Monika Goels Online Classes

For CS Professional Students

Strategic Management, Alliances and International
Trade
Chapter 12- INTERNATIONAL TRADE AND TREATIES
(WORLD TRADE ORGANISATION)

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 othermonetary, 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.
GATTs 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
Geneva
Annecy
Torquay
Geneva
Dillon
Kennedy
Tokyo

Period
1947
1949
1951
1956
1960-61
1964-67
1973-79

Participants
23
13
38
26
26
62
102

Average Reduction in US Tariff Rates 1947-85

120
100
80
60
40
20

GATT Negotiating Rounds

yo
To
k

ed
y
en
n
K

ill
on
D

en
ev
a
G

ay
To
rq
u

nn
ec
y
A

en
ev
a
G

en
ev
a

Pr
eG

Index
Pre-Geneva
Tariff = 100

Uruguay Roundthe 8th Round

123 participating countries.
Most difficultand most ambitiousamong
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 RoundOutcomes
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.

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 WTOs 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 nondiscriminatory 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

Basic
principles

GATT

GATS

TRIPS

Additional
details

Other goods
agreements
and annexes

Services
annexes

Market access Countries

commitments schedules of
commitments

Countries
schedules of
commitments

Disputes
Dispute
settlement

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 Members 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.

WTOs 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 eliminateor reduce substantiallyits

internal trade barriers in a reasonable period of
time.
* Provision aimed at avoiding partial PTAswhich
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