Lecture 6 ib 404 institutional framework for international business 1

LECTURE 6
WTO AGREEMENTS
THE GENERAL AGREEMENT
ONTARIFFS &TRADE

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.
2

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.
3

GATT-Sponsored Trade Liberalization
– Negotiating Rounds: The First Seven –
Round Period Participants
Geneva 1947 23
Annecy 1949 13
Torquay 1951 38
Geneva 1956 26
Dillon 1960-61 26
Kennedy 1964-67 62
Tokyo 1973-79 102
4

WTO Current Structure
5
Goods Services
Intellectual
property Disputes
Basic
principles
GATT GATS TRIPS Dispute
settlement
Additional
details
Other goods
agreements
and annexes
Services
annexes
Market access
commitments
Countries’
schedules of
commitments
Countries’
schedules of
commitments

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.
6

The 2 Pillars of GATT/WTO
Negotiations
Non-discrimination Reciprocity
7
Most-Favored-Nation
Clause (MFN)
Any tariff concession
a country gives to
another must be
extended to all other
WTO members.
Negotiations are
“reciprocal:”
the market access
obtained must be
equivalent to the
market access
conceded.

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.”
8

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.
9

PART I
 Article 2 --Schedules of Concessions
 Tariff concessions granted in negotiations
with one member are automatically extended
to all GATT 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.
10

PART II
 Article 3 --NationalTreatment on InternalTaxation 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. ]
11

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.
12

PART II
 Article 5.Freedom ofTransit
 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.
13

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.
14

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 CustomsValuation 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.]
15

PART II
 Article 8. Fees and Formalities ConnectedWith
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.]
16

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.
17

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.
18

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.
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 GATT
obligations toward the country applying the restrictions
20

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.
21

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 GATT 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.
22

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.]
23

PART II
 Article 17 --StateTrading 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.
24

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 ."
25

PART II
 Article 19 --EmergencyAction 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.
26

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.
27

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 .
28

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.
29

PART III
 Article 24 --Territorial Application; FrontierTraffic; 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.
30

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.
31

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.
32

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.
33

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
GATT 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.
34

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 InternationalTrade Organization -
-and provided a course of action for
"amending, supplementing, or maintaining"
the GATT in the event of failure to ratify the
Havana Charter.
35

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.
36

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.
37

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.
38

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.
39

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.
40

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. [TheTokyo
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."]
41

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.
42

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-
43

Lecture 6 ib 404 institutional framework for international business 1

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Lecture 6 ib 404 institutional framework for international business 1