GATT and Regional Integration Unit 4

GATT and Regional Integration unit 4

Regional integration is encouraged by GATT as a means of promoting international trade. Two kinds of integration are recognized

FREE trade areasare arrangements for eliminating tariffs between two or more countries.

•Customs unions are arrangements for both the elimination of internal tariffs and the establishment of a common external tariff for member countries.

Although encouraged, the GATT sets limits for these agreements. In particular, they may "not to raise barriers to the trade of other contracting countries." That is, member states of a free trade agreements may not increase their tariffs with respect to nonmembers; and common tariff created by a customs union cannot "be higher or more restrictive than the general incidence of the duties and regulations of commerce" before the customs union was established.

To ensure that regional integration arrangement comply with the GATT, the GATT requires that any such agreement involving a member state must be approved by the WTO. Once a free trade agreement or customs union is established, the GATT rules will apply to the union or area as a whole and not to its constituent states.

Commodity arrangement, or commodity trade regulation, are mechanisms for stabilizing the production and supply of basic or "primary" commodities through the intergovernmental regulation of supply and demand. Primary commodities, in general, are:

•products derived by extraction (such as fuels and ores),

•obtained by harvest (such as foodstuffs and fish), or

•that require minimal industrial processing before being used or consumed.

Commodity arrangements have been established at one time or another for bananas, bauxite, cocoa, coffee, copper, cotton and cotton yarns, hard fibers and their products, iron ore, jute and its products, manganese, meat, phosphates, rubber, sugar, tea, tropical timber, tin, and vegetable oils including olive oil and oil seeds. The GATT allows its member states to participate in commodity agreements, so long as the agreements involve both exporting and importing countries, and the agreements have to the approved by the WTO. Once established, an organization set up to operate a commodity arrangement will operate independently of the WTO.

A member state may avoid, temporarily, its GATT 1994 obligations when it is threatened by a surge in the number of imports coming from other member states. It may, in such a situation adopt emergency, restrictive trade measures known as Safeguard Measures. Before doing so, however, it must notify the WTO of its action and consult with the affected exporting member state to arrange for compensation. If a notifying country fails to negotiate, the injured exporting state is authorized to "retaliate." That is, it may withhold "substantially equivalent concessions" in order to restore the previous balance of trade between the two countries.

The GATT 1994 allows its member states to adopt certain public policies that are in conflict with its general goal of liberalizing trade. These authorized exceptions are known as general exceptions (GATT Art. XX) and security exceptions in (Art. XXI). General exceptions excuse a member states from complying with its GATT obligations so long as this is not done as "a means or an unjustifiable discrimination" or as "a disguised restriction on international trade." A member state, in reliance on GATT Article XX, may take measures contrary to the General Agreement which

1.are necessary to protect public morals.

2.are necessary to protect human, animal, or plant life, or health.

3.relate to the importation or exportation of gold or silver.

4.are necessary to secure compliance with laws or regulations which are not inconsistent with the general agreement.

5.relate to the products of prison labor.

6.protect national treasures of artistic, historic, or archaeological value.

7.relate to the conservation of exhaustible materials. 8.are undertaken in accordance with an intergovernmental commodity agreement.

9.involve restrictions on exports of domestic materials needed by a domestic processing industry during a period when the domestic price is held below world prices as part of a governmental stabilization plan.

10.are essential to acquiring products in short supply.

Security exceptions allow a member state to avoid any obligation which is either:

1.contrary to an essential security interest of the member.

2.conflicts with duties imposed by the United Nations Charter for the maintenance of international peace and security.

Most of the exceptions listed in Articles XX and XXI may be invoked only if they are necessary or essential to the contracting party. This has been done most often to protect cultural property or maintain national security, as in the Organization of American States’ 1976 Convention on the Protection of the Archaeological, Historical, and Artistic Heritage of the American Nations, and the Zangger Committee in which members of the Treaty on Non-Proliferation of Nuclear Weapons meet to coordinate export controls of nuclear weapons materials.

The World Trade Organization

Activity 1. Yes or no answer.

To help prepare yourself for the trade environment as your company begins a new level of international trade, consider the type of complaints that members could make to the World Trade Organization (WTO). Indicate all complaints that are in conflict with WTO or GATT agreements for members by responding ''yes" to indicate conflict and "no" to indicate that it is permissible.

Question 1. Member country refuses to import member nation citrus fruit because its taste quality is much better than homegrown. Yes or no?

The answer to question 1 is Yes. This is not an acceptable reason to refuse import. Question 2. Developing member country restricts quantity of electronic imports from member states until it has further developed its own industry. Yes or no?

The answer to question 2 is No. This temporary restriction is permissible for a developing country.

Question 3. Developed member country refuses to export bread until its national food shortage ends. Yes or no?

The answer to question 3 is No. This temporary export restriction is valid in case of food shortage

Question 4. Developed member country with a free trade agreement with the region raises tariffs for those outside the region. Yes or no?

The answer to question 4 is Yes. It is not acceptable to raise tariff for those outside of an agreement.

Question 5. Member country accepts import of another member country’s perfume product and internally stipulates it can only be sold at the borders.

The answer to question 5 is Yes. This type of restriction does not allow the product to compete equally and would not be allowable. The internal stipulation sounds like a transparency issue, also.”

Activity 2. Identify the position. The World Trade Organization’s (WTO) Ministerial Conference is being held in a city where you have business meetings. Some roads are difficult to access because of protests against the WTO. Identify the causes of those troubled by World Trade Organization ambitions by responding "Anti WTO" to those signs that represent opposition to the WTO and "Pro WTO" to those which represent a position of the WTO.

Question 6: Lower trade barriers!

The correct answer to question 6 is pro-WTO. Question 7: Save the environment!

The correct answer to question 7 is anti-WTO.

Question 8: The corporation for the world!

The correct answer to question 8 is pro-WTO.

Question 9: Jobs for the poor!

Question 10: Patent genes? NO WAY!

Question 11: Stop polluting!

Question 12: Keep food safe!

The correct answer to question 12 is anti-WTO. Question 13: International peace and order!

Question 14: Protect worker rights!

Question 15: Local government not WORLD government!!

Activity 3: Multiple choice.

Organizations and councils have done work to help protect nations from trade abuses and security threats. To help yourself refer knowledgably to these protections, as you speak with other executives who will help take the company international, review by identifying from the multiple choice options the group that provides the protection

Question 16. What entity or agreement can sanction trade bans on nations that are endangering peace?

UNESCO & OAS

Australia Group

UN Charter-UN Security Council

Wassenaar Agreement

GATT (general exceptions)

GATT (general exceptions) The correct answer to Question 16 is C, UN Charter-UN Security Council.

Question 17. What entity or agreement ensures countries do not need to accept products made from prison labor?

UNESCO & OAS

Australia Group

Wassenaar Agreement

The correct answer to Question 17 is GATT (general exceptions)

Question 18. What entity or agreement tries to control misappropriation of national cultural property?

UNESCO & OAS

Australia Group

Wassenaar Agreement

The correct answer to Question 18 is A, UNESCO & OAS.

Question 19. What entity or agreement provides member controls for conventional arms export?

UNESCO & OAS Australia Group

Wassenaar Agreement

Question 20. What entity or agreement protects countries from having to trade their gold or silver?

UNESCO & OAS

Australia Group

Wassenaar Agreement

The correct answer to Question 20 is E, GATT (general exceptions).

Question 21. What entity or agreement provides member controls for chemical or biological materials that can be used in warfare.

UNESCO & OAS

Australia Group

Wassenaar Agreement

The correct answer to Question 21 is B, Australia Group.

Reference August, R. (2003). International business law: Text, cases, and readings (chap. 7). Upper Saddle River, NJ: Pearson, Prentice Hall.

End of activity.

Trade in Goods

History of Contemporary International Trade Law

The General Agreement on Tariffs and Trade came into effect in 1947. GATT was both a framework of rules and an institution. The rules defined the way trade relations were conducted between contracting states. The institution was a forum for trade negotiations and a mechanism for modifying and enforcing the GATT rules.

Its articles established rules governing customs procedures, quantitative restrictions, subsidies, antidumping and countervailing duties, and state trading. Its contracting parties agreed to honor the most- favored-nation principle and the principle of national treatment. Unlike proposals discussed immediately after World War II, the GATT had no provisions dealing with employment, international investment, restrictive business practices, or international commodity agreements. A small secretariat (the GATT Organization) was set up in Geneva, Switzerland to oversee the operation of the GATT Agreement.

The contracting parties to the GATT (which were most of the states allied with the United States and Europe during the Cold War) regularly participated in multilateral trade negotiations (or rounds) to negotiate trade concessions. The first five rounds (held from 1947 to 1962) were devoted almost exclusively to tariff reductions. Latter rounds—the Kennedy Round (1962–1967) and the Tokyo Round (1973–1979)—expanded their agendas to nontariff matters and the drafting of nontariff codes. The last of the GATT 1947 rounds was the Uruguay Round (1986–1994).

The Uruguay Round was concerned with

creating a new World Trade Organization; adopting new special agreements (e.g., agriculture); andexpanding the GATT principles to new fields (e.g., services and intellectual property). Although the negotiations were lengthy (lasting 9 years) and fractious, they did lead to the adoption of an agreement known as "The Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations," which provided for the establishment of a World Trade Organization (the WTO, which came into existence on January 1, 1995).

The "Final Act" is made up of three parts: (1) A one page "umbrella agreement" that introduces the other two parts; (2) the WTO Agreement and its Annexes; and (3) various ministerial declarations and decisions agreed to during the course of the Uruguay Round negotiations

The World Trade Organization

In this topic, we will be learning about

structure of the WTO. decision-making in the WTO. trade policy review.

The WTO Agreement establishes a legal framework to bring together and administer the various trade pacts negotiated under GATT 1947. In particular, it establishes a unified administrative organization— the World Trade Organization (WTO)—to oversee the Uruguay Round Agreements.

The WTO, however, is not substantially different either in scope or function from the old GATT organization. It is not a supranational organization with the power to usurp national sovereignty. And its operations are to be guided by the procedures, customary practices, and decisions of the old GATT.

The main organs of the WTO are:

A Ministerial Conference, which is the WTO's supervisory and policy making organ (it meets every other year)

A General Council, which also functions as the WTO's Dispute Settlement Body and Trade Policy Review Body. It is responsible for the day-to-day operations of the WTO and for making arrangements for effective cooperation with other IGOs.

A Council for Trade in Goods. A Council for Trade in Services.

A Council for Trade-Related Aspects of Intellectual Property Rights. There is also a relatively small Secretariat headed by a Director-General.

The WTO makes its decisions by consensus. That, by general agreement and in the absence of any voiced objection. If a consensus cannot be reached, then decisions are made by a simple majority vote.

The WTO Agreement establishes a Trade Policy Review Mechanism for carrying out periodic reviews of the trade policies and practices of member states and for preparing an annual overview of the international trading environment. This exercise is overseen by the Trade Policy Review Board (TPRB), which is actually the WTO General Council meeting to carry out the review. It prepares an annual overview of the international trading environment.

Multilateral Trade Agreements

The customs valuation code (or formally, the Agreement on the Implementation of Article VII of the GATT 1994) establishes several methods for valuing items for customs purposes. The primary method is to use the "transaction value" of the imported item. That is, tariffs are to be based on the price actually paid or payable for merchandise when sold for exportation. If this cannot be determined, the following methods (in this order) are to be used:

the transaction value of identical goods sold for export to the same importing country the transaction value of similar items sold for export to the importing country the deductive value or the price actually paid for the greatest number of units sold in sales to nonrelated persons in the importing country the computed value determined by adding the cost or value of the materials, the profits, and overhead, and deducting the cost of handling, transportation, and insurance the derived value, which is found by applying whichever of the other methods best fits, and adjusting it to the particular circumstances

The Agreement on Preshipment Inspection allows developing WTO members states to carry out preshipment inspections to verify price, quantity, quality, customs classifications, and other characteristics of goods before the goods are shipped from other states. Such an inspection must comply with the basic GATT principles (such as nondiscrimination and transparency). The Agreement on Technical Barriers to Trade (called the TBT Agreement) establishes rules governing the way WTO member states draft, adopt, and apply technical regulations, standards, and conformity assessment procedures. The purpose of the TBT Agreement is to ensure that states

protect human life and the health of humans, animals, and plants. protect the environment. do not engage in deceptive practices. do not create unnecessary obstacles to trade.

Technical regulations are mandatory laws and provisions specifying the characteristics of products, the processes and production methods for creating products, and the terminology, symbols, packaging, marking, or labeling requirements for products, processes, or production methods.

Standards are voluntary guidelines that specify the same things as technical regulations. Conformity assessment procedures are procedures used to directly or indirectly determine if the relevant requirements in technical specifications or standards have been fulfilled. Examples of conformity assessment procedures include the sampling, testing, and inspecting of products; the evaluation, verification, and assurance of product conformity; and the registration, accreditation, or approval of a product.

The TBT Agreement applies to all products, including agriculture and industrial products. It does not apply to the purchasing specifications of governmental bodies (which is covered by the Agreement on Government Procurement) or sanitary and phytosanitary measures (which are covered by the Agreement on Sanitary and Phytosanitary Measures). The TBT Agreement requires WTO member states to comply with the basic GATT principles. Additionally, the central governments of WTO member states are required to take "reasonable measures" to ensure the local governments and nongovernmental organizations comply with the TBT Agreement.

Multilateral Trade Agreements

The Agreement on Sanitary and Phytosanitary Measures (called the SPS Agreement) defines the measures that WTO member states may take to protect the lives and health of humans, animals, and plants. In particular, such measures may not be disguised means of restricting international trade, may not arbitrarily discriminate between states without justification, and they must be based on scientific evidence. The Agreement on Trade-Related Investment Measures (called the TRIMs Agreement) is meant to promote foreign investment and eliminate provisions in foreign investment laws that distort or reduce international trade. Member states agree to accord foreign investors "national treatment" and not to impose quantitative restrictions on the use of foreign products by foreign-owned local enterprises.

The Agreement on Import Licensing Procedures seeks to insure that licensing procedures are neutral. That is, forms and procedures must be simple, licenses are not to be denied because of minor errors in completing an application, and imports are not to be barred from entry into a member state because of minor deviations in the value, quantity, or weight designated on the license.

Antidumping Code (formally the Agreement on Implementation of Article VI of GATT 1994) sets out the procedures by which states may take measures to counter dumping. Dumping being the introduction into the commerce of another country of a product at less than its normal value.

It is important to note that the Antidumping Code does not declare dumping to be illegal, so states that are pleased to have goods brought into their territories do not have to take any action. States that wish to take antidumping measures (i.e., the imposition of off setting duties) to counter dumping must first conduct an investigation and determine that the dumped product causes or threatens to cause material injury to, or materially retard the establishment of, a domestic industry in the importing country.

The Agreement on Subsidies and Countervailing Measures (called the SCM Agreement) specifies the actions a WTO member state may take to counterbalance an improper subsidy. A subsidy being a financial contribution made by a government or other public body that confers a benefit on an enterprise, group of enterprises, or an industry.

Not all subsidies are improper. The SCM Agreement does not apply to nonspecific subsidies, certain specific subsidies mentioned in the SCM Agreement and agricultural subsidies (which are covered by the Agreement on Agriculture). The subsidies subject to the "disciplines" of the SCM Agreement are "specific subsidies." These are subsidies that target a specific enterprise or industry, a group of enterprises or industries, or enterprises in a particular region.

The SCM Agreement categorizes subsidies as follows: Prohibited subsidies (or red subsidies) are subsidies that either depend upon export performance or are contingent upon the use of domestic instead of imported goods.

Actionable subsidies (or yellow subsidies) are subsidies that are trade distorting because, in the way they are used, they injure a domestic industry of another member state, nullify or impair benefits due another member state under GATT 1994, or cause or threaten to cause serious prejudice to the interests of another member state.

Nonactionable subsidies (green subsidies) are subsidies that either nonspecific or a re infrastructural subsidies that involve government funding to assist (but not fully cover) the cost of business research activities, aid disadvantaged regions, or help existing facilities adapt to new environmental requirements.

Before countering either a prohibited or an actionable subsidy, a state must request consultations with the subsidizing state. If this fails, it may seek authorization to adopt countervailing measures (such as the imposition of a duty to offset the subsidy) from the WTO (which will refer the matter to the WTO Dispute Settlement Body to determine if countervailing measures are appropriate) or it may conduct an investigation (identical to the kind of investigation it must conduct before imposing antidumping duties) to determine if countervailing measures are appropriate.

The Agreement on Safeguards defines when WTO member states may adopt safeguard measures as authorized in the GATT Escape Clause, which we discussed earlier. In particular, it requires a member state to conduct an official investigation to determine if a product is being imported into the territory of the investigating state, if the quantities inside the state have increased sufficiently to cause or threaten to cause serious injury, and if injury is being done a domestic firm producing the same or a directly competitive products. Any safeguard measure that a state adopts must be applied to the imported product, regardless of its origin, and only for the time and to the extent necessary to prevent or remedy serious injury and to facilitate adjustment.

The Agreement on Agriculture establishes guidelines for "initiating a process of reform of trade in agriculture."

The provisions of the Agreement:

specify the agriculture products it governs. requires that nontariff barriers to agricultural imports be converted into customs tariffs. defines permissible forms of domestic supports. defines export subsidies. phases in initial reductions in tariffs, impermissible domestic support measures, and export subsidies during a six-year implementation period. progressively integrates international trade in agricultural products into the GATT system.

The Agreement on Textiles and Clothing provides for the phasing out over a ten-year period of the existing Multi-Fiber Arrangements that allow states to impose quantitative restrictions on imports of textiles and clothing.

The Agreement on Rules of Origin calls for the creation of an international system of harmonized rules of origin. The new rules will require WTO member states to comply with the basic GATT principles.

In this topic, we learned about

Customs Valuation Code

Agreement on Pre-shipment Inspection

Agreement on Technical Barriers to Trade, Sanitary and Phytosanitary Measures, and Trade-Related Investment Measures

Agreement on Import Licensing Procedures

Antidumping Code

Agreement on Subsidies and Countervailing Measures

Agreement on Safeguards, Agriculture, Textiles and Clothing, and Rules of Origin.

Tariffs and Trade

The GATT 1994 is now one of the Annexes to the WTO Agreement. It replaces the old GATT 1947 agreement, but the differences between the two are mainly in terminology. That is, "member" replaces "contracting party," and "WTO" or its "Ministerial Conferences" are substituted for "Contracting Parties." The Purpose of the GATT is to give WTO member states equal access to markets and reciprocity in trade concessions. It also is meant to establish transparent and stable trading conditions. In the long term, it looks to progressively liberalize world trade.

Some of the GATT provisions are directly effective. That is, they may be relied upon by individuals (in addition to other signatories) to challenge the actions of a contracting state. Those provisions that are directly effective are those that prohibit a state from taking action contrary to the General Agreement are directly effective. By comparison, provisions that do not prohibit some action, but which require a contracting state to take some positive action, may only be challenged by individuals if the member state adopts implementing legislation authorizing such a challenge.

Nondiscrimination in international trade simply refers to the concept that international trade should be conducted without discrimination. It is the basic principle of GATT, and it is given expression in the GATT articles as the most-favored-nation rule and the national treatment rule.

The most-favored-nation (or MFN) rule requires each member state to apply its tariff rules equally to all other members. This rule is not absolute, however. Member states (contrary to the rule) may take actions to counter dumping and subsidization, they may join together to create customs unions and free trade areas, and they may restrict imports to protect public health, safety, welfare and national security.

Additionally, they are special exceptions to the MFN rule that apply to developing member states. The Generalized System of Preferences (GSP) allows developing members to export all (or nearly all) of their products into a participating developed members on a nonreciprocal basis. And the South-South Preferences allows developing members to exchange tariff preferences among themselves without extending the same preferences to developed members.

The national treatment rule requires a member to treat products equally with its own domestic products once they are inside its borders. In other words, a member state must accord to the nationals of other members states "treatment equivalent to that which the state accords to its own nationals." Products must be treated equally vis-à-vis their “content”; they may not be discriminated against because of the way in which they were made.

As with the MFN rule, the GATT sets out exceptions to the national treatment rule. Member state may maintain preferences that existed at the time they became signatories of the GATT, they discriminate in the procurement of goods by government agencies, in the payment of certain subsidies to domestic producers, and in the screening of domestically produced movies.

By becoming a party to the WTO and the GATT, member states agree that the will only protect their domestic industries through the use of tariffs. In particular, they may not use quotas or other quantitative restrictions, which block the function of the price mechanism. Additionally, they agree to only collect tariffs "at the time or point of importation." This last requirement was added to the GATT to ensure that internal taxes would not used by member states as disguised as tariffs.

There are some exceptions that a member may impose:

Temporary export prohibitions or restrictions to prevent or relive critical shortages of foodstuffs or other essential products.

Import and export restrictions related to the application of standards or regulations for classifying, grading, or marking commodities.

Quantitative restrictions on imports of agricultural and fisheries products to stabilize a member state’s national agricultural markets.

Reasonable quantitative restrictions to safeguard a member state’s balance of payments. And

Quantitative restrictions to further the economic development of a developing member state.

Transparency requires governments of WTO member states must disclose to the public, and to other governments, the rules, regulations and practices they follow in their domestic trade systems. Simplification requires members to work toward simplifying their import and export formalities.