Regulation of international trade within the framework of the world trade organization (WTO)

REGULATION OF INTERNATIONAL TRADE WITHIN THE FRAMEWORK OF THE WORLD TRADE ORGANIZATION

Tashkent 2011

Foreword

This textbook on the course “Regulation of International Trade within the framework of the WTO” is designed for students of higher education institutions, specializing in International Economics and Foreign Trade.

The textbook includes basic notions of lectures, questions for self-control and class discussions, case-studies, illustrations, and reference books on relevant topics.

The aim of the course is to introduce students to basics of WTO regulation on trade in goods and services, intellectual property rights and investments.

The objectives of the course are:

- to familiarize students with the basic institutional mechanisms regulating International Trade;

- to introduce students to basic principles and concepts of the World Trade Organization;

- to develop students’ analytical abilities on issues of foreign trade regulation;

- to enable students to evaluate compatibility foreign trade regime of Uzbekistan with WTO rules.

Throughout the classes students will be required to engage in classroom and group discussions, prepare an individual research paper on particular issues of WTO, and pass computer based test.

Classes will be taught using advanced teaching methods such as interactive education, class and small group discussions, case studies, role playing, presentations with usage of up-to-date IT technologies.

Content

Lecture 1. Introduction to the course “Regulation of International Trade under WTO rules”

1. Reasons for imposing trade restriction – individual country perspective     

2. Historical background of the WTO      

3. Reasons for replacing the GATT by the WTO        

Questions

References

Lecture 2. WTO – structure, aims and principles

1. Objectives, main functions, principles

2. Organization structure

3. Accession and Decision-Making procedure

4. Trade policy review mechanism (TPRM) of the WTO     

5. Plurilateral trade agreements of the WTO

6. Main difference between the WTO and GATT        

Questions

Reference

Lecture 3. Regulation of Trade in Goods (GATT system)

1. Trade without Discrimination

2. Progressive trade liberalization and Transparency

3. Rules on Fair Competition

4. Encouraging Development and Economic Reform

5. Single undertaking

Questions

References

Lecture 4. Issues on market access

1. Tariffs

2. Safeguards

3. Balance-of-Payments Provisions

4. Technical Barriers to Trade        

5. Sanitary and Phytosanitary Measures

6. Trade-Related Investment Measures (TRIMs)

Questions

References

Lecture 5. Measures against Unfair Trade

1. Subsidies

2. Dumping and Anti-dumping       

Questions

References

Lecture 6. Trade in Services

1. Significance of Liberalization of Trade in Services

2. Main Purpose of the GATS

3. Frame of Commitments of GATS

4. Specific Commitments of GATS

5. General Obligations and Disciplines

6. The Annexes: Services Are Not All The Same

Questions

References

Lecture 7. TRIPS

1. Intellectual property rights – basic concepts

2. Trade related aspects of IPRs

3. Copyright and related rights

4. Industrial property

5. Enforcement of IPRs

Questions

Reference

Lecture 8. Rules and Procedures Governing the Settlement of Disputes (DSU)

1. WTO Dispute settlement system – main definitions

2. Dispute settlement system in the WTO – basic concepts

3. Procedures for dispute settlement process

4. Case study: the timetable in practice

Questions

References

Lecture 9. Regulation of Agricultural Trade

1. Background for the Agreement

2. Areas of Commitments under the Agreement on Agriculture

3. Market Access

4. Export Subsidies

Questions

Reference

1. Reasons for imposing trade restriction – individual country perspective

Within the course of International Economics you have learnt that free trade maximizes world output and benefits all nations. In theory, international trade can result in full utilization of natural and social resources and increase the welfare of all nations in trade.

International trade is a bridge for a nation towards prosperity, advancement and civilization. Today, no civilized nation can isolate itself from the rest of the world. Processes of globalization and economic integration have made the world a global village, and international trade plays an irreplaceable role in this process. In this respect, the WTO constitutes international trade policy, including general trade policies, trade rules and regulations of individual nations. International trade policy examines the reasons for and effects of trade restrictions because nations usually impose some restrictions on the flow of goods, services, and factors across their borders.

Despite the theory 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 order to explain this phenomenon, it is necessary to understand effects of trade restrictions on production, consumption, trade and welfare.

Trade restrictions include tariffs and non-tariff measures. The most important type of trade restriction has historically been the tariff. The WTO/GATT has predominantly been devoted to the tariff reduction negotiations. The only issue discussed in the first 6 rounds of negotiations of the GATT is how to reduce tariff rates.

A tariff is a tax 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 is a duty on the exported commodity. Import tariffs are more important than export tariffs. Export tariffs are usually applied by developing countries on their traditional exports (such as Ghana on its cocoa and Brazil on its coffee) to get better prices and raise revenues. The main objectives of an import tariff are to protect domestic market or domestic infant industries such as auto industry in Uzbekistan against foreign competition and to raise revenues of the central government of a country.

Tariffs can be ad valorem, specific, or compound. The ad valorem tariff is expressed as a fixed percentage of the value of the traded commodity. The specific tariff is expressed as a fixed sum per physical unit of the traded commodity. A compound tariff is a combination of an ad valorem and a specific tariff.

Tariffs, though generally declined in industrial nations since World War II (with an average nominal tariff rate of 3.8%), are still rendering tremendous effects on production, consumption, trade and welfare in the nation imposing the tariff and on its trade partners. While tariffs are invariably rationalized in terms of national welfare (such as the protection of infant industry or national industries), in reality they are usually advocated by those special groups in the nation that stand to benefit from such restrictions.

In short, consumers pay a higher price for the commodity and producers receive a higher price as a result of the tariff. A tariff leads to inefficiencies, which are referred to as protection cost, because some domestic resources are transferred from the more efficient production of exportable commodities to the less efficient production of importable commodities. Consumers’ welfare has been sacrificed for jobs or employment saved in less efficient industries. Improper tariff rates can only hamper the growth and development of so called infant industry. Auto industry in Uzbekistan is a typical example. It is something beyond economics. If you want to know more about the effects of tariffs, you can refer to partial and general equilibrium analysis of a tariff in International Economics written by Dominick Salvatore.

Nevertheless, tariffs are legal and the only preferred trade restriction in the WTO. This will be discussed in detail later.

Non-tariff trade barriers refer to all the other trade restriction measures other than tariffs, including import quota or licensing (automatic and non-automatic import licensing), voluntary export restraints, technical barriers to trade, sanitary and phytosanitary measures, anti-dumping, subsidies and countervailing measures, customs valuation, pre-shipment inspection, rules of origin, fees and formalities, etc.

Case - effects of non-tariff trade barriers: Voluntary Export Restraints on Japanese Automobiles to the US.

From 1977 to 1981, US automobile production fell by about one-third, the share of imports rose from 18 to 29 percent, and nearly 300,000 autoworkers in the US lost their jobs. In 1980, the Big Three US automakers suffered combined losses of 4 billion $US. As a result, the US negotiated an agreement with Japan that limited Japanese automobile exports to the US to 1.68 million units per year from 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 import restrictions by the US. As a result of this agreement, US automakers reaped profits 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 higher profits. The big loser was the American public, who had to pay substantially higher prices for domestic and foreign automobiles. It was estimated that the agreement 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 US consumers was 15.7 billion $US from 1981 through 1984, and that 44,000 US automaker’s jobs were saved at the cost of more than 100,000 $US each, 2 or 3 times the yearly earnings of a US autoworker.

As the example above shows, neither tariffs nor non-tariff measures are reasonable or justified to be imposed on because of the high cost of trade protection practice. There are, however, still some fallacious or questionable arguments for trade protection.

Trade restrictions are needed to protect domestic labor against cheap foreign labor.

· Scientific tariff rates could make the price of imports equal to domestic prices and allow domestic producer to meet foreign competition.

· Protection is needed to reduce domestic unemployment and to cure a deficit in the nation’s Balance of Payments or trade deficit.

· Trade restrictions are needed to protect infant industries in developing countries and to acquire a comparative advantage in crucial high-technology industries in developed countries (Strategic Trade Policy).

The first three arguments are to be questions for students. Below, the fourth argument is conferred.

Infant-industry argument: 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, the industry will not be set up or, if already started, cannot compete successfully with more established foreign firms. Temporary trade protection is then justified to establish and protect the domestic industry during its “infancy” until it can meet foreign competition, achieve economies of scale, and reflect the nation’s long-run comparative advantage. At that time, protection is to be removed. However, for this argument to be valid,

1) the return in the grown-up industry must be sufficiently high to offset the higher prices paid by domestic consumers of the commodity during the infancy period;

2) there is an objective standard to identify which industry or potential industry qualifies for this treatment;

3) there is a schedule to remove the protection.

Strategic trade policy: A nation can create a comparative advantage (through temporary trade protection, subsidies, tax benefits, and cooperative government-industry programs) in such fields as semiconductors, computers, telecommunications, and other industries that are deemed crucial to future growth in the nation. These high-technology industries are subject to high risks, require large-scale production to achieve economies of scale, and give rise to extensive external economies (a benefit to society at large, say, by training workers who then leave to work in other industries) when successful. Strategic trade policy suggests that by encouraging such industries, the nation can reap the large external economies that result from them and enhance its future growth prospects. Semiconductors (such as computer chips) and steel industry in Japan are a good example. Other examples are the Concorde supersonic aircraft and the Airbus in Europe. However, there are serious difficulties in carrying out this argument: 1) It is extremely difficult to choose the industries that will provide large external economies in the future and devise appropriate policies to successfully nurture them; 2) Since most leading countries undertake strategic trade policies at the same time, their efforts are largely neutralized, so that the potential benefits to each may be small; 3) When a country does achieve substantial success with strategic trade policy, this comes at the expense of other countries and so other countries are likely to retaliate.

All in all, trade production usually increases the commodity price, benefits producers and harms consumers and usually the nation as a whole. For example, it is estimated that removing all quantitative restrictions (QRs) on textile and apparel exports to the US would result in a gain of 11.92 billion $US for the US at 1984 prices. Removing QRs also leads to employment losses in the industry losing the QRs, but these employment losses are matched or more than matched by economy-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 the US. Also eliminating all tariffs on industrial products after the above QRs have 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 from protection, they have a strong incentive to lobby the government to adopt protectionist measures. On the other hand, since the losses are diffused among many consumers, each of whom loses very little from the protection, they are not likely to effectively organize to resist protectionist measures. Thus, there is a bias in favor of protectionism. For example, the sugar quota raises individual expenditures on sugar by only a few dollars per person per year in the US. But with about 250 million people in the US, the quota generates more than 600 million $US in rents to the few thousand sugar producers in the US.

2. Historical background of the WTO

The World Trade Organization, established on 1 January 1995, is the umbrella organization governing the international trading system. It oversees international trade agreements and provides the secretariat for GATT, based in Geneva.

The members of the WTO now account for well over 90% of the world’s trade and virtually all of its investment; by the end of 2005, the organization’s membership had increased to 149, from the 76 founding members of 1995. Nearly all the developed, and most of the developing countries, have joined.

The multilateral framework of international trade originated from the end of the World War II. The earlier experience with the Great Depression of the late twenties and early thirties, followed in its wake by the trade protection imposed by major trading nations, made governments aware of the need for a multilateral discipline in the field of international trade. This awareness assumed a new urgency with the devastation caused by the World War II and with the need for the expansion of international trade as an important tool for development and growth. The WTO’s origins can be traced back to the Atlantic Charter of 1941, developed by then US President Franklin Roosevelt and British Prime Minister Winston Churchill. In order to counter US isolationism, the principle of the Atlantic Charter was for an international trading system with equal access to trade for all nations. This was seen as a complement to an effective world political forum, the United Nations, established in 1946 with its permanent headquarters in New York City. The United States organized an international conference on trade and employment which resulted in the Havana Charter of 1948, in which it was proposed to establish the International Trade Organization (ITO). Twenty-three countries agreed to a set of tariff cuts and these were ratified by the GATT, which was set up as a transitory arrangement to be subsumed under the ITO. However, the ITO was never ratified because the US government announced in 1950 that it would not seek Congressional ratification of the Charter, and the GATT, though never intended to be an “organization”, continued for 47 years, until the WTO finally emerged in the last stages of the Uruguay Round to take on the role originally designed for the ITO. The WTO now stands with the World Bank and the International Monetary Fund as the third leg of the global economic system.

The Bretton Woods conference 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 begin negotiations on liberalizing international trade. The negotiations were intended to create an International Trade Organization that would facilitate trading relations as Bretton Woods facilitated monetary relations and to implement quickly an agreement to reduce tariff levels. In March 1948, the draft charter for the ITO, known as the Havana Charter, was drawn up. This charter contained sections on employment and economic activity, economic development and reconstruction, restrictive business practices, inter-governmental commodity arrangements and subsidies. It was more wide ranging than the GATT, which focused on tariffs in manufactured goods. In negotiating the Havana Charter the US push for a pure free trade system was limited by its own internal commitment to agricultural protection. With echoes of the Senate’s refusal to endorse Woodrow Wilson’s effort to have the US join the League of Nations following the First World War, the US Congress refused to give its agreement to the ITO. More influential than isolationists in rejecting the agreements were liberal forces which heartily condemned concessions the US negotiators made to other countries. The GATT was actually created two years later to replace the abortive ITO. The original 23 GATT countries were among over 50 which 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 also contained rules relating to employment, commodity agreements, restrictive business practices, international investment and services.

The disastrous state of the global economy - especially the collapse of trade markets - contributed to the belief that the international system required greater management along liberal lines. It also convinced policymakers everywhere that a prosperous national economy was impossible without a well-designed international system. In an effort to give an early boost to trade liberalization after the World War II, and to begin to correct the large overhang of protectionist measures which remained in place from the early 1930s because of the Great Depression, tariff negotiations were opened among the 23 founding GATT contracting parties in 1946. The tariff concessions and rules together became known as the GATT and entered into force in January 1948.

Throughout its 48-year history, the GATT provided the structure for a global process of steady trade liberalization through eight “rounds” of multilateral trade negotiations sponsored by its Contracting Parties. In the first six Rounds, the focus was on the reduction of tariffs. The last two Rounds have covered wider areas (see table below).

The Uruguay Round Negotiations and establishment of the WTO.

The seeds of the Uruguay were sown in November 1982 at a Ministerial meeting of GATT members in Geneva. Though the meeting stalled on the issue of agriculture, the work program formed the basis of the Uruguay negotiation agenda. With four more years of exploring and clarifying issues and painstaking consensus-building, Ministers met again in September 1986, in Punta del Este, Uruguay. The negotiation was expected to be completed in four years. In December 1990, however, disagreement on the nature of commitments to future agricultural trade reform led to a decision to extend the round. For the following three years, the negotiations lurched continuously from impending failure to predictions of imminent success. Several deadlines came and went; farm trade was joined by services, market access, anti-dumping rules and the proposed creation of a new institution as the major points of conflict. It took until 15 December 1993 for every issue to be finally resolved. On 15 April 1994, the deal was signed by Ministers from most of the 125 participating governments at a meeting in Marrakesh, Morocco. The agreements of the Uruguay came into force on 1 January 1995.

3. Reasons for replacing the GATT by the WTO

There is popular belief, that the WTO replaces the GATT. In fact, the WTO did not replace the GATT. An amended GATT remains as one of the legal pillars of the world’s trade and, to a lesser extent, investment systems. The other pillars, set up in the Uruguay Round’s Marrakesh agreement of 1994, include the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). So, what has been replaced is not the GATT as an international agreement but the GATT as an international organization. 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 has been updated. The updated GATT is called GATT 1994, and the replaced GATT is called 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 GATS and the TRIPs.

As a matter of fact, the 1986 Ministerial declaration of Punta del Este, containing the agenda and objectives for the Uruguay negotiation, did not include any explicit call for a new charter or organization. Despite this hesitancy, however, by 1990 there was considerable discussion of the need for an improved organizational structure for effective implementation of the Uruguay results. The first public call for a world trade organization to be established was a proposal by the Canadian Government in early 1990. The Canadian proposal built on the work of Professor John Jackson (Hessel E. Yntema Professor of Law at the University of Michigan) and others at an informal meeting in Geneva in 1989. It was then incorporated into the “Dunkel Text” of 1991 (Arthur Dunkel was then the GATT Director General), which eventually became the final text of the Uruguay Round adopted at Marrakesh in April 1994. In approving the Uruguay Round on its “fast track” system, the United States insisted on the name World Trade Organization, rather than the European Community’s preference for Multinational Trade Organization.

The GATT has undertaken eight “rounds” of multilateral trade negotiations, which have achieved major cuts in tariffs and, since the 1970s, some reductions in related non-tariff barriers to trade. The latest round, the Uruguay Round, lasted seven years, as its agenda broadened to include trade in services and intellectual property, and a revised system of dispute settlement mechanisms.

In spite of the remarkable success during its nearly five decades of history, the GATT system was being increasingly challenged by the changing conditions of international economic activity, including the greater ‘interdependence’ of national economies, and the growth in trade in services. Anxiety developed that the GATT was too handicapped to play the needed role of complementing the Bretton Woods system as the “third leg”, alongside the IMF and World Bank. Problems and ‘birth defects’ included.

Provisional application and Grandfather rights exceptions embraced by the Protocol of Provisional Application. The GATT was designed to be a multilateral trade and tariff agreement and would depend on the ITO for its organizational context and secretariat services. The GATT never definitively came into force; instead it was legally applied by a Protocol of Provisional Application originally designed to last until the ITO came into force. Grandfather clause provided that the rules in Part III of the GATT 1947, which essentially dealt with non-tariff trade measures, need be applied only to the extent that they were not inconsistent with legislation in effect when a country acceded to the GATT.

There were exceptions from GATT rules for textiles, agriculture, regional trading groups, developing countries and safeguards to prevent serious injury to domestic producers.

Another reason for the need to reform GATT was ambiguity about the powers of the Contracting Parties to make certain decisions. The GATT dispute settlement process had two major weaknesses. The first was the ability of a Contacting Party to veto the process at numerous stages. A dissatisfied party could block the creation of a panel, block adoption of the report by the Council or fail to undertake the obligations outlined in the report. The second problem was that even if the country accepted a panel report in question, it could choose to keep the offending policy, leaving the injure party to suspend benefits in kind. The dispute then fell back on to unilateral action by the aggrieved party. The party which had its complaint supported by a panel would have to undertake retaliation through its own domestic legislation. This could take the form of tariffs or suspension of trade benefits to the offender. Offenders were not sanctioned; they just had benefits of equal value withdrawn by the complaint. The unilateral nature of the process raised serious problems for the whole system. The countries able to take unilateral measures tended to be the economically powerful such as the US, Japan and the EU. Smaller states were less likely to take action against the giants because they feared a trade war that would cost them dearly. One of the purposes of having an international legal framework for trade is to facilitate relations based on rules rather than power. Law should restrain powerful states from abusing their economic power to the cost of smaller states. Since the GATT process relied so heavily on unanimity, this goal was difficult to achieve.

Also, murky legal status leading to misunderstanding by the public, media, and even government officials lead to negotiating a new solution – establishment of an international institution. As described above, there were certain serious defects in the dispute settlement procedures, there was lack of institutional provisions generally, so constant improvisation was necessary. All these contributed to the reform of GATT system and creation of the WTO.

Questions

1. Explain the reasons for trade restrictions. What are trade restrictions and what do you think about them?

2. Why are the following three arguments fallacious or questionable?

a) Trade restrictions are needed to protect domestic labour against cheap foreign labour.

b) Scientific tariff rates could make the price of imports equal to domestic prices and allow domestic producer to meet foreign competition.

c) Protection is needed to reduce domestic unemployment and to cure a deficit in the nation’s Balance of Payments or trade deficit.

3. Outline the major results of the Uruguay Round. Why should the GATT 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 of International 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.

1. Objectives, main functions, principles

Objectives.

The objectives of 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 demand in 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 developed to secure a share in the growth in international trade commensurate with the needs of their economic development

Main functions.

There are five main functions of the WTO:

To facilitate formulation, implementation, administration and operation of the covered Agreements

Modern market economy must rely on international regulations or standardized global economic operations. Who should be the one to formulate these regulations? Should it be the US simply because of its strong economy? No single country is appropriate to make the rules. Only an international organization, like the GATT in the past and now in the form of the WTO, should formulate rules through many rounds of negotiations. Once the regulations and rules are set, there must be an organization to supervise and facilitate the implementation, administration and operation of these regulations and rules.

To provide the forum for negotiations on multilateral trade

The WTO provides the forum for negotiations on multilateral trade relations in matters covered by its various agreements. It may also, on decision by the Ministerial Conference, provide a forum for further negotiations, and a framework for the implementation of their results, on other issues arising in the multilateral trade relations among its Members. To put it simply, this is a matter of opening up the market. The founding of GATT in 1948 was based on the historical lessons of World War I and II, with the purpose of avoiding fighting for resources and market shares as a result of countries being divided up by different groups and because of closed markets. It was believed that opening market to each other could avoid the breakout of new wars. So far, this opening process 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, and trade-related investment measures or mutual opening of the investment market. The WTO is the direct result of multilateral negotiations, and will provide the forum for further negotiations on multilateral trade.

To administer the integrated dispute settlement system.

Along with increasing international exchanges, countries cannot avoid frictions in their trade 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 means to go to court to win their cases. This is why the US often used the “special clause 301”and “super-301”(introduced in 1988, under which the US could unilaterally find other countries’ trade practices as ‘unfair’ and impose trade sanctions if the offending country did not reach a satisfactory settlement with the US Trade Representative) to solve disputes. Now, the WTO has provided a more effective dispute settlement system.

To review national trade policies (see p.14. TPRM).

To achieve greater coherence in global economic policy-making by cooperating with the IMF and with the World Bank

The World Bank is the world’s biggest development bank, providing finance, research and policy advice to developing countries, with an annual turnover in new loan commitments to developing nations of over 20 billion $US. The Bank loans are primarily for specific development projects. Like the World Bank, the IMF emerged from the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire, in July 1944. According to its constitutional instrument, the Fund exists:

(a) to promote international monetary cooperation;

(b) to facilitate the expansion and balanced growth of international trade;

(c) to promote foreign exchange stability;

(d) to create a multilateral system of payments between members;

(e) to assist in the correction of maladjustments in members’ balance of payments; and

(f) to reduce the duration and severity of disequilibria in members’ balance of payments.

During the first quarter-century after it started operations in 1945, the Fund was mainly concerned to establish and manage the international regime of fixed (but adjustable) exchange rates. Its interventions were mainly restricted to monetary and trade policy measures. The IMF lost much of its old role with the end of the dollar-centered fixed-rate system in 1971; however, the rapid globalization of money and finance since the 1960s has prompted the Fund to reinvent itself with an expanded agenda: First, the Fund has since the late 1970s exercised comprehensive and detailed surveillance, both of the economic performance of individual member states and of the world economy as a whole. Second, the Fund has since the 1970s intervened more intensely in many countries by designing for them not only traditional stabilization measures for short-term corrections of the balance of payments, but also structural adjustment packages for medium- and long-term economic reconstruction. Third, the ‘second-generation’ IMF has undertaken major training and technical assistance activities, largely in order to provide poorly equipped states with staff and tools that can better handle the policy challenges of contemporary globalization. Fourth, the IMF has pursued various initiatives to restore stability to global financial markets. The IMF has its membership risen from 62 states in 1960 to 182 states in 1998.

Principles.

WTO establishes the following key principles, which occur in all agreements under the 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

Highest Authority: the Ministerial Conference

Ministerial Conference is the supreme body of the WTO, composed of representatives of all Members. The Ministerial Conference is authorized to carry out the functions of the WTO, take the actions necessary to this effect, and take decisions on matters under any of the Multilateral Trade Agreements if so requested by a Member. 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), the second in Geneva in May, 1998 (Declaration on Global Electronic Commerce), the Third 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

General Council, also composed of representatives of all WTO members, is in charge of the daily business of the WTO and normally meets once every two months. General Council acts on behalf of the Ministerial Conference in the periods between its meetings, and reports directly to it. The General Council convenes also as the Dispute 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), the Council for Trade-Related Aspects of Intellectual Property Rights (TRIPs Council). The three councils, consisting of all WTO members, deal with their respective areas of trade.

Six committees, also consisting of all WTO members, report to the General Council for different issues such as trade and development, the environment, regional trading arrangements, and administrative issues.

Fourth Level: Committees and working party dealing with specific subjects

The Goods Council has 11 committees. They consist of all WTO members. The Textiles Monitoring Body also reports to the Goods Council.

It should be noted that important breakthroughs are rarely made in any of these formal bodies. With consensus and without voting, informal consultations play a vital role in bringing a vastly diverse membership round to an agreement. Occasionally a deadlock 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. A multilateral package of commitments is usually the result of numerous bilateral, informal bargaining sessions. These informal consultations, however, are not separated from the formal meetings which are necessary for making formal decisions. Nor are the formal meetings unimportant. They are the forums for exchanging views, putting countries’ positions on the record, and ultimately for confirming decisions. The art of achieving Agreement among all WTO Members is to strike an appropriate balance, so that a breakthrough achieved among only a few countries can be acceptable to the rest of the membership.

The WTO Secretariat: In Article VI of the WTO Agreement, provision is made for the establishment of a Secretariat and the appointment of its Director-General. At present it has approximately five hundred staff members. The Secretariat, based in Geneva, Switzerland, has no decision-making powers. Its main duties are to supply technical and professional support for the various councils and committees, to provide technical assistance for developing countries, to monitor and analyze developments in world trade, to provide information to the public and the media and to organize the ministerial conferences. It also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become Members of the WTO. The WTO Secretariat is organized into 24 Divisions with functional, information and liaison, and support roles. Divisions are normally headed by a Director who reports to a Deputy-Director General or directly to the Director General. The professional staff is composed mostly of economists, lawyers and others with a specialization in international trade policy. The working languages of the WTO are English, French and Spanish.

3. Accession and Decision-Making procedure

The accession.

Any state or separate customs territory possessing full autonomy in the conduct of its external commercial relations and of the other matters related with its trade policies is eligible to accede to the WTO on terms agreed between it and WTO Members. Accession to the WTO is essentially a process of negotiation—quite different from the process of accession to other international entities, like the IMF, which is largely an automatic process.

The accession procedure:

Commencement of the Accession Process: An applicant submits a communication to the Director-General of the WTO, expressing its desire to accede to the WTO under Article XII. The General Council then considers the application and establishes a working party. Any member of the WTO can join the working party. The working party is chaired by a Chairperson selected after consultation with WTO Members and the applicant.

The fact-finding process: The applicant provides a Memorandum describing in detail its foreign trade regime, together with information on the currently applicable tariff schedule and copies of relevant laws and regulations in one of the WTO official languages. Members of the working party then ask questions about the Memorandum, examine the Memorandum and the questions and answers to study the conformity of the regime with the requirements of the WTO Agreements. Technical assistance at each stage of the accession process can be obtained from the Secretariat.

Bilateral negotiations: Bilateral market access negotiations between the applicant and Members of the working party on goods and services, as well as on the other specific terms of accession constitute the most critical element of the accession process. The phase commences either by the applying government tabling its initial offer on goods or services or interested WTO Members submitting their request lists to the applicant. The resulting market-access commitments of acceding governments can be considered to be the payment for the entry ticket into the WTO.

Report, Protocol of Accession and Entry into Force: Following the conclusion of bilateral negotiations between interesting Members and the Applicant, the working party prepares a Report and a draft Decision and Protocol of Accession, containing the terms of accession agreed by the Applicant and members of the working party. As part of the draft Protocol of Accession, the Schedule of Concessions and Commitments on Goods and the Schedule of Specific Commitments on Services are prepared. When the Draft Report, Draft Protocol and Schedule on Goods and Services have been finalized, the working party submits the package to the WTO General Council/ Ministerial Conference for approval. Following the decision of the General Council/ Ministerial Conference to adopt the package, the Protocol of Accession enters into force. Thirty days after acceptance by the applicant, it becomes a WTO member.

Now, the WTO has around 30 applicants negotiating membership. They are WTO observers. Besides, the WTO has 7 international organizations observers: UN,UNCTAD (United Nations Conference on Trade and Development), IMF, World Bank, Food and Agricultural Organization, World Intellectual Property Organization, Organization for Economic Co-operation and Development.

Decision-making

Unlike other international organizations, the WTO normally makes decisions by consensus. Consensus is defined as the situation where no member, present at a meeting where a decision is taken, formally objects to the proposed decision. It should be noted that this is not the same as unanimity, since consensus is defeated only by a formal objection by a member present at the meeting. Thus, those absent 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 all Members. In case of trade sanctions, the sanctions are imposed by Members, not by the organization.

The WTO Agreement envisages four specific situations involving voting:

1) An interpretation of any of the multilateral trade Agreements can be adopted by a majority of three-quarters of WTO Members.

2) The Ministerial Conference can waive an obligation imposed on a particular member by a multilateral Agreement through a three-quarters majority.

3) Decisions to amend provisions of the multilateral Agreements can be adopted through approval either by all Members or by a two-thirds majority depending on the nature of the provision concerned. But the amendments only take effect for those WTO Members which accept them.

4) A decision to admit a new Member is taken by a two-thirds majority in the Ministerial Conference, or the General Council in between conferences.

4. Trade policy review mechanism (TPRM) of the WTO

TPRM was introduced into GATT in 1989 following the Mid-term Review of the Uruguay. The review covers the full range of individual Members’ trade policies and practices and their impact on the functioning of the multilateral trading system in order to encourage governments to follow closely the WTO rules and disciplines and to fulfill their commitments.

The TPRB is formally the General Council. The frequency of reviews of a Member is related to its weight in the multilateral trading system, as defined by the Member’s share of world trade in goods and services. On this principle, the frequency of review for individual Members, based on trade flows in October 1995, is as follows:

· every four years for the four largest trading entities, counting the 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 longer interval for least-developed countries.

Variations in trade in goods and services flows may alter the ranking of Members and thus their review cycles. The accession of new Members to the WTO could also affect the position of existing Members in all the three review cycles.

Procedures for Review:

A TPRM review consists of several steps whose timing is agreed between the Secretariat and the country under review.

Collection of information: The Secretariat prepares and sends a detailed country questionnaire to the Member under review and the Member has four weeks to prepare and provide replies.

Visit to the capital: A Secretariat team consisting of 2 or 3 staff members of the Trade Policy Review Division undertakes a visit of one week or ten days to the country under review for discussion with government ministers and agencies, as well as private enterprise (Chamber of Commerce) and research institutes.

The TPRB meeting: Preparation and publication of documents. For each review, two documents are prepared: a detailed report written independently by the WTO Secretariat and a policy statement by the government under review. The Secretariat report focuses on the trade policies and practices of the Member under review in the context of the evolution of overall macro-economic and structural policies in a representative period up to the present date. The government’s policy statement by Members aims to outline the objectives and main directions of trade policies, as well as a succinct presentation of recent trends and problems, including those encountered in foreign markets.

5. Plurilateral trade agreements of the WTO

For the most part, all WTO members subscribe to all WTO agreements. There remain, however, two agreements, originally negotiated in the Tokyo Round, which have a narrower group of signatories and are known as “plurilateral agreements”. All other Tokyo Round agreements became multilateral obligations when the WTO was established in 1995. The two are:

1) Agreement on Trade in Civil Aircraft

2) Agreement on Government Procurement

The other two plurilateral agreements, namely, International Dairy Agreement and International Bovine Meat Agreement, were scrapped at the end of 1997 and incorporated into the Agriculture and Sanitary and Phytosanitary agreements.

6. Main difference between the WTO and GATT

Nature: The GATT was ad hoc and provisional. The WTO and its agreements are permanent. The WTO has a legal man status.

Scope: The GATT 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 were adopted during the Tokyo Round on a plurilateral - that is, selective-basis, causing a fragmentation of the multilateral trading system. The WTO has been adopted and accepted by its members, as a single undertaking: the agreements are all multilateral.

Dispute Settlement: The WTO dispute settlement procedure reversed the unanimity principle which had hindered acceptance of reports. The WTO dispute settlement mechanism has specific time limits and is therefore faster than the GATT system; it operates more automatically, thus ensuring less blockages than in the GATT; for example, panel reports are now automatically adopted sixty days after being issued unless there is a consensus that it be rejected (Since the side benefiting from the report would be unlikely to agree to reject, it seems most probable that a consensus to reject would very rarely be achieved.); and it has a permanent appellate body to review findings by dispute settlement panels. There are also more detailed rules on the process of the implementation of findings.

Questions

1. Describe the basic structure and tasks of the WTO.

2. Discuss the major principles of the WTO.

3. Who may become a member of GATT/WTO?

4. What are the main differences of WTO from the GATT system?

5. Explain decision-making rules of the WTO.

References

1. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed., Cambridge, MA: MIT Press, 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

The WTO agreement contains some 29 individual legal texts covering everything from agriculture to textiles and clothing, and from services to government procurement, rules of origin and intellectual property. Added to these are more than 25 additional Ministerial declarations, decisions and understandings which spell out further obligations and commitments for WTO members. However, a number of simple and fundamental principles run throughout all of these instruments which, together, make up the multilateral trading system.

1. Trade without Discrimination

For almost fifty years, key provisions of GATT outlawed discrimination among members and between imported and domestically-produced merchandise. This basic principle of the multilateral trading system is embodied in the WTO Agreement, deriving mostly from the principles that constituted the foundations of the GATT. This principle is guaranteed through the operation of various clauses included in the multilateral agreements on the trade in goods, in the GATS, and in the TRIPs Agreement.

The principle of non-discrimination consists of three aspects:

The first is the most-favored-nation status, the cornerstone of multilateral trade. It emphasizes that no matter which country or region a product, service or provider of the service comes from, the items should be treated equally upon entering customs. The most-favored-nation status oversees equality and fairness, but not the depth of trade.

The second is national status, which means a product, service or provider of the service is treated as its own national by the government of the country upon whose customs house the items reach, or into which they enter, according to the foreign investment policy of that given country.

The third is mutual benefit, which means an equal degree of opening to each other, and equal rates of tariff duties.

There are four important exceptions to the key GATT principle of non-discrimination.

1. Developed countries can give tariff preference to developing countries.

2. Countries entering into regional free trade agreements do not need to extend the preferences negotiated in this context on an MFN basis.

3. A country can invoke temporary «safeguard» protection to one of its industries suffering serious injury due to a surge of imports.

4. Temporary quantitative restrictions can be invoked by a country with serious balance of payment problems.

In the latter two cases, these measures are temporary exceptions to the member’s commitment to the GATT, and a public investigation has to be undertaken to allow for limited relief from GATT obligations.

Most-Favored-Nation (MFN) Treatment.

The most-favored-nation clause has been the pillar of the system since the inception of the GATT in 1947 and is equally the cornerstone of the new WTO multilateral trading system. The provision of MFN treatment essentially means non-discriminatory treatment among the Members. Article I of GATT 1994 states that “any advantage, favor, privilege or immunity granted by any contracting party (Member) to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties (Members)”.

This commitment is the starting-point of the WTO system of rights and obligations. It is fundamental to all the multilateral trade agreements annexed to the WTO Agreements. Quite contrary to its name, this provision does not mean any special favor to any country; in fact, it prohibits special favors even to the friendliest country. What this principle actually means is that any benefit in connection with 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 Members without discrimination. According to Article I of both GATT1947 and GATT1994, the famous “most-favored-nation” clause, members (or the Contracting Parties to the GATT 1947) are bound to grant to the products of other members (Contracting Parties) treatment no less favorable than that accorded to the products of any other country. Besides, members of the WTO have entered into this commitment under the GATS (Article II) in relation to treatment of service suppliers and trade in services, and under the TRIPs (Article 4) in regard to the protection of intellectual property. No reason whatsoever is sufficient to justify any deviation from MFN treatment. Thus, no country is to give special trading advantages to another or to discriminate against it. All are on an equal basis and all share the benefits of any moves towards lower trade barriers.

The principle of MFN treatment applies to both imports and exports, i.e., when a Member:

· imports like products originating in the territories of other Members, and

· exports like products destined for the territories of other Members.

For example, if Member country A has been imposing a customs duty of 10% on steel bars, and if it now starts charging only 6% duty on the steel bars of any particular country (whether a Member or not), it has to reduce the duty to 6% for the steel bars of all Member countries. Similarly, if a Member had earlier banned the export of coal, and now allows its export to a particular country (whether a Member or not), it has to allow export to all Member countries.

Of course, a Member is not bound to give MFN treatment to a country which is not a Member of the WTO. The treatment given to non-Member countries depends on the Member’s bilateral agreements with each one of them. However, if a Member gives a certain trade benefit to a non-Member, then that benefit has to be extended to all Members in accordance with the principle of MFN treatment.

Forms of Benefit.

The benefits covered by MFN treatment may be in the form of advantages, favors, privileges or immunities granted by a Member in respect of a product. For example, an advantage may be in the form of a reduced tariff level; a favor may be extended by allowing the export of a raw material which was not allowed earlier; a privilege may be in the form of exemption from a tax; and immunity may be given by exemption from a health hazard test. The obligation on a Member is to give these benefits immediately and unconditionally to the like products of all Members once these have been given to a product of any country.

Coverage of Benefit

The benefits which have to be extended to all Members may be with respect to the following items:

· Customs duties, i.e., the tariff imposed at the time of importation;

· 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 or exportation, e.g., customs fee, consular fee, quality inspection fee;

· Charges imposed on the international transfer of payments for imports or exports, e.g., some tax or fee charged by governments at the time of these transfers;

· The method of levying such duties and charges, e.g., the method of assessing the base value on which the duty or charge is calculated, or the type of forms seeking information which will help in calculating the amount to be charged;

· All rules and formalities in connection with importation and exportation, e.g., requirement of giving specific information or declarations at the time of import or export;

· Internal taxes or other internal charges, e.g., sales tax, charges imposed by local bodies;

· Laws, regulations and requirements affection internal sale, offering for sale, purchase, transportation, distribution or use of any product, e.g., requirement of quality certificates, restrictions relating to movement, transport, storage or retailing channels, need for particular type of packaging, restriction on use.

The simplest implication of MFN treatment is that a Member cannot apply different rates of customs duty on a product imported from different Member countries. Similarly, in any of the matters mentioned above, a Member cannot give different treatment to different Member countries, nor can it give better treatment to a non-Member country.

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% duty on the textile machinery coming from a Member country which has allowed aid to buy this product. Similarly, if a Member charges a 3% customs duty on a product coming from Member countries in general and now wishes to raise it to 5% for an unfriendly Member, it is not permitted to do so. Similar discipline applies to the other matters listed above.

Some Important Concepts.

Two important concepts have emerged in defining the scope of obligation of MFN treatment. As described above, the obligation of a Member is to give this treatment to the “like product” of all Members ‘unconditionally’. It is important to understand the implication of these terms.

Like Product: This phrase has not been specifically defined, thus has different meanings in different contexts. On several occasions, serious consideration has been given to this phrase as it has presented problems of interpretation. Some of the broad points which have been considered while determining whether two products are like 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: Colombian mild, other mild, unwashed Arabica, Robusta and other. The first two were duty-free and the other three were subject to a 7% duty. Brazil claimed that all these were like products and that different rates of duty were inconsistent with Article I. The Panel on Spain’s Tariff Treatment of Unroasted Coffee (June 1981) noted that the arguments given for differentiation were based on geographical factors, cultivation methods, the processing of the beans and genetic factors. The Panel did not consider such grounds as sufficient for differentiation and noted that no other Member made such a classification. It concluded that these should be considered like products within the meaning of Article I.

Unconditional Application of Benefits: MFN treatment has to be extended to Members immediately and unconditionally. If a Member formulates an improved set of rules on the trade of goods within the framework of GATT 1994, it cannot limit the application of these rules to only those Members that fulfill some conditions. For example, it cannot say that the improved rules will be applicable only to those that undertake to adopt similar rules. Such a limited application will 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 of providing certain benefits of tariff treatment only to countries which had a cooperation contract with Hungary. During the course of examination of this matter, the GATT Secretariat gave, on request, a legal opinion that the prerequisite of having a cooperative contract in order to get beneficial tariff treatment appeared to imply conditional MFN treatment and would not appear to be compatible with Article I.

Another example is the US. Before China’s accession to the WTO, the US Congress reviewed annually the MFN treatment to China. This treatment was always connected with non-business issues such as the Taiwan Question, the Tibetan minority nationality, the Tiananmen Square Incident, and human rights. After China’s WTO accession, these practices are not allowed any longer.

Some Considerations.

Coverage of unbound duty. If a Member is committed not to raise the customs duty on a product beyond a particular level, the duty is said to be bound, otherwise, the duty is unbound. The MFN treatment obligation applies equally to bound and unbound customs duties.

Balancing of treatment not permissible. Each relevant measure or step has to satisfy the condition of MFN treatment by itself. A Member is not allowed to give less favorable treatment in one case to balance more favorable treatment in another case.

Goods transited through several countries. The benefits apply to products “originating in” the territories of Members. This phrase signifies that even if the product might have passed through some other countries on the way, it has to be given the particular benefit in the importing Member country based on its country of origin.

Possibility of circumvention. There may be cases where the rules and procedures appear non-discriminatory and yet the application of these rules and procedures causes discrimination in actual practice. For example, the Panel report on EEC’ Imports of Beef from Canada (March 1981) examined an EEC regulation imposing a levy-free tariff quota on high-quality grain-fed beef. T