Strategic Management, Alliances and International

Trade Chapter 12- INTERNATIONAL TRADE AND TREATIES

(WORLD TRADE ORGANISATION)

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Forms of Economic Integration

• Free Trade Area (FTA) Free trade among members.

Each country has independent trade policies toward nonmembers.

• Customs Union (CU) FTA + common external trade policy.

• Common Market CU + free mobility of factors of production.

• Economic Union Common Market + harmonization of other—monetary, fiscal—

policies.

From GATT to WTO

• Bretton Woods institutions intended to be complemented by International Trade Organisation – stillborn in 1946

• GATT came into being as an interim arrangement 1947. • GATT’s primary focus was the reciprocal reduction of tariffs

which later expanded to other trade related areas. In the years leading up to the Uruguay Round, GATT expanded its competence through several rounds of trade negotiations which witnessed the formulation of complex legal instruments on specific aspects of trade, particularly disciplines on the use of non tariff barriers.

• Successive rounds of GATT negotiations to reduce tariffs… • … culminating in the Uruguay Round which established the

World Trade Organisation 1994

GATT-Sponsored Trade Liberalization – Negotiating Rounds: The First Seven –

Round Period Participants

• Geneva 1947 23

• Annecy 1949 13

• Torquay 1951 38

• Geneva 1956 26

• Dillon 1960-61 26

• Kennedy 1964-67 62

• Tokyo 1973-79 102

Average Reduction in US Tariff Rates 1947-85

0

20

40

60

80

100

120

Pre-G

enev

a

Gen

eva

Ann

ecy

Tor

quay

Gen

eva

Dill

on

Ken

nedy

Tok

yo

Index Pre-Geneva Tariff = 100

GATT Negotiating Rounds

• 123 participating countries.

• Most difficult—and most ambitious—among all rounds of negotiation.

• Lasted almost 8 years (1986-1994, in effect since 1995): the longest round.

• Created the WTO in 1995.

• Ultimately, very successful.

Uruguay Round—the 8th Round

• Manufactured goods’ further liberalization: – Cap on developed countries’ average tariff: not higher than

4%.

– Overall, tariffs reduced by more than 30%.

– Additional tariffs ‘bound.’

• Extended GATT scope to many new areas: – Agriculture.

– Textiles.

– Services (banking, insurance, telecommunications, transportation etc.): GATS.

– Intellectual property (copyrights, patents, trademarks): TRIPS.

• Strengthened GATT dispute settlement procedures.

Uruguay Round—Outcomes

Agriculture • Main difficulty. Ultimately, plan to progressively

reduce subsidies was approved.

Textiles • Plan to progressively reduce and eliminate the

current quota system.

TRIPS • Agreement to provide enhanced protection to

intellectual property.

GATS

• Extension of GATT rules to services.

• Negotiations continued after the conclusion of the Uruguay Round. – Telecommunications (1997-98)

• 69 countries (90% of world telecommunications revenues) involved.

– Financial Services (1997-99) • 102 countries (95% of trade in banking, insurance and

financial information) involved.

In both cases, markets became more open to foreign competition and barriers to FDI were reduced.

What is the WTO?

• The World Trade Organisation (WTO)

Established on 1st January 1995

As a result of the Uruguay Round negotiations (1986-1994)

Located in Geneva, Switzerland

Members: 149 countries (as of 11 Dec. 2005)

• At its simplest:

“A global organisation dealing with rules of trade between nations”.

(source: WTO)

The WTO’s functions

• Administers the WTO Agreements and facilitates their operation and implementation

• Provides a forum for trade negotiations among member states on matters covered by the Agreements and for further liberalisation of trade amongst members

• Responsible for the settlement of differences and disputes between members

• Responsible for periodic reviews of the trade policies of members • Also provides technical assistance and training for developing countries • Cooperates with other international organisations on subjects of mutual

interest

GATT/WTO: Main Objective

To provide a legal framework for incorporating the results of negotiations

directed toward

“reciprocal and mutually advantageous exchange of market access commitments on a non-

discriminatory basis.”

• Typically, such an outcome is obtained through reductions of tariffs and other barriers to trade.

Principles of the world trading system under the WTO

• Non discrimination- Most Favoured Nation (MFN) and National Treatment obligations

• Freer trade – negotiations aimed at lowering trade barriers

• Predictability and transparency - binding commitments, restrictions on the use of barriers to trade and transparent trade policies and regulatory frameworks (e.g. transparency obligations in the major trade agreements and the Trade Policy Review Mechanism)

• The promotion of fair competition- MFN, national treatment and rules against unfair trade practices (e.g. anti dumping)

• Encouragement of development and economic reform

Organisational structure of the WTO

• Ministerial Conference- The apex body for decision making (meets every 2 years). Composition:-ministerial representatives.

• General Council- performs the functions of the Conference between meetings and has specific duties assigned to it by the WTO agreements. Composition:- governmental representatives.

• The General Council also meets as the Dispute Settlement Body and the Trade Policy Review Body.

• Councils for Trade in Goods (oversees GATT), Trade in Services (oversees GATS) and TRIPS which report to and assist the General Council.

• Committees on special subjects, Committees functioning under the Councils and Committees for the Plurilateral Agreements.

Membership- developed, developing, least developed countries and economies in transition. Decision making is by consensus. If consensus is not possible decisions will be taken by a majority vote.

Review Question

• Role of the Ministerial Conference. • Answer: The Ministerial Conference is the highest decision-making body in the

WTO. The Ministerial Conference meets at least once every two years and is composed of international trade ministers from all member countries. The major decisions are taken by members as a whole, either by ministers or their ambassadors or delegates. Ministerial conference can take decision on all matters under any of the multilateral trade agreements.

• Major issues before the Ministerial Conference”: • Answer: There are several important issues. One of the major issues is market

access – a call to either put an end to import quotas, or substantially increase import quotas, to facilitate the export of goods into different countries. Another is that of domestic support, which calls for the end of direct payments to farmers to produce their goods, skewing the market for imports. Third is an export subsidy. Forth relates to lifting of restrictions in service sector. The developing countries have been insisting on deeper reductions in trade distorting farm support by the US and European Union, creating new market access in farm, making real cuts in industrial tariffs and establishing new openings in services trade.

WTO Current Structure

Goods Services Intellectual

property Disputes

Basic

principles

GATT

GATS

TRIPS

Dispute

settlement

Additional

details

Other goods

agreements

and annexes

Services

annexes

Market access

commitments

Countries’

schedules of

commitments

Countries’

schedules of

commitments

The Uruguay Round agreements

• The Agreement establishing the WTO Its Annexes • Annex 1A - GATT 1994 , related agreements (e.g. Agreements on Agriculture,

Subsidies etc.) and texts 1B- General Agreement on Trade in Services (GATS) and Annexes 1C- Agreement on Trade Related Aspects of Intellectual Property Rights

(TRIPS) • Annex 2 Understanding on the Rules and Procedures Governing the

Settlement of Disputes (aka Dispute Settlement Understanding /DSU) • Annex 3 Trade Policy Review Mechanism • Annex 4 Plurilateral Agreements (e.g. Agreement on Trade in Civil Aircraft)

Four main principles of GATT

• Most Favoured Nation – Art. 1 of GATT embodies the MFN rule. At its simplest, it requires any favourable treatment granted to a product originating in or destined for any other country, to be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other member states.

E.g. Spanish coffee case: Spain applied a higher duty on the types of coffee imported from Brazil while applying a lower duty on other coffees considered to be ‘like products’. The Panel considered this to be a breach of its GATT MFN obligation.

• There are permitted exceptions to the MFN rule: for e.g. free trade areas/customs unions and preferential systems. [The principle of MFN is also found in GATS(Art.2) and TRIPS (Art.4)]

Principles (Cont.)

• National Treatment – The national treatment rule in Art. 3 of GATT provides that internal taxes,

charges, laws and regulations must not be applied so as to afford protection to domestic production. The imported product must not be subject directly or indirectly to internal taxes in excess of those applied directly or indirectly to the like domestic product.

E.g. Japan- Alcoholic beverages case (1996) imported vodka (and other alcoholic beverages) vs. local shochu (a

distilled white spirit) and excessive taxes on the former. [The national treatment principle is also found in GATS (Art.17) and TRIPS (Art.3).]

Principles (Cont.)

• Tarrification

- Protection of the domestic industry by tariffs only.

- Reinforced through rules which prohibit use of quantitative restrictions

(Art 11 GATT).

Limited exceptions are allowed e.g. for BOP reasons (Art 12 GATT).

• Tariff Concessions- negotiations shall be aimed at reducing tariffs (Preamble and Art. 28bis GATT). Tariffs shall also be bound against further increases [Art 2.1(b) GATT].

(Tariff concessions are recorded in schedules of concessions)

Review Questions

• ‘’Most favoured nation status does not always mean equal treatment. It is often used to favour selected member countries.’’ Comment.

• Under the WTO agreements, countries cannot normally discriminate between their trading partners. If you grant someone a special favouryou have to do the same for all other WTO members. This principle is known as most-favoured-nation (MFN) treatment. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or ser-vices from all its trading partners whether rich or poor, weak or strong. It suggests special treatment, but in the WTO it actually means non-discrimination, treating virtually everyone equally. Each member treats all the other members equally as “most-favoured” trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same “best” treatment to all the other WTO members so that they all remain “most-favoured”. The MFN principle ensures that each country treats its over 140 fellow-members equally.

Review Question

• What are the principles of multilateral trading system under WTO ? • Solution • The principles of multilateral trading system are as under: • — Without discrimination : a country should not discriminate between its

trading partners (they are all, equally, granted “most-favoured-nation” or MFN status); and it should not discriminate between its own and foreign products, services or nationals (they are given “national treatment”);

• — Freer : with barriers coming down through negotiation; • — Predictable : foreign companies, investors and governments should be

confident that trade barriers (including tariffs, non-tariff barriers and other measures) should not be raised arbitrarily; more and more tariff rates and market- opening commitments are “bound” in the WTO;

• — More competitive : by discouraging “unfair” practices such as export subsidies and dumping products at below cost to gain market share;

• — More beneficial for less developed countries : by giving them more time to adjust, greater flexibility, and special privileges.

Review Question

• ____________________ means placing home and foreign producers on an equal level with regard to artificial conditions of production caused by foreign bounties, but not interfering with natural comparative advantage.

Services and the WTO

• The WTO regulates trade in services through the General Agreement on Trade in Services (GATS). The GATS is “broadly comparable” to the GATT but there are significant differences in its approach to liberalization.

• Services cover a wide range of activities. Under the GATS, the term “services” include any service in any sector except services supplied in the exercise of governmental authority.

• The GATS applies to all measures by Members affecting trade in services.

Measures can be laws, regulations, procedures, decisions, administrative action etc., of Member governments.

Four modes of Supply under GATS

• Trade in services under the GATS is defined in terms of four modes of supply. They are :-

(1) from the territory of one Member into the territory of any other Member (aka cross border supply of services/ Mode 1)

(2) in the territory of one Member to the service consumer of any other Member (aka consumption abroad/ Mode 2)

(3) by a service supplier of one Member, through commercial presence in the territory of any other Member; (aka commercial presence/ Mode 3)

(4) by a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member (aka presence of natural persons/ Mode 4)

(Art.1 GATS)

GATS obligations

Two main categories of obligations • General obligations which apply to all service sectors of all

Members. • Specific obligations which apply only to service sectors

specified in the Member’s “Schedule of specific commitments”.

General Obligations

MFN (Art.2) “With respect to any measure covered by this Agreement, each Member

shall accord immediately and unconditionally to services and service

suppliers of any other Member treatment no less favorable than that it

accords to like services and service suppliers of any other country.”

Note qualifications to the MFN rule via Art. 2 exemptions and RTAs (Art.5)

Transparency (Art.3)

Art. 3 is mainly concerned with the provision of information. The rule

requires the “prompt” publication of general measures, notification of

changes to/introduction of measures that affect sectors covered by

specific commitments to the Services Council. Also requires the

establishment of national enquiry points.

Specific obligations

Market Access Art. 16 “With respect to market access through the modes of supply identified in Article 1, each Member shall accord services and service suppliers of any other Member treatment no less favorable than that provided for under the terms, limitations and conditions agreed and specified in its Schedule.” Art. 16 contains a prohibition of a list of measures (mostly quantitative) which Members cannot maintain unless they specify them in their Schedules as limitations on market access. These measures include: - limitations on the number of suppliers (e.g. quotas) - limitations on the quantity of service out put (e.g. limited broadcasting time for foreign films) - limitations on the participation of foreign capital or restrictions on the type of legal entity (e.g. joint venture)

Cont.

National Treatment Art. 17 “In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favorable than that it accords to its own like services and service suppliers.” Example : The availability of tax incentives only to companies controlled by nationals of the country in the retail services sector. Art. 17 covers both de jure and de facto discrimination.

Cont.

Domestic regulations Art. 6 Article 6 addresses domestic regulations as these may act as barriers to trade even if they are non-discriminatory. E.g. professional qualifications, licensing procedures and technical regulations. Certain Art. 6 obligations apply only to service sectors in which commitments have been undertaken. They include: - obligations to ensure that general measures are administered in “a reasonable,

objective and impartial manner”. - obligations aimed at preventing licensing and qualification requirements and

technical standards from being unnecessary barriers to trade.

Review Question

• _____________ is the first ever set of multilateral, legally enforceable rules covering international trade in services.

WTO: Benefits for business

• Creation of a stable, rule based, multilateral trading regime • Market access translates into market opportunities • The rule based system creates certain rights of access - Security of access tariff bindings and disciplines on barriers to trade whether tariff or non tariff. It also provides

non discriminatory treatment of products and services.

- Stability of access the application of uniform rules in key areas of the trading process e.g. customs valuation,

import licenses etc.

- Rights against unfair trade practices for – Domestic industry – Export industry – Import industry

Participating in the process

Why is it important?

• Improve market access through continuous lobbying through chambers of commerce, trade/product/service organizations.

• Overcome problem areas in international trading e.g. technical standards, high tariffs on processed goods.

• Expand or protect trading interests through support or opposition of new subject areas in trade negotiations.

• Preserve or defend markets through their governments’ use of the dispute resolution mechanism.

Preferential trade agreements

• They are, by nature, discriminatory:

member countries’ concessions to each other are not extended to third parties.

• Although PTAs are allowed by the WTO, the WTO has some guidelines governing the formation of PTAs.

WTO’s Guidelines for PTAs:

• Bloc members cannot increase external trade barriers against imports from third countries.

* Provision aimed at securing interests of

WTO members not participating in the PTA.*

• Bloc should eliminate—or “reduce substantially”—its internal trade barriers in a “reasonable” period of time.

* Provision aimed at avoiding partial PTAs—which

would lead to the practical elimination of the MFN rule.*

PTAs: The Facts

• Over 200 regional trade arrangements are currently in force.

• Nearly all WTO members participate in at least one regional free trade agreement.

The WTO as a dispute settlement forum and a monitoring body

• Settlement of disputes under the DSU 1. Consultations, good offices, conciliation and mediation 2. Panel proceedings 3. Appellate Body 4. Consideration and adoption of Panel/AB reports by the DSB If the report concludes that a measure is inconsistent with a covered

agreement the Panel (/AB) must recommend that the Member concerned bring the measure into conformity with that agreement.

Adoption of Panel (/AB) reports by the DSB is automatic. 5. Implementation of reports by members - Compliance - Negotiation of compensation (voluntary, mutually acceptable) - Authorisation of retaliatory action (suspension of concessions/obligations) • Trade Policy Review Mechanism- Periodic review of trade policies

For further information

• The WTO Website : www.wto.org

Some related websites of interest

• OECD www.oecd.org

• ITC www.intracen.org

• World Bank www.worldbank.org