GATT and WTO

Free Trade Vs Protectionism

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Barriers of Trade

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Stages of Economic Integration

World Trade Organization, as an institution was established in 1995. It replaced General Agreement on Trade and Tariffs (GATT) which was in place since 1946.

About WTO: The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.
At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.
The goal is to ensure that trade flows as smoothly, predictably and freely as possible.

GATT Vs WTO

	GATT	WTO
Purpose	To strengthen international trade	To govern GATT and international trade practices.
Framework	No permanent structure or framework	Has a permanent structure with a permanent framework
Scope	Trade in goods	Trade in goods; trade in services and trade-related aspects of intellectual property rights
Dispute resolution	Has a permanent appellate body to review findings and settle disputes	Disputes are resolved faster as settlement system has a select time frame

https://www.youtube.com/watch?v=rdX3xPSywgU

Uruguay Ministerial Conference (1986 – 93)

The Uruguay Round, the eigth and most ambitious Round of multilateral trade negotiations under the auspicious of the GATT which involved 117 countries, concluded on December 15, 1993 after more than 7 years of often contentions trade talks. The Final Act was signed at Marrakesh on the fifteenth day of April, 1994. The major themes of the Final Act are as follows:

• World Trade Organisation (WTO): GATT has been converted from a provisional agreement into a formal international organisation called WTO. The World Trade Organisation will serve as a single institutional framework encompassing GATT and all the results of the Round.
• Industrial Products (Market Access): Under this agreement, tariffs on industrial products are to be reduced by more than 1/3 on average. In industrial countries, tariff would be eliminated in several sectors (for example, steel, pharmaceuticals, and wood and wood products). Developing countries would both lower their tariff barriers significantly and increase the number of their ‘bound’ tariffs.

What is the WTO?

Who we are: The WTO has many roles: it operates a global system of trade rules, it acts as a forum for negotiating trade agreements, its settles trade disputes between its members and it supports the needs of developing countries.
What we do: All major decisions are made by the WTO\’s member governments: either by ministers (who usually meet at least every two years) or by their ambassadors or delegates (who meet regularly in Geneva).
What we stand for: A number of simple, fundamental principles form the foundation of the multilateral trading system.
Overview: The primary purpose of the WTO is to open trade for the benefit of all.

Objectives of WTO

• Raise living standards
• Ensure full employment
• Ensure a large and steadily growing volume of real income and effective demand
• Expand the production of and trade in, goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development.

 Decision-making

• Organization chart: The WTO\’s top decision-making body is the Ministerial Conference. Below this is the General Council and various other councils and committees.
• Ministerial conferences: Ministerial conferences usually take place every two years.
• General Council: The General Council is the top day-to-day decision-making body. It meets a number of times a year in Geneva.

Whose WTO is it any way?

The WTO is run by its member governments. All major decisions are made by the membership as a whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva).
Decisions are normally taken by consensus. In this respect, the WTO is different from some other international organizations such as the World Bank and International Monetary Fund.

Organizational hierarchy

The Ministerial Conference: So, the WTO belongs to its members. The countries make their decisions through various councils and committees, whose membership consists of all WTO members. Topmost is the ministerial conference which has to meet at least once every two years.
The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements.

Second level: General Council in three guises: Day-to-day work in between the ministerial conferences is handled by three bodies:

• The General Council
• The Dispute Settlement Body
• The Trade Policy Review Body

All three are in fact the same — The General Council acts on behalf of the Ministerial Conference on all WTO affairs. It meets as the Dispute Settlement Body and the Trade Policy Review Body to oversee procedures for settling disputes between members and to analyse members’ trade policies.

Third level: councils for each broad area of trade, and more: Three more councils, each handling a different broad area of trade, report to the General Council:

• The Council for Trade in Goods (Goods Council)
• The Council for Trade in Services (Services Council)
• The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS Council)

As their names indicate, the three are responsible for the workings of the WTO agreements dealing with their respective areas of trade. Again they consist of all WTO members.
The three also have subsidiary bodies. 

Developing and Developed Nations

Who are the developing countries in the WTO? There are no WTO definitions of “developed” and “developing” countries. Members announce for themselves whether they are “developed” or “developing” countries. However, other members can challenge the decision of a member to make use of provisions available to developing countries.

What are the advantages of “developing country” status? Developing country status in the WTO brings certain rights. There are for example, provisions in some WTO Agreements which provide developing countries with longer transition periods before they are required to fully implement the agreement and developing countries can receive technical assistance.

Least-developed countries: The WTO recognizes as least-developed countries (LDCs) those countries which have been designated as such by the United Nations. There are currently 48 least-developed countries on the UN list, 36 of which to date have become WTO members.

Developed countries: All the countries other than developing and least developing countries are automatically considered as developing countries.

 

Principles of WTO

• Non-discrimination: Non-discrimination is a fundamental principle of the WTO. It has two components:
• The Most-Favoured Nation (MFN) principle: treating other WTO members equally.
• The National Treatment Principle: treating foreigners and locals equally

These two principles apply to trade in goods, trade in services as well as trade related aspects of intellectual property rights.

Principle of Most Favoured Nation

If a WTO Member grants to a country an advantage, it has to give such advantage to all WTO Members. The MFN principles ensures that every time a WTO Member lowers a trade barrier or opens up a market, it has to do so for the like goods or services from all WTO Members – without regard of the Members’ economic size or level of development. However, there are exceptions allowed for preferential treatment of developing countries, regional free trade areas and customs unions.

If a country gives favourable treatment to one country (Member or Non-Member) regarding a particular issue, it must handle all Members equally regarding the same issue. A WTO Member could give an advantage to other WTO Members, without having to accord advantage to non- Members (only WTO Members benefit from the most favourable treatment).

Exceptions to MFN

• A member may provide preferential treatment only to some countries within a free trade area or customs union, without having to extend such better treatment to all members.
• Developed members may give “unilaterally” preferential treatment to goods imported from developing countries and least developed countries (LDCs), without having to extend such better treatment to other members.

Principle of National Treatment

Under the principle of national treatment, a WTO member should not discriminate between imports and like domestic products from a WTO member. This means that for trade in goods, the national treatment principle prohibits a WTO Member from favouring its domestic products over the imported like products of other Members. The national treatment applies to only internal measures, as opposed to border measures (e.g. tariffs).
It covers:

• Internal taxation (e.g. sales, value added tax), and
• Internal laws, regulations and requirements affecting the internal sale, transportation, distribution or use of products
• The General Agreement on Trade in Services (GATS) and the TRIPS Agreement have similar provisions.

In the area of services, the national treatment principle refers to non-discrimination between, on the one hand, domestically produced services or domestic service providers and, on the other hand, imported services or foreign services providers.

Exceptions to National Treatment Principle

• Government procurement
• Subsidies to domestic producers
• Internal maximum price control measures
• Cinematographic films

 Transparency and predictability

• Traders and Members need to know what are the trade rules around the world (transparency) and that trade measures will not be raised arbitrarily (predictability).
• Special treatment for less developed Members: Least developed Countries face more challenges before they start benefiting from trade liberalization therefore, they have more time to adjust to the rules, greater flexibility and other special rights.

https://www.youtube.com/watch?v=Q5_Bh-Y48_E

Major agreements of WTO

Agreement on Agriculture (AoA)

Agreement on agriculture stands on 3 pillars viz.
Domestic Support, Market Access, and Export Subsidies.

Domestic Support

It refers to subsidies such guaranteed Minimum Support Price (MSP) or Input subsidies which are direct and product specific. Under this, Subsidies are categorized into 3 boxes –

• Green Box – Subsidies which are no or least market distorting includes measures decoupled from output such as income-support payments (decoupled income support), safety – net programs, payments under environmental programs, and agricultural research and-development subsidies. Such as Income Support which is not product specific.
  Like in India farmer is supported for specific products and separate support prices are there for rice, wheat etc. On the other hand income support is uniformly available to farmers and crop doesn’t matter. US has exploited this opportunity to fullest by decoupling subsidies from outputs and as of now green box subsidies are about 90% of its total subsidies. It was easy for USA because it doesn’t have concern for food security. Further, it has prosperous agro economy, and farmers can better respond to markets and shift to other crops.
  But in India, domestic support regime provides livelihood guarantee to farmers and also ensures food security and sufficiency. For this MSP regime tries to promote production of particular crop in demand. And this makes decoupling Support with output very complicated.
  USA was also in position to subsidies R&D expenditure in agriculture as almost all the farming in US is capitalist and commercial. Big agriculturists spend substantial amount on technology upgradations and R&D. But in India about 80% of farming is subsistence and hence, India & other developing countries can use this opportunity.
• Blue Box – Only ‘Production limiting Subsidies’ under this are allowed. They cover payments based on acreage, yield, or number of livestock in a base year. ‘Targets price’ are allowed to be fixed by government and if ‘market prices’ are lower, then farmer will be compensated with difference between target prices and market prices in cash.
  This cash shall not be invested by farmer in expansion of production. Loophole here is that there no limit on target prices that can be set and those are often set far above market prices deliberately. USA currently isn’t using this method, instead here EU is active.
• Amber Box – Those subsidies which are trade distorting and need to be curbed. It contains category of domestic support that is scheduled for reduction based on a formula called the “Aggregate Measure of Support” (AMS).

What is AMS(Aggregate Measure of Support)

The AMS is the amount of money spent by governments on agricultural production, except for those contained in the Blue Box, Green Box. It required member countries to report their total AMS for the period between 1986 and 1988, bind it, and reduce it according to an agreed upon schedule. Developed countries agreed to reduce these figures by 20% over six years starting in 1995. Developing countries agreed to make 13% cuts over 10 years. Least – developed countries do not need to make any cuts.

De-Minimis provision: Under this provision developed countries are allowed to maintain trade distorting subsidies or ‘Amber box’ subsidies to level of 5% of total value of agricultural output. For developing countries this figure was 10%. So far India’s subsidies are below this limit, but it is growing consistently. This is because MSP are always revised upward whereas Market Prices have fluctuating trends. In recent times when crash in international market prices of many crops is seen, government doesn’t have much option to reduce MSP drastically. By this analogy India’s amber box subsidies are likely to cross 10% level allowed by de Minimis provision.

Market Access

The market access requires that tariffs fixed (like custom duties) by individual countries be cut progressively to allow free trade. It also required countries to remove non-tariff barriers and convert them to Tariff duties.

Earlier there were quotas for Imports under which only certain quantities of particular commodities were allowed to Import. This is an example of Non-tariff Barrier. India has agreed to this agreement and substantially reduced tariffs. Only goods which are exempted by the agreement are kept under control.

Maximum tariff has been bonded as required by WTO, under which a higher side of tariffs is fixed in percentage that should never be surpassed. Generally actual tariffs are far below this high limit. This makes custom policy transparent and tariffs can’t be fixed arbitrarily. If India is able to diversify its production and add value by food processing, then this is a win-win deal for India. A number of commodities are exported to West and low tariffs in west will benefit Indian suppliers.

Export Subsidy

These can be in form of subsidy on inputs of agriculture, making export cheaper or can be other incentives for exports such as import duty remission etc. These can result in dumping of highly subsidized (and cheap) products in other country. This can damage domestic agriculture sector of other country.

These subsidies are aligned to 1986-1990 levels, when export subsidies by developed countries were substantially higher and Developing countries almost had no export subsidies at that time.

What are safeguards?

In WTO’s terms, safeguards are contingency or emergency restrictions on imports taken temporarily to deal with special circumstances such as a surge in imports. Contingency restriction means imposition of an import tax if the imports are causing injuries to domestic agricultural sector. The original GATT itself allows such restrictions to protect domestic economy.

Anti-dumping actions

If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. The WTO agreement does not pass judgement. Its focus is on how governments can or cannot react to dumping — it disciplines anti-dumping actions, and it is often called the “Anti-Dumping Agreement”. (This focus only on the reaction to dumping contrasts with the approach of the Subsidies and Countervailing Measures Agreement.)

The WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry. In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to do so.

Countervailing duty (CVD)

It is an additional import duty imposed on imported products (by the importing country) when such products enjoy benefits like export subsidies and tax concessions in the country of their origin (i.e., where it is produced and exported). CVD is thus an import tax by the importing country on imported products. It is an attempt to ensure fair and market oriented pricing of imported products and thereby protecting domestic industries and firms.

The most popular example for CVD is the imposition of additional duty by an importing country when the product has given export subsidy by the exporter/producer country. In India, the CVD is imposed as additional duty of customs on imported products when such products are given tax concession at the country of their origin. On the other hand, the Indian goods have to give excise duties. The CVD effectively nullifies the low-price advantage of the imported products (that doesn’t pay any excise duties in the foreign country).

Special Safeguard Mechanism

It is a protection measure allowed for developing countries to take contingency restrictions against agricultural imports that are causing injuries to domestic farmers. The contingency measure is imposition of tariff if the import surge causes welfare loss to the domestic poor farmers. The design and use of the SSM is an area of conflict under the WTO.

Doha Development Agenda and the origin of the SSM: At the Doha Ministerial Conference, the developing countries were given a concession to adopt a Special Safeguard Mechanism (SSM) besides the existing safeguards (like the Special Agricultural Safeguard or the SSG).

This SSM constituted an important part of the promises offered to the developing world at Doha (known as Doha Development Agenda) and the Doha MC became known as a development round. As mentioned, the Special Safeguard Mechanism (SSM) allowed developing countries to raise import duties on agricultural products in response to import surges.

Difference between SSM and other safeguards under Agreement on Agriculture: The SSG was available to all countries- both developing and developed whereas the SSM is allowable only to the developing countries. It is to be mentioned that the SSG was available as it was inducted under the GATT agreement; whereas the SSM was the invention of the Doha MC.

General Agreement on Trade in Services – GATS

Main purpose of the GATS: The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade, GATT: creating a credible and reliable system of international trade rules; ensuring fair and equitable treatment of all participants (principle of non-discrimination); stimulating economic activity through guaranteed policy bindings; and promoting trade and development through progressive liberalization.
While services currently account for over 60 percent of global production and employment, they represent no more than 20 per cent of total trade (BOP basis).

Which products are allowed to trade under GATS: Services negotiations in the WTO follow the so-called positive list approach countries specifically list which products or services they agree to lower tariffs on (or decrease non-tariff barriers on). The other approach, as contained in the General Agreement on Tariffs and Trade (GATT) treaty of the WTO, is called a negative list approach.

In this type of agreement, countries specifically list which products or services they will maintain trade barriers on. If a product is not listed, no restrictions exist and the product is subject to be traded openly. West is pushing hard to move from positive list approach to negative list approach.
India is against negative list approach as it will throw open almost whole Indian services sector to western multinational giants. The positive list approach discriminates against new products and services, which are not protected under past commitments.

Is it true that the GATS not only applies to cross-border flows of services, but additional modes of supply? The GATS distinguishes between four modes of supplying services: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.

4 Modes of Services

Mode 1: Cross-border supply is defined to cover services flows from the territory of one Member into the territory of another Member (e.g. banking or architectural services transmitted via telecommunications or mail);

Mode 2: Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into another Member\’s territory to obtain a service;

Mode 3: Commercial presence implies that a service supplier of one Member establishes a territorial presence, including through ownership or lease of premises, in another Member\’s territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and

Mode 4: Presence of natural persons consists of persons of one Member entering the territory of another Member to supply a service (e.g. accountants, doctors or teachers). The Annex on Movement of Natural Persons specifies, however, that Members remain free to operate measures regarding citizenship, residence or access to the employment market on a permanent basis.

How India’s stand differs when it comes to services?

From India’s point of view, services present a different picture from agriculture and industrial tariffs. As an emerging global power in IT and business services, the country is, in fact, a demander in the WTO talks on services as it seeks more liberal commitments on the part of its trading partners for cross-border supply of services, including the movement of ‘natural persons’ (human beings) to developed countries, or what is termed as Mode 4 for the supply of services.

With respect to Mode 2, which requires consumption of services abroad, India has an offensive interest. In sharp contrast, the interest of the EU and the US is more in Mode 3 of supply, which requires the establishment of a commercial presence in developing countries.

Accordingly, requests for more liberal policies on foreign direct investment in sectors like insurance have been received. These developed countries are lukewarm to demands for a more liberal regime for the movement of natural persons. Unlike many developing countries, India has taken offensive positions in this area as it has export interests in information technology (Mode 1).
The country also seeks greater access to the EU and the US in terms of the movement of natural persons, or what is termed as Mode 4 in cross-border supply of services. Lack of movement in Mode 4 due to opposition by the US and the EU may affect India’s ability to offer much in other modes of services.

Some experts are of the view that under the Uruguay Round commitments, developed countries already have a liberal trade regime in Mode 1 (which covers Business Processing Outsourcing or BPOs) with regard to some of the service sectors of interest to India.

Further research needs to done to assess the extent of autonomous liberalisation undertaken by developed countries, which can be locked in during the negotiations, and consequent gains that can accrue to India.
Further, even in the absence of additional liberalisation, India’s service exports would continue to grow in view of its cost advantage and demography. India could also explore the possibility of finalizing mutual recognition agreements with the main importers of services, so that differences in national regulatory systems do not act as barriers to its exports.

Trade-Related Aspects of Intellectual Property Rights (TRIPS)

The TRIPS is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994.

It remains an issue between Developed and developing countries. TRIPS was fine tuned in favour of developing countries in 2003, as part of Doha development agenda, when all members agreed to compulsory licensing in certain cases. However, now U.S. and Europe remain unhappy about current strict terms of patent allowed by TRIPS.

Trade-Related Investment Measures (TRIMS)

The TRIMS recognizes that certain investment measures can restrict and distort trade. It states that WTO members may not apply any measure that discriminates against foreign products or that leads to quantitative restrictions, both of which violate basic WTO principles. A list of prohibited TRIMS, such as local content requirements, is part of the Agreement. Recently India was dragged to WTO by U.S. over former’s specification of Domestic Content Requirement in relation to procurement of Solar Energy cells and equipment’s.