GATT/WTO and Managing International Trade Relations (Chapter 7)

(1)

Book Chapter

Reference

ARAKI, Ichiro, MARCEAU, Gabrielle Zoe

ARAKI, Ichiro, MARCEAU, Gabrielle Zoe. GATT/WTO and Managing International Trade Relations (Chapter 7). In: Sejong Institute. Global Governance: The Role of International Institutions in the Changing World. Seongnam : Sejong Institute, 1997. p. 187 ss.

Available at:

http://archive-ouverte.unige.ch/unige:45534

Disclaimer: layout of this document may differ from the published version.

1 / 1

(2)

>

7 GATT/WTO and Managing International Trade Relations

Ichiro Araki and Gabrielle Marceau·

Introduction

Mankind has b~en engaged in trade - buying, selling and bartering goods and services - for many millennia, but it was not until formal and distinct borders were established that "international" trade formally came into being. From the beginning, states for various reasons wanted to regulate the flow of international trade, most notably to raise revenues and to protect vested interests within their territories. Later, state regulation of international trade was rationalized as a positive policy measure by the philosophy of mercantilism, which links trade surpluses dir.ectly with national

'The. a~thors are Legal Officers for the Legal Affairs Division of the wro Secretariat.

The opuuons expressed are strictly personal and cannot be attributed to the WTO. We are most grateful to Nadir Alikhan, Bill Davey, Nusrat Nazeer, Hans Peter Werner and Werner Zdouc for their detailded comments on previous drafts of this chapter.

We .are also most grateful to Kathryn Maissen and Eloise Ni Bhriain who prepared the included tables. All mistakes are ours only.

(3)

188 I Ichiro Araki and Gabrielle Marceau

s~ngth, and aims at maximizing exports and minimizing imports with a view to accumulating foreign exchange reserves.

Many have argued, however, that a policy of mercantilism cannot be justified on economic grounds. Free trade maximizes the welfare of all nations, and mercantilism, in the long run, is a self-defeating policy. Nonetheless, tariffs and other regulation of international trade were imposed by self-aggrandizing states that sought to use trade for their own purposes. As a result, when regulation receded, trade flourished; and when regulation was intense, trade languished. The most recent and particularly disas- trous experience was the downward spiral of shrinking trade during the Great Depression.

The need to "regulate" the regulation of trade was recognized as early as in the middle of the nineteenth century. Initially, states tried to achieve this through trade agreements concluded between .themselves, starting with the Cobden-Chevalier Treaty of 1860 between the United Kingdom and France. Benefits under these agreements were extended to other States by virtue of the "most- favoured-nation'' clause.¹World trade expanded under this system, but except for a few studies and failed attempts under the aegis of the League of Nations, there were no multilateral rules and disciplines on international trade until the middle of this century.

It was only after the world had witnessed the scourge of the Great Depression and World War II that these trade agreements started to be multilateralized and institutionalized. The unsuc- cessful attempt to create an International Trade Organization (ITO) immediately after the Second World War left the General Agreement on Tariffs and Trade (GATI), neg~tiated in 1947, as the sole legal instrument governing trade on a provisional basis.

1 See Section IV (a) infra for more detailed discussion.

(4)

GA TI /WTO and Managing International Trade Relations/ 189

Rapidly the GATI became the central forum where international trade relations evolved continuously. The World Trade Organization (WfO), which has been operational since 1995, now provides world trade partners with an authentic international trade organization administering various multilateral agreeme!'ts.

The present Chapter focuses on the GAIT /WTO as an institu- tion, and describes and analyzes the solutions proposed by the GATI

I

WIO to address international trade problems. The Chapter

is divided into eight Sections. Section I serves as an introduction;

Section IT elaborates general problems associated with international trade; Section

m

briefly explains the difficult birth of the GAIT; Section IV explains the basic principles of the GATI; &'Ction V explains the evolution of the GAIT into a de facto intemation,11 organisation and the steps ^f0\\¹ards the conclusion of the

U

ntguay Round; Section VI presents the WTO as an international organization; Section VII focuses on developing countries; and Section VIII concludes.

Nature and Scope of International Trade Problems

To understand the nature and scope of international trade problems, one has to look at how international trade is regulated at the national level. Because many, if not all, trade problems stem from each country's attempt to regulate the flow of trade in goods and services, we will try to identify and analyze various regulatory measures. These principles are described in the table 1, and are presented by order of their economic, political and GAIT ranking.

It should be noted that the solutions proposed by the GATI principles are discussed in Section IV.

(a) Tariffs

The levying of tariffs by customs services is one of the oldest

(5)

190 / Ichiro Araki and Gabrielle Marceau

Table l. Ranking of Trade Policy Instruments

Instruments of Economic Ranking Political ranking Legal ranking Import Protection (efficiency) (democratic elements) (GATTIWTO)

Production First best Transparency: GAIT 1994,

subsidy Published Agreement on Subsidie8

distortions are legislation or regulation and Agreement on limited to Financial: Budgetary Agriculture production espense

Control: Subject to Generally allowed, but government legislation, countervailable. In the regulation, and area of agriculture sonie

budgetary production subsidies controls have to be reduced.

Import tariff Second best Transparency: GA TT 1994 and the Published legislation or Understanding on distortions on regulation Article II

production and Financial: Protection

consumption rent to government Allowed subject to tariff Control: Subject to bindings and

legislation or regulation renegotiation Import restrictions Third best Transparency: GAIT 1994,

-global quota Administrative act

-country quota additional distortions Fmancial: Protection rent Generally prohibited, of price competition; to domestic businesses subject to certain private protection Control: Discretionary exceptionsforbalance- rents instead of tariff administrative acts of-payment, commelcial

revenue; legal reasons and for

insecurity developing countries

Voluntary export Fourth best Transparency: Secret WTO Agreement on

restraints document Safeguard

distortions: additional Financial: Protection Prohibited and to be distortions of rent to foreign phased out

protection rents producers

transferred abroad; Control: Discretionary additional legal administrative act insecurity

Note: From a chart initially prepared by Ernst-Ulrich Petersmann in International and European Trade and Environmental ^Lawafter the Uruguay Round, p. 20.

(6)

GA TI I WTO and Managing International Trade Relations / 191

functions of governments. Even today, tariffs provide an important · source of revenue for governments, in particular, for many developing countries. In economic terms, tariffs distort the costs of production and consumption, even though they are transparent instruments which may be controlled through legislation or regulation. High tariffs can, however, have devastating effects on . ifltemational trade, as was the case of the infamous Smoot-Hawley Tariff Act of 1930, which raised the average

U.S.

^tarifflevel from 38 to 52 percent and significantly contributed to the "downward spiral" in world trade in the 1930s. Reducing tariffs, therefore, has been one of the main features of international economic negotiations and, as further elaborated in section

rv,

the favoured trade instrument of the GAIT /WTO in preference to non-tariff instrument.

· (b) Quantitative restrictions

Quotas are restrictions on the number, volume or value of imported goods. Quotas impose absolute limits on imports. If quotas are used, the consumers of the importing country will pay higher prices for the product (according to basic supply and demand economics), and it is often the exporters, the producers of the exporting country, that will gain the benefit from higher prices resulting from reduced exports following the imposition of quotas.

Quotas and other quantitative restrictions ("QRs") are not transparent, and usually they are politically easy to implement through administrative acts. There are also important administrative problems associated with the allocation of quotas: how to allocate quotas and to whom and for how long? The existence of discretion may lead to potential situations of bribery. Trade negotiators have long been aware of the undesirability of QRs. Efforts to control the spread of QRs even preceded the GATI. In 1927, at the initfa- tive of the League of Nations, an agreement was reached on the

(7)

' j

;

i '!

'

"'

l

. i 'J

192 / khiro Araki and Gabrielle Marceau

Geneva Convention on Import and Export Prohibition and Restriction, which unfortunately did not come into effect. As further discussed below, the GATTI WTO prohibits QRs in principle.

(c) Voluntary export restraint agreements

Another problem arises with the use of bilateral agreements that impose voluntary export restraints ("VERs") where two countries or a country and a firm or a group of firms decide infor- mally or otherwise to limit the exportation of certain products.

VERs are economically worse than quotas because all the rents are transferred to the exporting country, while prices are increased .for consumers of the importing countries. These agreements do not provide any legal security since they are informal and non~

transparent.

(d) Administrative rules at the border

Restrictions at the border can take a more subtle form than outright quantitative restrictions. Arbitrary administration of customs valuation rules or discriminatory issuance of import licenses can also have siffiilar effects. Arbitrary application of the rules of origin can also act as quota-type measures. All these administrative manipulations of import formalities and procev dures are not transparent and can counteract the results of market access agreements and tariff reductions.

( e) Trade remedies

Trade remedies are usually concerned with measures against (illegal) subsidies and dumping. States have been providing subsidies to firms for a long time. Subsidies themselves are the ideal means of import protection, but if subsidized products are exported, they can cause "injury;, to the industry of the country into which such products are exported. In order to counteract the effects of such subsidies on the price of exported goods, the

(8)

~~---

... .

importing country may impose at its border a surtax to raise the price of the imported subsidized product so that it loses the benefit of such subsidies. States may, however, abuse these trade remedies in alleging that imports have benefitted from excessive and unfair.

subsidies in order to raise the prices of imports so as to protect their domestic industry producing similar goods. A similar pattern exists with regard to dumping. When goods are exported at a price which does not cover the cost of production of such a product or which is lower than the price of the same product in the domestic market of the exporter, one may fear that the exporter act this way in order to eliminate competition in the importing country so that after competition is eliminated, the foreign producer can impose monopolistic ptjces. In these circumstances countries may also want to impose a surtax at the border in order to ensure that the imported dumped good is not sold at such a threatening low price. After World War I, antidumping surtaxes were already used by Canada and the USA because of fears of cartelized exports, mainly from Germany. As we will see later, despite the effort of the GATT /WTO to address this issue, problems still remain because there are widely divergent views on this issue among major trading nations.

(f) Disguised restrictions on trade

Border measures can be taken to achieve goals such as protection of human, animal, plant life or health, but under the cover of these legitimate policies they can become a prime tool of protectionism.

The identification of the real purpose of a specific measure often involves a difficult interpretative question. As the case of an import ban of furs from allimals caught with leg-hold traps illustrates, what seems to be a disguised restriction on trade in the eyes of one group, may, for another group, be the only means to achieve a legitimate policy objective. The settlement of these apparently

(9)

conflicting goals (protection of animal health or environmental issues for instance, and free-trade) has recently become a primary source of international trade conflicts.

(g) DisCriminatory regulations

Ideally, once the imported goods have been cleared through . customs, they would be put in free circulation on equal tenns with domestic products. However, in reality, they can still face discrimination. Governments can impose higher taxes on imported goods or impose on them discriminatory regulations in various areas.

Discriminatory domestic regulations are particularly problematic for tracle in services, because the control of trade in services is not usually carried out at the border, but is implemented through domestic regulation. Almost all the difficult issues in the General Agreement on Trade in Services (GATS) involve heavily regulated industries -banking, insurance, maritime transport, telecom- munications, etc.

(h) Uneven enforcement of domestic policies

Finally, the way states implement various domestic policies can affect the conditions under which foreign goods and services compete with their domestic counterparts. These policies include for instance, industrial policy (e.g., nurturing of an aircraft industry), intellectual property protection (e.g., enactment and enforcement of patent and copyright laws) nd competition policy (e.g., prohibition of cartels). Recently, this issue of uneven enforcement of policies has been labelled "level playing fields." Perhaps the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the General Agreement on Services (GATS)2 was the first attempt to tackle these issues in a multilateral context.

Thus far we have identified the ways in which states regulate the flow of international trade. Let us now tum to how these regula-

(10)

GA IT I WTO and Managing International Trade Relations / 195

tory measures cause international trade "problems." Exporters of foreign products and foreign producers are among those who are affected by these trade measures. Foreign producers and exporters often bring grievances to their own governments. Those governments in tum request the importing country to rectify the situation.

Under normal circumstances, negotiations will ensue, resulting in a bilateral, plurilateral or multilateral agreement. Sometimes,

· however, states are tempted to settle a dispute unilaterally.

Unilateral enforcement of trade policy has become one of the world's major trade problems. That is why the negotiations concerning dispute settlement became so important during the

Uruguay Round. ·

Before analysing the solutions proposed by the GAIT /WTO, the next section will look at the historical background of the GATI.

The Birth of the GA'IT

The ideas behind today's multilateral trading system date back to World War II when the United States and Great Britain began negotiations about the shape of the post-war international economy. At the time, many state leaders and economists believed the Great Depression and to some extent the Second World War had been caused by "beggar-thy-neighbour" trade policies. It became clear that trade privileges had to be multilateralized. After the conclusion of the ·Bretton Woods Conference, where the International Monetary Fund and the World Bank were created, it became more and more evident that obstacles to trade also had

2 And some may say the Agreement on Technical Barriers to Trade(TBT) and the Agreement on the Application of Sanitary and Phytosanitary Measures(SPS) as well are agreements which attempt to tackle uneven domestic regulation levels and enforcement.

(11)

to be reduced in order to stimulate world trade expansion. Th~

United States then began a real campaign on the need for the · international free trade rules. Their slogan to negotiate a world trade agreement was: "If goods don't cross the borders, soldiers .will."3 In 1945, the United States invited some countries to multi-

lateral tariff reduction negotiations, thereby sowing the seeds for what was going to becomethe future GAIT.

At this time, the United Nations Economic and Social Co"uncil (ECOSOC) was being established. It began work on becoming a major co-ordinating body for international economic co-operation.

At the first meeting of ECOSOC, the United States called for a

~'United Nations Conference on Trade and Employment" with the purpose of drafting a charter for an International Trade Organization and also to pursue negotiations for reductions· in world-trade tariffs. In 1946, the United States published its famous

"Suggested Charter for an International Trade Organization" which formed the basis for the negotiations that took place during the

· preparatory meetings. It was in the context of the negotiations for an international trade organization that the negotiations of the . GATT were conducted.4

The negotiations for an international trade organization (ITO) . lasted one year and negotiators met five times: a first Session of the Preparatory Committee took place in London in November 1946;

the London Conference outlined the procedures that would b~

followed for multilateral tariff negotiations and suggested that a

11 general Agreement on Tariffs and Trade" would be necessary" to . safeguard the value of tariffs concessions" and to include "such other provisions as may be appropriate."5 A meeting of the

3 Gardner R., Sterling Dollar Diplomacy, p. 3. .

• Professor Jackson wrote, "The preparatory work for GA TI is unusually full and complex.and.it is "mingled" with that of the ITO." Jackson(1969), p. 35.

5 Jackson reports that the London Conference was divided into committees roughly

(12)

GATI /WfO and Managing International Trade Relations/ 197

Drafting Committee was held in Lake Success, New York, from·

20 January to 25February1947; the GAIT discussions at the New York meeting focused on which articles of the ITO draft charter should be included in the GAIT. "The theory of the GAIT was that it would be a specific trade agreement within the broader institutional context of the ITO Charter and that the ITO would furnish the necessary organizational and secretariat support for GATI."⁶A second formal Session of the Preparatory Committee began in Geneva on 10 April 1947; the ITO Draft was completed by the end of August 1947, but the GAIT negotiations were concluded in the autumn, with the signature of 22 contracting parties.7 Finally a third Session took place in Havana, Cuba, in November 1947 where the stillborn ITO Charter (often called the Havana Charter) was concluded. The ITO, created in Chapter VII of the Havana Charter, was going to be the central organization of the United Nations responsible for co-ordinating the various aspects of international economic co-operation among States including the results of the GAIT. s

corresponding with each of the major subjects of the United States draft ITO Charter.

The Committee II( commercial policy) was the committee charged with developing that portion of the text of the ITO Charter that was ultimately drawn up for many clauses of the GATI. Jackson}., GATI Law(1969), p. 42.

6 idem, p. 43.

7 the first contracting parties of the GA TI were: XXXXX

8 The main purpose and objectives of the ITO were of the United Nations: "stability and well-being which are necessary for peaceful and friendly relations among nations"(Article 1) and the specific means of the Havana Charter were co-operation in the field of trade and employment. In order to achieve these goals the Havana Charter contained a comprehensive approach to international trade in goods and services and it wanted to regulate both acts of States and acts of enterprises. The Charter was divided into seven main chapters which dealt with the following subjects: fair lab?ur standards and employment(Chapter Il); specific needs of European reconstructi?n and the special rights of developing countries(Chapter ill); a wide range of commer~al policies that affect the flow of trade i.e. tariffs, preferences, internal taxation, regu~tion, quotas, subsidies, dumping and safeguard measures(Chapter IV); standards relating.to restrictive business practices used by firms(Chapter V); inter-governmental commodity agreements(Chaptcr VI); the structure and function of the ITO(Chapter VIl); and the

(13)

J

;

198 / lchiro Araki and Gabrielle Marceau

It should be noted that, government representatives to the GATT negotiations were often the same individuals who were government representatives to the preparatory conferences for the ITO. In addition to.negotiating tariffs reductions, representatives on the Tariff Agreement Committee had to identify which provisions (disciplines), if any, should be included in the GAIT, taking into consideration the need to ensure that tariff concessions would have to be safeguarded. It was finally decided that most provisions of Chapter IV of the Havana Charter on commercial policies would be included therein in order to ensure the respect and the balance of the results of these tariff negotiations. Other provisions dealing with domestic policies, or which were not of immediate• application, were explicitly omitted since the U.S. Administration only had the authority to negotiate international trade agreements.9 It was, however, envisaged that if the ITO Charter came into force, changes in the GATT would occur automatically.to Before the Havana meeting, on 30 October 1947, the Final Act of the Second Session of the Preparatory Committee was signed, authenticating the GATT and its Protocol of Provisional Application, which

settlement of disputes(Chapter VIII), where the possibility of references to the International Court of Justice and also the use of arbitration were envisaged). The Havana Charter represented a prophetic recognition of need to coordinate all aspects of commercial policies in international trade which are now confirmed in the WTO Agreement. The emphasis put on the relationship between domestic employment and international trade(Chapter I) is also indicative of the conviction of the negotiators that international stability and well-being can only be achieved in relating and integrating domestic and external economic policies.

9 This authority was conferred upon the President of the United States by the Recirprocal Trade Agreements Act of 1934. U.S. Congress has never fully delegated the power to regulate international commerce to the President, and the U.S. delegates had to act within the confines of the 1934 law. If they had acted beyond this au·tho~ty, they would have had to request Congressional approval for the agreement, which was almost impossible to attain at that juncture.

10 Indeed at the first and second of the contracting parties to the GA TI after the demise of the ITO, many such changes to the ITO provisions were carried into the

GAIT. · ·.

(14)

GA TI I WTO and Managing International Trade Relations / 199

entered into force on 1January1948. The GAIT was brought into effect through a Protocol of Provisional Application for at least two reasons. First, it allowed prospective signatories to avoid having to present the GAIT with the Havana Charter for domestic approval. Second, it allowed parties to the protocolto lock ⁱⁿthe benefits of tariff reductions even if the ITO ran into trouble.

By the time the Havana Charter was completed ⁱⁿ1948, a new Congress hostile to the trade policies of the previous Administration had been elected in the United States. Support in the American business community had also decreased due in part to the detrimental impact of the new tariff levels under the GAIT on some producers and the fact that the British could not be persuaded to give up their system of Commonwealth Preferences.

In December 1950, the U.S. administration quietly issued a press release in which it stated that it would not be resubmitting the Charter to Congress for approval. There was not much point in other countries continuing without the leading economic power.

The demise of the ITO did not, however, signal the end of multilateral trade arrangements. The GAIT, as further discussed below · in Section V, continued to grow not only in membership but in scope .

. At the end of the Havana Conference, participating countries adopted a resolution establishing an Interim Commission for the International Trade Organization (!CITO) which was going to perform interim functions pending the establishment of the ITO.

The ICITO consisted of the governments which were entitled to original membership of the IT0.11 The ICITO made arrangements with the Secretary-General of the United Nations regarding

11 Note that China, Iran, Iraq, Lebanon and others are therefore members to the ICITO, although they are not members of the GA TI or WTO, having either left the GATI or never ratified it.

-

(15)

personnel for the Commission and the benefits, privileges and immunities provided in the Convention on Privileges and Immunities of Specialized Agencies adopted by the General Assembly of the United Nations, as far as possible, were extended to ICITO staff. Finally, it was envisaged that the !CITO would cease to exist upon the appointment of a Director-General of the ITO, at which time the property and records of ICITO would be transferred to the ITO. At its first session on 20March1948, the

!CITO elected an Executive Committee and delegated all its powers to it. The Executive Committee met in September 1948 and approved financial arrangements which conferred authority on the Executive Secretary to ICITO to provide secretariat services . to the CONTRACTING PARTIES of the GATI.¹²:rrus arrangement · · between ICITO and the CONTRACTING PARTIES¹³lasted until the end of 1995, when the CONTRACTING PARTIES decided to terminate the old GATT.¹⁴However, a transitional decision was proposed by the Preparatory Committee of the World Trade Organization· (WTO) dated 8 December 1994, confirmed by the General Council of the WTO on 31January1995, and was signed by the Executive Secretary for the I CITO, the Chairman of the CONTRACTING PARTIES for the GATT 1947 and the Chairman · for the Preparatory Committee for the WTO. The decision

12 Australia, Benelux, Brazil, Canada, China, Colombia, Egypt, El Salvador, United States, France, Greece, India, Italy, India, Mexico, Norway, the Philippines and the United Kingdom constitute the Executive Committee of IOTO. In the GAIT, wherever reference is made to the contracting parties acting jointly, they are designated as ~e CONTRACTING PARTIES (Article XXV: 1). We also follow this convention in this

Chapter. ·

13 And in fact ICITO's only role has been in relation with the GAIT.

14 Between 1950 and the end of 1994 the Executive Committee of !CITO met only three times, in March 1968 to appoint the Executive Secretary, Mr. Long, in December 1980 to appoint Mr. Dunkel as Director-General and in June 1990 to appoint ~r.

Sutherland. Mr. Ruggiero, the Director-General of the WTO, is now the Executive Secretary 0£ the ICITO.

•''

',• •.i. ,'•

·' ~

··:.

..

:J

:·:·.

(16)

•.;

; ' '

:·;·.

GA TT /WfO and Managing International Trade Relations/ 201

envisages that all assets and liabilities of the GAIT 1947 and the

!CITO shall be assets and liabilities of the WTO and that the staff of the !CITO shall perform the duties of the Secretariat of the WTO until the appointment of the staff of the Secretariat of the WT0.1s Returning to the birth of the GAIT in 1948, GATI contracting parties met twice in 1948 and introduced into the text of the GAIT the changes brought about by the ITO corresponding clauses. In spring 1949 the contracting parties organised a second major round of tariffs negotiations in Annecy, France. A third round was planned in Torquay, England in 1950. By that time it had become clear that the ITO wold never be ratified by the USA. After that failure two attempts to set a formal organisation to support the GATT were rejected by the US government. There is no doubt that the GATT turned out to be a totally different agreement that it was envisaged.

Guiding Principles and Rules of the GATT

Initially, representatives to the GAIT were very often the same governmental representatives who participated in the ITO negotiations. It is "only natural", wrote Jackson, to expect that these representatives would interpret GATT and apply it in a manner consistent with that background and experience. And, indeed, references to the preparatory work of the Havana Charter have been used to confirm interpretations of the GAIT provisions and principles. The basic principle of the GATI¹⁶is that countries

15 See the ^/1Agreement on the Transfer of Assets, Liabilities, records, staff and functions from the ICITO and the GATl' to the WTO" WT /L/36, January 31, 1995.

16 At the opening of the London Conference the USA representative expressed the five basic principles of what was to become the ITO (and as well the commercial policies of the GAIT):

(17)

I .

\ '

! ; ' I

i

·\

'

- ... ___________ _

should use tariffs - reduced through reciprocal concessions-:- on foreign goods on a non-discriminatory manner independent of the origin of the goods - the "most-favoured-nation" (MFN) clause - as the only "acceptable" form of protection. These two basic principles (negotiated tariffs applied on an :tv1FN basis) constitute PART I of the GATI. PART II contains the other related obligations, the purpose of which is to ensure the non-evasion of those principles assessed in PART I. The most fundamental of these obligations are: the national treatment ("NT") clause; the prohibition against quantitative restrictions ("QRs"); the possibility of safeguard, antidumping and countervailing measures against subsidies; and certain exceptions. Special treatment for developing countries was introduced into PART IV of the GA'IT in 1964-65 (and entered into force in January 1966) and specific provisions for developing countries are now included into the WTO _agree- ments. All these principles contained in the initial GAIT of 1947 still constitute the backbone of the WTO, and indeed the_ provisions of GATT 1947 are one of the components of the WTO Agreement.¹⁷

(a) The Non-Discrimination Principle: Most-Favoured-Nation Clause and National Treatment Obligation

The

"most-favoured-nation" ("MFN,n" Article I of GAIT) and

"national treatment'' {"NT," Article III of GATI) principles, are

"1) existing barriers to international trade should be substantially reduced; 2) International trade should be multilateral rather than bilateral; 3) International trade should ~e ~ondiscriminatory; 4) stabilization policies for industry and agricultu.re were so intimately related to international trade policies that the two must be consis·

tent and co-ordinated; 5) The rules for international commerce should be drafted so that they apply with equal fairness and equal force to the external trade of all nations r~gard.less of wh~~er their internal economies were organized upon the basis of indi·

vidualISm, collectiVISm, or some combination of the two." Taken from Jackson J., ^GATI

Law (1969), p. 54.

17 See discussion in section VI below.

'·.

(18)

two sides of the "non-discrimination" principle formally introduced in multilateral trade relations by the GAIT. They are the internal and external expressions of the idea that all trade partners must be offered the same privileges.

The MFN standard requires that any "advantage, favour, privilege, or immunity'' granted by one Member to a product of another country, in relation to imports or exports, be accorded·

"immediately and unconditionally" to like products from all Members.¹⁸This provision has magnified the effect of tariff reductions because any tariff concession made by a Member is automatically made available to .all other Members. The clause applies not just to tariffs but also to a wide range of measures that can regulate goods through the complete process of bringing a good to market and selling it.

Article III on national treatment ("NT") requires that once goods from other Members have entered the territories of a Member, they must be treated, as regards internal taxation and regulation, in the same manner as goods produced in that Member. As with the MFN clause, the scope of the NT clause is extremely wide, concerning all laws, regulations and requirements affecting the sale, purchase, transportation, distribution or use of products in the domestic market.

(b) Reciprocity of Tariff Reduction

Tariffs are taxes on the value,. weight or volume of goods, enforced at the border. As mentioned earlier, they are the form of protection that the GAIT permits because, unlike other forms of

18 We use the term "Members" as is used in the WTO Agreement. GA TI 1947 used the term "contracting parties," but the term is now deemed to read "Members."

:aragraph (a), Explanatory Notes to GAIT 1994. Members are usually S~ates, but a separate customs territory possessing full autonomy in the conduct of its external commerciai relations" can also be a Member. Article XII: I, WTO Agreement.

I .

11::·

L

'i: j,

! l ..

I .

(19)

protection, they show in a transparent manner the "amount of protection." Tariffs still allow for some foreign competition to the extent that domestic products are forced to compete with imported goods that have overcome the tariff barrier. Moreover, the GATI makes clear that these tariffs must be applied on a non-discriminatory basis (they must respect the MFN principle). The focus of the GATT on tariff reduction has been extremely effective as reflected in the lowering of the average industrial tariff in developed countries from nearly 40% in 1947 to less than 4% after the Uruguay Round negotiations in 1993.

(c) Elimination of Quantitative Restrictions

Quotas are restrictions on the number, volume or value of imported goods. Quotas are prohibited in Article XI primarily because they block competition and because their administration is less transparent than tariffs. The rejection of quotas is a reflection that tariffs are GATT's trade barrier "of choice.¹¹Tariffs are the most transparent trade measure at the border while quotas (as well as VERs explained further below) are imposed by administrative acts and not transparent. Moreover, quotas impose absolute . limits on imports. Tariffs do not. (If one makes products which are 20% more competitive than a domestic product and the tariff rate is 10%, one can still export that product and be 10% more efficient.) There are also important problems of allocation of quotas:

"which country gets which quotas and for how long." Finally, if tariffs are used, consumers in the importing country will pay higher prices for the imported goods. The ^/1revenue," however, or the money made from the tariff collection, could be redistributed to the same consumers within the importing country. On the other hand, generally, when quotas are used, the consumers of the importing country will pay a higher price. In most cases, it is the exporters (producers of the exporting country) who will gain the

.,

(20)

GATT /WfO and Managing International Trade Relations/ 205

benefit from charging higher prices for their products for which there is only a limited supply.

There are, however, several exceptions to the general prohibition of quotas. Article XI:2 allows for quotas on imports of agricultural and fishery products where they are necessary to implement government measures designed to stabilize national markets in the affected product. However, this provision is now of limited scope because trade in agricultural products are governed by and progressively liberalized by the WTO Agreement on Agriculture.

Article XII allows for the use of quotas on a temporary basis during a balance of payments crisis but again there are now further conditions and disciplines contained in the WTO Understanding on Balance-of-Payments. Article XIII envisages that if at all applied, quotas should be applied on a non-discrlminatory basis, a good principle which would have, however, benefitted from further clarification and details. Article XVIII allows quotas to be used by developing co~ntries to assist in the establishment of a particular industry for the purpose of furthering national economic development. There are also further rules under the WTO Agreement concerning import licensing procedures, customs valuation, preshipment inspection and rules of origin which have been developed to address the more sophisticated expressions of go_vernmental regulations that limit imports. These new agreements expand the scope of application of the principle against quotas but also circumscribe the situations for which exceptions to the prohibition to quotas are possible.

(d) Safeguard Measures, Measures against Dumping and Subsidies

i) Safeguard measures

The GATT also recognised that some "safety valves" were necessary in case of increased trade flows or unfair imports.

(21)

:i: :j

(I! I

;- I

i . H !

r '! 1

Uj'

ⁱ

'i '.

~ f ' ! {

'I

^I·;

:·i I:

. i :

. ^;

' l I I

l

i

Safeguard measures focus on the possibilities for the importing countries to use quotas or tariffs to reduce a surge of imports.

Article XIX of the GATT together with the WTO Agreement on Safeguards allows a Member to take protectionist measures, for a limited period of time and upon compensation in certain circum~

stances, in the face of a surge in (fairly traded) imports which causes or threaten to cause injury to a domestic industry.

ii) Measures against subsidization by the exporting country A related, fundamental GAIT principle is one of free competi~

tion in trade - the most efficient firm of any nationality should win favours of customers world-wide. This competition for trade should not be distorted by governmental intervention. This is why Article VI of the GATT provides that countervailing duties (surtaxes at the border) may be imposed to offset government subsidies used to aid exports (contrary to the provisions Article XVI of the GATI and now the WTO Agreement on Subsidies) if these subsidies cause injury to the domestic industry of the like subsi· _, dized exports. It should be noted, as in Table 1, that provision of direct subsidies to production, as opposed to export subsidies, are usually considered by economists as the best trade measure to improve efficiency without distorting international trade.

Production subsidies are also transparent and can even be difficult to justify politically since one domestic industry is favoured at the expense of another. GAIT has never penalized production subsidies but has strongly discouraged export subsidies. A distinc- tion was made between export subsidies on primary products and the others where export subsidies on primary products were tolerated as long as they did not result in granting to the signatory country ¹'having more than an equitable share of world export in such product" a criteria which always remained ambiguous.

However, with the conclusion of the Uruguay Round, there is a more specific, predictable discipline on the use of export subsidies

-

(22)

..

in the agriculture sector.

iii) Measures against dumping by the exporting country

Article VI also provides fo~ the right of contracting parties to apply anti-dumping measures, i.e. measures against imports of a . product, the price of which is below its "Llormal value" (usually the price of the product in the domestic market of the exporting country or, alternatively a third-country market price or the full cost of production of the said exported good), if such dumped imports cause injury to a domestic industry in the territory of the importing country. It should be noted that the GAIT does not address pricing practices of private firms and does not condemn dumping as such.

The GATI only permits the importing country to protect itself in allowing a surtax at the border which covers the dumping margin if injury is caused to domestic industry producing products like those dumped imports.

(e) Regional Groupings

Although mentioned as an exception to the MFN principle, regional preferences are a fundamentally important characteris- tic of the present international trade system. Regional arrangements, as such, are neither good nor bad for international trade and most economists agree that only the practice. of a regional arrangement can reveal its actual impact. In fact, regional preferences existed much before the GATT and were never formally abolished by the GATT. Although Article XXIV attempts to impose conditions in order to ensur~ that regional groupings inside the GAIT are "trade creative" generally, none of the notified regional roupings has ever been opposed by the CONTRACTING PARTIES, probably because of the consensus principle. There is however a WTO Understanding of Article XXIV which allows any member to trigger a dispute settlement process for "any matter resulting from the application of those provisions of Article XX:IV ... "¹⁹

;.

l ~

(

{ '

. !

(23)

208 / Jchiro Araki and Gabrielle Marceau

(f) General Exceptions

Articles XX and XXI contain a list of policy goals which can justify a country to deviate from its obligations under the GAIT.

National security policies are addressed in article XXI and other policies such as those necessary to protect public morals, to protect human, animal or plant life or health, and those relating to the importations or exportations of gold or silver. Others relate to the products of prison labour, to the protection of national treasures of artistic, historic or archaeological value, and the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption, etc. Article XX states that these derogations shall not constitute a means of arbitrary or unjustifiable discrimination · between countries where the same conditions prevail, or constitute a disguised restriction on international trade.

The Evolution of the GATT and the Steps Towards the Uruguay Round

As mentioned, the GAIT was an interim agreement containing the results of the tariff reduction negotiations and represented an effort to restrict the primary sources of trade diversion on a multilateral basis. It was an international treaty and was never intended to be an international organization, as it was supposed to be eventually administered under the umbrella of the ITO. However, the demise of the Havana Charter created a void which the GATI eventually filled. Notwithstanding the failure of the U.S. administration to obtain approval from the U.S. Congress, which would have clarified the organizational structure to administer the GATI,

19 Article 12 of the Understanding on Article XXIV of the GA IT 1994.

(24)

GA TI /WTO and Managing International Trade Relations / 209

the GATI developed its own institutions and an ability to function through custom and practice. When it became apparent that the ratification of the ITO would be postponed indefinitely, the CONTRACTING PARTIES instructed the Executive-~cretary of the GAIT to consult with the United Nations for practical arrangements. On 11August1952, the Executive Secretary of the GAIT and the Secretary-General of the United Nations exchanged letters confirming that the existing de facto working arrangements between the Secretariat of the ICITO and the UN made it unnecessary to have a special or formal arrangement relating to the GAIT. The de facto working arrangements involve participation in the Common System on salaries and pension, membership of its executive head in the Administrative Committee on Coordination ,, (ACC) and its subsidiary bodies, and entitlement to all rights accorded to specialized agencies under the principal relationship agreements, namely the exchange of information and documents, reciprocal representation at meetings and coordination activities, as well as participation in inter-agency bodies. The GA'IT never concluded a specialized agency agreement with the United Nations, nor did it enter into any other formal arrangement with that organization. Nevertheless, this has not prevented the development of an effective practical interaction with the United Nations, its organs and agencies.

The GAIT also evolved through periodic rounds of multilateral trade negotiations covering substantive aspects of the Agreement. Chronologically, the important stages of the GAIT negotiations can be summarized as follows.

During the second Round of trade negotiations, held from April to August 1949 at Annecy, France, the contracting parties exchanged some 5,000 tariff concessions. At this third Session, they also dealt with the accession of ten more countries.

From September 1950 to April 1951, at Torquay, England, the

(25)

210 I Ichiro Araki and Gabridle Marceau

contracting parties exchanged some 8,700 tariff concessions, yielding tariff reductions of about 25 per cent from the 1948 level.

Four more countries acceded to GAIT. During the fifth Session of the CONTRACTING PARTIES, the United States indicated that the ITO Charter would not be r.e-submitted to the U.S. Congress;

this, in effect, meant that the ITO would not come into operation.

The fourth Round was completed in May 1956 at Geneva and produced some .$2.5 billion worth of tariff reductions.²⁰The fifth Round op~ned in September 1960 and was divided into two phases: the first was concerned with negotiations with EEC member states for the creation of a single schedule of concessions for the Community based on its Common External Tariff; and the second was a furt:her general round of tariff negotiations. Named in honour of U.S. Under-Secretary of State Douglas Dillon, who proposed the negotiations, the Round concluded in July 1962 and resulted in about 4,400 tariff concessions covering $4.9 billion of trade.²¹

Meeting at the Ministerial level, a Trade Negotiations Committee formally opened the Kennedy Round in May 1964. In June 1967, the Round's Final Act was signed by some 50 participating

20 At the beginning of the year, the GA IT commercial policy course for officials of ' developing countries was inaugurated. The contracting parties at their 13th Session in 1958, attended by Ministers, subsequently established three committees in GATf:

Committee I to convene a further tariff negotiating conference; Committee If to review the agricultural policies of member governments and Committee

m

to tackle the problems lacing developing countries in their trade. The establislunent of the European Economic Community during the previous year also demanded large-scale tariff negotiations under Article XXlV: 6 of the General Agreement. In 1958, GA IT published Trends in International Trade in October. Known as the "Haberler Report" in honour of Professor Gottfried Haberler, the chairman of the panel of eminent economists, it provided initial guidelines for the work of GA IT.

21 In.1961, The Short-Term Arra11gement covering cotton textiles was agreed as an exception to the GAIT rules. The arrangement permitted the Negotiation of quota restrictions affecting the exports of cotton-producing countries. Jn 1962 the "Short- term'~ ~angement became the "Long-term" Arrangement, lasting until 1974 when the Multif1bre Arrangement entered into force.

(26)

countries which together accounted for 75 per cent of world trade.

For the first time, negotiations departed from the product-by- product approach used in the previous Rounds and used an across- the-board or linear method of cutting tariffs for industrial goods.

The working hypothesis of a 50 per cent target cut in tariff levels was achieved in many areas. Concessions covered an estimated total value of trade of about $40 billion. Separate agreements were reached on grains, chemical products and a Code on Anti- Dumping.

Before the Kennedy Round, completed in 1967, the GAIT negotiations dealt primarily with reducing tariffs, as efforts to expand the policy areas the GATI dealt with met with resistance. New types of international trade problems were occurring, namely the so-called non-tariff barriers, for which the initial GAIT provisions were neither appropriate nor adequate. Contracting parties had to wait until the Tokyo Round to reach consensus. The early 1960s were marked by the accession to the General Agreement of many newly-independent developing countries.²²

As mentioned, the contracting parties to the GATI needed then to address problems different from tariff concessions and not properly dealt with in the GATI. Since amendments of the GATT required unanimity, the growth of membership made further amendment of the GATI to address these new fields difficult. In the Tokyo Round, conducted between 1973 and 1979 with 102

22 As mentioned, in February 1965, the CONTRACTlNG PARTIES, meeting in a special session, adopted the text of Part N on Trade and Development. The additional chapter to the GA TT required developed countries to accord high priority to the reduction of trade barriers to products of developing countries. A Committee on Trad~

and Development was established to oversee the functioning of the new GA IT provi·

sions. In the preceding year, GA TT had established the International Trade Cen~e (ITC) to help developing countries with trade promotion and with iden~g po~tial markets. Since 1968, the ITC has been jointly operated by GA IT and the Uruted Nations Conference on Trade and Development (UNCT AD).

(27)

participants - and the results of which include also an average of one-third cut in customs duties covering more than $300 billion of trade (bringing the average tariff on manufactured products down from 7% to 4.7 %, compared with about 40% at the time of GATI's creation) - the contracting parties turned to the adoption of various GATI "Codes," i.e. special agreements binding only the contracting parties which accepted them. These codes were adopted to confront the increasing use of these non-tariff barriers, particularly by developed countries, and dealt with specific practices.23 It is important to note that notwithstanding the principle of non·

discrimination (MFN) institutionalised by the GAIT, the GATI codes were binding only on those states which ratified them.

Although contracting parties understood that rights under the GAIT were not affected by the existence and the participation of certain countries in these Codes, the rights and obligations of contracting parties to the GAIT became very complex and frag- mented. Moreover, developing countries generally opposed these codes during the Tokyo Round. As a result, the membership of the Codes always remained fairly limited. In fragmenting the GATT system, the GATT Codes separated even· more the developed from the developing countries. Moreover, the existence of parallel rules in the codes and in the GATI led to experiences of

"forum-shopping and agreement-shopping" from those countries

n The Tokyo Codes were the following: 1) Teclmical Barriers to Trade; 2) Government Procurement; 3) Subsidies; 4) Customs Valuation; 5) Import Licensing Procedures; 6) Du.mping. In addition the Arrangement Regarding Bovine Meat, the International Dairy Arrangement, the Agreement on Trade in Civil Aircraft were also concluded together with four decisions: the Differential and More favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, the Declaration on Trade Measures Taken for Balance-of-payments purposes, the Safeguard Action for D~velopment Purposes and the Understanding regarding Notification, Consultation, Dispute Settlement and Surveillance. For details, see the Twenty-sixth Supplement to the Basic Instruments and Selected Documents, published by the GATT Secretariat, at page 3 and onwards (hereinafter quoted as "BISD 265/3").

-

(28)

GA IT /WfO and Managing International Trade Relations / 213

which were parties to both the GA IT and any of the codes. The fragmentation of the trade disciplines amongst all countries and between developed and developing countries revealed to be an important weakness of the GATI /Tokyo Codes. This was one of the reasons why the WTO Agreement, some 15 years later, was negotiated as a "single undertaking."24

In addition, the Tokyo Round failed to come to grips with the fundamental problems affecting agricultural trade. Even before the implementing legislation for the Tokyo Round had been adopted by the US Congress, it was clear to the US Administration that "a new impetus was necessary."²⁵The economic recessions

·of the early 1980's led governments to devise new forms of protection. "The failure of the 1982 GATI Ministerial and the frequent resort to Voluntary Export Agreements had eroded the confidence in the GATT and its Codes to deal with trade problems of the 1980s and beyond."2⁶Starting with the 1983 G-7 Summit in Williamsburg, the U.S. began pushing for a new multilateral round of negotiations under the auspices of GATI.

In November 1983 the Director-General of the GAIT, on his personal initiative, announced that seven eminent persons had accepted his invitation to serve in an independent group to study and report on problems facing the international trading system.

These eminent persons presented their report in February 1985 in which they suggested 15 recommendations which focused on the main problems and weaknesses of the international trading system and which were going to determine the parameters of the Uruguay

24 The Punta del Este Dedaration states, "The launching, the conduct and the implementation of the outcome of the negotiations shall be treated as parts of a single undertaking" (Ministerial Declaration of 20 September 1986, BISD 33S/20).

·25 Marshall Casse, "Assessing the Uruguay Round - The US Perspective," SDE - Special GAIT, Voi. 7, No. 2, 1994.

26 Ibid.

(29)

Round negotiations. These recommendations summarizes well the weakness of the world trading system in early 1980s. They read as follows:

1. In each coW1try, the making of trade policy should be brought into the open. The costs and benefits of trade policy actions, existing and prospective, should be analyzed through a

"protection balance sheet." Private and public companies should be required to reveal in their financial statements any subsidies received. Public support for open trade policies

· should be fostered.

2. Agricultural trade should be based on clearer and fairer rules, with no special treatment for particular countries or corrimodi- ties. Efficient agricultural producers should be given the . maximum opportunity to compete.

3. A timetable and procedures should be established to bring into . conformity with GATT rules voluntary export restraints, orderly marketing agreements, discriminatory import restrictions, and other trade policy measures of both developed and developing counb.i.es which are inconsistent with the obligations of contracting parties under the GATI.

4. Trade in textiles and clothing should be fully subject to the ordinary rules of the GAIT.

5. Rules on subsidies need to be revised, clarified and made more effective. When subsidies are permitted they should be granted only after full and detailed scrutiny.

6. The GAIT "codes" governing non-tariff distortions of trade should be improved and vigorously applied to make trade more open and fair.

7. The rules permitting customs unions and free-trade areas have been distorted and abused. To prevent further erosion of the multilateral trading system, they need to be clarified and tightened up.

(30)

GA 'IT /WTO and Managing International Trade Relations / 215

8. At the international leveL trade policy and the functioning of the . trading system should be made more open. Countries should be subject to regular oversight or surveillance of their policies ^and actions, about which the GAIT Secretariat should collect and publish information

9. When emergency "safeguard'' protection for particular industries is needed, it should be provided only in accordance with the rules: it should not discriminate between different suppliers, should be time-limited, should be linked to adjust- ment assistance, and should be subject to continuing surveillance:

10. Developing countries receive special treatment in the GAIT rules. But such special treatment is of limited value. Far greater emphasis should be placed on permitting and encour- aging developing countries to take advantage of their competitive strengths, and on integrating them more fully into the trading system, with all the appropriate rights and responsibilities that this entails.

11. Governments should be ready to examine ways and means of expanding trade in services, and to explore whether multilateral rules can appropriately be devised for this sector.

12. In support of improved and strengthened rules, GATT's dispute settlement procedures should be reinforced by building up a permanent roster of non-governmental experts to examine disputes, and by improving the implementation of panel recommendations. Third parties should use their rights to complain when bilateral agreements break the rules.

13. We support the launching of a new round of GA'IT negotiations, provided they are directed toward the primary goal of strengthening the multilateral trading system and further opening world markets.

14. To ensure continuous high-level attention to problems in

(31)

international trade policy, and to encourage prompt negotiation of solutions to them, a permanent Ministerial-level body should be established in GAIT.

15. The health and even the maintenance of the trading syst~m,

and the stability of the financial system, are linked to a satis- factory resolution of the world debt problem, adequate flows of development finance, better international coordination of macroeconomic policies,· and greater consistency between trade and financial policies.2⁷

This report was strongly contested. Developing countries thought generally that priority shoul~ be given to enforcmg the GAIT rules as they stood rather that increasing the scope' of those rules. Developed countries, on the other hand, favoured expanding the coverage of international trade rules but disagreed with some . of the conclusions of this group of wise men. A Ministerial-level Jneeting of the CONTRACTING PARTIES at Punta del Este decided to launch the Uruguay Round of Multilateral Trade Negotiations. To this end, the Ministers adopted a formal Declaration. A Trade Negotiations Committee was established to·

carry out the negotiations and the Multilateral Trade Negotiations . were to be concluded within four years. The objectives of this round of negotiations were to:

Bring about further liberalization and expansion of world trade to the . benefit of all countries, especially less-developed contracting parties, · including the improvement of access to markets by the reduction and elimination of tariffs, quantitative restrictions and other non-tariff measures and obstacles;

27 Trade Policies for a Better Future, Proposals for Action, GA TI publication, Geneva;

March 1985, pp. 9~ 10.