectives:national security, prevention of deceptive practices, protection of human,animal and plant life or health or safety and protection of environment
Technicalregulations: a set of rules which lay down:
· the characteristics of a product
· related processes and production methods
· applicable administrative provisions
Standards:formulations approved by a recognized body, providing for rules and guidelineson characteristics of products and related processes and production methods.
Disciplines ontechnical regulations and standards:
· use of international standards for technical regulations: If thereare international standards for regulations in a specific field, Members areobliged to use them as a basis for their own technical regulations. Exceptionsare provided when the international standards will be ineffective orinappropriate.
· National treatment and MFN treatment must be applied
· The regulations must not create unnecessary obstacles tointernational trade
Procedure forformulation of regulations:
· send notice to the WTO Secretariat
· publish a notice indicating its proposal
· other Members make comments
There is,however, an exception for situations where urgent problems of safety, health,environment or national security might arise.
Obligations:
· A reasonable interval between the publication of the regulationand its actual entry into force must be allowed so that the producers inexporting countries will have time to adapt themselves to the new requirements.
· Regulation specifications should be based on product performancerather than design or descriptive characteristics.
· The technical regulations of other Members should be accepted asequivalent if they fulfill the desired objectives.
· Regulations of local government bodies and non-government bodiesmust be in conformity with the WTO disciplines.
· A Member must establish an enquiry point which is able to respondto enquiries from other Members and interested parties and provide relevantdocuments relating to central government bodies, local government bodies andnon-government bodies. 5. Sanitary and Phytosanitary Measures
SPS meanstrade-restrictive measures for the protection of human life or health and forthe protection of plant or animal life or health. Sanitary measures are relatedto human or animal health, and phytosanitary measures deal with plant health.
Nature andcoverage of SPS measures:
SPS measuresmay be in the form of laws, regulations, requirements, procedures or decreesand may cover products, processes and production methods (PPMs), testing,inspection, certification and approval procedures, requirements for transportof animals or plants, sampling procedures, packaging and labeling requirementsdirectly related to food safety. Some of these measures, like processingrequirements or certification, may take place in the exporting country and notupon arrival in the importing country. However, although the measure may beimposed outside the territory of the importing country, its purpose must be toprotect health within the territory of the importing country.
Situations:Sanitary and phytosanitary (SPS) measures are those which are applied in orderto:
· protect human life or health, or animal life or health from risksarising from additives, contaminants, toxins or disease-causing organisms infoods, beverages or feedstuffs;
For example,restrictions on imports of oranges containing a certain level of pesticideresidues, or regulations applied to imports of poultry products containingsalmonella (rod-shaped bacteria causing food poisoning, typhoid, andparatyphoid fever in human beings and other infectious diseases in domesticanimals) are typical SPS measures. Veterinary drugs given to farm animals arealso covered in so far as they may pose a threat to humans later consuming themeat.
· protect animal life or health, or plant life or health from risksarising from the entry, establishment or spread of pests, diseases,disease-carrying organisms or disease-causing organisms;
For example,an import ban on live cattle originating from herds infected by Bovinetuberculosis would be one example of an SPS measure taken with the objective ofavoiding the introduction and spread of the disease to domestic cattle. Anotherexample might be restrictions on certain fruit from areas plagued by the fruit fly.
· protect human life or health from the risks arising from diseasescarried by animals, plants or their products, or the entry, establishment orspread of pests;
For example,the spread of rabies (an acute, infectious, often fatal viral disease of mostwarm-blooded animals, especially wolves, cats, and dogs, that attacks thecentral nervous system and is transmitted by the bite of infected animals) willbe prevented or the banning of imports of meat and meat products originatingfrom foot-and-mouth disease regions will be imposed.
· prevent or limit other damage from the entry, establishment orspread of pests.
For example,the undesired importation of certain weeds can cause major damage in terms ofcrowding out domestic animal and plant species without necessarily causing adisease.
Purpose: toreduce the possible arbitrariness of governments’ decisions in the field ofsanitary and phytosanitary measures by clarifying which factors should be takeninto account when imposing health protection measures. The SPS Agreement alsoencourages consistent and transparent decision-making in determining anappropriate level of health protection, and should not result in unjustifiedbarriers to trade.
Consideration:SPS Agreement should be applied without unjustified discrimination, or be inline with MFN principles and National Treatment principle. SPS Agreementrecognizes, however, that the animal and plant disease status may differ amongsupplying countries, and this must be taken into consideration in the trade measuresapplied.The threestandard-setting international organizations:
1) FAO/WHOCodex Alimentarius Commission: based in Rome, is a subsidiary organ of the Foodand Agriculture Organization of the UN (FAO) and the World Health Organization(WHO). The SPS Agreement designates Codex as the authority for all mattersrelated to international food safety evaluation and harmonization(Harmonization means the establishment of national sanitary and phytosanitaryregulations must be consistent with international standards, guidelines andrecommendations). Codex develops scientific methodologies, concepts andstandards to be used worldwide for food additives, microbiologicalcontaminants, veterinary drug and pesticide residues to be used worldwide.
2) OfficeInternational des Epizooites (OIE): based in Paris, is the world animal healthorganization. The OIE develops manuals on animal diseases, standards fordiagnosis, vaccination, epidemiological surveillance, disease control anderadication, etc.
3) InternationalPlant Protection Convention (IPPC): based in Rome, is a subsidiary body of theFAO. The IPPC develops international plant import health standards, basicprinciples governing phytosanitary laws and regulations, and harmonized plantquarantine procedures.
Conformitywith international standards: Generally, Members must base their SPS measureson international standards, guidelines and recommendations if there exist. AHigher level of protections is permitted if a Member has conducted anexamination and evaluation of available scientific information and determinedthat the international standards are not sufficient to achieve an appropriatelevel of protection.
Equivalence:Ways of ensuring food safety or animal and plant health protection in differentcountries may be varied, but Members should accept each other’s regulations asequivalent whenever the same level of protection is achieved. For this purpose,bilateral consultations and negotiations are essential. For example, if CountryA is concerned with food-and-mouth disease in Country B, the latter mustcooperate by letting experts from Country A visit its farm operations andinspect its meat processing facilities.
Riskassessment: Members must establish SPS measures on the basis of an evaluationof the actual risks involved.
Riskassessments may be qualitative or quantitative, and quantitative riskassessment can be very costly. WTO Members have the right to determine whatthey consider to be an appropriate level of health protection, so long as thislevel does not protect domestic producers from competition.
Selection ofan SPS Measure: Once the government has determined its appropriate level ofsanitary and phytosanitary protection, it should not choose a measure that ismore stringent and trade-restrictive than necessary. For example, a completeban on imports of wheat may be one way to limit pesticide residue levelscausing certain health risks to consumers, but random testing for maximumresidue levels at the port of entry may be a less trade-restrictive measure,and wheat complying with the relevant residue requirements could safely bedistributed on the domestic market.
Disease-freeareas: Governments should recognize disease- or pest-free areas. These areasmay be only part of a country or may cover parts of several countries. In thepast, importing countries often required the whole exporting country to be freefrom a disease before it could be granted access. Today, products fromdisease-free areas within a given country should be grantee market access. Theburden rests on the exporting Member to demonstrate that given areas within anexporting country are free from a disease.
Transparency:SPS measures must be published by Members so that interested Members can becomeacquainted with them. A Member must establish an enquiry point which will beresponsible for providing answers to various questions. A national centralgovernment authority will be designated in each Member to notify the WTOSecretariat any new SPS regulations or modification to existing laws. 6. Trade-Related Investment Measures (TRIMs)
The Agreementon TRIMs covers conditions on investment which are related to trade in goods. Sometimes,governments impose conditions on investment, some of which are trade-related,others are not. For example, a government may prescribe that investment canonly be made in a firm owned by resident nationals, or it may imposerestrictions on the import of raw materials or the export of products. Therestrictions on import and export relate to trade in goods, whereas therestrictions in respect of firm ownership relate to non-trade matters.
Background:Prior to the Uruguay negotiations, the linkage between trade and investmentreceived little attention in the framework of the GATT. The Punta del EsteMinisterial Declaration included this subject, stating that further provisionsare necessary to avoid the trade-restrictive and trade-distorting effects ofinvestment measures. The Uruguay negotiations on TRIMs were marked by strongdisagreement among participants over the coverage and nature of possible new disciplines.The compromise that eventually emerged from the negotiations is essentiallylimited to an interpretation and clarification of the application totrade-related investment measures of GATT provisions on national treatment forimported goods (Article III) and on quantitative restrictions on imports orexports (Article XI).
Objectives: Topromote the expansion and progressive liberalization of world trade and tofacilitate investment across international frontiers so as to increase theeconomic growth of all trading partners, particularly developing countryMembers.
Coverage: TheAgreement applies to investment measures related to trade in goods only.Moreover, the Agreement is not concerned with the regulation of foreigninvestment. The disciplines of the TRIMs Agreement focus on discriminatorytreatment of imported and exported products and do not govern the issue ofentry and treatment of foreign investment. For example, a local contentrequirement imposed in a non-discriminatory manner on domestic and foreignenterprises is inconsistent with the TRIMs Agreement because it involvesdiscriminatory treatment of imported products in favor of domestic products.But the fact that there is no discrimination between domestic and foreigninvestors in the imposition of the requirement is irrelevant under the TRIMsAgreement.
Measuresinconsistent with Article III.4 of GATT 1994
· specifying that particular products of domestic origin must bepurchased or used by an enterprise,
· specifying that a particular volume or value of some products ofdomestic origin must be purchased or used by an enterprise,
· specifying that an enterprise must purchase or use domesticproducts at least up to a particular proportion of the volume or value of thelocal production of the enterprise,
· restricting the purchase or use of an imported product by andenterprise to an amount related to the export of its (the enterprise’s) localproduction.
The firstthree are local-content requirements and the fourth is an indirect requirementof partial balancing of foreign exchange outflows and inflows.
Measuresinconsistent with Article XI.1 of GATT 1994
· imposing a general restriction on the import of inputs by anenterprise or restricting the import of inputs to an amount related to theexport of its local production,
· restricting the foreign exchange for the import of inputs by anenterprise to an amount related to the foreign exchange inflow attributable tothe enterprise,
· restricting export by an enterprise by specifying the products sorestricted, the volume or value of products so restricted, or the proportion ofits local production so restricted.
The first twoare requirements of a partial balancing of foreign exchange, and the third isan export-restraint requirement for ensuring the domestic availability of theproduct.
Exception: Adeveloping country Member is allowed temporary deviation from this obligationin so far as it is covered by the flexibility provided under the provision ofBalance-of-Payment.
Notificationand transparency: Members have to notify all TRIMs not in conformity with theAgreement to the Council for Trade in Goods within 90 days of 1 January 1995.
Elimination ofexisting measures: 2 years of 1 January 1995 by a developed country Member, 5years of 1 January 1995 by a developing country Member, 7 years of 1 January1995 by a least developed country Member, and the time for developing and leastdeveloped country Members can be extended if necessary.Questions
1. What are VERs and OMAs? What economic interests ofparticipating and third countries are involved in connection to VERs? Why werethey seldom challenged in the GATT dispute settlement system?
2. What are safeguards and escape clauses?
3. Describe balance of payment provisions of WTO system.
4. Discuss the problem of technical standards in InternationalTrade.
5. Explain the aims and procedure of imposing sanitary andphytosanitary measures./>
References
1. John H. Jackson, The World Trading System: Law and Policy ofInternational Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p.139-228.
2. Ustor, Most-Favored-Nation Clause, III EPIL (1997), 468-473.
3. Jackson/Davey/Sykes, 559-595, 990-1061.
4. Trading into the Future – WTO, 3rd edition, Revised August 2003.p. 50-55.
Lecture 5. Measures against Unfair Trade
WTOestablishes rules of competition for countries, which can be described as ruleson ‘fair trade’. Mainly, WTO targets two types of measures affectingcompetitiveness of companies – subsidies and dumping. In cases of dumping andsubsidies WTO allows countries to restrict their trade under strict set ofrules. 1. Subsidies
Subsidies arebenefits provided by governments to producers and exporters of products whichimprove their competitiveness in international trade and thereby distortcompetition. Hence, a subsidy is generally considered to be an unfair practice.
For example,all major industrial nations give foreign buyers of the nation’s exportslow-interest loans to finance the purchase through agencies such as the USexport-import bank. These low-interest credits finance about 5% of US exportsbut as much as 30 to 40% of the exports of Japan and France. The amount of thesubsidy can be measured by the difference between the interest that would havebeen paid on a commercial loan and what is in fact paid at the subsidized rate.Definition
A subsidy is afinancial contribution or income or price support by the government or anypublic body or a funding mechanism or a private party directed or trusted bythe government within the territory of a Member, which confers a benefit to production/producersor export/exporters.
Financialcontribution
- Direct transfer of funds, e.g., direct payments, granting of taxrelief, subsidized loans, and equity infusion, low-interest loans to foreignbuyers
- Potential direct transfer of funds or liabilities, e.g., loanguarantees
- Revenue foregone or not collected, e.g., tax credits
- Provision of goods and services other than general infrastructure,or purchase of goods
- Subsidies for exports: an outright cash payment based on thevolume or value of the export of a product, payment of a part of the freightcharges
- Subsidies for domestic production: provision of raw materials atsubsidized prices for the production of a particular product, exemption from thepayment of some tax, provision of cheap loans
Examples ofnon-subsidy
- A government temporarily exempts a paper mill in financialdifficulties from the obligation to observe anti-pollution laws. (Regulatorybut not financial privileges)
- A private NGO — non-governmental organization — gives technicaland financial assistance to coffee growers in Africa. (Private aid)
- A government makes a loan to an automobile manufacturer onconditions equivalent to those that the manufacturer could obtain from privatebanks. (Financial contribution with no benefit)
- Differing effects of subsidies in importing countries
- Domestic producer industry: harm — more competitive foreignproducts
- Consumers and user industries: benefit — possibility of buying theproduct at lower prices and a wider choice of sources from which to buyCategories ofSubsidies
Prohibitedsubsidies (red): subsidies for export performance or for the use of domesticover imported goods, namely export subsidies and import substitution subsidies.
Exportsubsidies: direct payment of subsidy to a firm or an industry based on exportperformance, a bonus on exports through currency retention schemes, favorableinternal transport and freight charges on export shipments, favorable provisionof goods or services for the production of exported goods, export-relatedexemption, remission or deferral of indirect taxes or import duties, favorableexport credits at rates lower than those in international capital markets,export credit guarantee or insurance programs at premium rates inadequate tocover the operating costs and losses of the programs, full or partial paymentof the costs incurred by exporters
Prohibitedsubsidies are designed to affect trade and are most likely to cause adverseeffects to the interests of other Members, thus are subject to disputesettlement procedures which include an expedited timetable for action by theDispute Settlement Body. If it is found that the subsidy is indeed prohibited,it must be immediately withdrawn. If this is not done within the specified timeperiod, the complaining member is authorized to take counter-measures.
Actionablesubsidies (yellow): specific subsidies allowed under some conditions up tocertain limits, but subject to challenge, either through multilateral disputesettlement or through countervailing action, in the event that they causeadverse effects to the interests of other Members
There arethree possible types of adverse effects that can be challenged multilaterally:
- one country’s subsidies can hurt a domestic industry in animporting country;
- one country’s subsidies can harm a Member’s exporting interestsbecause of serious prejudice;
- there is nullification or impairment of benefits accruing underGATT 1994 because the improved access to a market that is presumed to flow froma bound tariff reduction is undercut by subsidization in that market.
Non-actionable(permissible) subsidies (green): Four types of subsidy are permitted in thesense that no counteraction against them is normally allowed.
1. general subsidies: subsidies not specific to particularenterprises or industries
2. subsidies for research activities conducted by firms or by highereducation or research establishments on a contract basis with firms
3. The subsidy should not exceed 75% of the cost of industrialresearch or 50% of the cost of pre-competitive development activity like thepreparation of blueprints and designs for new or improved products.
4. subsidies for development of disadvantaged regions within theterritory of a Member.
Criteria forthese regions are: a) per capita income, per capita household income or percapita GDP must not be above 85% of the average for the Member territory, b) theunemployment rate must be at least 110% of the average of the Member territory,c) subsidies for environmental purposes by promoting adaptation of existingfacilities to new environmental requirements by law or regulations which resultin greater constraints and financial burden on firms, provided that theassistance is a one-time non-recurring measure and is limited to 20% of thecost of adaptation, directly linked to the firm’s own planned reduction ofpollution and available to all firms which have to adapt to the newenvironmental requirements.
Non-actionablesubsidies are challenged if the implementation of these measures has resultedin “serious adverse effects” to the domestic industry of another Member, suchas to cause damage that is difficult to repair. Members initiating action forcountermeasures will first have consultations with the subsidizing Member, andif a mutually acceptable solution is not found in 60 days, the matter will bereferred to the Committee on Subsidies. If the Committee determines thatserious adverse effects do exist and that these cause damage which is difficultto repair, it will recommend the subsidizing Member to modify its program toremove these effects. If the recommendation is not implemented within sixmonths, the Committee will authorize the complaining Member to take appropriatecountermeasures normally in the form of the withdrawal of some concessions tothe Member or the reduction of obligations benefiting the Member.Specificity.
Assuming thata measure is a subsidy within the meaning of the SCM Agreement, it neverthelessis not subject to SCM Agreement disciplines unless it has been specificallyprovided to an enterprise or industry or group of enterprises or industrieswithin the jurisdiction of the authority granting the subsidy. In other words,only subsidy distorting the allocation of resources within an economy should besubject to SCM disciplines.Types ofspecificity.
Enterprise-specificity:for a particular enterprise
Industry-specificity:for a particular sector or sectors
Regional-specificity:for producers in specified parts of a territory
Elements foradverse effect:
- material injury or threat of material injury (clearly foreseeableand imminent injury)
- nullification or impairment of benefits under GATT 1994 when theimproved access to a market is undercut by subsidization in that market (seerelevant sections concerning DSM)
- serious prejudice to the interests of another Member, or thethreat of serious prejudice
Any one of theabove three elements will be enough to get the action initiated.
Factorsrelevant to injury:
- volume of the subsidized imports: whether there has been asignificant increase either in absolute terms or relative to production or consumptionin the importing country
- the effect of the subsidized imports on the prices of likeproducts in the domestic market: whether there has been significant priceundercutting, depression or suppression, i.e., prevention of price increasewhich would have occurred in the absence of the subsidized imports
- the consequent impact of the imports on the domestic producers ofthese products, such as decline in output, sales or market share, profits,productivity, return on investments, cash flow, inventories, employment, wages,etc… Criteria forserious prejudice.
Seriousprejudice is considered to exist if at least one of the following conditions isfulfilled.
The subsidydisplaces or impedes the import of a like product of another Member into the marketof the subsidizing Member. In this case, the subsidy is given by an importingMember, and the adverse effect is on an exporting Member.
The subsidydisplaces or impedes the export of a like product of another exporting Memberin a third country market. In this case, the subsidy is given by an exportingMember, and the adverse effect is on another exporting Member sharing a commonexport market.
The subsidyresults in significant price undercutting, significant price suppression (asituation in which prices are prevented from rising though normally they wouldhave risen) or price depression (lowering of prices), or lost sales in amarket. In this case, the subsidy is given by an exporting Member, and theadverse effect is on the importing Member in its market; or the subsidy isgiven by an importing Member, and the adverse effect is on an exporting Memberin the market of the importing Member; or the subsidy is given by an exportingMember, and the adverse effect is on another exporting Member in a thirdcountry market.
The subsidy ona particular primary product or commodity results in an increase in the worldmarket share of the subsidizing Member in that product or commodity as comparedto the average share it had during the previous three years, and the increasefollows a consistent trend over the period in which the subsidy has beengranted.Example ofserious prejudice.
The Panel onEuropean Community-Refunds on Exports of Sugar-Complaint by Brazil (Nov. 1980)considered the quantity of European Community sugar made available for exportwith maximum refunds and also the fact that the funds for export refunds didnot have a limit. It concluded that the manner of application of the system ofgranting export refunds contributed to depress sugar prices in the worldmarket, and this constituted a serious prejudice to Brazil.Clarification ofsome terms.
Domesticindustry: the whole of the domestic producers of the like products, or at leastthose of them whose collective output of the products constitutes a majorproportion (normally more than half) of the total domestic production of thoseproducts, excluding related producers
If there areisolated markets for products in question in a country, the examination ofinjury can be conducted in relation to only the industry located in a specificisolated region, i.e., regional industry, not to the total or majority of thedomestic producers.
Industry in aunified market of a customs union must be taken to be the domestic industry.
Like products:products identical, i.e., alike in all respects, to the product underconsideration, or in the absence of such products, products which havecharacteristics closely resembling those of the product under consideration,even though they are not totally alike in all respects
The decisionregarding the like product is important because it is the basis of determiningwhich companies constitute the domestic industry, and that determination inturn governs the scope of the investigation and determination of injury andcausal link.
For example:The Panel on US-Definition of Industry Concerning Wine and Grape Products(April 1992), examined whether wines and grapes were like products. Itconcluded that they were not because these two products had different physicalcharacteristics and the production of grapes and the production of wine weretwo separate groups of industries in the US.Remedies.
For prohibitedand actionable subsidies, two types of remedy are possible, i.e., remedythrough the dispute settlement mechanism at a multilateral level and remedy byimposing countervailing duty at a unilateral level. The route of countervailingduty can be taken only if material injury or a threat of material injuryexists.
CountervailingMeasures are usually duties imposed by the importing country to offset theeffect of the subsidy on the product in question. They are a unilateral remedy,but may only be applied by a Member after an investigation by that Member and adetermination that the criteria set forth in the SCM Agreement are satisfied.
Criteria:subsidized imports or the existence of a prohibited or actionable subsidy,injury to a domestic industry, a causal link between the subsidized imports andthe injuryCountervailing dutyprocess.
Application bydomestic industry: If an application is supported by more than half of thetotal domestic producers of the like product, or if those supporting anapplication account for a higher level of production of the product than thoseopposing it, the application will be considered to be made by or on behalf ofthe domestic industry. For this purpose, those supporting an application shouldnot account for less than 25% of the total domestic production of the product.
Preliminaryexamination by designated authorities of a Member: to determine whether theevidence given in the application is sufficient to justify the initiation of aninvestigation.
Theapplication must be rejected and investigation terminated if the amount ofsubsidy is de minimis, or the volume of the subsidized import or the injury isnegligible, i.e., less than 1% in general cases, or less than 3% for developingcountries in Annex VI, or less than 2% for other developing countries, or lessthan 4% of the total import of the like product in the importing country in thecase of a developing country under investigation ( but no more than 9%collectively for all developing countries).
Consultation:to be held between governments of importing and exporting countries after anapplication is accepted and before initiating the investigation so as toclarify facts in the application and arrive at a mutually agreed solution.
Investigation:If no agreement is reached in the consultation, the investigation may start.The time will normally be one year, but in no case should it exceed 18 months,and then a final determination will be made by the investigating authorities.
InterestedMembers and parties, i.e., foreign producers, exporters, importers and domesticproducers whose products are the subject of investigation, as well asindustrial users and consumers, will be informed of the investigation in orderto provide relevant information and arguments.
Theinvestigation is to determine whether the measure in question is a subsidy, theextent of the subsidy, whether material injury to the domestic industry hasbeen caused and whether there is a causal link between the subsidy and theinjury, i.e., whether the injury or the threat of it has been caused by the subsidy.
Provisionalmeasures may be taken by the Member after the expiry of 60 days from theinitiation of the investigation to prevent injury being caused during theinvestigation, but the period of application must not exceed 4 months.
SatisfactoryUndertakings from the subsidizing Member or from the exporters in the course ofthe investigation to remove or limit the subsidy or to raise the price of theproduct may suspend or terminate the investigation.
Imposition ofcountervailing duty: If there has been a positive finding in relation to thesubsidy, injury or linkage, countervailing duty may be imposed. But before theimposition, domestic consumers and industrial users should be given anopportunity to demonstrate the possible adverse effects of such duty on them.
Thecountervailing duty cannot be higher than or in excess of the subsidy found toexist. The Agreement provides a guideline that the duty should be less if sucha smaller duty will be adequate to remove the injury to the domestic industry,i.e., the duty should be just enough to compensate for the injury margin.
Thecountervailing duty has to be applied on a non-discriminatory basis to theproducts of all countries satisfying the conditions of subsidy, injury andcausal linkage.
Review andduration: A review may be undertaken by the authorities either on their owninitiative or at the request of an interested party as to whether thecontinuance of the duty is necessary to offset subsidization or it is likelythat injury will continue or recur if the duty is removed. A countervailingduty can be continued as long as is necessary to counteract injury-causingsubsidization, i.e., less or more than the 5-year period.Provisions fordeveloping country Members.Export Subsidy.
Leastdeveloped country (LCD) Members and other developing country Members havinggross national product (GNP) per capita less than US$1,000 per annum arepermitted to provide export subsidies.
Country list:Bolivia, Cameroon, Congo, Egypt, Ghana, Guatemala, India, Indonesia, Kenya,Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka,Zimbabwe.
Otherdeveloping country Members are exempted from the prohibition of exportsubsidies for a period of eight years from 1 January 1995.
If adeveloping country Member has attained export competitiveness in a product,i.e., a share of at least 3.25% of world trade in that product and such sharecontinues for two consecutive years, this Member will have to phase out exportsubsidies on this product over a period of eight years if it is included in theabove list (Annex VII to Article 3.1 a), or two years otherwise.ImportSubstitution Subsidy
LDC Memberswill be exempted from the prohibition of import substitution subsidies for 8years from 1 January 1995. For other developing country Members, theprohibition will not apply for five years from 1 January 1995.
Absence ofpresumption of serious prejudice
For developedcountry Members, there is a presumption of the existence of serious prejudice ifany of the following four situations exists:
- the subsidy on a product exceeds 5% of the value of production;
- the subsidy is given to cover the operating losses of an industry
- repeating subsidy is given to cover the operating losses of anenterprise;
- direct forgiveness of debt, including grants to cover debtrepayment.
The burden ofproof lies on the subsidizing Member to demonstrate that in spite of theexistence of these situations, the elements of serious prejudice do not exist. Inthe case of developing country Members, however, there is no presumption ofserious prejudice in these circumstances. Thus, there is a shift of the burdenof proof, i.e., the burden of proof is on the complaining Member to demonstratethat serious prejudice exists. Furthermore, adverse effect in a third countrymarket caused by the subsidized exports from developing countries will beexempted from any countermeasures.
Besides,subsidies linked to and granted within a privatization program of a developingcountry Member will be free from any remedial action.Special provisionsfor Member countries in transition.
For Membercountries in transition from a centrally planned economy to a market,free-enterprise economy, the following flexibilities have been laid down in theAgreement:
- such Members have seven years to phase out the prohibitedsubsidies, i.e., export subsidies and import-substitution subsidies;
- remedies through the dispute settlement process cannot be takenagainst direct forgiveness of debt for seven years;
- regarding remedies through the dispute settlement process againstother actionable subsidies, such Members have the same seven-year flexibilityas the developing country Members in general.2. Dumping and Anti-dumping
Definition:Dumping is a situation of international price discrimination, where the priceof a product, when sold in the importing country, i.e., the export price, isless than the price of that product in the market of the exporting country,i.e., the normal value.Dumping vs Subsidy.
Dumping isadopted by firms and enterprises, whereas subsidy by Member governments;
The remedialaction in respect of subsidies is targeted at the subsidizing Member, i.e., istaken against the subsidized product exported by the various enterprises of thesubsidizing country, whereas the action in respect of dumping is taken onlyagainst the enterprises that resort to the practice. Those enterprises which donot dump the product are not covered by the anti-dumping action.Effects of Dumping.
The low pricesof the imported products may harm the domestic industry which is producing likeproducts;
The consumersand industrial users of the product in the importing country may benefit fromsuch low prices.
Impact ontrade.
Generally, thevery initiation of an investigation on dumping gives rise to uncertainty in theexports from the country under investigation to the investigating importingcountry. Importers may start shifting their sources of supply. Usually, theinvestigation takes a long time, and even if finally there is a negative determinationof injury of dumping, some damage would already have been done, with some lossof market for the exporting country.
Developingcountries are exposed to a considerable degree of uncertainty about theirexport prospects as they have been facing a large number of anti-dumpinginvestigations.Classification.
Persistentdumping or international price discrimination, is the continuous tendency of adomestic monopolist to maximize total profits by selling the commodity at ahigher price in the domestic market than internationally.
Predatorydumping is the temporary sale of a commodity at below cost or at a lower priceabroad in order to drive foreign producers out of business, after which pricesare raised to take advantage of the newly acquired monopoly power abroad.
Sporadicdumping is the occasional sale of a commodity at below cost or at a lower priceabroad than domestically in order to unload an unforeseen and temporary surplusof the commodity without having to reduce domestic prices.
Cases inhistory
In the latetwentieth century, Japan was accused of dumping steel and television sets inthe US, and European nations of dumping cars, steel, and agricultural products.With the development of international trade, however, more and more developingcountries are exposed to charges of dumping by developed countries.Disciplines regardinganti-dumping measures.Existence ofdumping
- Existence of material injury or threat of material injury todomestic industry producing like products
- Causal link between dumping and injury
- Margin of dumping
If anenterprise is found to be dumping its products and if such dumping is causinginjury to the domestic industry in the importing country, the importing Memberscan impose a countervailing duty on the imports up to the maximum extent of themargin of dumping, i.e., the quantum of dumping.
Three steps indetermining the existence of dumping
1. determination of the export price
2. determination of the normal value
3. comparison of the export price and the normal value
The majorimporting countries have enacted very complex procedures to adjust theavailable data for the export price and the normal value so as to make themreasonably comparable.
Export Price
Generally, theexport price will be based on the transaction price at which the foreignproducers sells the product to an importer in the importing country. In somecases, however, this price may not be available or reliable:
- the export transaction is an internal transfer
- the product is exchanged in a barter transaction
- the exporter and the importer may be associated
- the exporter and the importer may have some mutual compensatoryarrangement between them or a third party.
In such cases,an alternative method of determining an appropriate export price or calculatinga constructed export price for comparison is needed.
Constructedexport price: The basis for calculating the constructed export price is theprice at which the imported product is first sold to an independent buyer. Ifthe product is not resold to an independent buyer or is not resold in itsoriginal imported condition, the authorities in the importing country maydetermine the constructed export price on some reasonable alternative basis.
Normal Value.
General rulefor the determination of normal value:
The normalvalue is generally the price of the product at issue or the price of the likeproduct, in the ordinary course of trade, when destined for consumption in theexporting country market.
Sometimes, itmay not be possible to consider the sale price in the exporting countrybecause:
- there is no sale of the like product in the exporting country
- the sale is made in a particular market situation
- sales volume in the domestic market of the exporting country isless than 5% of the sale of the product to the importing country
- sales in the domestic market of the exporter are made below cost
Ordinarycourse of trade
This concepthas been clarified by citing negative situations:
- the exporters and importers are related
- the sale price is consistently below the cost price
- the product is made for a single and specific purpose according toexclusive specifications
Particularmarket situation:
- there may be strict government control on prices and prices maynot be determined based on market conditions, but on several other social andpolitical considerations
- there may be different patterns of demand for the product in theexporting and importing countriesSales below cost.
Prices consistof fixed costs, variable costs, plus the amounts for administrative, sellingand general costs/expenses and amounts for profits. This issue has particularsignificance as it has a bearing on the calculation of the dumping margin. Ifprices below cost in the exporting countries are left out while calculating thenormal value, there will be a bias towards arriving at a higher normal valueand therefore a higher dumping margin. Generally, prices below cost will be includedin calculating the normal value. When there is evidence of persistent sales atlower prices and when large quantities are involved, sales below cost will beexcluded from the calculation of normal value.
Conditions forexclusion of sales below cost from calculation
- such sales are made within one year, and in no case less than sixmonths
- the volume of such sales is 20% or more of the volume underconsideration in determining normal value
- the weighted average selling price of the transaction under considerationis below the weighted average per unit cost, and therefore cannot provide forthe recovery of all costs within a reasonable period of timeCost ofproduction
Normally, thecost will be calculated based on the records kept by the exporter or producersunder investigation if:
- such records have been kept in accordance with the generallyaccepted accounting principles of the exporting country, and
- the records reflect reasonably the costs associated with theproduction and sale of the product.
Someadjustments in the cost will be required as there may be some items of costwhich are spread over products beyond those which have been exported, such asR&D costs, costs relating to start-up operations.AlternativeMethods for Calculating Normal Value
If therecorded sale price for the product in the exporting country cannot be takenfor the purpose o of calculating the normal value, the normal value will bedetermined as:
a comparableprice of the like product when exported to an appropriate third country
a constructednormal value based on the cost of production in the country of origin plusadministrative, selling and general costs/expenses and profits
Which of thetwo alternatives should be adopted will depend on the discretion of theimporting country.
According toGATT 1994 and the Agreement, importing countries have exercised significantdiscretion in the calculation of normal value of products exported from non-marketeconomies where the governments have a complete or substantially completemonopoly of its trade and where all domestic prices are fixed by states.Comparison ofExport Price and Normal Value (Calculation of Dumping Margins)General disciplines
The comparisonmust be made at the same level of trade, normally the ex-factory level, and thecomparison must be of sales made at as nearly as possible the same time. Dueadjustments should be made for differences which affect price comparability,such as differences in conditions and terms of sale, taxation, levels of trade,quantities, physical characteristics, etc.
In cases wherethe export price is constructed on the basis of sale to the first independentbuyer, adjustments should be made for costs incurred between importation andresale, such as duties and taxes, and also for profits. In most cases, thecomparison of the export price and the normal value will involve conversion ofcurrencies. The rate of exchange on the date of sale (i.e., the date of theinstrument which establishes the material terms of sale) will be considered.
Level of traderefers to the stage of transaction, e.g., whether the sale is to retailers, tolocal distributors, or to regional distributors. If levels other thanex-factory level have entered into the calculations, they will have to bereduced to ex-factory level by making suitable adjustments.
Normal methodfor comparison of prices
After havingmade all the relevant calculations, the actual comparison will normally be madeaccording to the following methods:
- a weighted average normal value will be compared with a weightedaverage of the prices of all export transactions
- the normal value will be compared with the export price on atransaction-to-transaction basis
This parity incomparison is important as it ensures a degree of fairness. If the averagenormal value were to be compared with the export prices in individualtransactions, it will generally result in a higher dumping margin. In averagingthe export prices of various transactions, the higher export prices getbalanced with the lower prices and, the margin becomes smaller.Exceptions-Targeted Dumping
A weightedaverage normal value may be compared with the export prices of individualtransactions when there is a pattern of export prices differing significantlyamong purchasers, regions or time periods. To prove a pattern in respect ofregions, for example, it will be necessary to show that the prices of productsexported to a particular region in the importing country are usually differentfrom the prices for other regions.
Determinationof Injury
In order toimpose anti-dumping duties, the investigating authorities of the importingMember must make a determination of injury.
Coverage ofinjury: Injury covers material injury to a domestic industry, or threat ofmaterial injury to a domestic industry, or material retardation of theestablishment of a domestic industry.
Elements ofanalysis: To confirm the determination of injury, a Member must examine thevolume of dumped imports either in absolute terms or relative to production orconsumption in the domestic industry, and price effects of dumped imports onthe domestic market such as significant price undercutting by the dumpedimports as compared with the price of a like product of the importing Member orprice depression or prevention of price increase of domestic like productsevaluate the impact of dumped imports on the domestic industry, such as actualor potential declines in sales, profits, output, market share, productivity,return on investment, utilization of capacity, actual or potential effects oncash flow, inventories, employment, wages, growth, ability to raise capital orinvestmentDemonstration of Causal Link.
Ademonstration based on an examination of all relevant evidence must be given toshow that there is a causal relationship between the dumped imports and theinjury to the domestic industry. Apart from dumping, other factors such aschanges in the pattern of demand or developments in technology may cause injuryto domestic producers. Injury caused by such factors must not be attributed todumped imports.
Procedures forImposition of Anti-dumping Duties
Initiation ofinvestigations: Generally, investigations should be initiated on the basis ofwritten request submitted by or on behalf of a domestic industry, statingevidence of dumping, injury, and causality, as well as information regardingthe product, industry, importers, exporters, and other matters.
Investigation:collection of evidence, use of sampling techniques, confidentiality ofsensitive information, transparency of proceedings, on-the-spot investigations,use of best information available, etc. Investigations should be completedwithin one year, and in no case more than 18 months after initiation.
All interestedparties should be given an opportunity to present evidence and to comment.
Anti-dumpinginvestigations are to end immediately in cases where the authorities determinethat the margin of dumping is de minimis, i.e., less than 2% of the exportprice, or that the volume of dumped imports is negligible, i.e., less than 3%of the imports of the like product in the importing country individually and nomore than 7% collectively.
Provisionalmeasures: Provisional measures preferably in the form of a security throughcash deposit of bond may be applied if there is a preliminary affirmativedetermination of dumping, injury and causality 60 days after initiation of aninvestigation. The time limit is usually 4 months, with a possible extension to6 months. The period of provisional measures for a Member imposing anti-dumpingduties lower than the margin of dumping is 6 and 9 months respectively.
Priceundertaking: In the case of preliminary affirmative determination of dumping,injury and causality, undertaking from exporters may be acceptable by revisingprices to remove the effects of dumping or by ceasing exports at dumped pricesto the area in question.
Imposition ofanti-dumping duties: Members should collect duties on a non-discriminatorybasis on imports from all sources found to be dumped and causing injury, exceptwith respect to sources from which a price undertaking has been accepted.Moreover, the amount of the duty collected may not exceed the dumping margin,although it may be a lesser amount.
Retroactiveduty: Anti-dumping duty can be imposed on products imported up to 90 days priorto the date of application of provisional measures in the following cases:
- there is a history of dumping causing injury
- the importer was, or should have been, aware that the exporterpractices dumping which would cause injury
- the injury is caused by a massive volume of dumped imports in arelatively short time, which is likely to seriously undermine the remedialeffect of the prospective final anti-dumping duty.
Duration andtermination: The ‘sunset’ requirement establishes that dumping duties shallnormally terminate no later than 5 years after first being applied, unless areview investigation prior to that date establishes that expiry of the dutywould be likely to lead to continuation or recurrence of dumping and injury.This 5-year ‘sunset’ provision also applies to price undertakings.Public Notice
Article 12sets forth detailed requirements for public notice by investigating authoritiesof the initiation of investigations, preliminary and final determinations, andundertakings. The public notice must disclose non-confidential informationconcerning the parties, the product, the margins of dumping, the facts revealedduring the investigation, and the reasons for the determinations made by theauthorities, including the reasons for accepting and rejecting relevantarguments or claims made by exporters or importers.Dispute Settlement.
Members maychallenge the imposition of anti-dumping measures, in some cases may challengethe imposition of preliminary anti-dumping measures, and can raise all issuesof compliance with the requirements of the Anti-dumping Agreement, before apanel established under the Dispute Settlement Understanding.
But, the roleof the panel is very much restricted in the field of anti-dumping. It will onlydetermine whether the authorities of the importing Member established the factsproperly and whether they evaluated the facts in an unbiased and objectivemanner.Third Country Action
When thedomestic industry of a third country (also an exporting country) suffers injurybecause of the dumping practices of the enterprises of a Member in an importingMember country, the third country Member has to request the importing countryMember to conduct an investigation and to take further action for anti-dumpingmeasures. The decision whether to initiate and proceed with an investigationrests with the importing country. Questions
1. What is Dumping and how is it countered by countries?
2. Outline the Procedure of Imposing Anti-Dumping Duties.
3. Which measures may count as subsidies?
4. How are subsidies treated in WTO system?
5. Give examples of “unfair trade practices”.
6. Does the GATT allow unilateral action against “unfair tradepractices”?References
1. John H.Jackson, The World Trading System: Law and Policy of International EconomicRelations (2nd ed., Cambridge, MA: MIT Press, 1997). p. 247-277
2. Jackson/Davey/Sykes,666-756, 757-814, 815-843.
Lecture 6. Trade in Services 1. Significance of Liberalization of Trade in Services
Tradeliberalization, and even economic growth, are not ends in themselves. Theultimate aim of Government is to promote human welfare in the broadest sense,and trade policy is only one of many instruments Governments use in pursuingthis goal. But trade policy is nevertheless very important, both in promotinggrowth and in preventing conflict. The building of the multilateral tradingsystem over the past 50 years has been one of the most remarkable achievementsof international cooperation in history. The system is certainly imperfect—thatis one of the reasons why periodic negotiations are necessary—but the worldwould be a far poorer and more dangerous place without it.
In January2000, WTO Member Governments started a new round of negotiations to promote theprogressive liberalization of trade in services. The GATS agreementspecifically states that the negotiations “shall take place with a view topromoting the interests of all participants on a mutually advantageous basis”and “with due respect for national policy objectives and the level ofdevelopment of individual Members”. The pace and extent of these negotiationsare set by the WTO’s 149 Member Governments themselves according to theirdifferent national policy priorities.
It isimpossible for any country to prosper today under the burden of an inefficientand expensive services infrastructure. Producers and exporters of textiles,tomatoes or any other product will not be competitive without access toefficient banking, insurance, accountancy, telecoms and transport systems. Inmarkets where supply is inadequate, imports of essential services can be asvital as imports of basic commodities. The benefits of services liberalizationextend far beyond the service industries themselves; they are felt throughtheir effects on all other economic activities.
The productionand distribution of services, like any other economic activity, is ultimatelydestined to satisfy individual demand and social needs. The latterelement—social needs—is particularly relevant in sectors like health oreducation which in many, if not all, countries are viewed as a coregovernmental responsibility. They are subject to close regulation, supervisionand control. Although social policy concepts—including equity and universal access—donot necessarily imply that Governments also act as producers, public facilitieshave traditionally been, and continue to be, the main suppliers of servicessuch as health and education in most countries.
In 1999, thevalue of cross-border trade in services amounted to US$1350 billion, or about20% of total cross-border trade. This understates the true size ofinternational trade in services, much of which takes place throughestablishment in the export market, and is not recorded in balance-of-paymentsstatistics. For the past two decades trade in services has grown faster thanmerchandise trade. Developing countries have a keen interest in many servicesareas including tourism, health and construction. According to the World Traveland Tourism Council, tourism is the world’s largest employer accounting for onein ten workers worldwide. According to IMF data for 1999, tourism exports,estimated at US$443 billion, were 33% of global services exports and 6.5% oftotal exports.
Theliberalization of trade in goods, which has been promoted through negotiationsin the GATT over the past 50 years, has been one of the greatest contributorsto economic growth and the relief of poverty in mankind's history. Following thecatastrophic experience of the first half of the 20th century, Governmentsdeliberately turned away from the policies of economic nationalism andprotectionism which had helped to produce disaster, and towards economiccooperation based on international law. Growth in this period was not uniformlyshared, but there is no doubt that those countries which chose deeperinvolvement in the multilateral trading system through liberalization benefitedgreatly from doing so.
There was noparallel movement of multilateral liberalization of services trade until thenegotiation of the GATS and its entry into force in 1995. Since the servicessector is the largest and fastest-growing sector of the world economy,providing more than 60% of global output and in many countries an even largershare of employment, the lack of a legal framework for international servicestrade was anomalous and dangerous—anomalous because the potential benefits ofservices liberalization are at least as great as in the goods sector, and dangerousbecause there was no legal basis on which to resolve conflicting nationalinterests.Benefits of ServiceLiberalization.
1. Economicperformance
An efficientservices infrastructure is a precondition for economic success. Services suchas telecommunications, banking, insurance and transport supply strategicallyimportant inputs for all sectors, goods and services. Without the spur ofcompetition they are unlikely to excel in this role – to the detriment ofoverall economic efficiency and growth. An increasing number of Governmentsthus rely on an open and transparent environment for the provision of services.
2. Development
Access toworld-class services helps exporters and producers in developing countries tocapitalize on their competitive strength, whatever the goods and services theyare selling. A number of developing countries have also been able, building onforeign investment and expertise, to advance in international services markets– from tourism and construction to software development and health care.Services liberalization has thus become a key element of many developmentstrategies.
3. Consumersavings
There isstrong evidence in many services, not least telecoms that liberalization leadsto lower prices, better quality and wider choice for consumers. Such benefits,in turn, work their way through the economic system and help to improve supplyconditions for many other products. Thus, even if some prices rise duringliberalization, for example the cost of local calls, this tends to beoutweighed by price reductions and quality gains elsewhere. Moreover,governments remain perfectly able under the GATS, even in a fully liberalizedenvironment, to apply universal-service obligations and similar measures onsocial policy grounds.
4. Fasterinnovation
Countries withliberalized services markets have seen greater product and process innovation.The explosive growth of the Internet in the US is in marked contrast to itsslower take-off in many Continental European countries which have been morehesitant to embrace telecom reform. Similar contrasts can be drawn in financialservices and information technology.
5. Greatertransparency and predictability
A country'scommitments in its WTO services schedule amount to a legally binding guaranteethat foreign firms will be allowed to supply their services under stableconditions. This gives everyone with a stake in the sector—producers,investors, workers and users—a clear idea of the rules of the game. They areable to plan for the future with greater certainty, which encourages long-terminvestment.
6. Technologytransfer
Servicescommitments at the WTO help to encourage foreign direct investment (FDI). SuchFDI typically brings with it new skills and technologies that spill over intothe wider economy in various ways. Domestic employees learn the new skills (andspread them when they leave the firm). Domestic firms adopt the new techniques.And firms in other sectors that use services-sector inputs such as telecoms andfinance benefit too. 2. Main Purpose of the GATS
The creationof the GATS was one of the landmark achievements of the Uruguay Round. The GATSwas inspired by essentially the same objectives as its counterpart inmerchandise trade (GATT):
· creating a credible and reliable system of international traderules;
· ensuring fair and equitable treatment of all participants;
· stimulating economic activity through guaranteed policy bindings;
· promoting trade and development through progressiveliberalization.
While servicescurrently account for over 60 percent of global production and employment, theyrepresent no more than 20% of total trade (BOP basis). This seemingly modestshare should not be underestimated, however. Many services, which have longbeen considered genuine domestic activities, have increasingly becomeinternationally mobile. This trend is likely to continue, owing to theintroduction of new transmission technologies (e.g. electronic banking,tele-health or tele-education services), the opening up in many countries oflong-entrenched monopolies (e.g. voice telephony and postal services), andregulatory reforms in hitherto tightly regulated sectors such as transport.Combined with changing consumer preferences, such technical and regulatoryinnovations have enhanced the “tradability” of services and, thus, created aneed for multilateral disciplines.3. Frame of Commitments of GATS
GATSestablishes a framework within which liberalization commitments in the area ofservices are to be undertaken and implemented. GATS provides a frame forinitial commitments, and also for progressively increasing commitments throughsuccessive rounds of negotiations. There are broadly two types of obligationsand commitments, i.e., general obligations and specific commitments. Thegeneral commitments are applicable to all Members and all sectors of servicestrade. The specific commitments in services sectors are those undertaken byindividual Members in particular sectors. Some specific commitments had beennegotiated by Members before 1 January 1995 when the Agreement went intoeffect; further specific commitments will be added through negotiations in thefuture.Scope of Applicationof GATS
GATS appliesto any measures by a Member, which affects trade in services. “Measure” coversany actions taken by any level of government as well as by authorizednon-governmental bodies, and could take any form: a law, regulation, administrativedecision or guideline. “Affect” means that the scope of GATS encompasses notonly measures designed to regulate trade in services directly, but also anyother measures that might be designed to regulate other matters butincidentally affect the supply of a service.
Modes ofService Supply
The mode ofsupply refers to the manner in which the service is supplied. Four modes ofsupply of service have been specified in the Agreement.
Box A:Examples of the four Modes of Supply (from the perspective of an«importing» country A)
Mode 1: Cross‑border
A user incountry A receives services from abroad through its telecommunications orpostal infrastructure. Such supplies may include consultancy or market researchreports, tele-medical advice, distance training, or architectural drawings.
Mode 2:Consumption abroad
Nationals of Ahave moved abroad as tourists, students, or patients to consume the respectiveservices.
Mode 3:Commercial presence
The service isprovided within A by a locally-established affiliate, subsidiary, orrepresentative office of a foreign-owned and – controlled company (bank, hotelgroup, construction company, etc.)
Mode 4:Movement of natural persons
A foreignnational provides a service within A as an independent supplier (e.g.,consultant, health worker) or employee of a service supplier (e.g. consultancyfirm, hospital, construction company).
4. Specific Commitments of GATS
Specificcommitments in services sectors are those undertaken by individual Members inparticular sectors of services. Individual countries’ commitments to openmarkets in specific sectors — and how open those markets will be — are theoutcome of negotiations. Each Member of the WTO is required to have a schedule.The commitments appear in the “schedules” that list the sectors being opened(i.e., market access), the extent of market access being given in those sectors(i.e., market access limitation, e.g. whether there are any restrictions onforeign ownership), and any limitations on national treatment (whether somerights granted to local companies will not be granted to foreign companies.)
As an example,if a government commits itself to allow foreign banks to operate in itsdomestic market, that is a market access commitment. And if the governmentlimits the number of licenses it will issue, then that is a market accesslimitation. If it also says foreign banks are only allowed one branch whiledomestic banks are allowed numerous branches, it is an exception to thenational treatment principle.
Thesecommitments are “bound”: like bound tariffs, they can only be modified orwithdrawn after negotiations with affected countries — which would probablylead to compensation. However, new commitments and improvements to existingones can be added at any time. Because “unbinding” is difficult, thecommitments are virtually guaranteed conditions for foreign exporters andimporters of services and investors in the sector to do business. In each ofthe selected sectors of services, a Member will have taken commitments in threeareas, i.e., market access, national treatment, and other commitments.Market access
Market accessis a negotiated commitment in specified sectors. In the frame of the Agreement,a Member has to select the sector in which it makes commitments and grants freemarket access. The sectors left out by the Member will not be granted any marketaccess. Market access may be made subject to some terms, conditions and varioustypes of limitations. Limitations may be imposed on:
· the number of services suppliers (e.g. annual quota on theestablishment of branches of banks and licenses for new restaurants based on aneconomic needs test),
· the total value of transactions or the total assets of servicetransactions (e.g., limitation of the transactions or assets of branches ofbanks to a specified percentage of the total domestic transactions or assets ofall banks),
· total number of service operations or the total quantity ofservice output (e.g., prescribing the maximum weekly duration of the telecastof films),
· total number of employees in the sector (e.g., in computersoftware service, only a prescribed maximum number of workers can be employedin a year),
· requirement regarding the type of the legal form of the servicesupplier (e.g., in a particular sector, commercial presence can only be in theform of a company in which the citizens of the country must have a majorityshareholding),
· the participation of foreign capital.
The lists ofmarket access commitments (along with any limitations and exemptions fromnational treatment) are negotiated as multilateral packages, although bilateralbargaining sessions are needed to develop the packages. The commitmentstherefore contain the negotiated and guaranteed conditions for conductinginternational trade in services. If a recorded condition is to be changed forthe worse, then the government has to give at least three months’ notice and ithas to negotiate compensation with affected countries. But the commitments canbe improved at any time. They will be subject to further liberalization throughthe future negotiations already committed under GATS. National treatment
Nationaltreatment means treating one’s own nationals and foreigners equally. Inservices, it means that once a foreign company has been allowed to supply aservice in one’s country there should be no discrimination between the foreignand local companies. In this context, the treatment accorded by a Member to theservices and service suppliers of any other Member must not be less favorablethan what the Member accords to its own services and service suppliers. The keyrequirement is not to modify, in law or in fact, the conditions of competitionin favor of the Member's own service industry.
Nationaltreatment is treated differently for services. For goods (GATT) andintellectual property (TRIPS) it is a general principle. In that case, once aproduct has crossed a border and been cleared by customs it has to be givennational treatment even if the importing country has not made any commitmentunder the WTO to bind the tariff rate. Under GATS, a country only has to applythis principle when it has made a specific commitment to provide foreignersaccess to its services market. It does not have to apply national treatment insectors where it has made no commitment.
GATS allowssome limits on national treatment. Again, the extension of national treatmentin any particular sector may be made subject to conditions and qualifications.Members are free to tailor the sector coverage and substantive content of suchcommitments as they see fit. The commitments thus tend to reflect nationalpolicy objectives and constraints, overall and in individual sectors.
While someMembers have scheduled less than a handful of services, others have assumedmarket access and national treatment disciplines in over 120 out of a total of160-odd services. The existence of specific commitments triggers furtherobligations concerning, inter alia, the notification of new measures that havea significant impact on trade and the avoidance of restrictions oninternational payments and transfers.
Other/additionalcommitments: commitments relating measures other than those subject to schedulingunder market access or national treatment, involving competition policy, orqualifications, technical standards or licensing in respect of trade inservices.
Schedules ofspecific commitments
Normally, aMember offers low levels of commitments, expands its commitments through aseries of bilateral and plurilateral (involving a limited number of Members)negotiations, and finally reaches a balance of costs and benefits and have anoverall reciprocity among the Members as a whole.
Illustration
Box B: Sample Schedule of Commitments: Arcadia
Modes ofsupply: (1) Cross-border supply; (2) Consumption supply; (3) Commercialpresence; (4) Presence of natural personsSector or sub-sector Limitations on market access Limitations on national treatment Additional commitments I. HORIZONTAL COMMITMENTS
ALL SECTORS INCLUDED
IN THIS SCHEDULE
(4) Unbound, other than for
(a) temporary presence, as intra-corporate transferees, of essential senior executives and specialists and
(b) presence for up to 90 days of representatives of a service provider to negotiate sales of services. (3) Authorization is required for acquisition of land by foreigners. II. SECTOR-SPECIFIC COMMITMENTS
4. DISTRIBUTION SERVICES
C. Retailing services
(CPC 631, 632)
(1) Unbound (except for mail order: none).
(2) None.
(3) Foreign equity participation limited to 51%.
(4) Unbound, except as indicated in horizontal section.
(1) Unbound (except for mail order: none).
(2) None.
(3) Investment grants are available only to companies controlled by Arcadian nationals.
(4) Unbound.
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“Unbound”means the Member has taken no commitment in respect of that mode of supply inthis sector. In other words, the Member is free to impose any restriction onmarket access or national treatment in respect of that mode in this sector.
“None” meansthe Member will not put any limitation on market access or national treatmentrelating to this mode in this sector.
Specialtreatment of developing countries
· Due respect for national policy objectives and the level ofdevelopment of developing Members
· Opening up fewer sectors and liberalizing fewer types oftransactions
· Extend market access progressively in line with their developmentsituation
· Strengthening domestic service capacity, access to technology andaccess to information channels and networks while allowing market access toforeign service suppliers
Modificationof schedules
A Member maymodify its schedule of specific commitments by offering alternative equivalentconcessions three years after the application of the particular commitment. Themodifying Member and the affected Member or Members may get into negotiationsto reach an agreed compensatory adjustment which will be applicable to allMembers. If no agreement is reached, the affected Members may refer the matterto arbitration and abide by its decision. Without compensatory adjustment inaccordance with the findings of the arbitration, the affected Members maymodify or withdraw substantially equivalent benefits from the modifying Member.With no agreement and no arbitration, the modifying Member is free to modify oreliminate its commitments as was proposed in its notice to the Council forTrade in Services.5. General Obligations and Disciplines Most-favored-nation(MFN) treatment
Under ArticleII of the GATS, Members are held to extend immediately and unconditionally toservices or services suppliers of all other Members “treatment no lessfavorable than that accorded to like services and services suppliers of anyother country” (whether a Member or not). It is permissible to accord morefavorable treatment to Members than to a non-Member. This amounts to aprohibition, in principle, of preferential arrangements among groups of Membersin individual sectors or of reciprocity provisions which confine accessbenefits to trading partners granting similar treatment.
Favor one,favor all. MFN means treating one’s trading partners equally. Under GATS, if acountry allows foreign competition in a sector, equal opportunities in thatsector should be given to service providers from all other WTO members. (Thisapplies even if the country has made no specific commitment to provide foreigncompanies access to its markets under the WTO.)
MFN applies toall services, but some special temporary exemptions have been allowed.Derogations are possible in the form of so-called Article II-Exemptions.
· initial exemptions: Members were allowed to seek initialexemptions before the Agreement entered into force. Individual Members havelisted their initial exemptions in their schedules after consultation withinterested Members.
· New/ Later exemptions: New/ Later exemptions can only be granted tonew Members at the time of accession or, in the case of current Members, by wayof a waiver under Article IX:3 of the WTO Agreement. In the latter case, arequest for such a waiver will be made to the Council for Trade in Services.The Ministerial Conference will decide on this issue. A waiver can be allowedonly by a decision of three-fourths of the Members.
All exemptionsare subject to review; they should in principle not last longer than 10 years.The obligation to apply MFN treatment does not prevent adjacent countries fromexchanging advantages in order to facilitate exchanges of services limited tocontiguous frontier zones where such services are locally produced andconsumed. Further, the GATS allows groups of Members to enter into economic integrationagreements or to mutually recognize regulatory standards, certificates and thelike if certain conditions are met.
Illustrationof a schedule of exemption
LIST OF ARTICLE II MFN EXEMPTIONS Switzerland (GATS/EL/83)
Sector or
Sub-Sector Description of measure indicating its inconsistency with Article II Countries to which the measure applies Intended duration Conditions creating the need for the exemption Audiovisual services To confer national treatment to audiovisual works covered by bilateral or plurilateral agreements on coproduction in the field of audiovisual works, in particular in relation to access to funding and to distribution All countries with whom cultural cooperation may be desirable (at present agreements exist with member countries of the Council of Europe and with Canada) Indefinite Promotion of common cultural objectives
Measures granting the benefit of support
programmes, such as MEDIA and EUruguayI-
MAGES, and measures relating to the allocation of screentime which implement arrangements such as the Council of Europe Convention on Transfrontier Television and confer national treatment,
to audiovisual works and/or to suppliers of audiovisual services meeting specific
European origin criteria European countries Indefinite Promotion of cultural objectives based on long-standing cultural links Concessions for the operation of radio or television broadcast stations may be granted, normally on the basis of bilateral agreements, to persons of countries other than Switzerland All countries with whom cultural cooperation may be desirable Indefinite Promotion of common cultural objectives, and to regulate access to a market limited in scale (given the size of Switzerland) in order to preserve diversity of supply
Source: Damien Géradin/David Luff (eds.), The WTOand Global Convergence in Telecommunications and Audiovisual Services, OxfordUniversity Press 2003.
Transparency
Servicesactivities are typically subject to heavy domestic regulation, which makestransparency even more important than in any other Agreements. GATS saysgovernments must publish all relevant laws and regulations. If publication isnot practicable, such information must be made available publicly. Within twoyears (by the end of 1997) they have to set up inquiry points within theirbureaucracies to provide information on laws and regulations affecting trade inservices. Foreign companies and governments can then use these inquiry pointsto obtain information about regulations in any service sector. And they have tonotify the Service Council of the WTO, at least annually, of any changes inregulations that apply to the services that come under specific commitments.Domesticregulations
Since domesticregulations are the most significant means of exercising influence or controlover services trade, the agreement says governments should regulate servicesreasonably, objectively and impartially. Disciplines are prescribed in respectof the following aspects:
Review ofdecisions: A Member must establish an administrative or judicial procedure forthe review of administrative decisions affecting trade in services. If aservice supplier is dissatisfied with an administrative decision, recourse tosuch a review should be possible for an objective and impartial considerationof the issues.
Authorization forsupply of service: In case any authorization is needed for the supply of aservice for which specific commitments have been made, the decision of theauthorities has to be conveyed within a reasonable period of time to avoidtrade barriers caused by unnecessary delays.
Qualification,standards and licensing: Members are required, in sectors where they havescheduled specific commitments, to ensure that measures relating toqualification requirements (necessary qualifications of the service supplier),technical standards ( of the service) and licensing requirements and procedures(for providing the service in a Member country) do not constitute unnecessarybarriers to trade in services. For this purpose, a Member must ensure that:
· qualification requirements are based on objective and transparentcriteria;
· technical standards are not more burdensome than necessary toensure the quality of the service;
· licensing procedures are not in themselves a restriction on thesupply of service.
Recognitionprocess: Members are expected to adopt criteria or standards for theauthorization, licensing or certification of service suppliers. Suchrecognition may be granted through harmonization, may be based on a mutualrecognition agreement or an arrangement with other countries, or may beaccorded autonomously. Different level of qualifications means differenttreatment granted to service suppliers, wherever the suppliers come from. Whentwo (or more) governments have agreements recognizing each other’squalifications (for example, the licensing or certification of servicesuppliers), GATS says other members must also be given a chance to negotiatecomparable pacts, or to join such harmonization agreements. The recognition ofother countries’ qualifications must not be discriminatory, and it must notamount to protectionism in disguise.
In order thatthere be at least some degree of harmonization among these standards andcriteria, GATS provides that a Member may recognize:
· the education or experience obtained in another country,
· the requirement met in another country,
· the licenses or certifications granted in another country.
· Balance-of-payment provision
If there is asituation of serious BOP difficulties and external financial difficulties, orif there is a threat of such difficulties, a Member may adopt or maintainrestrictions on trade in service on which it has undertaken specificcommitments and adopt or maintain restrictions on payments or transfers fortransactions related to such commitments. Such measures have to benon-discriminatory, temporary, avoid unnecessary damage to the commercial,economic and financial interests of other Members and must be phased outprogressively.
Monopolysuppliers of service
In some cases,governments regulate certain service activities (usually services constitutinginputs to other service activities) by granting monopoly or exclusive rights tocertain entities to supply the service. Or sometimes a government establishesor provides authority to a small number of service suppliers, and substantiallyprevents competition among those suppliers in the country. GATS does notprohibit the maintenance of such monopoly right, but the behavior of suchservice suppliers must be consistent with the general obligations and specificcommitments of the Member concerned.
Requirementsin respect of monopoly suppliers of service:
· A Member has to ensure that a monopoly supplier of service of itsterritory does not act in a manner inconsistent with the obligations of the Memberregarding MFN treatment and specific commitments;
· When such a supplier competes for the supply of a service outsidethe scope of the monopoly and yet in a sector covered by the obligations of theMember, the Member has to ensure that the supplier does not abuse it monopolyposition to act in a manner inconsistent with the commitments of the Member.
· A new monopoly right in the area of trade in service granted after1 January 1995 has to follow the procedure for modification of a Member’scommitments.
Cases ofmonopoly: telecommunications, financial services, insurance, railway transportservice
For example,if a telecommunications monopoly allows interconnection to suppliers ofvalue-added telecommunications, it should do so without discrimination betweensuppliers of other Members. If the Member concerned has undertaken a nationaltreatment commitment in value-added services, it must ensure that itstelecommunications monopoly provides interconnection to service suppliers ofother Members on a national treatment basis.
Competition-restrictivepractices
If a Memberconsiders that the business practices of a service supplier are restrainingcompetition and are thereby restricting trade in services, it may requestconsultation with the Member concerned. The other Member has to enter intoconsultation with a view to eliminating these practices.
Economicintegration
A Member mayenter into an agreement of integration for liberalizing trade in services amongparties to the agreement, whether the parties are Members or not. Such anagreement must have substantial sectoral coverage. A Member may also enter intoan agreement providing for full integration of labor markets among parties tothe agreement, such as free entry into the employment markets of the parties.
Internationalpayments and transfers
Capitaltransaction and international transfers and payments for current transactionsrelating to services activities covered by specific commitments should not berestricted by Members.
If a Memberhas undertaken a commitment of market access through the cross-border mode ofsupply of service and if cross-border movement of capital is an essential partof the service itself, the Member, in such a case, is committed to allowingsuch movement of capital. Further, in the case of a commitment of market accessthrough the mode of commercial presence, a Member is committed to allowingrelated transfers of capital into its territory.
Once agovernment has made a commitment to open a service sector to foreigncompetition, it must not normally restrict money being transferred out of thecountry as payment for services supplied (“current transactions”) in thatsector. The only exception is when there are balance-of-payments difficulties,and even then the restrictions must be temporary and subject to other limitsand conditions.Exceptions
Generalexceptions: The GATS permits Members in specified circumstances to introduce ormaintain measures in contravention of their obligations under the Agreement,including the MFN requirement or specific commitments. The relevant Articleprovides for measures necessary to:
· protect public morals or maintain public order;
· protect human, animal or plant life or health; or
· secure compliance with laws or regulations not inconsistent withthe measures necessary to prevent deceptive or fraudulent practices or toprotect privacy of individuals and safety.
Securityexceptions: A Member has the flexibility to take measures which it considersnecessary for the protection of its essential security interests and thosewhich it takes in pursuance of its obligations under the UN Charter for themaintenance of international peace and security.
Governmentprocurement: The obligations of MFN treatment, specific market access commitmentsand specific national treatment commitments will not apply to laws, regulationsor requirements governing procurement by government agencies for governmentalpurposes. This exception does not extend to government procurement forcommercial resale or for use in the supply of services for commercial sale.
Moreover, theAnnex on Financial Services entitles Members, regardless of other provisions ofthe GATS, to take measures for prudential reasons, including for the protectionof investors, depositors, policy holders or persons to whom a fiduciary duty isowed by a financial service supplier, or to ensure the integrity and stabilityof the financial system.
Finally, inthe event of serious balance-of-payments difficulties Members are allowed totemporarily restrict trade, on a non-discriminatory basis, despite theexistence of specific commitments.ProgressiveLiberalization
In services,the Uruguay Round was only a first step in a longer-term process ofmultilateral rule-making and trade liberalization. Observers tend to agreethat, while the negotiations succeeded in setting up the principle structure ofthe Agreement, the liberalizing effects have been relatively modest. Barringexceptions in financial and telecommunication services, most schedules haveremained confined to confirming status quo market conditions in a relativelylimited number of sectors. This may be explained in part by the novelty of theAgreement and the perceived need of Members to gather experience beforeconsidering wider and deeper commitments. Moreover, many administrations neededtime to develop the necessary regulation — including quality standards,licensing and qualification requirements — that ensures that externalliberalization is compatible with, and conducive to, core policy objectives(quality, equity, etc.) in socially or infrastructurally important services.
More than sixyears have passed since the Agreement's inception, and the economic importanceof services — in terms of production, income, employment and trade — hascontinued to rise. There thus appears ample scope for new and/or improvedcommitments in new negotiations.6. The Annexes: Services Are Not All The Same
Internationaltrade in goods is a relatively simple idea to grasp: a product is transportedfrom one country to another. Trade in services is much more diverse. Telephonecompanies, banks, airlines and accountancy firms provide their services inquite different ways. The GATS annexes reflect some of the diversity.Movement of naturalpersons
This annexdeals with negotiations on individuals’ rights to stay temporarily in a countryfor the purpose of providing a service. It specifies that the agreement doesnot apply to people seeking permanent employment or to conditions for obtainingcitizenship, permanent residence or permanent employment.
Financialservices
Instability inthe banking system affects the whole economy. The financial services annex saysgovernments have the right to take prudential measures, such as those for theprotection of investors, depositors and insurance policy holders, and to ensurethe integrity and stability of the financial system. It also excludes from theagreement services provided when a government exercising its authority over thefinancial system, for example central banks’ services. Negotiations on specificcommitments in financial services continued after the end of the Uruguay Round,ended in late 1997 and entered into force 1 March 1999.
Telecommunications
Thetelecommunications sector has a dual role: it is a distinct sector of economicactivity; and it is an underlying means of supplying other economic activities(for example electronic money transfers). During the Uruguay Round, manygovernments made commitments in value-added telecommunication services, howeververy few offered commitments on basic telecommunications. The annex saysgovernments must ensure that foreign service suppliers are given access to thepublic telecommunications networks without discrimination. Negotiations onspecific commitments in telecommunications resumed after the end of the UruguayRound. This led to a new liberalization package agreed in February 1997.Air transportservices
Under thisannex, traffic rights and directly related activities such as the carriage ofpassengers or freight are excluded from GATS’s coverage. They are handled byother bilateral agreements. However, the annex establishes that the GATS willapply to aircraft repair and maintenance services, marketing of air transportservices and computer-reservation services.Maritime transport
Maritimetransport negotiations were originally scheduled to end in June 1996, butparticipants failed to agree on a package of commitments. The talks haveresumed with the new services round which started in 2000. Some commitments arealready included in some countries’ schedules covering the three main areas inthis sector: access to and use of port facilities; auxiliary services; andocean transport. Questions
1. Does the GATS define «service» as a legal term?
2. When is e-commerce a service, when is it trade in goods?
3. Consider the economic role of services in developed anddeveloping countries as it evolved since the end of World War II. Why has theliberalization of trade in services not surfaced earlier?
4. What kind of services are tradables and non-tradables?
5. Why do you think there have never been tariffs levied on thecross-border provision of services? Consider reasons of historical coincidence,but also aspects of practicability.
6. Consider the nature of regulatory restrictions which impede thecross-border provision of services. Think of typical examples in professionsyou know where specific licenses, diplomas etc. are required for the lawfulexercise of a professional activity
7. Look up those provisions of the GATS which relate tocompetition and investment. Are such rules more important in the context ofservices than in connection to goods?
8. Why does the GATS highlight the importance of “domesticregulation” so much?References
1. John H. Jackson, The World Trading System: Law and Policy ofInternational Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p. 247-277.
2. Jackson/Davey/Sykes, 666-756, 757-814, 815-843.
3. OECD Secretariat. 2004. “Services Trade LiberalisationOpportunities & AMP.”
4. Trading into the Future – WTO, 3rd edition, Revised August 2003
5. www.wto.org see Trade topics; Trade in Services; GATS
Lecture 7. TRIPS
World tradeorganization
Ideas andknowledge are an increasingly important part of trade. Most of the value of newmedicines and other high technology products lies in the amount of invention,innovation, research, design and testing involved. Films, music recordings,books, computer software and on-line services are bought and sold because ofthe information and creativity they contain, not usually because of theplastic, metal or paper used to make them. Many products that used to be tradedas low-technology goods or commodities now contain a higher proportion ofinvention and design in their value — for example brand-named clothing or newvarieties of plants. Creators can be given the right to prevent others fromusing their inventions, designs or other creations. These rights are known as“intellectual property rights” (IPRs).
Ideas andknowledge are an increasingly important part of trade. Most of the value of newmedicines and other high technology products lies in the amount of invention,innovation, research, design and testing involved. Films, music recordings,books, computer software and on-line services are bought and sold because ofthe information and creativity they contain, not usually because of theplastic, metal or paper used to make them. Many products that used to be tradedas low-technology goods or commodities now contain a higher proportion ofinvention and design in their value — for example brand-named clothing or newvarieties of plants. Creators can be given the right to prevent others fromusing their inventions, designs or other creations. These rights are known as“intellectual property rights” (IPRs). 1. Intellectual property rights – basic conceptsDefinition of IPRs
Intellectualproperty rights are the rights given to persons over the creations of theirminds: inventions, literary and artistic works, symbols, names, images, anddesigns used in commerce. They usually encourage and reward creative work, andgive the creator an exclusive right over the use of his/her creation for acertain period of time.Types of intellectualproperty rights
Intellectualproperty rights play an important role in an increasingly broad range of areas,ranging from the Internet to health care to nearly all aspects of science andtechnology and literature and the arts. They take a number of forms. Forexample books, paintings and films come under copyright; inventions can bepatented; brand names and product logos can be registered as trademarks. Theseforms can be classified as follows:
1. Copyright and related rights
2. Trademarks, including service marks
3. Geographical indications, including appellations of origin
4. Industrial designs
5. Patents, including the protection of new varieties of plants
6. Layout-designs (topographies) of integrated circuits
7. Undisclosed information, including trade secrets and test data
Intellectualproperty rights listed above are customarily divided into two main areas: 1)copyrights and related rights, 2) industrial property rights.1) Copyright andrights related to copyright.
The rights ofauthors of literary and artistic works (such as books and other writings,novels, poems and plays, films, musical works, musical compositions, computerprograms and films, drawings, paintings, photographs and sculptures, and architecturaldesigns) are protected by copyright, for a minimum period of 50 years after thedeath of the author.
Also protectedthrough copyright and related (sometimes referred to as “neighbouring”) rightsare the rights of performers (e.g. actors, singers and musicians), producers ofphonograms (sound recordings) and broadcasting organizations. 2) Industrialproperty, inventions (patents), trademarks, industrial designs, and geographicindications of source
Industrialproperty can usefully be divided into two main areas:
One area canbe characterized as the protection of distinctive signs, in particulartrademarks (which distinguish the goods or services of one undertaking fromthose of other undertakings) and geographical indications (which identify a goodas originating in a place where a given characteristic of the good isessentially attributable to its geographical origin).
Other types ofindustrial property are protected primarily to stimulate innovation, design andthe creation of technology. In this category fall inventions (protected bypatents), industrial designs and trade secrets.Objectives of IPRs
IPRs areintended to give the creators adequate returns so that there are enoughincentives for creativity. For example, the social purpose of industrialproperty rights of the second area is to provide protection for the results ofinvestment in the development of new technology, thus giving the incentive andmeans to finance research and development (R&D) activities.
IPRs canfurther ensure fair competition and protect consumers, by enabling them to makeinformed choices between various goods and services and to differentiatecounterfeit commodities. This objective is particularly attributable to theprotection of industrial property rights of the first area (distinctive signs).The protection may last indefinitely, provided the sign in question continuesto be distinctive.
A functioningintellectual property regime should also facilitate the transfer of technologyin the form of foreign direct investment, joint ventures and licensing.
To sum up, theprotection and enforcement of intellectual property rights should contribute
- to the promotion of technological innovation,
- to the transfer and dissemination of technology,
- to the mutual advantage of producers and users of technologicalknowledge in a manner conducive to social and economic welfare, and
- to a balance of rights and obligations.2. Trade related aspects of IPRsBackground for theNegotiation of the TRIPs Agreement.
So far, wehave understood that creations should be accorded protection. However, thegeneral public that benefits from such creations should not be expected to payunreasonably high prices. The balance between the remuneration to the innovatorand artist on the one hand, and the genuine interests of the public on theother, has been a subject of debate for a long time. Various countries tried tohave their own balance. The extent of protection and enforcement ofintellectual property rights varied widely around the world; and asintellectual property became more important in trade, these differences becamea source of tension in international economic relations. Although the WorldIntellectual Property Organization (WIPO) has laid down some rules for theprotection of intellectual property, many developed countries feel that theprotection of IPRs needs much more strengthening than what is possible throughthe WIPO agreements. In the wake of rapid technological development, reapingthe full benefits of their technological innovations is important for them. Inthe emerging world economic and trade scene, their prospects lie mainly inknowledge-intensive, high technology sectors of industrial production andservices. It is vital for them to provide strengthened and assured protectionto their innovations, particularly in the sectors of pharmaceuticals andelectronics where copy is much easier. New internationally-agreed trade rulesfor intellectual property rights were seen as a way to introduce more order andpredictability, and for disputes to be settled more systematically.
The 1986-94Uruguay Round achieved this goal in spite of the initial objection from a largenumber of countries participating in the negotiations to the inclusion of IPRsin GATT negotiations on the grounds that the subject was covered by anotherorganization, i.e., the World Intellectual Property Organization, and that theGATT had jurisdiction only in the field of trade (As a compromise, the subjectof the negotiations was termed trade-related intellectual property rights, andit was thought that it would cover only the matters related to trade. But finally,it was agreed that all issue relating to IPRs, including the standards ofprotection, would be negotiated, and the link with trade has almost vanished.).The TRIPS Agreement (Agreement on Trade-Related Aspects of IntellectualProperty Rights), which came into effect on 1 January 1995, is to date the mostcomprehensive multilateral agreement on intellectual property. Issues Covered by theTRIPs Agreement.
The agreementcovers five broad issues:
- how basic principles of the trading system and other internationalintellectual property agreements should be applied
- how to give adequate protection to intellectual property rights
- how countries should enforce those rights adequately in their ownterritories
- how to settle disputes on intellectual property between members ofthe WTO
- special transitional arrangements during the period when the newsystem is being introduced.Objectives of theTRIPs Agreement.
The TRIPS isan attempt (i) to narrow the gaps in the way these rights are protected aroundthe world, (ii) to bring them under common international rules, and (iii) Whenthere are trade disputes over intellectual property rights, the WTO’s disputesettlement system is available.
The generalgoals of the TRIPS Agreement are contained in the Preamble of the Agreement,which reproduces the basic Uruguay Round negotiating objectives established inthe TRIPS area by the 1986 Punta del Este Declaration and the 1988/89 Mid-TermReview. These objectives include:
- the reduction of distortions and impediments to internationaltrade,
- promotion of effective and adequate protection of intellectualproperty rights, and
- ensuring that measures and procedures to enforce intellectualproperty rights do not themselves become barriers to legitimate trade. Main Features of theTRIPs Agreement.
The three mainfeatures of the Agreement are:
1) Standards.In respect of each of the main areas of intellectual property covered by theTRIPS Agreement, the Agreement sets out the minimum standards of protection tobe provided by each Member. Each of the main elements of protection is defined,namely the subject-matter to be protected, the rights to be conferred andpermissible exceptions to those rights, and the minimum duration of protection.
The Agreementsets these standards by requiring, first, that the substantive obligations ofthe main conventions of the WIPO, i.e., the Paris Convention for the Protectionof Industrial Property (Paris Convention) and the Berne Convention for theProtection of Literary and Artistic Works (Berne Convention) in their mostrecent versions, must be complied with. With the exception of the provisions ofthe Berne Convention on moral rights, all the main substantive provisions ofthese conventions are incorporated by reference and thus become obligationsunder the TRIPS Agreement between TRIPS Member countries.
Secondly, theTRIPS Agreement adds a substantial number of additional obligations on matterswhere the pre-existing conventions are silent or were seen as being inadequate.The TRIPS Agreement is thus sometimes referred to as a Berne and Paris-plusagreement.
2) Enforcement.The second main set of provisions deals with domestic procedures and remediesfor the enforcement of intellectual property rights. The Agreement lays downcertain general principles applicable to all IPR enforcement procedures. Inaddition, it contains provisions on civil and administrative procedures andremedies, provisional measures, special requirements related to border measuresand criminal procedures, which specify in detail the procedures and remediesthat must be available so that right holders can effectively enforce theirrights.
3) Disputesettlement. The Agreement makes disputes between WTO Members about the respectof the TRIPS obligations subject to the WTO's dispute settlement procedures.
In additionthe Agreement provides for certain basic principles, such as national and most-favored-nationtreatment, and some general rules to ensure that procedural difficulties inacquiring or maintaining IPRs do not nullify the substantive benefits thatshould flow from the Agreement. The obligations under the Agreement will applyequally to all Member countries, but developing countries will have a longerperiod to phase them in. Special transition arrangements operate in thesituation where a developing country does not presently provide product patentprotection in the area of pharmaceuticals.
The TRIPSAgreement is a minimum standards agreement, which allows Members to providemore extensive protection of intellectual property if they so wish. Members areleft free to determine the appropriate method of implementing the provisions ofthe Agreement within their own legal system and practice.Basic principles ofthe TRIPs Agreement: national treatment, MFN, and technological progress.
As in GATT andGATS, the starting point of the intellectual property agreement is basicprinciples. And as in the two other agreements, non-discrimination featuresprominently: national treatment (treating one’s own nationals and foreignersequally), and most-favored-nation treatment (equal treatment for nationals ofall trading partners in the WTO).National treatment.
Nationaltreatment is a key principle in other intellectual property agreements outsidethe WTO. As in the main pre-existing intellectual property conventions, thebasic obligation on each Member country is to accord the treatment in regard tothe protection of intellectual property provided for under the Agreement to thepersons of other Members. These persons are referred to as “nationals” butinclude persons, natural or legal, who have a close attachment to other Memberswithout necessarily being nationals. The criteria for determining which personsmust thus benefit from the treatment provided for under the Agreement are thoselaid down for this purpose in the main pre-existing intellectual propertyconventions of WIPO, applied to all WTO Members whether or not they are partyto those conventions. These conventions are the Paris Convention, the BerneConvention, International Convention for the Protection of Performers,Producers of Phonograms and Broadcasting Organizations (Rome Convention), andthe Treaty on Intellectual Property in Respect of Integrated Circuits (IPICTreaty). These obligations cover not only the substantive standards ofprotection but also matters affecting the availability, acquisition, scope,maintenance and enforcement of intellectual property rights as well as thosematters affecting the use of intellectual property rights specificallyaddressed in the Agreement. Most-favored-nation treatment.
While thenational treatment clause forbids discrimination between a Member's ownnationals and the nationals of other Members, the most-favored-nation treatmentclause forbids discrimination between the nationals of other Members. Inrespect of the national treatment obligation, the exceptions allowed under thepre-existing intellectual property conventions of WIPO are also allowed underTRIPS. Where these exceptions allow material reciprocity, a consequentialexception to MFN treatment is also permitted (e.g. comparison of terms forcopyright protection in excess of the minimum term required by the TRIPSAgreement as provided under Article 7(8) of the Berne Convention asincorporated into the TRIPS Agreement). Certain other limited exceptions to theMFN obligation are also provided for.Technological progress.
When aninventor or creator is granted patent or copyright protection, he obtains theright to stop other people making unauthorized copies. Society at large seesthis temporary intellectual property protection as an incentive to encouragethe development of new technology and creations which will eventually beavailable to all. The TRIPS Agreement recognizes the need to strike a balance.It says intellectual property protection should contribute to technicalinnovation and the transfer of technology. The agreement says both producersand users should benefit, and economic and social welfare should be enhanced.Exhaustion.
Exhaustion hasan implication for the limitation on the exclusive rights of the IPR-holder.According to the principle of exhaustion of IPRs, once the IPR-holder has soldthe product covered by the IPR, the IPR-holder cannot thereafter have anycontrol on the later stages of the marketing of the product. The IPR is deemedto have been exhausted after the first sale.
For example,when a patent-holder sells the patented product, the buyer is free to use it inany way he/she likes, including selling it and exporting it to another country.Suppose that a product is patented in a country C and it is sold to a buyer inthat country. A person in another country D imports it for sale in country Dwhere this product is also patented. Since the patent right has been exhaustedin country C after the first sale in that country, the patent-holder cannotstop the export of the product to country D. This process has been called“parallel import”, to distinguish it from the normal import of the product withthe authorization of the patent-holder. If the patented product normally sellsat higher prices in country D, the parallel import from country C may push theprices down, thus the consumers will benefit.
A Member isfree to have its own provisions regarding the exhaustion of IPRs in theirdomestic laws and practices. In fact, it may be an important tool to protectthe interest of consumers and to ensure the availability of industrial andagricultural inputs as well as essential drugs at competitive prices.How to protectintellectual property.
The secondpart of the TRIPS agreement looks at different kinds of intellectual propertyrights and how to protect them. The purpose is to ensure that adequatestandards of protection exist in all member countries. Here the starting pointis the obligations of the main international agreements of the WorldIntellectual Property Organization (WIPO) that already existed before the WTOwas created:
- the Paris Convention for the Protection of Industrial Property(patents, industrial designs, etc).
- the Berne Convention for the Protection of Literary and ArtisticWorks (copyright).
Some areas arenot covered by these conventions. In some cases, the standards of protectionprescribed were thought inadequate. So the TRIPS agreement adds a significantnumber of new or higher standards.3. Copyright and related rights
Copyrightincludes literary and artistic works such as novels, poems and plays, films,musical works, artistic works such as drawings, paintings, photographs andsculptures, and architectural designs. Rights related to copyright includethose of performing artists in their performances, producers of phonograms intheir recordings, and those of broadcasters in their radio and televisionprograms.Copyright.
During theUruguay Round negotiations, it was recognized that the Berne Conventionalready, for the most part, provided adequate basic standards of copyrightprotection. Thus it was agreed that the point of departure should be theexisting level of protection under the latest Act, the Paris Act of 1971, ofthat Convention. Members are obliged to comply with the substantive provisionsof the Paris Act of 1971 of the Berne Convention, i.e. Articles 1 through 21 ofthe Berne Convention (1971) and the Appendix thereto (Article 9.1). However,Members do not have rights or obligations under the TRIPS Agreement in respectof the rights conferred under Article 6bis of that Convention, i.e. the moralrights (the right to claim authorship and to object to any derogatory action inrelation to a work, which would be prejudicial to the author's honor orreputation), or of the rights derived thereof.
The provisionsof the Berne Convention referred to deal with questions such as subject-matterto be protected, minimum term of protection, and rights to be conferred andpermissible limitations to those rights. The Appendix allows developingcountries, under certain conditions, to make some limitations to the right oftranslation and the right of reproduction.
In addition torequiring compliance with the basic standards of the Berne Convention, theTRIPS Agreement clarifies and adds certain specific points.
Copyrightprotection shall extend to expressions and not to ideas, procedures, methods ofoperation or mathematical concepts as such (Article 9.2).Coverage ofcopyright
- Literary and artistic works, including computer programs anddatabases
- Cinematographic works
- Works of architecture
The TRIPSagreement ensures that computer programs will be protected as literary worksunder the Berne Convention and outlines how databases should be protected.Computer programs, whether in source or object code, shall be protected asliterary works under the Berne Convention (1971) (Article 10.1). This provisionconfirms that computer programs must be protected under copyright and thatthose provisions of the Berne Convention that apply to literary works shall beapplied also to them. It confirms further, that the form in which a program is,whether in source or object code, does not affect the protection. Theobligation to protect computer programs as literary works means that only thoselimitations that are applicable to literary works may be applied to computerprograms. It also confirms that the general term of protection of 50 yearsapplies to computer programs. Possible shorter terms applicable to photographicworks and works of applied art may not be applied to computer programs.
Databases areeligible for copyright protection provided that they by reason of the selectionor arrangement of their contents constitute intellectual creations. Theprovision also confirms that databases have to be protected regardless of whichform they are in, whether machine readable or other form. Furthermore, theprovision clarifies that such protection shall not extend to the data ormaterial itself, and that it shall be without prejudice to any copyrightsubsisting in the data or material itself.Rental right.
It alsoexpands international copyright rules to cover rental rights. Authors ofcomputer programs and producers of sound recordings must have the right toprohibit the commercial rental of their works to the public. A similar exclusiveright applies to films where commercial rental has led to widespread copying,affecting copyright-owners’ potential earnings from their films. Authors shallhave in respect of at least computer programs and, in certain circumstances, ofcinematographic works the right to authorize or to prohibit the commercialrental to the public of originals or copies of their copyright works. Withrespect to cinematographic works, the exclusive rental right is subject to theso-called impairment test: a Member is excepted from the obligation unless suchrental has led to widespread copying of such works which is materiallyimpairing the exclusive right of reproduction conferred in that Member onauthors and their successors in title. In respect of computer programs, theobligation does not apply to rentals where the program itself is not theessential object of the rental.Term ofprotection to copyright.
According tothe general rule of the Berne Convention as incorporated into the TRIPSAgreement, the term of protection shall be the life of the author and 50 yearsafter his death. TRIPS Agreement provides that whenever the term of protectionof a work, other than a photographic work or a work of applied art (in thiscase, the term will be at least 25 years from the making of the work), iscalculated on a basis other than the life of a natural person, such term shallbe no less than 50 years from the end of the calendar year of authorizedpublication, or, failing such authorized publication within 50 years from themaking of the work, 50 years from the end of the calendar year of making.Related (neighboring)rights.
The agreementsays performers must also have the right to prevent unauthorized recording,reproduction and broadcast of live performances (bootlegging) for no less than50 years. Producers of sound recordings must have the right to prevent theunauthorized reproduction of recordings for a period of 50 years. Coverage.
- unauthorized fixation and reproduction of such fixations
- unauthorized broadcasting by wireless means of their liveperformance
- the communication to the public of their live performance
According tothe provisions on protection of performers, producers of phonograms andbroadcasting organizations, performers shall have the possibility of preventingthe unauthorized fixation of their performance on a phonogram (e.g. therecording of a live musical performance). The fixation right covers only aural,not audiovisual fixations. Performers must also be in position to prevent thereproduction of such fixations. They shall also have the possibility ofpreventing the unauthorized broadcasting by wireless means of their liveperformance and the communication to the public of their live performance.However, it is not necessary to grant such rights to broadcastingorganizations, if owners of copyright in the subject-matter of broadcasts areprovided with the possibility of preventing these acts, subject to theprovisions of the Berne Convention.
Members haveto grant producers of phonograms an exclusive reproduction right. In additionto this, they have to grant an exclusive rental right at least to producers ofphonograms. The provisions on rental rights apply also to any other rightholders in phonograms as determined in national law. This right has the samescope as the rental right in respect of computer programs. Therefore it is notsubject to the impairment test as in respect of cinematographic works. However,it is limited by a so-called grand-fathering clause, according to which aMember, which on 15 April 1994, i.e. the date of the signature of the MarrakeshAgreement, had in force a system of equitable remuneration of right holders inrespect of the rental of phonograms, may maintain such system provided that thecommercial rental of phonograms is not giving rise to the material impairmentof the exclusive rights of reproduction of right holders.Term ofprotection to related right.
The term ofprotection is at least 50 years from the end of the year of fixation orperformance for performers and producers of phonograms, and 20 years from theend of the year of broadcast for broadcasting organizations.Exception.
Any Membermay, in relation to the protection of performers, producers of phonograms andbroadcasting organizations, provide for conditions, limitations, exceptions andreservations to the extent permitted by the Rome Convention (Article 14.6). TheConvention provides fro exceptions for private use, short excerpts, teachingand scientific research, etc.
Article 13requires Members to confine limitations or exceptions to exclusive rights tocertain special cases which do not conflict with a normal exploitation of thework and do not unreasonably prejudice the legitimate interests of the rightholder. This is a horizontal provision that applies to all limitations andexceptions permitted under the provisions of the Berne Convention and theAppendix thereto as incorporated into the TRIPS Agreement. The application ofthese limitations is permitted also under the TRIPS Agreement, but theprovision makes it clear that they must be applied in a manner that does notprejudice the legitimate interests of the right holder.
Copyright vs.patent.
Noregistration in an individual country is necessary to enjoy the protection ofcopyright, as is the case with patents. No disclosure is required forcopyright, as is the case with patent; hence, the secret of the programming canbe retained with the author.
The conditionsto be satisfied for copyright are less stringent than those for patents. Theprotection through copyright is weak compared to that through patents.Copyright prohibits the copying of the creative expression, but permitsindependent creations even though based on the same ideas. Thus, suchindependent creations can be easily defended against charges of copying.4. Industrial property
Industrialproperty includes inventions (patents), trademarks, industrial designs, andgeographic indications of source.Trademarks.
The agreementdefines what types of signs must be eligible for protection as trademarks, andwhat the minimum rights conferred on their owners must be. It says that servicemarks must be protected in the same way as trademarks used for goods. Marksthat have become well-known in a particular country enjoy additionalprotection.
Definition: Atrademark is defined as any sign, or any combination of signs, capable ofdistinguishing the goods and services of one undertaking from those of otherundertakings. Such signs include personal names, letters, numerals, figurativeelements and combinations of colors as well as any combination of such signs. Conditions forthe registration of trademarks
The basic ruleis that such signs must be visually perceptible. Members are free to determinewhether to allow the registration of signs that are not visually perceptible(e.g. sound or smell marks).
Where signsare not inherently capable of distinguishing the relevant goods or services,Member countries are allowed to require, as an additional condition foreligibility for registration as a trademark, that distinctiveness be acquiredthrough use.
Members maymake registrability depend on use. However, actual use of a trademark shall notbe permitted as a condition for filing an application for registration, and atleast three years must have passed after that filing date before failure torealize an intent to use is allowed as the ground for refusing the application.Rights conferredto a trademark.
The owner of aregistered trademark must be granted the exclusive right to prevent all thirdparties not having the owner's consent from using in the course of tradeidentical or similar signs for goods or services which are identical or similarto those in respect of which the trademark is registered where such use wouldresult in a likelihood of confusion. In case of the use of an identical sign foridentical goods or services, a likelihood of confusion must be presumed(Article 16.1).Well-known trademarks.
The TRIPSAgreement contains certain provisions on well-known marks, which supplement theprotection required by the Paris Convention, obliges Members to refuse orcancel the registration, and to prohibit the use of a mark conflicting with amark which is well known.
First, theprovisions must be applied also to services.
Second, it isrequired that knowledge in the relevant sector of the public be taken intoaccount. The knowledge can be acquired not only as a result of the use of themark but also by other means, including as a result of its promotion.
Furthermore,the protection of registered well-known marks must extend to goods or serviceswhich are not similar to those in respect of which the trademark has beenregistered, provided that its use would indicate a connection between thosegoods or services and the owner of the registered trademark, and the interestsof the owner are likely to be damaged by such use.Exception.
Members mayprovide limited exceptions to the rights conferred by a trademark, such as fairuse of descriptive terms, provided that such exceptions take account of thelegitimate interests of the owner of the trademark and of third parties.Term.
Initialregistration, and each renewal of registration, of a trademark shall be for a termof no less than seven years. The registration of a trademark shall be renewableindefinitely. In other words, there will be no limit to the number of times thetrademark is renewed.Requirement of use.
Cancellationof a mark on the grounds of non-use cannot take place before three years ofuninterrupted non-use has elapsed unless valid reasons based on the existenceof obstacles to such use are shown by the trademark owner, such as importrestrictions or other government restrictions arising independently of the willof the owner of the trademark. Use of a trademark by another person, when issubject to the control of its owner, must be recognized as use of the trademarkfor the purpose of maintaining the registration.
It is furtherrequired that use of the trademark in the course of trade shall not beunjustifiably encumbered by special requirements, such as use with anothertrademark, use in a special form, or use in a manner detrimental to itscapability to distinguish the goods or services.Geographicalindications.
Place namesare sometimes used to identify a product. Well-known examples include“Champagne”, “Scotch” whisky, “Tequila” alcoholic liquor, and “Roquefort”cheese. Wine and spirits makers are particularly concerned about the use ofplace-names to identify products, and the TRIPS agreement contains specialprovisions for these products. But the issue is also important for other typesof goods.Definition.
Geographicalindications are defined in TRIPs as indications which identify a good asoriginating in the territory of a Member, or a region or particular place inthat territory to which a given quality, reputation or other characteristic ofthe good are essentially attributable.Conditions forgeographical indication.
The quality,reputation or other characteristics of a good can each be a sufficient basisfor eligibility as a geographical indication, where they are essentiallyattributable to the geographical origin of the good.Use ofgeographical indication.
The use of aplace name to describe a product in this way — a “geographical indication” —usually identifies both its geographical origin and its characteristics.Therefore, using the place name when the product was made elsewhere or when itdoes not have the usual characteristics can mislead consumers, and it can leadto unfair competition. The TRIPS agreement says countries have to prevent themisuse of place names.
In respect ofall geographical indications, interested parties must have legal means toprevent use of indications which mislead the public as to the geographicalorigin of the good, and to prevent any use which constitutes an act of unfaircompetition.
Theregistration of a trademark which uses a geographical indication in a way thatmisleads the public as to the true place of origin must be refused orinvalidated if the legislation so permits or at the request of an interestedparty.Geographical indications of wines and spirits.
For wines andspirits, the agreement provides higher levels of protection, i.e. even wherethere is no danger of the public being misled. An Article in the TRIPs providesthat interested parties must have the legal means to prevent the use of ageographical indication identifying wines for wines not originating in theplace indicated by the geographical indication. This applies even where thepublic is not being misled, there is no unfair competition and the true originof the good is indicated or the true origin is indicated in translations or thegeographical indication is accompanied be expressions such as “kind”, “type”,“style”, “imitation” or the like (e.g., champagne-type wine, imitation scotchwhisky). Similar protection must be given to geographical indicationsidentifying spirits when used on spirits. Protection against registration of atrademark must be provided accordingly.Exceptions.
Trips containa number of exceptions to the protection of geographical indications. Theseexceptions are of particular relevance in respect of the additional protectionfor geographical indications for wines and spirits. For example, Members arenot obliged to bring a geographical indication under protection, where the nameis already protected as a trademark or it has become a generic term fordescribing the product in question. For example, “cheddar” now refers to aparticular type of cheese not necessarily made in Cheddar (a place in Britain).
But anycountry wanting to make an exception for these reasons must be willing tonegotiate with the country which wants to protect the individual geographicalindication in question. Measures to implement these provisions shall notprejudice prior trademark rights that have been acquired in good faith. Undercertain circumstances, continued use of a geographical indication for wines orspirits may be allowed on a scale and nature as before. The agreement providesfor further negotiations in the WTO to establish a multilateral system ofnotification and registration of geographical indications for wines. Theexceptions cannot be used to diminish the protection of geographicalindications that existed prior to the entry into force of the TRIPS Agreement.The TRIPS Council shall keep under review the application of the provisions onthe protection of geographical indications.Industrial designs.
Definition:Industrial design refers to the features concerning the look of an article,such as the shape, ornamentation, pattern, configuration, etc.
TRIPs coveronly industrial designs, and not utility models, i.e., minor functionalmodifications. Coverage.
TRIPSAgreement obliges Members to provide for the protection of independentlycreated industrial designs that are new or original. Members may provide thatdesigns are not new or original if they do not significantly differ from knowndesigns or combinations of known design features. Members may provide that suchprotection shall not extend to designs dictated essentially by technical orfunctional considerations.
TRIPs containa special provision aimed at taking into account the short life cycle and sheernumber of new designs in the textile sector: requirements for securingprotection of such designs, in particular in regard to any cost, examination orpublication, must not unreasonably impair the opportunity to seek and obtainsuch protection. Members are free to meet this obligation through industrialdesign law or through copyright law.Right ofindustrial design holder.
Members arerequired to grant the owner of a protected industrial design the right toprevent third parties not having the owner's consent from making, selling orimporting articles bearing or embodying a design which is a copy, orsubstantially a copy, of the protected design, when such acts are undertakenfor commercial purposes.Exception.
Members areallowed to provide limited exceptions to the protection of industrial designs,provided that such exceptions do not unreasonably conflict with the normalexploitation of protected industrial designs and do not unreasonably prejudicethe legitimate interests of the owner of the protected design, taking accountof the legitimate interests of third parties.Term.
Under theTRIPS agreement, the duration of protection available of industrial designsshall amount to at least 10 years. The wording “amount to” allows the term tobe divided into, for example, two periods of five years.Patents.
Patents relateto scientific and technological innovations in various industrial and servicesectors and confer certain exclusive rights on the patent-holder regarding thesubject of the patent.
The TRIPS Agreementrequires Member countries to make patents available for any inventions, whetherproducts or processes, in all fields of technology without discrimination,subject to the normal tests of novelty, inventiveness and industrialapplicability. Conditions forpatentability.
Novelty: itshould not have been invented by somebody earlier, or at least, should not havebeen publicly disclosed;
Inventiveness:it should be non-obvious, or that it should be the result of a serious exerciseof mind;
Industrial applicability:it should be useful, or that it should not be limited to the thought process,but should be applicable in having a new product or process, or in improvingthe functioning of an existing product or process.
It is alsorequired that patents be available and patent rights enjoyable withoutdiscrimination as to the place of invention and whether products are importedor locally produced. The agreement says patent protection must be available forinventions for at least 20 years. Patent protection must be available for bothproducts and processes, in almost all fields of technology. Rights ofpatent-holder.
The exclusiverights that must be conferred by a product patent are the ones of making,using, offering for sale, selling, and importing for these purposes. Processpatent protection must give rights not only over use of the process but alsoover products obtained directly by the process. Other persons must be preventedfrom getting these rights. Patent owners shall also have the right to assign,or transfer by succession, the patent and to conclude licensing contracts.Members may provide limited exceptions to the exclusive rights conferred by apatent, provided that such exceptions do not unreasonably conflict with anormal exploitation of the patent and do not unreasonably prejudice thelegitimate interests of the patent-holder, taking account of the legitimateinterests of third parties.
Product patentvs process patent: If a patent is issued for a production process, then therights must extend to the product directly obtained from the process. Undercertain conditions alleged infringers may be ordered by a court to prove thatthey have not used the patented process. It is possible for another innovatorto develop the same final product through an alternative process.
In a case ofthe patent covering a product, another innovator is debarred from producingthat product even through any alternative method which this innovator mighthave developed. Thus, the whole process of further scientific and technologicalresearch on obtaining the particular product by various alternative methods isstopped by allowing the patent of the product.Countrywidepatent.
A patent isapplicable to each jurisdiction, i.e., the registration for the patent is donein each country and validity is limited to the jurisdiction of that country.Thus, if an innovator wants to have the patent rights in different countries,registrations will have to be obtained in all of them.Obligation ofpatent-holder: full disclosure of patentable matter.
Members shallrequire that an applicant for a patent shall disclose the invention in a mannersufficiently clear and complete for the invention to be carried out by a personskilled in the art and may require the applicant to indicate the best mode forcarrying out the invention known to the inventor at the filing date or, wherepriority is claimed, at the priority date of the application. This obligationis meant to ensure that the subject of the patent comes within the publicdomain of knowledge, and does not remain a secret.
Advantages ofa disclosure of a patent.
- All interested persons come to know the source of a particulartechnology;
- Other innovators may be in a position to carry forward furtherscientific and technological development, and come up with new processes andproducts based on the existing patented matter, particularly for those incountries that do not have much domestic innovation and wish to encourage it;
- At the expiry of the patent period, it may be possible for allinterested persons to use the patented subject freely.Process patent.
If thesubject-matter of a patent is a process for obtaining a product, the judicialauthorities shall have the authority to order the defendant to prove that theprocess to obtain an identical product is different from the patented process,where certain conditions indicating a likelihood that the protected process wasused are met.Patent of plantvarieties.
Plantvarieties, however, must be protected by patents or by a special system (suchas the breeder’s rights provided in the conventions of UPOV — the InternationalUnion for the Protection of New Varieties of Plants).
The agreementdescribes the minimum rights that a patent owner must enjoy. Exceptions.
TRIPs agreementalso allows certain exceptions. Governments can refuse to issue a patent for aninvention if its commercial exploitation is prohibited for reasons of publicorder or morality. They can also exclude diagnostic, therapeutic and surgicalmethods, plants and animals (other than microorganisms), and biologicalprocesses for the production of plants or animals (other than microbiologicalprocesses).
There arethree permissible exceptions to the basic rule on patentability.
One is forinventions contrary to ordre public or morality; this explicitly includesinventions dangerous to human, animal or plant life or health or seriouslyprejudicial to the environment. The use of this exception is subject to thecondition that the commercial exploitation of the invention must also beprevented and this prevention must be necessary for the protection of ordrepublic or morality.
The secondexception is that Members may exclude from patentability diagnostic,therapeutic and surgical methods for the treatment of humans or animals.
The third isthat Members may exclude plants and animals other than micro-organisms, e.g.,bacteria, viruses, fungi, algae, protozoa, etc., and essentially biologicalprocesses for the production of plants or animals other than non-biological andmicrobiological processes. However, any country excluding plant varieties frompatent protection must provide an effective sui generis system of protection.
Furthermore,for countries which wish to encourage domestic innovation, it may be desirableto provide a limited exception that patented matter may be put to experimentaluse without the authorization of the patent-holder, especially for reverseengineering, i.e., proceeding backwards from the patented product to learn howit has been produced.
Moreover, thewhole provision is subject to review four years after entry into force of theAgreement.Compulsorylicenses.
A patent-ownercould abuse his rights, for example by failing to supply the product on themarket. To deal with that possibility, the agreement says governments can issue“compulsory licenses”, allowing a competitor to produce the product or use theprocess under license. But this can only be done under certain conditions aimedat safeguarding the legitimate interests of the patent-holder.
Compulsorylicensing and government use without the authorization of the right holder areallowed, but are made subject to conditions aimed at protecting the legitimateinterests of the right holder. The conditions include the obligation, as ageneral rule, to grant such licenses only if an unsuccessful attempt has beenmade to acquire a voluntary license on reasonable terms and conditions within areasonable period of time; the requirement to pay adequate remuneration in thecircumstances of each case, taking into account the economic value of thelicense; and a requirement that decisions be subject to judicial or otherindependent review by a distinct higher authority. Certain of these conditionsare relaxed where compulsory licenses are employed to remedy practices thathave been established as anticompetitive by a legal process. These conditionsshould be read together with the related provisions (Article 27.1) whichrequire that patent rights shall be enjoyable without discrimination as to thefield of technology, and whether products are imported or locally produced.Integrated circuitslayout designs.
TRIPSAgreement requires Member countries to protect the layout-designs of integratedcircuits in accordance with the provisions of the IPIC Treaty (the Treaty onIntellectual Property in Respect of Integrated Circuits), negotiated under theauspices of WIPO in 1989. These provisions deal with, inter alia, thedefinitions of “integrated circuit” and “layout-design (topography)”,requirements for protection, exclusive rights, and limitations, as well asexploitation, registration and disclosure. The TRIPS agreement adds a number ofprovisions: for example, protection must be available for at least 10 years.Definition.
An “integratedcircuit” means a product, in its final form or an intermediate form, in whichthe elements, at least one of which is an active element, and some or all ofthe interconnections are integrally formed in and/or on a piece of material andwhich is intended to perform an electronic function.
A“layout-design (topography)” is defined as the three-dimensional disposition ofthe elements, at least one of which is an active element, and of some or all ofthe interconnections of an integrated circuit, or such a three-dimensionaldisposition prepared for an integrated circuit intended for manufacture.Condition forprotection.
The obligationto protect layout-designs applies to such layout-designs that are original inthe sense that they are the result of their creators' own intellectual effortand are not commonplace among creators of layout-designs and manufacturers ofintegrated circuits at the time of their creation.
For thepurpose of protection, disclosure of the layout design has to be made, such asa copy or a drawing of the layout design, information on the electronicfunction, etc.
The durationbetween the first commercial exploitation of the layout design and the date offiling the application cannot be less than two years.Rights of layoutdesign holder.
The exclusiverights include the right of reproduction and the right of importation, sale andother distribution for commercial purposes. Certain limitations to these rightsare provided for.Exception.
The exceptionsto the scope of protection are the following:
- Acts of reproduction for private purpose;
- Acts of reproduction for the purposes of evaluation, analysis,research or teaching;
- Use of an identical but original layout design createdindependently by a person other than the right-holder;Term.
The term mustbe at least 10 years from the date of filling the application for registration,or from the first commercial exploitation in the world.
A Member mayprovide that the term will lapse 15 years after the creation of the layoutdesign.Undisclosedinformation and trade secrets.
Trade secretsand other types of “undisclosed information” which have commercial value mustbe protected against breach of confidence and other acts contrary to honestcommercial practices. But reasonable steps must have been taken to keep theinformation secret. Test data submitted to governments in order to obtainmarketing approval for new pharmaceutical or agricultural chemicals must alsobe protected against unfair commercial use.Conditions forprotection.
The TRIPSAgreement requires undisclosed information — trade secrets or know-how — tobenefit from protection. The protection must apply to information that issecret, that has commercial value because it is secret and that has beensubject to reasonable steps to keep it secret.
The Agreementdoes not require undisclosed information to be treated as a form of property,but it does require that a person lawfully in control of such information musthave the possibility of preventing it from being disclosed to, acquired by, orused by others without his or her consent in a manner contrary to honestcommercial practices. “Manner contrary to honest commercial practices” includesbreach of contract, breach of confidence and inducement to breach, as well asthe acquisition of undisclosed information by third parties who knew, or weregrossly negligent in failing to know, that such practices were involved in theacquisition.
The Agreementalso contains provisions on undisclosed test data and other data whosesubmission is required by governments as a condition of approving the marketingof pharmaceutical or agricultural chemical products which use new chemicalentities. In such a situation the Member government concerned must protect thedata against unfair commercial use. In addition, Members must protect such dataagainst disclosure, except where necessary to protect the public, or unlesssteps are taken to ensure that the data are protected against unfair commercialuse.Curbinganti-competitive licensing contracts.
The owner of acopyright, patent or other form of intellectual property right can issue alicense for someone else to produce or copy the protected trademark, work,invention, design, etc. The agreement recognizes that the terms of a licensingcontract could restrict competition or impede technology transfer. It says thatunder certain conditions, governments have the right to take action to preventanti-competitive licensing that abuses intellectual property rights. It alsosays governments must be prepared to consult each other on controllinganti-competitive licensing.
TRIPSAgreement recognizes that some licensing practices or conditions pertaining tointellectual property rights which restrain competition may have adverseeffects on trade and may impede the transfer and dissemination of technology.Member countries may adopt, consistently with the other provisions of theAgreement, appropriate measures to prevent or control practices in thelicensing of intellectual property rights which are abusive andanti-competitive. The Agreement provides for a mechanism whereby a countryseeking to take action against such practices involving the companies ofanother Member country can enter into consultations with that other Member andexchange publicly available non-confidential information of relevance to thematter in question and of other information available to that Member, subjectto domestic law and to the conclusion of mutually satisfactory agreementsconcerning the safeguarding of its confidentiality by the requesting Member.Similarly, a country whose companies are subject to such action in another Membercan enter into consultations with that Member. 5. Enforcement of IPRs
Havingintellectual property laws is not enough. They must be enforceable. WTO Membershave to implement the TRIPs agreement through their respective domesticlegislation. In the multilateral forum of the WTO, a Member is responsible forthe establishment of the necessary administrative and legal framework and forensuring that the machinery works. The agreement says governments have toensure that intellectual property rights can be enforced under their laws, andthat the penalties for infringement are tough enough to deter furtherviolations. The procedures must be fair and equitable, and not unnecessarilycomplicated or costly. They must not entail unreasonable time-limits orunwarranted delays. People involved should be able to ask a court to review anadministrative decision or to appeal a lower court’s ruling.
The agreementdescribes in some detail how enforcement have to be handled, including rulesfor obtaining evidence, provisional measures, injunctions, damages and otherpenalties. It says courts must have the right, under certain conditions, toorder the disposal or destruction of pirated or counterfeit goods. Willfultrademark counterfeiting or copyright piracy on a commercial scale must becriminal offences. Governments have to make sure that intellectual propertyrights owners can receive the assistance of customs authorities to preventimports of counterfeit and pirated goods.Transitionarrangements.
When the WTOagreements took effect on 1 January 1995, developed countries were given oneyear to ensure that their laws and practices conform with the TRIPS agreement.Developing countries and (under certain conditions) transition economies fromcentrally planned economy to a market economy are given five years, or 4 yearsafter 1 January 1996. Least developed countries have 11 years, or 10 years from1 January 1996. Thus, it has to apply it, at the least, by 1 January 2006.
If adeveloping country did not provide product patent protection in a particulararea of technology when the TRIPS Agreement came into force (1 January 1995),it has up to 10 years to introduce the protection. But for pharmaceutical andagricultural chemical products, the country must accept the filing of patentapplications from the beginning of the transitional period, though the patentneed not be granted until the end of this period. If the government allows therelevant pharmaceutical or agricultural chemical to be marketed during thetransition period, it must — subject to certain conditions — provide anexclusive marketing right for the product for five years, or until a productpatent is granted, whichever is shorter.
Subject tocertain exceptions, the general rule is that obligations in the agreement applyto intellectual property rights that exist at the end of a country’s transitionperiod, as well as to new ones.
Annex: Otherintellectual property conventions incorporated by reference into the TRIPSAgreement. The TRIPS Agreement contains references to the provisions of certainpre-existing intellectual property conventions.
Below is alist of these agreements.
- Paris Convention for the Protection of Industrial Property (1967)(the Stockholm Act of 14 July 1967 of the Paris Convention for the Protectionof Industrial Property)
- Berne Convention for the Protection of Literary and Artistic Works(1971) and the Appendix thereto (the Paris Act of 24 July 1971 of the BerneConvention for the Protection of Literary and Artistic Works)
- The Rome Convention: International Convention for the Protectionof Performers, Producers of Phonograms and Broadcasting Organizations adoptedat Rome on 26 October 1961
- Treaty on Intellectual Property in Respect of Integrated Circuits(1989), adopted at Washington on 26 May 1989 Questions
1. What is therationale of protecting intellectual property rights in general? Should IPs beprotected under the WTO? Wouldn’t the WIPO be sufficient?
2. Think ofother legal (under WTO or beyond WTO) grounds for exempting TRIPs obligationsas to pharmaceuticals in order to save human lives in poor countries?
3. What wouldbe demerits of expanding the protection of geographical indication?
4. What is therelationship between the TRIPS Agreement and the pre-existing internationalconventions that it refers to?
5. Which ofthe following statements is correct? Support your respond with arguments.
a)intellectual property rights are divided into 2 main categories – industrialproperty rights, and copyrights and related rights
b) Copyrightsand related rights include the protection of distinctive signs such astrademarks and geographical indications
c) TRIPSAgreement requires all member’s rules on protection of intellectual property tobe identical
d) the mainprinciples of the TRIPS agreement are free trade, non-discrimination, MFN andtarificationReference
1. Jackson, The World Trading System, 305-317.
2. Jackson/Davey/Sykes, 844-892, 893-490.
3. WIPO. 2004. WIPO Intellectual Property Handbook: Policy, Law andUse. WIPO Publication No.489 (E). Geneva.
4. Trading into the Future – WTO, 3rd edition, Revised August 2003.
5. Robert H. Folsom, International Trade and Investment in a Nutshell(2nd ed., St. Paul, Minn.: West Pub. Co., 2000).
6. World Bank. 2002-2005. Global Economic Prospects. Washington, DC:World Bank. www.worldbank.org/prospects.
7. www.wto.org see Trade topics à TRIPS.
Lecture 8. Rules and Procedures Governing the Settlement of Disputes(DSU)1. WTO Dispute settlement system – main definitions
DSU means theUnderstanding on Rules and Procedures Governing the Settlement of Disputeswhich is Annex 2 to the WTO Agreement;
DSB means theDispute Settlement Body established under Article 2 of the DSU, made up of allmember governments, usually represented by ambassadors or equivalent. The DSBhas the authority to establish panels, adopt panel and Appellate Body reports,maintain surveillance of implementation of rulings or recommendations of panelsor of the Appellate Body and authorize suspension of concessions or otherobligations under the covered agreements.
Panels andpanelists refer to a team of three or five experts or well-qualifiedgovernmental or non-governmental individuals to examine a dispute, givingfindings and making recommendations. Panelists are nominated by the Secretariatand agreed by the parties to a dispute or appointed by the Director-General ofthe WTO where there is no agreement within 20 days after the date ofestablishment of the panel. Panelists are expected to function in theirindividual capacities and not as representatives of governments or of anyorganization.
Standard Termsof Reference refer to the legal responsibilities of the DSB panels, i.e., theexamination of the issues raised by the complaining Member, and giving findingswhich will assist the DSB in making recommendations or in giving its rulings onthe issues in question.
Consensus adecision is deemed to be made by consensus if no Member formally objects to it,or there is no consensus against it.
Good offices,conciliation and mediation refer to a procedure of the disputer settlementprocess in which the Director-General of the WTO assists the parties to settlea dispute in a way satisfactory to both parties of the dispute.
Good officesmean that a third party assists the negotiation or consultation between the twoparties to a dispute.
Conciliationmeans that a dispute is submitted to a committee or an organization who willmake findings and recommend solutions satisfactory to both parties.
Mediationmeans a third party is involved directly in the negotiations of concernedparties of a dispute.
Good offices,conciliation and mediation may be requested by any party to a dispute, but canbe effectively undertaken only if both parties to the dispute agree to use thisprocedure. It may begin and be terminated at any time, and it may even becontinued while the panel process is on.
Arbitrationrefers to an alternative course in the dispute settlement process where thedispute issues are clearly defined by both parties. It will be entered into ifthe parties to the dispute agree to adopt it. The parties have to agree toabide by the arbitration award, which will be notified to the DSB. Theimplementation process of the award will be along the same lines as that forthe recommendation and ruling of a panel.
Appellate Bodyrefers to the permanent seven-member Appellate Body set up by the DisputeSettlement Body and broadly represents the range of WTO membership. Members ofthe Appellate Body have four-year terms, and can be renewed once. They have tobe individuals with recognized standing in the field of law and internationaltrade, not affiliated with any government.
Division meansthe three Members of Appellate Body who are selected to serve on any oneappeal;
appellantmeans any party to the dispute that has filed a Notice of Appeal or has filed asubmission;
appellee meansany party to the dispute that has filed a submission;
thirdparticipant means any third party that has filed a written submission; or anythird party that appears at the oral hearing, whether or not it makes an oralstatement at that hearing;
third partymeans any WTO Member who has notified the DSB of its substantial interest inthe matter before the panel. 2. Dispute settlement system in the WTO – basic concepts
The disputesettlement system of the GATT is generally considered to be one of thecornerstones of the multilateral trade order. The system has already beenstrengthened and streamlined as a result of reforms agreed following theMid-Term Review Ministerial Meeting held in Montreal in December 1988. TheUruguay Round Understanding on Rules and Procedures Governing the Settlement ofDisputes (DSU) further strengthened the existing system significantly,extending the greater automaticity agreed in the Mid-Term Review to theadoption of the panels' and a new Appellate Body's findings. Disputes currentlybeing dealt with by the Council are subject to these new rules, which includegreater automaticity in decisions on the establishment, terms of reference andcomposition of panels, such that these decisions are no longer dependent uponthe consent of the parties to a dispute. Moreover, the DSU will establish anintegrated system permitting WTO Members to base their claims on any of themultilateral trade agreements included in the Annexes to the Agreementestablishing the WTO. For this purpose, a Dispute Settlement Body (DSB) will exercisethe authority of the General Council and the Councils and committees of thecovered agreements. Description ofdispute settlement process.
The DSUemphasizes the importance of consultations in securing dispute resolution,requiring a Member to enter into consultations within 30 days of a request forconsultations from another Member.
If after 60days from the request for consultations there is no settlement, the complainingparty may request the establishment of a panel. Where consultations are denied,the complaining party may move directly to request a panel.
The partiesmay voluntarily agree to follow alternative means of dispute settlement,including good offices, conciliation, mediation and arbitration.
Where adispute is not settled through consultations, the DSU requires theestablishment of a panel, at the latest, at the meeting of the DSB followingthat at which a request is made, unless the DSB decides by consensus againstestablishment. The DSU also sets out specific rules and deadlines for decidingthe terms of reference and composition of panels. Standard terms of referencewill apply unless the parties agree to special terms within 20 days of thepanel's establishment. Where the parties do not agree on the composition of thepanel within the same 20 days, this can be decided by the Director-General.
Panelsnormally consist of three persons of appropriate background and experience fromcountries not party to the dispute. The Secretariat will maintain a list ofexperts satisfying the criteria. Panel procedures are set out in detail in theDSU. It is envisaged that a panel will normally complete its work within sixmonths or, in cases of urgency, within three months. Panel reports may beconsidered by the DSB for adoption 20 days after they are issued to Members.Within 60 days of their issuance, they will be adopted, unless the DSB decidesby consensus not to adopt the report or one of the parties notifies the DSB ofits intention to appeal.
The concept ofappellate review is an important new feature of the DSU. An Appellate Body willbe established, composed of seven members, three of whom will serve on any onecase. An appeal will be limited to issues of law covered in the panel reportand legal interpretations developed by the panel. Appellate proceedings shallnot exceed 60 days from the date a party formally notifies its decision toappeal. The resulting report shall be adopted by the DSB and unconditionallyaccepted by the parties within 30 days following its issuance to Members,unless the DSB decides by consensus against its adoption.
Once the panelreport or the Appellate Body report is adopted, the party concerned will haveto notify its intentions with respect to implementation of adoptedrecommendations. If it is impracticable to comply immediately, the partyconcerned shall be given a reasonable period of time, the latter to be decidedeither by agreement of the parties and approval by the DSB within 45 days ofadoption of the report or through arbitration within 90 days of adoption. Inany event, the DSB will keep the implementation under regular surveillanceuntil the issue is resolved.
Furtherprovisions set out rules for compensation or the suspension of concessions inthe event of non-implementation. Within a specified time-frame, parties canenter into negotiations to agree on mutually acceptable compensation. Wherethis has not been agreed, a party to the dispute may request authorization ofthe DSB to suspend concessions or other obligations to the other partyconcerned. The DSB will grant such authorization within 30 days of the expiryof the agreed time-frame for implementation.
Disagreementsover the proposed level of suspension may be referred to arbitration within 90days of the date of adoption of the recommendations and rulings. Thearbitration will be done by an arbitrator mutually agreed upon by the partiesto the dispute. If there is no agreement on who should be the arbitrator within10 days of the matter being referred to arbitration, the Director-General ofthe WTO has to appoint an arbitrator within another period of 10 days ofconsulting the parties. The guideline to the arbitrator will be that thereasonable period of time to implement the panel or Appellate Bodyrecommendation should not exceed 15 months from the date of adoption of thepanel or Appellate Body report. If the panel or the Appellate Body has takenadditional time, such time will be added to the 15-month period. But in anycase, the time shall not exceed 18 months except if the parties to the disputeagree on a longer period in exceptional circumstances.
In principle,the level of suspension will be equivalent to the level of nullification or impairment,i.e., it cannot be higher, and concessions should be suspended in the samesector as that in issue in the panel case. If this is not practicable oreffective, the suspension can be made in a different sector of the sameagreement (cross-sector suspension). In turn, if this is not effective orpracticable and if the circumstances are serious enough, the suspension ofconcessions may be made under another agreement (cross-agreement suspension),for example, action can be taken on goods for some actions or for some omissionto take action in the area of services or IPRs.
One of thecentral provisions of the DSU reaffirms that Members shall not themselves makedeterminations of violations or suspend concessions, but shall make use of thedispute settlement rules and procedures of the DSU (multilateral process indispute settlement).
The DSUcontains a number of provisions taking into account the specific interests ofthe developing and the least-developed countries. It also provides some specialrules for the resolution of disputes which do not involve a violation ofobligations under a covered agreement but where a Member believes neverthelessthat benefits are being nullified or impaired (non-violation nullification orimpairment). Special decisions to be adopted by Ministers in 1994 foresee thatthe Montreal Dispute Settlement Rules, which would otherwise have expired atthe time of the April 1994 meeting, are extended until the entry into force ofthe WTO. Another decision foresees that the new rules and procedures will bereviewed within four years after the entry into force of the WTO. Coverage of DSU.
The disputesettlement process covers the WTO Agreement (i.e., the Agreement onEstablishing the World Trade Organization), GATT 1994, GATS, TRIPs.
Preconditionsfor resorting to dispute settlement process
· Any benefit accruing to the Member under a particular agreement isbeing nullified or impaired;
· The attainment of any objective of the agreement is being impededas a result of the failure of another Member to carry out its obligations underthe agreement, or as a result of the application by another Member of anymeasure which conflicts with the provisions of the agreement.Nature of cases.
Violationcases: If the nullification or impairment of a benefit is caused by a Memberfailing to carry out its obligations under the agreement, or applying a measurewhich conflicts with some provision of the agreement, the situation occursbecause of the violation of some provision of the agreement. For example, if aMember impairs the benefit flowing out of its tariff binding by imposing aninternal charge on an imported product which it does not apply to the likedomestic product, it is violating the provisions of Article III of GATT 1994(National Treatment).
In theseviolation cases, the establishment of the following elements is necessary:
· Existence of an obligation in the relevant agreement
· Failure of a Member to carry it out, or
· A Member has taken a measure conflicting with a provision in therelevant agreement.
Particularly,because Members are required to bring their laws and procedures into conformitywith the provisions of the WTO agreements, the mere existence of a violatingprovision in the legislation of a Member would amount to a violation, even whenno measure might have been taken in pursuance of the legislation. The marketaccess commitments in the GATT are generally on the conditions of competitionfor trade and not on the volumes of trade.
Non-violationcases: When a Member applies a measure which does not conflict with theagreement and yet causes the nullification or impairment of benefits, it isdoing so without violating the provisions of the agreement. For example, aMember may negotiate tariff concessions with another Member, resulting in thebinding of the tariff on a product, but then grant a subsidy to the domesticindustry producing a like product within permissible limits, and may therebyaffect adversely the prospects of the export of another Member. This may, undercertain circumstances, be held to impair the benefit accruing to this Member,though it does not violate the disciplines on subsidies. The reason behind thisconclusion is that the exporting Member had no anticipation at the time thenegotiation for the tariff concession took place that such a subsidy would begranted.
The mainelements in non-violation cases are:
· The existence of a benefit,
· Subsequent action by a Member curtailing the benefit,
· The existence of a reasonable expectation that the competitiveconditions would not be upset.Principles:equitable, fast, effective, mutually acceptable.
Equitable(multilateral settlement).
WTO membershave agreed that if they believe fellow-members are violating trade rules, theywill use the multilateral system of settling disputes instead of taking actionunilaterally. That means abiding by the agreed procedures, and respectingjudgements.
Fast (timelimit).
A procedurefor settling disputes existed under the old GATT, but it had no fixedtimetables, rulings were easier to block, and many cases dragged on for a longtime inconclusively. The Uruguay Round agreement introduced a more structuredprocess with more clearly defined stages in the procedure. It introducedgreater discipline for the length of time a case should take to be settled,with flexible deadlines set in various stages of the procedure. The agreementemphasizes that prompt settlement is essential if the WTO is to functioneffectively. It sets out in considerable detail the procedures and thetimetable to be followed in resolving disputes. If a case runs its full courseto a first ruling, it should not normally take more than about one year — 15months if the case is appealed. The agreed time limits are flexible, and if thecase is considered urgent (e.g. if perishable goods are involved), then thecase should take three months less.
Effective(enforcement).
The UruguayRound agreement also made it impossible for the country losing a case to blockthe adoption of the ruling. Under the previous GATT procedure, rulings couldonly be adopted by consensus, meaning that a single objection could block theruling. Now, rulings are automatically adopted unless there is a consensus toreject a ruling — any country wanting to block a ruling has to persuade allother WTO members (including its adversary in the case) to share its view.
Mutuallyacceptable (consultation).
Although muchof the procedure does resemble a court or tribunal, the preferred solution isfor the countries concerned to discuss their problems and settle the dispute bythemselves. The first stage is therefore consultations between the governmentsconcerned, and even when the case has progressed to other stages, consultationand mediation are still always possible.3. Procedures for dispute settlement process
Settlingdisputes is the responsibility of the Dispute Settlement Body. The DisputeSettlement Body has the sole authority to establish “panels” of experts toconsider the case, and to accept or reject the panels’ findings or the resultsof an appeal. It monitors the implementation of the rulings andrecommendations, and has the power to authorize retaliation when a country doesnot comply with a ruling.
First stage:consultation (up to 60 days). Before taking any other actions, the countries indispute have to talk to each other to see if they can settle their differencesby themselves. If that fails, they can also ask the WTO director-general tomediate or try to help in any other way.
First, thecomplaining Member must send notice for consultation to the offending Memberand to the DSB, stating the reasons, the measures and the legal basis for therequest.
Second, theresponding Member must reply to the request within 10 days of receiving therequest, and enter into consultation within 30 days of receiving the request,or within 10 days in cases of urgency, such as cases concerning perishablegoods.
Third, thecomplaining Member may request the DSB for the formation of a panel within 60days or 20 days in urgent cases of the receipt of the notice for consultationby the responding Member if the consultation has failed. Any offer made in theconsultation is not binding.
InterestedMembers may give notice to the consulting Members and the DSB within 10 days ofthe date of circulation of the request for consultation in order to join theconsultation, or may initiate a separate consultation.
Second stage:the panel (up to 45 days for a panel to be appointed, plus 6 months for thepanel to conclude). If consultations fail, the complaining country can ask fora panel to be appointed. The country “in the dock” can block the creation of apanel once, but when the Dispute Settlement Body meets for a second time, theappointment can no longer be blocked (unless there is a consensus againstappointing the panel).
Officially,the panel is helping the Dispute Settlement Body make rulings orrecommendations. But because the panel’s report can only be rejected by consensusin the Dispute Settlement Body, its conclusions are difficult to overturn. Thepanel’s findings have to be based on the agreements cited.
The panel’sfinal report should normally be given to the parties to the dispute within sixmonths. In cases of urgency, including those concerning perishable goods, thedeadline is shortened to three months.
The agreementdescribes in some detail how the panels are to work. The main stages are:
Before thefirst hearing: each side in the dispute presents its case in writing to thepanel.
First hearing:the case for the complaining country and defense: the complaining country (orcountries), the responding country, and those that have announced they have aninterest in the dispute, make their case at the panel’s first hearing.
Rebuttals: thecountries involved submit written rebuttals and present oral arguments at thepanel’s second meeting. The responding Member has the right to make itsrebuttal first, and then, the complaining Member will follow.
Experts: ifone side raises scientific or other technical matters, the panel may consultexperts or appoint an expert review group to prepare an advisory report.
First draft:the panel submits the descriptive (factual and argument) sections of its reportto the two sides, giving them two weeks to comment. This report does notinclude findings and conclusions.
Interimreport: The panel then submits an interim report, including its findings andconclusions, to the two sides, giving them one week to ask for a review.
Review: Theperiod of review must not exceed two weeks. During that time, the panel mayhold additional meetings with the two sides.
Final report:A final report is submitted to the two sides and three weeks later, it iscirculated to all WTO members. If the panel decides that the disputed trademeasure does break a WTO agreement or an obligation, it recommends that themeasure be made to conform to WTO rules. The panel may suggest how this couldbe done.
The reportbecomes a ruling: The report becomes the Dispute Settlement Body’s ruling orrecommendation within 60 days of the date of circulation of the report toMembers unless a consensus rejects it. Both sides can appeal the report (and insome cases both sides do).Appeal process.
Either side orboth sides can appeal a panel’s ruling. The third parties which have indicatedtheir interest in the dispute do not have such a right. Appeals have to bebased on points of law such as legal interpretation — they cannot reexamineexisting evidence or examine new evidence.
Each appeal isheard by three members of a permanent seven-member Appellate Body set up by theDispute Settlement Body and broadly representing the range of WTO membership.Members of the Appellate Body have four-year terms, and can be renewed once.They have to be individuals with recognized standing in the field of law andinternational trade, not affiliated with any government.
The appeal canuphold, modify or reverse the panel’s legal findings and conclusions. Normallyappeals should not last more than 60 days, with an absolute maximum of 90 days.The Dispute Settlement Body has to accept or reject the appeals report within30 days — and rejection is only possible by consensus.Implementation ofRecommendation.
If a countryhas done something wrong, it should swiftly correct its fault. And if itcontinues to break an agreement, it should offer compensation or suffer asuitable penalty that has some bite.
Even once thecase has been decided, there is more to do before trade sanctions (theconventional form of penalty) are imposed.
The priorityat this stage is for the losing “defendant” to bring its policy into line withthe ruling or recommendations. The dispute settlement agreement stresses that“prompt compliance with recommendations or rulings of the DSB [DisputeSettlement Body] is essential in order to ensure effective resolution ofdisputes to the benefit of all Members”. If the country that is the target ofthe complaint loses, it must follow the recommendations of the panel report orthe appeals report. It must state its intention to do so at a DisputeSettlement Body meeting held within 30 days of the report’s adoption. Ifcomplying with the recommendation immediately proves impractical, the memberwill be given a “reasonable period of time” to do so.
If it fails toact within this period, it has to enter into negotiations with the complainingcountry (or countries) in order to determine mutually-acceptable compensation —for instance, tariff reductions in areas of particular interest to thecomplaining side.
If after 20days, no satisfactory compensation is agreed, the complaining side may ask theDispute Settlement Body for permission to impose limited trade sanctions(“suspend concessions or obligations”) against the other side. The DisputeSettlement Body should grant this authorization within 30 days of the expiry ofthe “reasonable period of time” unless there is a consensus against therequest.
In principle,the sanctions should be imposed in the same sector as the dispute. If this isnot practical or if it would not be effective, the sanctions can be imposed ina different sector of the same agreement. In turn, if this is not effective orpracticable and if the circumstances are serious enough, the action can betaken under another agreement. The objective is to minimize the chances ofactions spilling over into unrelated sectors while at the same time allowingthe actions to be effective.
In any case,the Dispute Settlement Body monitors how adopted rulings are implemented. Anyoutstanding case remains on its agenda until the issue is resolved. 4. Case study: the timetable in practice
On 23 January1995, Venezuela complained to the Dispute Settlement Body that the UnitedStates was applying rules that discriminated against gasoline imports, andformally requested consultations with the United States.
The case arosebecause the United States applied stricter rules on the chemicalcharacteristics of imported gasoline than it did for domestically-refinedgasoline. Venezuela (and later Brazil) said this was unfair because US gasolinedid not have to meet the same standards — it violated the “national treatment”principle and could not be justified under exceptions to normal WTO rules forhealth and environmental conservation measures.
Just over ayear later (on 29 January 1996) the dispute panel completed its final report.(By then, Brazil had joined the case, lodging its own complaint in April 1996.The same panel considered both complaints.) The dispute panel agreed withVenezuela and Brazil.
The UnitedStates appealed. The Appellate Body completed its report (The appeal reportupheld the panel’s conclusions, making some changes to the panel’s legalinterpretation), and the Dispute Settlement Body adopted the report on 20 May1996, one year and four months after the complaint was first lodged.
The UnitedStates and Venezuela then took six and a half months to agree on what theUnited States should do (i.e., to determine mutually-acceptable compensation).The agreed period for implementing the solution was 15 months from the date theappeal was concluded (20 May 1996 to 20 August 1997) (i.e., the United Statesagreed with Venezuela that it would amend its regulations within 15 months).
The DisputeSettlement Body has been monitoring progress — the United States submitted“status reports” on 9 January and 13 February 1997, for example, and on 26August 1997 it reported to the Dispute Settlement Body that a new regulationhad been signed on 19 August. Case before the WTO:The tuna-dolphin dispute.
This case washandled under the old GATT dispute settlement procedure but still attracts alot of attention because of its implications for environmental disputes. Keyquestions are:
· can one country tell another what its environmental regulationsshould be?
· and do trade rules permit action to be taken against the methodused to produce goods (rather than the quality of the goods themselves)?
In easterntropical areas of the Pacific Ocean, schools of yellowfin tuna often swimbeneath schools of dolphins. When tuna is harvested with purse seine nets,dolphins are trapped in the nets. They often die unless they are released.
The US MarineMammal Protection Act sets dolphin protection standards for the domesticAmerican fishing fleet and for countries whose fishing boats catch yellowfintuna in that part of the Pacific Ocean. If a country exporting tuna to theUnited States cannot prove to US authorities that it meets the dolphinprotection standards set out in US law, the US government must embargo allimports of the fish from that country. In this dispute, Mexico was theexporting country concerned. Its exports of tuna to the US were banned. Mexicocomplained in 1991 under the GATT dispute settlement procedure.
The embargoalso applies to “intermediary” countries handling the tuna en route from Mexicoto the United States. Often the tuna is processed and canned in one of thesecountries. In this dispute, the “intermediary” countries facing the embargowere Costa Rica, Italy, Japan and Spain, and earlier France, the NetherlandsAntilles, and the United Kingdom. Others, including Canada, Colombia, theRepublic of Korea, and members of the Association of Southeast Asian Nations,were also named as “intermediaries”.
The panel.
Mexico askedfor a panel in February 1991. A number of “intermediary” countries alsoexpressed an interest. The panel reported to GATT members in September 1991. Itconcluded:
· that the US could not embargo imports of tuna products from Mexicosimply because Mexican regulations on the way tuna was produced did not satisfyUS regulations. (But the US could apply its regulations on the quality orcontent of the tuna imported.) This has become known as a “product” versus“process” issue.
· that GATT rules did not allow one country to take trade action forthe purpose of attempting to enforce its own domestic laws in another country —even to protect animal health or exhaustible natural resources. The term usedhere is “extra-territoriality”.
What was thereasoning behind this ruling? If the US arguments were accepted, then anycountry could ban imports of a product from another country merely because theexporting country has different environmental, health and social policies fromits own. This would create a virtually open-ended route for any country toapply trade restrictions unilaterally — and to do so not just to enforce itsown laws domestically, but also to impose its own standards on other countries.The door would be opened to a possible flood of protectionist abuses. Thiswould conflict with the main purpose of the multilateral trading system — toachieve predictability through trade rules.
The panel’stask was restricted to examining how GATT rules applied to the issue. It wasnot asked whether the policy was environmentally correct or not. It suggestedthat the US policy could be made compatible with GATT rules if members agreedon amendments or reached a decision to waive the rules specially for thisissue. That way, the members could negotiate the specific issues, and could setlimits that would prevent protectionist abuse.
The panel wasalso asked to judge the US policy of requiring tuna products to be labeled“dolphin-safe” (leaving to consumers the choice of whether or not to buy theproduct). It concluded that this did not violate GATT rules because it wasdesigned to prevent deceptive advertising practices on all tuna products,whether imported or domestically produced.
P.S. Thereport was never adopted.
Under thepresent WTO system, if WTO members (meeting as the Dispute Settlement Body) donot by consensus reject a panel report after 60 days, it is automaticallyaccepted (“adopted”). That was not the case under the old GATT. Mexico decidednot to pursue the case and the panel report was never adopted even though someof the “intermediary” countries pressed for its adoption. Mexico and the UnitedStates held their own bilateral consultations aimed at reaching agreement outsideGATT.
In 1992, theEuropean Union lodged its own complaint. This led to a second panel reportcirculated to GATT members in mid 1994. The report upheld some of the findingsof the first panel and modified others. Although the European Union and othercountries pressed for the report to be adopted, the United States told a seriesof meetings of the GATT Council and the final meeting of GATT ContractingParties (i.e. members) that it had not had time to complete its studies of thereport. There was therefore no consensus to adopt the report, a requirementunder the old GATT system. On 1 January 1995, GATT made way for the WTO.Timetable forsettling a dispute.
Theseapproximate periods for each stage of a dispute settlement procedure are targetfigures — the agreement is flexible. In addition, the countries can settletheir dispute themselves at any stage. Totals are also approximate.
60 days — Consultations,mediation, etc
45 days — Panelset up and panelists appointment
6 months — Finalpanel report to parties
3 weeks — Finalpanel report to WTO members
60 days — DisputeSettlement Body adopts report
(if no appeal)
Total = 1 year(without appeal)
60-90 days — Appealsreport
30 days — DisputeSettlement Body adopts appeals report
Total = 1y 3m(with appeal) Case: Timetable forsettling the US-Venezuela gasoline disputeTime(0 = start of case) Target/ actual period Date Action -5 years 1990 US Clean Air Act amended -4 months September 1994 US restricts gasoline imports under Clean Air Act “60 days” 23 January 1995 Venezuela complains to Dispute Settlement Body, asks for consultation with US +1 month 24 February 1995 Consultations take place. Fail. +2 months 25 March 1995 Venezuela asks Dispute Settlement Body for a panel +2½ months “30 days” 10 April 1995 Dispute Settlement Body agrees to appoint panel. US does not block. (Brazil starts complaint, requests consultation with US.) +3 months 28 April 1995 Panel appointed. (31 May, panel assigned to Brazilian complaint as well) +6 months 9 months (target is 6-9) 10-12 July and 13-15 July 1995 Panel meets +11 months 11 December 1995 Panel gives interim report to US, Venezuela and Brazil for comment +1 year 29 January 1996 Panel circulates final report to Dispute Settlement Body +1 year, 1 month 21 February 1996 US appeals +1 year, 3 months “60 days” 29 April 1996 Appellate Body submits report +1 year, 4 months “30 days” 20 May 1996 Dispute Settlement Body adopts panel and appeal reports +1 year, 10½ months 3 December 1996 US and Venezuela agree on what US should do (implementation period is 15 months from 20 May) +1 year, 11½ months 9 January 1997 US makes first of monthly reports to Dispute Settlement Body on status of implementation +2 years, 7 months 19-20 August 1997 US signs new regulation (19th). End of agreed implementation period (20th) Questions
1. Adjudicatingvs. negotiating vs. negotiating international trade disputes – pros and cons?
2. How doesthe WTO dispute settlement procedure work?
3. Explain theconcepts of reverse consensus and of cross-retaliation.
4. Who mayparticipate in WTO dispute settlement procedure?
5. Are WTOPanels bound by earlier GATT/WTO decisions?References
1. John H. Jackson, The World Trading System: Law and Policy ofInternational Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p. 107-137.
2. Jackson/Davey/Sykes, 327-371.
3. Trading into the Future – WTO, 3rd edition, Revised August 2003
Lecture 9. Regulation of Agricultural Trade1. Background for the Agreement
The originalGATT1947 did apply to agricultural trade, but it contained loopholes. Forexample, it allowed countries to use some non-tariff measures such as importquotas, and to subsidize. Agricultural trade became highly distorted, especiallywith the use of export subsidies which would not normally have been allowed forindustrial products. During 1997-2001, for example, the US injected exportsubsidies worth $78.87 billion. In May 2002, the US enacted another lawauthorizing massive farm subsidies. Farm subsidies account for more than 46% ofthe EU budget, spending U$7 billion in export subsidies to support 2% of itspopulation involved in agriculture, accounting for 85% of all exports subsidiesin the world. In Japan, the level of support is 65 percent (Switzerland 73% andNorway 69%) of gross farm receipts.
Theagricultural negotiations of the Uruguay Round were largely dominated byexchanges between the US and the EU. On the eve of the Uruguay negotiations,the US was the world’s biggest exporter of agricultural products and the secondbiggest importer. In contrast, the EU was the biggest importer and the secondbiggest exporter at world level. When the Round began, the two major exportingpowers had both reached self-sufficiency because of the effectiveness of theCAP, technological progress and improved productivity, and were trying toconquer the export market. Only with a simultaneous and similar modification offarm policies on both sides of the Atlantic could there be a sharing of thecost of agricultural policy reform. The agricultural negotiations that wereinitially multilateral in the GATT context rapidly turned into bilateralnegotiations between the EU and the US. The agriculture negotiations blockedthe rest of the multilateral negotiations. The concessions obtained were infact no more than an international consolidation of internal reforms.
Reasons forthe existence of exceptional arrangements for agriculture.
Governmentsusually give three reasons for supporting and protecting their farmers, even ifthis distorts agricultural trade to make sure that enough food is produced tomeet the country’s needs
In manycountries, support for agriculture is primarily strategic in nature. Byencouraging agriculture, a country can guarantee its food supplies againstfluctuating harvests and protect its population from famines. Self-sufficiencyin agricultural products means a country does not have to depend on suppliesfrom third countries, which could one day turn out to be its enemies. It isparticularly significant for the developing countries with chronic shortage offoreign exchange. It is not practical for them to depend on imported staplefood, even though it may be cheaper to import, because they may not haveadequate foreign exchange to import the food products. Considering theuncertain nature of their foreign exchange availability and also, perhaps, theuncertainty in the supply of food grain even if the necessary foreign exchangewere available, several countries would like to develop their own productionbase for their staple food, rather than depend on imports.
To shieldfarmers from the effects of the weather and swings in world prices.
The objectiveof ensuring consumers reasonable prices and protecting producers againstfluctuations in the price of agricultural products is often put forward tojustify the existence of agricultural policies. One of the main characteristicsof the agricultural product market is indeed its wide price variations due tothe fact that demand for foodstuffs is constantly rising because of worldpopulation growth whereas supply can vary enormously because of fluctuatingharvests and weather conditions. Variable customs duties, as are given in EU,can correct any variation in world prices and guarantee a fixed price on thedomestic market thus ensure a stable income for producers. Loans to farmers oran insurance mechanism that guarantees producers a minimum income, irrespectiveof fluctuations in world prices, as is the case in the US, can also achievethis goal.
To preserverural society.
Many Westerndemocracies remain closely attached to the cultural, social, and historicalvalues that agriculture perpetuates. In the US, people still cherish the imageof the pioneer farming families who settled the vast expanses of America.Similarly, the Japanese remain very attached to maintaining nationalagriculture through which they can preserve their ancestral traditions. In theEuropean Community, the existence of the common agricultural policy (CAP) isnowadays justified by the multifunctional aspect of agriculture. Thus regionalplanning, safeguarding the rural way of life, animal welfare, environmentalprotection and food security are financed via support for agriculture.
Severaldeveloping countries have a more deep-seated concern. Agriculture in thesecountries is not so much a matter of commerce; it is intimately interwoven withthe pattern of rural life. Many farmers cultivate their land not as acommercial venture, but more as a family tradition. The land has been withtheir families for generations and they have been cultivating it as they haveno other source of income to support their families. Such developing countriesfear that their small and marginal household farmers will be in greatdifficulty when they are called upon to face the challenge of worldcompetition.
To winpolitical support.
This is aninexplicit motivation in granting favorable agricultural policies. In manyWestern democracies, agricultural interests have a political clout that givesthem a decisive influence on the political life of their countries. This is thecase in the US where the thinly populated states of the farm belt have as manysenators as densely populated states like California, and similarly in Japan orCanada where the political systems also encourage over-representation of ruralrather than urban areas. This phenomenon also exists in the EU. In Germany theweight of farming interests in the south of the country was decisive in keepingChancellor Kohl in power; in France the rural electorate still influences avery large share of the vote although farmers account for only some 5% of theworking population.
This culturaland sociological dimension of agricultural support, which is very evident inthe urban electorate, coupled with the strong political representation enjoyedby the agricultural electorate in the major Western democracies, helps tounderstand why, apart from reasons of simple economic logic, the major Westerndemocracies remain firmly attached to maintaining agricultural policies.
But thepolicies have often been expensive, and they have encouraged gluts leading toexport subsidy wars. Countries with less money for subsidies have suffered. Innegotiations, some countries have argued that trying to meet any of theseobjectives is counter-productive. Others have attempted to find ways of meetingthe objectives without distorting trade too much.
Overridingfeature of the agreement: Where there is any conflict between the Agreement andother WTO agreements, the provisions of the Agreement on Agriculture prevail.
The objectiveof the Agreement is to establish a fair and market-oriented agriculturaltrading system, thus improve predictability and security for importing andexporting countries alike.2. Areas of Commitments under the Agreement onAgriculture
- market access, i.e., the disciplines on import restraints andimport limitations;
- domestic support, i.e., support by government to domesticproducers;
- export subsidies, i.e., support by government to exporters.
The agreementdoes allow governments to support their rural economies, but preferably throughpolicies that cause less distortion to trade. It also allows some flexibilityin the way commitments are implemented. Developing countries do not have to cuttheir subsidies or lower their tariffs as much as developed countries, and theyare given extra time to complete their obligations. Special provisions dealwith the interests of countries that rely on imports for their food supplies,and the least developed economies. “Peace” provisions within the agreement aimto reduce the likelihood of disputes or challenges on agricultural subsidiesover a period of nine years.3. Market Access Tariffication.
The new rulefor market access in agricultural products is “tariffs only”. Before theUruguay Round, some agricultural imports, especially for many temperate zoneagricultural products, were restricted by quotas and other non-tariff measures.These have been replaced by tariffs that provide more-or-less equivalent levelsof protection — if the previous policy meant domestic prices were 75% higherthan world prices, then the new tariff could be around 75%. (Converting thequotas and other types of measures to tariffs in this way was called“tariffication”.) The tariffs on virtually all agricultural products tradedinternationally are bound in the WTO.
Tarifficationformula — tariffication referred to the conversion to an ordinary tariff rateof the full extent of protection given to a product through both tariff andNTBs. The Modalities document prescribed the use of the price gap method tomeasure tariff equivalents, as follows:
T = (Pd — Pw)/Pw * 100
Where T = advalorem tariff equivalent
Pd = domesticprice (e.g. wholesale price)
Pw = worldreference price (import or export parity price)
Base year — the average of three years, ex.1986, 1987 and 1988.Tariff Reduction.
A Member hasto reduce its tariff total every year in equal steps over a prescribed span oftime.
DevelopedMembers will, from 1995 to 2000, reduce their tariffs on agricultural productsby 36% on average, with a minimum cut of 15% in each tariff line. Fordeveloping Members, the cuts are 24 and 10% respectively from 1995 to 2004.Least-developed Members were required to bind all agricultural tariffs, but notto undertake tariff reductions.
In practice,major importers of agricultural products have bound the tariffs at very highlevels, assuming very high tariff equivalents for non-tariff measures, thusmaking the entry of imports almost impossible.
Typical HighTariffs
Canada: butter360%,
cheese 289%,
eggs 236.3%
EU: beef 213%,
wheat 167.7%,
sheep meat144%
Japan: wheatproducts 388.1%,
wheat 352.7%,
barleyproducts 361%
US: sugar244.4%,
peanuts173.8%,
milk 82.6%.
These tariffsare so high that even in the final year of the implementation period they wouldstill be very high.Tariff Reductionformulas.
No method orformula for further reduction of the tariffs has been identified as yet for thenext round within the formal WTO process — in fact, this itself would be asubject for negotiations. However, reflecting the importance of this matter,this subject has attracted considerable attention from analysts. What followsis a summary of various ideas, albeit all informal, by which tariffs may bereduced. Given that tariff binding is a matter of strategic concern, it isimportant for countries to be aware of these possible methods and how thesewould affect their currently bound tariff rates.
Across-the-boardlinear reduction. A linear reduction formula is simply Tn = (1-r*t)*T0, whereTn and T0 are new and original tariff rates respectively, r is agreed reductionrate and t is the time period for reduction. For example, if r = 0.06 (i.e. 6 percentreduction per year) and t = 6 years, a 100 percent tariff is reduced to 64percent. This method was applied in the Kennedy Round with the «r*t»set at 50 percent. As a result of some exceptions negotiated subsequently, thefinal reduction was 35 percent. The approach is both simple and transparent.While tariffs could be cut significantly if the reduction rate is high (e.g. 50percent compared to 36 percent on average in the Uruguay), another linear cutwould still leave many tariff peaks in agriculture left by the Uruguay formula.
Linearreduction with conditions on minimum cuts. This was the formula used in the UruguayAoA (36 percent average reduction with a 15 percent minimum per tariff line).Although tariffs were reduced by an average of 36 percent, the method left manytariff peaks, as countries had the freedom to cut tariffs on«sensitive» products by only the minimum 15 percent while reducing bymore for others, in order to reach the (un-weighted) average of 36 percent.This formula could be improved, e.g. by raising the minimum to, say 25 percent,or by seeking a balance in the trade volume between those with higher and lowerthan average cuts, i.e. trade-weighted tariff reductions.
The Uruguayformula with the same base as in the Uruguay. Rather than using the bound ratesreached at the end of the implementation period of the Uruguay as the benchmarkfor further reduction, a further 36 percent cut in the average level of tariffsfrom the same base as in the Uruguay would imply a 72 percent cut over the tworeform periods, a significant reduction over a dozen years or so. This approachhas some other advantages, e.g. giving a sense of the continuity of the processof reform by using the same formula; no controversy over the choice of a new baseperiod; and full «credit» for unilateral reductions during thenegotiation period.
Successivelinear reductions. Compared with the linear method, here the base tariff rate,T0, is adjusted every year to its new level. The formula for this, also knownas a radial formula, is
Tn = (1-r)t *T0. With this, if r = 0.06 and t = 6 years, a tariff level of 100 percent isreduced to 69 percent, compared with 64 percent with the linear formula. As thebase itself gets reduced every year, the overall reduction at the end of theperiod is smaller. However, for a smaller reduction rate and a shorter timeperiod, the difference in reduction rates from the two formulae is not much.
Harmonizationof tariff rates — the Swiss Formula. This formula was used in the Tokyo Roundto harmonize tariff peaks on industrial products left as a result of the linearformula used in the Kennedy Round. The Swiss formula is Tn = (amax * T0)/(amax+ T0), where amax is the upper bound on all resulting tariffs. With amax = 50,an initial tariff of 40 percent would be reduced to 22 percent while a 100percent tariff would be reduced to 33 percent. On the other hand, with amax =25, a 40 percent tariff is reduced to 15 percent and a 100 percent tariff isreduced to 20 percent. The value of amax then becomes the parameter fornegotiations. Figure 1 shows how three of these methods discussed here comparein terms of tariff reductions.
Capping alltariffs at some maximum rate. For example, a maximum rate of 60 percent couldbe agreed to which all higher tariffs would have to be reduced over an agreedperiod. This rule may be applied in conjunction with other reduction methods.
Using actualprotection rates for recent years as the benchmark. In this approach,negotiators agree to eliminate the gap, or a good part of it, between the boundand the applied rates, the so-called «discretionary protection» or«water in the tariff», using some recent period to measure the gap,e.g. 1995-97. This approach, while it makes some economic sense, appears problematicdue to problems associated with measuring (or agreeing with the measurement of)the protection rate. This was one of the problems that led to inflated tariffequivalents (and thus bound tariffs) on many commodities in the Uruguay, whichcame to be known as «dirty tariffication». This method is lesshelpful for developing countries where domestic prices tend to be lower than orsimilar to world reference prices, resulting in negative or zero bound rates,which would not be acceptable.Tariff Quota.
As the tariffsexisting after the tariffication of non-tariff barriers are very high inseveral cases, there would be no meaningful market access opportunities. Hence,particular provisions were made in the document for market accessopportunities. There are three types of such provisions.
Current accessopportunity.
Opportunityhas to be provided for a level of import equal to the average annual importlevel during the base period 1986-88 by having very low tariffs for imports upto this extent.
Minimum accessopportunity.
Opportunityfor a level not less than 3% of the annual consumption in the period 1986-88has to be provided in 1995. This level would be raised to 5% by the end of 2000by developed countries and by the end of 2004 by developing countries by havingvery low tariffs for imports up to this extent.
Specialminimum access opportunity.
Members whohave opted for non-tariff measures instead of tariffication have to providesuch opportunity, i.e., Japan, the Philippines and the Republic of Korea forrice, and Israel for sheepmeat, wholemilk powder and some dairy products. Fordeveloped Members, it means import in 1995 to the extent of 4% of the annualaverage consumption in the base period 1986-88, and an increase of 0.8% of thebase period consumption every year thereafter up to the end of 2000. Fordeveloping Members, it means import in 1995 to the extent of 1% of the annualaverage consumption in the base period, rising uniformly to 2% in 1999 and thento 4% in 2004.
Theseabove-mentioned access opportunities are to be provided by tariff quotas, i.e.,by having very low tariffs up to the stipulated extent of imports, and abovethat level, having the normal tariffs which, in the case of agriculturalproducts, are generally very high. Except for cases of bilateral andplurilateral agreements, these quotas should generally be global quotas, i.e.,on a non-discriminatory basis, rather than country-specific quotas. A tariff-quota.
This is what atariff-quota might look like: Imports entering under the tariff-quota (up to1,000 tons) are charged 10%. Imports entering outside the tariff quota arecharged 80%. Under the Uruguay Round agreement, the 1,000 tons would generallybe based on actual imports in the base period or an agreed “minimum access” formula.
Tariff quotasare also called “tariff-rate quotas”.Special SafeguardProvision (SSP).
Generally,safeguard action can be taken only if there is existence of serious injury orthe threat of serious injury to domestic production, whereas the specialsafeguard action can be taken without the demonstration of any adverse effecton domestic production. A special safeguard action can be taken if the importprice falls below a particularly prescribed level (trigger price) or if theimport quantity rises above a particularly prescribed level (trigger quantity).Price trigger.
The triggerprice is normally to be determined as the average cost, insurance and freight(CIF) import price of the product during the 1986-88 base period. If thetrigger price is high, the import price may fall below this level more often,and consequently, it will be easier to take the special safeguard action.
Formula forthe calculation of the ceilings of price trigger.
1) if thedifference between the trigger price and the import price is 10% of the triggerprice or less, no additional duty can be imposed;
2) if thedifference is more than 10%, but not more than 40%, the additional duty will be30% of the amount by which the difference exceeds 10%;
3) if thedifference is more than 40%, but not more than 60%, the additional duty will be50% of the amount by which the difference exceeds 40%, plus the duty in 2);
4) if thedifference is more than 60%, but not more than 75%, the additional duty will be70% of the amount by which the difference exceeds 60%, plus the duty in 3);
5) if thedifference is more than 75%, the additional duty will be 90% of the amount bywhich the difference exceeds 75%, plus the duty in 4).
For example,when the trigger price is $200 per unit, and the current price falls to $80 perunit, the difference is $120.
According to1), there is no additional duty if the difference is only up to 10% of thetrigger price, i.e., $20.
According to2), up to $80, the duty is 30% of $60 (%80-$20), i.e., $18.
Thereafter, upto a difference of 60%, i.e., $120, the duty is 50% of the difference exceeding40%, i.e., 50% of $40 ($120-$80), i.e., $20.
Hence, theadditional duty may be to the extent of $18+$20, i.e., $38 on each unit. Quantity trigger.
If the volumeof imports is higher than a trigger level of 105-125% of the average level ofimports during the preceding three years, and the import is above 30% or 10-30%of the domestic consumption, special safeguard measures can be imposed. Higherimport penetration will enable a Member to take SSP action at a lower level ofincrease in imports.
Formula forthe calculation of base trigger level, i.e., the increase in the importquantity:
1) if theimport is 10% of domestic consumption or less, 125% of the average quantity ofimports in the three preceding years for which data are available;
2) if theimport is 10-30% of domestic consumption or less, 110% of the average quantityof imports in the three preceding years for which data are available;
3) if theimport is above 30% of domestic consumption or less, 105% of the averagequantity of imports in the three preceding years for which data are available;
The actualtrigger level is the sum of the increase in import quantity and the change indomestic consumption, and must not be less than 105% of the average quantity ofimports in the three preceding years for which data are available.
The measureis, under the SSP, an increase in duty, which must not exceed one-third of theordinary customs duty and will terminate by the end of the imposing year. Forexample, when domestic consumption is 1000 units and the import quantity is 280units, i.e., 28% of domestic consumption, the base trigger import quantitylevel will be 110% of 280 units, i.e., 308 units. Suppose the consumption hasgrown to 1000 units from 900 units, which means a change in consumption of +100units, the actual trigger level in this case is 308+100, i.e., 408 units. If theimport quantity exceeds 408 units, an additional duty can be imposed. Supposethe ordinary customs duty on this item is 30%, the maximum additional duty thatcan be imposed is one-third of 30%, i.e., 10%. Domestic Support.
Reduction ofdomestic support.
Domesticsupport measures are disciplined through reductions in the Total AggregateMeasurement of Support (Total AMS), including product-specific AMS andnon-product-specific AMS. The Total AMS is a means of quantifying the aggregatevalue of domestic support or subsidy given to each category of agriculturalproducts.
Example:Calculation of the current total AMS.
Member X(developed country), year Y
Wheat:
>Intervention price for wheat = $255 per tonne
> Fixedexternal reference price (world market price) = $110 per tonne
> Domesticproduction of wheat = 2,000,000 tonnes
> Value ofwheat production = $510,000,000
> Wheat AMS(AMS 1) ($255–$110) x 2,000,000 tonnes = $290,000,000
(de minimislevel=$25,500,000)
Barley:
>Deficiency payments for barley = $3,000,000> Value of barley production =$100,000,000
> BarleyAMS (AMS 2) = $3,000,000
(de minimislevel=$5,000,000).
Oilseeds:
>Deficiency payments for oilseeds = $13,000,000> Fertilizer subsidy =$1,000,000
> Value ofoilseeds production = $250,000,000
> OilseedsAMS (AMS 3) = $14,000,000
(de minimislevel=$12,500,000)
Support notspecific to products.
> Generallyavailable interest rate subsidy = $ 4,000,000
Value of totalagricultural production = $860,000,000
>Non-product-specific AMS (AMS 4) = $4,000,000
de minimislevel=$43,000,000
Current totalAMS (AMS 1 + AMS 3) = $304,000,000.
If a supportmeasure exists but the method of calculation of the AMS cannot be applied toit, the calculation of an equivalent measurement of support (EMS), i.e.,budgetary outlays, will be made and included in the Total AMS.
Generally,price support is measured by multiplying the gap between the appliedadministered price and a specified fixed external reference price, i.e., worldmarket price, by the quantity of production eligible to receive theadministered price. The fixed external reference price is the average unitprice during the period 1986-88. It is the FOB price for the net exportingcountry and the CIF price for the net importing country.
The scheduleon the reduction in domestic support prescribes that the Base Total AMS must bereduced by 20% for developed Members over 6 years (1995-2000 both inclusive)and 13.3% for developing Members over 10 years (1995-2004 both inclusive),while there is no reduction required of least-developed countries.
Measures ofdomestic support.
Domesticsupport measures are the aid granted to agricultural production that are notexport subsidies. These aids are classified into three categories of two types:green and blue box measures free of reduction commitments and yellow/amber boxmeasures subject to reduction commitments.
Green boxmeasures: measures having no or at most minimal trade-distorting effects oreffects on production, and must be provided through a publicly-funded program(including revenue foregone) not involving transfer from consumers. It impliesa preference for agriculture support policies financed in a transparent way bythe taxpayer as opposed to price support policies financed by the consumers.
1) Governmentservice programs for agriculture and the rural community, such as pest anddisease controls, support for training and information, infrastructure (water,electricity) or research programs, which involve no direct payments.
2) Domesticfood aid programs for people in need, provided that products are bought fromproducers at market prices, and aid for public storage of agricultural productsfor food security purposes.
3) Directpayment: aid for developing agricultural structures such as resource retirementprograms, or investment aid for producers totally and permanently retire fromproduction, or de-coupled income support measures granted to producerssuffering an income loss and not related to the quantities produced or theprices charged or factors of production employed.
4) Regionalassistance for farmers in disadvantaged regions and environmental aid
5) Payments forrelief from natural disasters.
Blue boxmeasures: direct payments under production limiting programs made on fixedareas and yield or a fixed number of livestock, or on 85% or less of productionin a defined base period, particularly aids respecting certain criteriaprecisely met by European direct support (the central pillar of the very recentCAP reforms) for products subject to quantitative production limits anddeficiency payments granted by the US.
Blue boxmeasures can be considered to be partially-decoupled, that is, production isstill required in order to receive the payments, but the actual payments do notrelate directly to the current quantity of that production.
Amber/yellowbox measures: any domestic support measures not correspond to the exceptionalarrangements of the green and blue boxes are classified as being yellow andmust therefore be included in the calculation of reduction commitments. Thereduction commitment is a global commitment. In other words, Members have notundertaken to reduce the support granted to each product by 20%. A Member isconsidered to be in compliance with its domestic support commitments if itsdomestic support in favor of agricultural producers expressed in terms ofcurrent total AMS does not exceed the corresponding annual or final boundcommitment level specified in its Schedule. Other exemptmeasures.
1) developmentmeasures: measures of assistance, whether direct or indirect, designed toencourage agricultural and rural development and that are an integral part ofthe development programs of developing countries, including investmentsubsidies, agricultural input subsidies available to low-income orresource-poor producers in developing countries and domestic support toencourage diversification from growing illicit narcotic crops in developingcountries.
2) de minimuslevels of support: When the aggregate value of product-specific ornon-product-specific support does not exceed 5% (for developed countries) or 10%(for developing countries) of the total value of production of the agriculturalproduct in question, there is o requirement to reduce such trade-distortingdomestic support.Summary:
The maincomplaint about policies which support domestic prices, or subsidize productionin some other way, is that they encourage over-production. This squeezes outimports or leads to export subsidies and low-priced dumping on world markets.The Agriculture Agreement distinguishes between support programmes thatstimulate production directly, and those that are considered to have no directeffect.
Domesticpolicies that do have a direct effect on production and trade have to be cutback. WTO members have calculated how much support of this kind they wereproviding (using calculations known as “total aggregate measurement of support”or “Total AMS”) for the agricultural sector per year in the base years of1986-88. Developed countries have agreed to reduce these figures by 20% oversix years starting in 1995. Developing countries are making 13% cuts over 10years. Least developed countries do not need to make any cuts.
Measures withminimal impact on trade can be used freely — they are in a “green box” (“green”as in traffic lights). They include government services such as research,disease control, infrastructure and food security. They also include paymentsmade directly to farmers that do not stimulate production, such as certainforms of direct income support, assistance to help farmers restructureagriculture, and direct payments under environmental and regional assistanceprogrammes.
Alsopermitted, are certain direct payments to farmers where the farmers arerequired to limit production (sometimes called “blue box” measures), certaingovernment assistance programmes to encourage agricultural and ruraldevelopment in developing countries, and other support on a small scale whencompared with the total value of the product or products supported (5% or lessin the case of developed countries and 10% or less for developing countries).
4. Export Subsidies
Background:Before the WTO, particularly in the 1970s and 1980s, success in internationalmarket for agricultural products became increasingly determined by thefinancial power of national treasuries rather than the efficiency and marketingskills of agricultural producers and exporters. Export subsidies also became amajor factor in depressing, or destabilizing, world market prices for manyagricultural products. When the Uruguay negotiations began, the commonobjective of the US and the Cairns Group1 countries was the pure and simpleabolition of export subsidies. The possibility of granting export subsidies wasfinally incorporated in the Agreement on Agriculture at the request of the EU.
Definition:Export subsidies are subsidies contingent on export performance, including:
1) directexport subsidies contingent on export performance
2) sales ofnon-commercial stocks of agricultural products for export at prices lower thancomparable prices for such goods on the domestic market
3)producer-financed subsidies such as a levy on all production is then used tosubsidize the export of a certain portion of that production
4) costreduction measures such as subsidies to reduce the cost of marketing goods forexport like handling cost and cost for international freight
5)international transport subsidies applying only to exports
6) subsidieson primary agricultural products incorporated in a processed agriculturalproduct such as wheat contingent on their incorporation in export products of biscuits.Rates of Reduction:
TheAgriculture Agreement prohibits export subsidies on agricultural productsunless the subsidies are specified in a member’s lists of commitments. Wherethey are listed, the agreement requires WTO members to cut both the amount ofmoney they spend on export subsidies and the quantities of exports that receivesubsidies. All in all, 25 Members (counting the members of the EU as one) haveexport subsidy reduction commitments specified in their schedules, with a totalof 428 individual reduction commitments.
Takingaverages for 1986-90 as the base level, developed countries have agreed to cutthe value of export subsidies by 36% over the six years starting in 1995 (24%over 10 years for developing countries). Developed countries have also agreedto reduce the quantities of subsidized exports by 21% over the six years (14%over 10 years for developing countries). Least developed countries do not needto make any cuts.
During thesix-year implementation period, developing countries are allowed under certainconditions to use subsidies to reduce the costs of marketing and transportingexports.Other provisions.
1) Exportrestrictions on foodstuffs should not be introduced without giving dueconsideration to the effects of such restrictions on importing Member’s foodsecurity.
2) Duerestraint or peace clause should be applied when subsidies in respect of agriculturalproducts are to be subject to other WTO agreements.
3) Netfood-importing developing countries should be ensured the availability ofadequate supplies of basic foodstuffs from external sources on reasonable termsand conditions.Questions
1. Why aretrade in agricultural products and textiles and clothing subject to specialagreements in GATT 1994?
2. Who willbenefit more from the Agreement on Agriculture, the developed countries or thedeveloping ones?
3. What areareas of commitments under Agreement on Agriculture?
4. What is AMSand how is it calculated?
5. ExplainSpecial Safeguard Provisions.
6. Discuss thetariff reduction formulas in Agricultural Trade.Reference
1. GONZALEZ,C.G., Institutionalizing inequality: the WTO Agreement on Agriculture, foodsecurity, and developing countries. Colum. J. Envtl. L., 27 (2002), p. 433-490.
2. Bhagirath Lal.The World Trade Organization — A Guide to the Framework for International Trade,Third World Network, Malaysia 1999.