LECTURE 6WTO AGREEMENTS

THE GENERAL AGREEMENT ON TARIFFS & TRADE

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The World Trade Organization – WTO

A rules-based, member-driven organization. “Its main function is to ensure that trade

flows as smoothly, predictably and freely as possible.”

Created in 1995 by 120 nations to supersede and extend the GATT.

Now: 148 member nations (over 97% of world

trade). 32 ‘observer’ countries.

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Origin: The General Agreement on Tariffs and Trade (GATT)

Before GATT: several joint declarations of free-trade ideals—and failed attempts to create an international trade institution.

Under US leadership, the GATT was created in 1947—as a step toward the “ITO.”

GATT: 19 original “contracting parties.”(WTO has now 148 members.)

Regulated trade in goods, only.

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

Round Period ParticipantsGeneva 1947 23Annecy 1949 13

Torquay 1951 38 Geneva 1956 26Dillon 1960-61 26Kennedy 1964-67 62

Tokyo 1973-79 102

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WTO Current Structure

GoodsServices

Intellectual property

Disputes

Basic principle

sGATT GATS TRIPS Dispute

settlement

Additional details

Other goods agreements and annexes

Services annexes

Market access

commitments

Countries’ schedules of commitments

Countries’ schedules of commitments

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GATT/WTO: Main Objective

To provide a legal framework for incorporating the results of negotiations directed toward

“Reciprocal and mutually advantageous exchange of market access commitments on a non-discriminatory basis.”

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

The objectives of the members signing the agreement included raising living standards and promoting full employment by reducing trade barriers and eliminating discriminatory trade practices.

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The 2 Pillars of GATT/WTO NegotiationsNon-discrimination Reciprocity

Most-Favored-NationClause (MFN)Any tariff concessiona country gives toanother must be extended to all other WTO members.

Negotiations are“reciprocal:”the market accessobtained must beequivalent to themarket accessconceded.

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Can these 2 guidelines deliver an efficient outcome?

According to recent, cutting-edge research, YES

“As long as bilateral negotiations abide by MFN and satisfy reciprocity, they can be presumed to produce Pareto improvements across governments.

But if either MFN or reciprocity is violated, then this presumption may not be warranted.”

PART I

Article 1 --General Most-Favored-Nation Treatment

The cornerstone of the General Agreement is the principle of nondiscrimination. The most-favored-nation (MFN) clause states that a contracting party's trade policies must treat all GATT members equally. The Article applies to all tariffs --whether or not they have been subject to negotiations between GATT members --as well as to all policy measures affecting imports or exports.

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PART I

Article 2 --Schedules of Concessions Tariff concessions granted in negotiations

with one member are automatically extended to all GA TT members. Once a tariff concession is made on a particular item, that item is "bound" against any increase above the agreed level. A contracting party is committed not to impose duties or other charges that would tend to undercut such concessions.

PART II

Article 3 --National Treatment on Internal Taxation and Regulation

The "national treatment" principle means that internal taxes and regulations cannot be used as substitutes for tariffs by discriminating against imported goods. There are no limits on the level of taxation or regulation concerning sales, purchases, transportation, and distribution so long as imported goods are treated "no less favorably" than domestic goods. Local-content rules (i.e., regulations requiring specific proportions or amounts of domestic goods in production) are not allowed, and no contracting party may apply internal quotas in a way that affects the national treatment of imports. [Article 3 is not designed to prevent subsidies to domestic producers and does not apply to government procurement. However, the GATT Government procurement Code2 requires that national treatment be extended to parties covered by the Code. ]

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PART II

Article 4. Special Provisions Relating to Cinematographic Films

As an exception to Article 3, domestic theaters may reserve a portion of screen time for showing of exclusively domestic films. Screen-time quotas must be established on an annual basis for individual theaters.

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PART II

Article 5.Freedom of Transit Freedom of movement through the

territory of each contracting party is to be assured for goods (and their conveyances), which are destined to or come from any other contracting party. Such traffic must be allowed to move via the most convenient route; is to be exempt from customs or transit duties; and is to be free from unnecessary delays or restrictions.

PART II

Article 6.Antidumping and Countervailing Duties Contracting parties retain the right to protect themselves from

dumping and subsidization, which cause or threaten material injury to an established domestic industry, or retard the establishment of a domestic industry.

Goods may not be subject to antidumping duties unless the goods are sold for export at a price below the price at which they are sold for domestic consumption in the exporting country, or below the price at which they are sold to third countries. An antidumping duty may not be greater than such a price differential. [The GATT Antidumping Code further provides that "injury" is to be determined by the volume of dumped goods, their effect on prices, and their impact on domestic producers. It also provides that antidumping proceedings may be suspended or terminated in the event that the exporter raises prices or ceases to export at dumped prices.] Countervailing duties may be imposed only to offset subsidies on production or export; they may not exceed the amount of the subsidies.

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PART II

Article 7. Valuation for Customs Purposes Certain general principles for customs valuation are set

forth, including that the value of goods for customs purposes should be based on the actual value of the goods and not on arbitrary or fictitious values, nor on the value of similar, domestically-produced goods.

In addition, Article 7 states that where goods are exempted in the exporting country from internal taxes applicable to sales for home consumption, such taxes should not be included in the computation of dutiable value in the importing country .[The GATT Customs Valuation Code alters Article 7 by requiring that customs duties be based on the price actually paid for the goods when sold for export. The Code also establishes specific means of determining the dutiable value when the actual price is not available.]

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PART II

Article 8. Fees and Formalities Connected With Importation and Exportation

In order to minimize impediments to trade due to customs procedures, fees charged by customs officials must be limited to the approximate cost of customs services; they are not to be used for protective or fiscal purposes. Contracting parties are expected to decrease and simplify their documentation requirements, and are not to impose substantial penalties for minor breaches of customs regulations such as clerical errors. [The GATT Import Licensing Code elaborated upon and updated the requirements of Article 8.]

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PART II

Article 9.Marks of Origin Because the trade-inhibiting effects of

regulations concerning marks of origin are hard to pin down, Article 9 contains general language calling for relaxation of such rules to decrease the inconvenience and difficulty of marking imported goods. Provisions include the elimination of marking requirements that would deface or seriously damage the goods, and limitations on penalties for noncompliance with marking regulations.

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PART II

Article 10 -. Publication and Administration of Trade Regulations

The basic "transparency" obligation requires contracting parties to ensure prompt publication of laws and regulations affecting imports and exports so that foreign governments and traders may clearly understand them. In provides that increases in customs duties and more burdensome restrictions on imports may not be enforced until such measures have been officially published.

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PART II

Article 11 ..General Elimination of Quantitative Restrictions

Contracting parties are prohibited from introducing new quotas and are required to eliminate existing ones. However, Article 11.2(c) permits quantitative restrictions in support of certain domestic agricultural programs --particularly those which, by raising domestic prices above the world market price, tend to create an incentive for importation --provided that domestic production or marketing is similarly limited. Other exceptions to the general prohibition of quantitative restrictions are made in Articles 12, 18, and 19.

PART II

Article 12 ..Restrictions to Safeguard the Balance of Payments As an exception to Article 11, contracting patties facing

balance-of-payments difficulties may impose import quotas to the extent necessary to prevent a serious decline in monetary reserves. [The Tokyo Round Framework Agreement (see Sec. 1) broadened the scope of Article 12 to legitimize the use of non-quantitative restrictions such as import surcharges for balance-of-payments purposes.] A country imposing new restrictions or intensifying old ones is required to consult with the other contracting parties. If it is determined in the course of these consultations that restrictions are being applied in a discriminatory manner, an adversely affected contracting patty may be released from GA TT obligations toward the country applying the restrictions

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PART II

Article 13 ..Nondiscriminatory Administration of Quantitative Restrictions

As an extension of the MFN clause, Article 13 proscribes discrimination in the application of import or export quotas. In addition, it requires that when import quotas are applied, each supplier country's share of trade in the product concerned should approximate the share which it would be likely to have in the absence of the quotas.

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PART II

Article 14 ..Exceptions to the Rule of Nondiscrimination The nondiscrimination requirement of Article 13 can be

waived in special situations involving restrictions imposed to deal with balance-of-payments problems.

Article 15. Exchange Arrangements Currency or exchange controls may not be used as

disguised quantitative restrictions or to frustrate the intent of GA TT or IMF provisions. Article 15 also provides for coordination between the GATT and IMF in times of balance-of-payments emergencies. All GATT contracting patties must either become members of the IMF or conclude a special exchange arrangement with the IMF.

PART II

Article 16 --Subsidies Production subsidies that tend to reduce imports --while not

proscribed --are subject to notification and consultation requirements that are designed to discourage subsidization. (The nature and extent of all such subsidies are to be reported to the GATT , accompanied by a statement showing why the subsidy is necessary and an estimate of its effect on imports or exports.) Article 16 further calls for elimination of export subsidies on non- primary products, and states that all subsidies on the exportation of primary products should be avoided. [The GATT Subsidies Code extended Article 16 by prohibiting export subsidies on non-primary products, and by providing an illustrative list of .prohibited export subsidies on manufactured products. The Code also expanded and clarified procedures for consultation on subsidy issues, and established procedural requirements for countervailing duty actions against imports of subsidized products.]

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PART II

Article 17 --State Trading Enterprises A state-trading enterprise --i.e., one

which is given exclusive or special privileges by the state --must conduct import or export operations on a nondiscriminatory basis. Article 17 also establishes the principle that state-trading enterprises are to use market factors in making decisions regarding purchases or sales.

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PART II

Article 18 --Government Assistance to Economic Development

LDC contracting parties are permitted under certain circumstances to impose quantitative restrictions in furtherance of their economic development programs or in response to foreign exchange problems attributable to their development status. LDCs are also allowed to withdraw from or modify a tariff binding or apply import quotas to establish or protect an "infant industry ."

PART II

Article 19 --Emergency Action on Imports of Particular Products

If an operative concession leads unexpectedly to serious injury to a domestic industry, the affected contracting party may invoke this "escape clause" to temporarily withdraw the concession. In the absence of an agreement providing otherwise, the country to which the concession was originally granted is then entitled to withdraw equivalent concessions.

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PART II

Article 20 --General Exception General exceptions to GATT rules are

established for measures necessary for protection of public morals, or for health and safety measures. However, such measures are not to be used as disguised trade restrictions and are not to discriminate arbitrarily between countries.

PART II

Article 21 --Security Exception Contracting parties are free to apply trade

controls they deem necessary for national security. Article 21 further permits a contracting party to withhold any information that must be kept confidential in order to protect national security interests.

Article 22 --Consultation Contracting parties must be willing to consult

with other members, on request, on any matter affecting the operation of the GATT .

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PART II

Article 23 --Nullification or Impairment

Working parties or panels of independent experts may be established to review disputes and to make recommendations for resolving them. If these efforts fail, the Contracting Parties may authorize an agreed country to adopt retaliatory measures against the trade of an offending country.

PART III

Article 24 --Territorial Application; Frontier Traffic; Customs Unions and Free ..Trade Areas

Customs unions and free trade ease (FTAs) are exempted from the MFN clause, but such an arrangement must not increase existing levels of trade restrictions affecting nonmember countries. If existing trade barriers are raised to outsiders, compensation may be required. The arrangement must lead to significant liberalization --in particular, it must cover "substantially all" trade between participating countries --and interim arrangements should lead to formation of Ff As or customs unions within a reasonable period of time. Article 24 also provides that, regardless of political status, any area that maintains its own tariffs and commercial regulations may be treated as a contracting party.

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PART III

Article 25 --Joint Action Representatives of the contracting parties may

meet periodically to ensure smooth functioning of the GA TT and t1 give effect to provisions involving joint action.

Article 26 --Acceptance, Entry Into Force, and Registration

Article 26 sets out the ratification requirements for bringing GATT into force. The Article also establishes procedures for former dependencies of contracting parties to become contracting parties in 1ir own right upon sponsorship by the former metropolitan government.

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PART III

Article 27 --Withholding or withdrawal of Concessions

Contracting parties are authorized to withhold/ withdraw particular tariff concessions which were initially negotiated with a country that subsequently withdrew from/ failed to accede to the GATT.

PART III

Article 28 --Modification of schedules In order to provide flexibility to

members' commercial policies, a contracting party may renegotiate its tariff concession every 3 years, provided that compensating concessions are made to the other members primarily affected.

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PART III

Article 28 bis --Tariff Negotiations This follow-on to Article 28 (" is" is a French

term meaning continuation) sets out general rules for GA TT tariff negotiations. Contracting parties are not obligated to participate in multilateral trade negotiations, but recognition is given that success of such negotiations depends on the widest possible participation by trading nations. LDC contracting parties are not obliged to reduce tariffs needed for economic development and revenue purposes.

PART III

Article 29 --Relation to the Havana Charter

Article 29 provided for suspension of the GA II upon ratification of the 1948 Havana Charter --which was expected to establish a permanent International Trade Organization --and provided a course of action for "amending, supplementing, or maintaining" the GATT in the event of failure to ratify the Havana Charter.

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PART III

Article 30 --Amendments Amendments to Part I of GATT or to

Articles 29 or 30 require the unanimous acceptance of the contracting parties. Other amendments enter into force upon acceptance by two- thirds of the contracting parties, but apply only to the members accepting them.

PART III

Article 31 --Withdrawal Any contracting party may withdraw from

GATT upon three months' written notice. Article 32 --Contracting Parties Any government applying the General

Agreement --whether definitively under Article 26, provisionally under the Protocol of Provisional Application, or as an acceding country under Article 33 --is to be considered a "contracting party to the GATT.

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PART III

Article 33 --Accession A nonmember government may

negotiate the terms of its accession to GA II --on its own behalf or on behalf of a separate, autonomous customs territory --subject to approval by two-thirds of the contracting parties.

PART III

Article 34 --Annexes The Annexes to the text of the

General Agreement (including notes and supplementary provisions) are incorporated as integral parts of the GATT.

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PART III

Article 35 --Non-application of the Agreement Between Particular Contracting Parties

A contracting party may withhold application of its schedule of tariff concessions/ the entire agreement, from another contracting party with which it has not entered into tariff negotiations.

PART IV. TRADE AND DEVELOPMENT

Article 36 --Principles and Objectives Article 36 acknowledges the special trade problems of LDCs and

recognizes that export earnings can play an important role in their development. It calls for positive efforts to increase the share of LDC activity in world trade. It also states that developed countries "do not expect reciprocity" from LDCs for commitments made during trade negotiations. [The Tokyo Round Framework Agreement supplemented the principles embodied in Article 36 with the so-called graduation clause, which stated that "Less-developed contracting parties expect that their capacity to make contributions/ negotiated concessions/ take other mutually agreed action under the provisions and procedures of the General Agreement would improve with the progressive development of their economies and improvement in their trade situation, and they would accordingly expect to participate more fully in the framework of rights and obligations under the General Agreement."]

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PART IV.

Article 37 --Commitments Article 37 exhorts developed

countries to lower import barriers to products most easily exported from LDCs. Developed countries are also urged to have special consideration :. for LDC needs with regard to financial or other measures affecting their trade and economic stability.

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PART IV.

Article 38 --Joint Action ...Article 38 calls for joint action of

the Contracting Parties to improve access to world markets of primary products commonly exported by LDCs. It also calls for international harmonization and adjustment of national policies to stabilize world markets and allow LDCs to expand their trade-