UNIT IV

WTO AND INDIA

LESSON 16:
INTRODUCTION TO WTO-ORIGIN AND
ORGANIZATION

(without technically imposing quotas) by persuading

foreign companies to voluntarily restrict the quantity of
goods they export into a particular country. (Foreign
companies agree to do this because the government
threatens to impose tariffs if the foreign companies do not
agree to VERs.)

World Trade Organization (WTO)

History

In the 1930s during the depression, most governments

substantially restricted trade in an effort to protect domestic
jobs. Policy makers began to recognize that when all
countries use these practices, it is clearly counter-productive.
However, no country was prepared to open its own
markets unless other countries did the same.
In 1948 the General Agreement on Tariffs and Trade
(GATT) was entered into by many of the developed
nations. This agreement substantially reduced tariff levels
and disallowed certain other types of government
intervention.
Since then there have been seven sets of trade rounds in
which further reductions in tariffs have been negotiatedThe most recent round (The Uruguay Round) established
the World Trade Organization (WTO), which supersedes
GATT. The WTO was established in 1995.
The WTO is an organization whose members agree to
abide by the trade rules stipulated by the WTO. Moreover,
the WTO has a binding dispute resolution process (which
is something the GATT lacked.)

135 countries are members. (The most significant nonmember is China. However, the last major hurdles (the
U.S. and E.U.s consent) have recently been cleared for their
entry. China will almost certainly be in the WTO soon.)

The WTO is a system of rules dedicated to open, fair and

undistorted competition. (taken from a WTO publication

Types of Trade Restrictions or other Interventions

Note that trade barriers are usually intended to protect a
domestic industry. However, those barriers are costly to the
customers.

The US government has made such deals with Japanese

auto-makers.

Local Content Requirements

To avoid tariffs, companies often do the final assembly of

products within the country in which the companies plan
to sell. However, components are often manufactured in
another country.

Some countries therefore have local content requirements.

They might, for example, stipulate that an auto company
that assembles cars in the country use at least 75% local
content. (i.e. 75% of the value of components must be
made in the local country.)

Administrative Barriers

What is the WTO?

Many countries use customs and inspection processes to

interfere with imports.

Examples

Japan had a practice of inspecting all tulip bulbs by slicing

them open (& thus ruining them).

France used to require that all imported VCRs be

processed through a remote, under-staffed office. The
result was costly delays.

For cosmetics imports, Japan had a list of what ingredients

were allowed. The list was not made public, so foreign
cosmetics companies had to guess at what ingredients were
allowed when they submitted a product for approval, and
would have to wait a long time for each application.

Subsidies

Tariffs

In order to assist exporting industries, some governments

have adopted policies of subsidizing exports.

A tariff is a charge on imports.

Most Favoured Nation (MFN) Clause

Specific tariffs are a fixed charge for each unit of good

imported (e.g. $4 per barrel of oil).

WTO members may not treat any WTO member less

favourably than any other WTO member.

Ad valorem tariffs are charges computed as a percentage of

the value of the imports (e.g. 30% on imported clothing).

There are some exceptions - such as for customs unions

and free trade areas.

Quotas

WTO on Tariffs

A quota is a restriction on the quantity of imports.

Voluntary Export Restraints (VERs)

As a result of the GATT (discussed later in this lecture),

quotas were banned for most products. However, some
governments have gotten the same result as quotas

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When GATT was created, the average tariff on

manufactured goods was about 40%. It is now down to
about 3.8%.
Approximately 44% of international trade in industrial
products is now tariff-free.

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WTO

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WTO on Quotas

Quotas are prohibited on most goods.

WTO on VERs

As of 1995, VERs are no longer allowed. Countries that

have them have up to 8 years to phase them out.

WTO on Local Content Requirements

Local content requirements are no longer allowed.

There is a 5-7 year phase-in period for developing

countries.

The WTO has rules that attempt to prevent administrative

abuses. However, the rules are unable to prevent all abuses.

WTO on Export Subsidies

Export subsidies are not allowed (on most products).

However, general subsidies are allowed.

Resolution of Trade Disputes

Intellectual Property Rights (IPRs)

WTO on Administrative Barriers

When one country believes another country is breaking one

of the WTO rules, and the two countries cannot resolve
the dispute, the plaintiff country may not unilaterally take
retaliatory measures against the other country. Instead, it
should take the matter to the WTO.

This WTO dispute resolution process involves the

following steps:

1.

The WTO provides mediators to try to help the countries

come to a mutually acceptable agreement.

2.

These exceptions have now been eliminated, but

conversion from the rules permitted under GATT to the
rules of the WTO are being phased in over a ten year
period. So the textile industry will not be fully under the
WTO rules until 2005.
IPRs (e.g. copyrights, patents) were previously not included
under GATT.
Many developed countries were unhappy with the lack of
rules or the lack of enforcement of rules concerning IPRs.

Unlike GATT, the WTO has rules governing IPRs.

Now the protection of IPRs cannot be applied unfairly.

Foreign companies must get the same protection that
domestic companies get.

Copyrights for films and sound recordings last 50 years.

Industrial designs - 10 years.

Patents - 20 years.

Trademarks - international standards are in place.

Developing countries are allowed five years to phase in
these rules.

Least developed countries are allowed 11 years.

The WTO and the Environment

If that fails, an independent panel is established to review

the matter. The panel renders a decision. If the panel finds
that WTO rules have been violated, it may make
recommendations on how the violating country can change
its rules to conform with the WTO rules.

This is a highly contentious issue. A number of countries

have introduced laws that have the double effect of
protecting the environment and restricting imports (for the
benefit of a domestic industry). A number of these rules
have been challenged under the WTOs dispute settlement
process. The WTO has typically ruled against such laws.

Famous cases include:

3.

The violating country is given 30 days to state its intention

to comply with the ruling.

The tuna dispute (see appendix at the end of these notes)

The hormone-treated beef dispute

4.

There is also an appeal process, where the matter can be

taken to a different panel.

5.

If the violating country does not comply, the other country

may apply additional tariffs of similar value on the
violating country. This, too, is negotiated.

The readings allude to this case between the EU and the

US. The EU bans the import of hormone-treated beef.
The US mounted a WTO challenge on this issue, since the
use of hormones is common practice in the US and since
the US viewed the rule as being disguised protection of the
EUs relatively inefficient beef industry.

The WTO ruled in favour of the US on the basis that there

is very little scientific evidence that hormone-treated beef is
any more dangerous than hormone-free beef.

The shrimp/sea-turtle dispute (see readings)

The WTOs position on trade and the environment is as

follows:

A country has a right to take measures to protect human,

animal or plant life or health and the conservation of
exhaustible natural resources, PROVIDED the measures
do not constitute an arbitrary or unjustifiable
discrimination between countries where the same
conditions prevail or a disguised restriction on
international trade (Article XX of GATT 1994)

Agriculture

Many of the developed countries have in the past strongly

resisted opening up their agricultural markets. Under
GATT rules, there were many exceptions in agriculture to
the tariff, quota, export subsidy and other rules.

The WTO has now banned quotas on almost all

agricultural products.

The Uruguay round also brought about substantial

reductions in tariffs and export subsidies. (Export
subsidies are still allowed for a number of agricultural
products.)

Textiles

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The textile industry is another industry in which many

exceptions to the regular GATT rules persisted.
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According to the WTO, countries should explore nontrade-related measures (such as environmental treaties) first
to pursue their environmental aims.

The WTO also encourages the use of eco-labeling. (For

example, a government could require that labels for all beef
products clearly indicate whether the beef was hormonetreated.)

ii

Non-Actionable (Green Light): Assistance for research,

spending on education, assistance for promoting
development of poor regions, assistance for adapting
existing facilities to comply with environmental
regulations. In each of these cases the subsidies must not
exceed certain critical percentages (for instance, the
government may contract with firms and may fund 50% of
basic research and 25% of applied research; 20% of
adaptation to environmental standards).

iii

Actionable (Yellow Light): Subsidies that are specific and

injure the domestic industry of another country.

Antidumping and Countervailing Duties

Dumping
What is Dumping?

Dumping is when the normal value of a good exceeds its

export price.

Specificity

A subsidy is not countervailable unless it is specific.

Governments are concerned that foreign companies will

dump their products into the country at the expense of
domestic companies.
Some foreign firms, for example, operate in a protected
market at home. As a result, they may be able to cover their
fixed costs at home. When selling abroad, then, all they
have to do to make money is price their products above
variable costs. This gives such firms a price advantage over
domestic firms, who must cover their fixed costs.

A subsidy is specific if it is targeted to specific industries or

enterprises (as opposed to generally available to all). In
addition, subsidies that are available to all but are only used
by certain producers, are also considered to be specific (on a
de facto basis).

Where a domestic industry is or is likely to be materially

injured by foreign dumping or specific subsidies, that
industry may request its government to impose duties on
the dumped or subsidized products.

The first method is the domestic sales price in the

exporting country - i.e. the price at which the foreign firm
sells its product in its home market.

A country may only apply countervailing duties on foreign

products that have benefited from prohibited or actionable
subsidies.

The second method is the third country sales price - i.e. the
price at which the foreign firm sells its product to
importers of any country other than Canada.

The antidumping or countervailing duties would be

calculated and imposed so as to offset the dumping margin
or subsidy, as the case may be.
If dumping is found to occur, the offending company will
typically increase its price to the normal price. As a result,
governments would not actually collect antidumping duties
on new sales.

Can you think of any other examples when a foreign firm

might want to dump?

There are three methods of calculating normal value:

2.

3.

The third method is the constructed value - i.e. derived

from determining the cost of the product (including
production, administration, selling, etc.) plus a reasonable
profit amount.
The first method is the favoured one. It should be used
unless it is unreasonable to do so.

Subsidies

Basic Definition: Subsidies are deemed to exist if there is a

financial contribution by a government or any public body
where the government practice involves a direct transfer of
funds (e.g. grants, loans, and equity infusion); potential direct
transfers of liabilities (e.g. loan guarantees); government
revenue that is otherwise due but is foregone; government
provision of goods or services other than general infrastructure;
government payments to a funding mechanism or direction to
a private body to carry out any of the foregoing functions.
Three types of subsidies:
i

What is an Antidumping Duty or Countervailing Duty?

What is Normal Value?

1.

Duties

Prohibited (Red Light): Subsidies that are contingent in

law or in fact on exporting or on using domestic rather
than imported inputs (local content). (We are still in a
phase-in period, during which developing countries may
still subsidize exports.)

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Antidumping or countervailing duties that do not exceed

the dumping margin or subsidy amount, are permitted by
the WTO.

Material Injury

Injury means that a domestic industry has suffered in the

past, or is likely to suffer in the future, from the dumping
or subsidizing of competitors products.

No antidumping (or countervailing) duties will be applied

if the dumping margin (or amount of subsidy) is
insignificant.

Similarly, no such duties will be applied if the volume of

dumped or subsidized goods is negligible.

Public Interest

The interest of consumers is also taken into consideration

to determine whether countervailing duties should be
imposed.

The fact that one particular Canadian industry is injured is

not enough to justify countervailing duties.

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For example, by protecting one industry, a downstream

industry could be unduly harmed.

Appendix: Tuna Dispute (U.S. and Mexico)

In recent years, the U.S. had a dispute with Mexico and other
Pacific Latin American countries concerning trade in tuna. At
issue, are the yellow-fin tuna, whose territory in the Pacific
Ocean ranges from about Los Angeles down to Santiago, Chile.
The territory extends from the continental coast to about 500
miles from the coast.
For reasons that baffle scientists, yellow-fin tuna like to swim
below schools of dolphins. This habit is very convenient for
fishermen, since dolphins swim at the surface and therefore
signal that there are tuna below. So fishermen surround areas
with dolphins with nets up to a mile wide, to capture the tuna.
Historically, many dolphins have been killed in this process
several hundred thousand per year in the 1970s.

allowed. The agreed upon result was that the Latin American
countries agreed to impose quotas on their fishermen, and to
require that each boat had an international observer on board to
report dolphin kills.
However, some people worry that the quotas are not really kept.
The observers are quite vulnerable to harm when they are out at
sea, so some captains intimidate the observers into underreporting dolphin kills.
Notes :

Since then, new techniques have been developed to allow

dolphins to escape. In addition, the U.S. government sought to
protect dolphins by imposing a dolphin-kill quota on American
fishermen. (I believe the quota was 8%. That is, American
fishermen had to ensure that dolphin casualties did not exceed
8% of the number of captured tuna.) In addition each boat
had to have an independent observer to ensure that this quota
was kept.
Some of the American sellers of tuna (e.g. StarKist) then
adopted a policy of only accepting tuna from boats which did
not use dolphin sets the method mostly likely to result in
dolphin casualties.
However, the above rules only applied to American fishermen.
Dolphin populations were still threatened by Latin American
fishermen and fish from those countries could enter the U.S. at
a much lower cost. So the U.S. banned tuna imports from the
other countries that harvest yellow-fin tuna. The Latin American countries therefore took the matter to the WTO, arguing
that the U.S. cannot discriminate against tuna from those
countries, because the product is identical to those captured by
American fishermen.
The WTO ruled in favour of the Latin American countries.
(This ruling is one example of why many environmental
groups oppose freer trade and the WTO.) While the WTO rules
do allow governments to restrict trade for justifiable environmental reasons, the WTO panel concluded that the U.S.
measures were not justifiable. The panel found that the U.S. did
not adequately explore other means of achieving their environmental objectives. For example, the U.S. could have attempted
to negotiate an environmental treaty that commits these
governments to keep dolphin casualties down to some level. In
addition, the WTO panel rejected the USs argument that it had
always been prepared to lift its ban on Mexican tuna if Mexicos
dolphin kill was reduced to the actual levels of US casualties.
The WTO panel considered this stipulation to be unreasonable,
since it did not allow Mexico to know whether trade was open
until after the US actual casualties for a year were known.
As a result of the WTOs decision, the US and the Latin
American countries had to find a way to come to an agreement,
with the proviso that what the US had been doing was not
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