Author: Shubhangi Agarwalla
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Required knowledge: www.wto.org -The official website of the WTO contains the official documents of the WTO, the official documents issued under the GATT 1947, the WTO Analytical Index, an article by article commentary on the agreements
Learning objectives: Understanding the evolution, essential principles, and challenges of international trade law and offering interdisciplinary insights that stimulate critical thinking.
A. Setting the ContextEdit
I. Why do countries trade?Edit
The effects of trade rules are all around us.
For instance, at this very moment, dozens of violent cartels in the state of Michoacán, in Mexico, are fighting for power over one of its most secretive markets. Buses are being burnt. Armed Civilians are fighting back. Surprisingly, the market in question is not marijuana or methamphetamines but a fruit that has seen an astonishing uptick in demand, largely due to the North American Free Trade Agreement (NAFTA), a trade agreement signed by the United States, Canada and Mexico. The NAFTA was designed to promote market liberalization and to encourage capital flows between member countries. For instance, it lifted the United States ban on Mexican avocados, making it the most successful import to the United States all year round. However, the disproportionate demand for avocados has also wrekced havoc on the environment in Mexico. It is estimated that 9.5 billion litres of water, equivalent to 3,800 Olympic pools. are used to produce avocados in Mexico on a daily basis!
It is clear that engaging in international trade comes with its own set of trade offs. According to the The Economist magazine in a cover story of 30 July 2016, the new political divide is not left versus right, but open versus closed borders. In fact the only thing the political left and right seem to agree upon is that the current model of international trade needs to change. The Left critiques international trade's relationship with the environment and labour standards. They also argue that the current regime focuses on capital over people. The Right, on the other hand, argue that economic production and jobs should be locally sourced.
Despite this, why do countries choose to trade?
A variety of economic and political reasons have been advanced to justify free trade between countries. The most prominent of these theories are explained below.
1. Adam SmithEdit
Adam Smith, a professor of moral philosophy at the University of Glasgow, is known to have made a rigorous intellectual contribution to the economic theory of international trade and is considered to have a “well established reputation as the founder of modern economics”. His widely read book 'An Inquiry into the Nature and Causes of the Wealth of Nations' published in 1776 was a text that blended history, politics and economics to argue that gains from specialisation domestically could also be extended to the international context. He believed that countries should only produce goods on which they had an absolute production cost advantage. For instance, a country with a tropical climate could probably produce bananas more cheaply than a country with a temperate climate. According to Adam Smith, this would imply that it should export bananas to the country with a more temperate climate.
The only limitation he could foresee on his theory on the division of labour and the absolute advantage that individuals or countries may enjoy in the production of goods is “the extent of the market.” This too could be solved by open borders and international trade which allowed the exploitation of an international labour force.
The tailor does not attempt to make his own shoes but buys them off the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor . . . What is prudence in the conduct of every private family can scarcely be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry, employed in a way in which we have some advantage.
Scholars have stressed that the theory of absolute advantage “can explain only a small part of world trade” since it assumes that bilateral trade could take place between states and only in two commodities that are to be exchanged. They have also questioned the relevance of international trade for countries that have no absolute advantage in producing goods. This question is addressed by David Ricardo in his book, The Principles of Political Economy, published in 1817.
2. Ricardo and MillsEdit
Ricardo's theory of comparative advantage is considered to be “the bedrock on which all subsequent developments in the theory of international trade have rested”
Contra Smith, Ricardo explained why trade could make both countries better off even if one state were better than the other at producing both goods, provided that there was a difference in each country’s relative levels of productivity. If a state is relatively better at making Product A than Product B, it makes sense to put more resources into the production of A, and to export it to pay for imports of B. This is also implies that any state does not have to be best at anything to gain from trade. Instead, the state has gains by specializing in those activities which, at world prices, the country is relatively better at, even though it may not have an absolute advantage in them. The most famous illustration of his theory is the cloth and wine example.
Example for Comparative Advantage from Ricardo, On the Principles of Political Economy and Taxation, third edition (1821): Portugal can produce wine with 60 units of labour and cloth with 80 units of labour, while England can produce wine with 130 units of labour and cloth with 100 units of labour. Portugal has an absolute advantage over England in the production of both wine and cloth. However, according to Ricardo, trade can still be mutually beneficial since England can export cloth using 100 units of labour in exchange for wine which would have taken 130 units of labour. Similarly, Portugal can export wine using 60 units of labour in exchange for cloth which would have taken 80 units of labour. Thus, Ricardo's contribution is that it is not important whether Portugal can produce both products more efficiently but the relative efficiency of producing each product when compared to England's relative efficiency is producing the same products.
We see the same thing play out domestically. Say for instance, a lawyer is more efficient in both legal services and regular clerking jobs than her secretary. It takes the secretary 4 hours to do a task that takes the lawyer 2 hours to do. Yet it would not be efficient for the lawyer to be doing both the tasks since the lawyer's hourly rate (USD $200) is more than the secretary's hourly rate (USD $50).
There were some disadvantages of the comparative advantage theory. One was the challenge for states to find out which good they were relatively better in producing. Second, some markets, such as agriculture, took longer to develop and there was less incentive to develop them. This was antithetical to long-term development, a concern of states in the Global South. Third, comparative advantage rules out any deliberation of path of adjustment and evolution of economic forces over time.
3. Heckscher OhlinEdit
Ricardo's theory was further refined by Hecksher and Ohlin’s Factor Proportions Hypothesis. Eli Heckscher and Bertil Ohlin, economists at Stockholm University, recognized that most products were a function of multiple factors of production (land, labour and capital) so they considered both factor intensity of commodities with the factor endowments.
Example for Factor Endowment Theory: Suppose that Saudi Arabia and India are trade partners. Both countries produce electrical equipment and fertilizers and the two factors of production that impact trade are labor in the fertilizer industry and capital in the electrical equipment industry. If South Africa is capital-abundant, the country must have a high ratio of capital to labor. If Botswana is labor-abundant, the country must have a high ratio of labor to capital. According to the Factor Endowment Theory, countries will export goods if the country is abundant in a factor that is used by the goods intensively. If India was actually a capital-intensive country (it is not) then India would produce goods that require capital. If Saudi Arabia was actually a this model would suggest that Saudi Arabia would export goods that require labor.
This theory also explains why two countries that are labour intensive would not trade with one another as they both would want to export goods that require abundant labour. If they did trade they would not gain an advantage from international trade.
The Factor Proportions Hypothesis does not, however, provide an adequate explanation of manufacturing activities in advanced industrialized economies. Further, its fundamental assumption that technology is constant across countries, is wrong and undermines the models use in this analysis.
4. Prebisch–Singer HypothesisEdit
The Prebisch–Singer Hypothesis tells us a story about international trade in the middle of the 20th century and drives a lot of economic policy. Now, the law of comparative advantage says specialisation improves economic outcomes. But Prebisch and Singer noted that Asian, Latin American and Africa economics were labour intensive and were primarily producing primary commodities such as sugar, spice or coffee. This had pernicious implications- the rate of increase of price of primary products had fallen steadily since the late 19th Century, particularly relative to rate of increase of price of manufacturing products. The reason for this is the process of production and the belief that the production of manufacturing good require a greater transformation than the production of primary goods. Further, comparative advantage theory assumes perfectly competitive markets but that is only true for primary products. For example, Ghana specialises in the production of cocoa, a homogenous good. It cannot influence the world market price and thus the market for cocoa is perfectly competitive. On the other hand, the world market for cars is imperfectly competitive.
Thus, specialization in primary commodities, combined with a relatively slow rate of technical progress in the primary sector and an adverse trend in the commodity terms of trade, had caused developing economies to lag behind the industrialized world.
Prebisch and Singer argued that as the way out of their dilemma, developing countries should foster industrialization.
Interestingly, this went on to be the intellectual basis for the import substitution industrialisation policies that prevailed in many developing countries through the 1970s. The aim of the import substitution policies was to fully develop the domestic market so the goods produced are competitive with imported goods. It was justified on the basis that developing countries inherited truncated economies from their colonizers so temporary protectionism was required for their infant industries. Further, it was widely argued that some variant or the other of import substitution policies had been used by most developed countries early in the process of their economic development, including the United States, Canada, Germany which were now protesting against developing countries doing the same. However, several studies in the 1970s started to conclude that import-substitution policies were often detrimental to the growth of developing countries.
II. Why have Trade Agreements?Edit
There are several reasons why states choose to enter into trade agreements.
First, trade agreements allow states to enlist export-oriented industries, through improved access to foreign markets, as a counterweight to domestic political constituencies in import-impacted industries through the reciprocal exchange of binding trade concessions or commitments with other countries.
Second, trade agreements provide security and transparency to investors who might be otherwise deterred by domestic politics.
Third, trade agreements resolve terms-of-trade driven Prisoners’ Dilemma problems in international trading relationships where major trading powers might otherwise engage in mutually destructive high tariff policies.
These rationales and the expansion of trade agreements have not gone uncontested. Scholars have lamented the materialism of international trade law and the application of market logic to goods that are unmarketable. According to Rosset for instance, “food is not just another commodity, to be bought and sold like a microchip, but something which goes to the heart of human livelihood, culture and society.” Others still have questioned the relevance and gains from trade agreements in developing countries where arguments in favour of open markets need to be modified by other considerations.
Thus, trade agreements are often formulated keeping in mind that trade is not a positive sum game for all. Hence, for example, the General Agreement on Tariffs and Trade has tried to reduce adjustment costs from increased international trade through three mechanisms:
- Gradualism: Tariff concessions are phased in over extended periods of time both within and across successive negotiating rounds.
- Reciprocity: WTO Members are not required to completely remove their trade barriers, nor are they generally required to have the same levels of protection, either in general or at the product level. Instead, as a result of negotiations, WTO Members are expected to make similar efforts in undertaking concessions, taking into account their levels of development and importance in world trade.
- Reversibility: Various safeguard provisions could be temporarily reinstated to mitigate the impact of unforeseen import surges on domestic industries.
Finally, it is helpful to note that there is ongoing debate amongst researchers whether trade agreements promote peace by reducing the incentive to use military force in interstate conflicts. For instance, a state more trade-dependent is less likely to fight a partner because of the larger opportunity cost associated with the loss of trade. Additionally, it is also likely that big domestic corporations use their leverage to influence the state to limit the use of military force against an important trading partner. On the other hand, other scholars point out that the biggest wars in history have been caused by trade disputes which is only likely to arise when there is asymmetrical economic inter-dependence.
III. The Birth of the World Trade OrganisationEdit
1. International Trade OrganisationEdit
In 1916, United States' Democratic Congressman, Cordell Hull, argued for the establishment of ‘a permanent international trade congress’ in response to the growing opinion that high US tariffs favoured Northern manufacturers to the detriment of Southern agriculture. At this stage, Hull had no clear strategy on how the proposed congress would actually function. Yet by 1934, he managed to persuade the Congress to pass the Reciprocal Trade Agreements Act (RTAA) which shifted the locus of power to alter tariffs from the Congress to the President. As Stephen Haggard notes, "With the transfer of tariff-making authority to the executive, the United States could make credible commitments and thus exploit its market power to liberalize international trade." After the commencement of the Second World War, and prompted by the economic factionalism it saw, the United States' planning for the post-war order assumed that the RTAA could be the basis for progress towards its vision of free trade.
The United States also ensued negotiations with Britain to present a shared vision for the global economic order. This involved the Atlantic Charter which spoke of the "desire to bring about the fullest collaboration between all nations in the economic field, with the object of securing for all improved labour standards, economic advancement and social security" and the Lend Lease Agreement which called for "the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariffs and other trade barriers". The notion that all states could trade freely with each other guided by a common set of laws was understood to be an integral step towards achieving peace. By the end of the Second World War, this overwhelming Anglo-American planning led to several economic and political conferences that led to the birth of several multilateral institutions such as the Bretton Woods Conference which established the International Monetary Fund (IMF) and the World Bank and the Dumbarton Oaks Conference which established the United Nations Organization. They also agreed on a set of "proposals for consideration by an international conference on trade and employment" and a for an International Trade Organization (ITO). While facially, everything seemed rosy between Britain and America as they both agreed on the need for an ITO, there were tensions on tariff levels and imperial preference that would come to affect the subsequent discussions. In fact, US's $3.75 billion loan to the Labour Party in December 1945 was conditional upon Britain accepting the ‘Proposals’. The relationship further deteriorated when Britain, aware of her own growing economic vulnerability, proposed provisions that departed from free trade principles. Eventually, the US rallied a number of states against Britain's demands, but this came at the cost of other exemptions in the charter that made it unpalatable to domestic opinion in the US.
The proposal was embellished in a Charter that was discussed at the first session of the preparatory committee in London in October-November 1946. The conference also saw participation from "developing" countries such as India, Australia (which self-identified as developing at the time), China, Brazil and Lebanon who proposed that the Charter ought to encourage industrialization in developing countries through the use of import quotas. In response, the negotiators from the United States proposed a new chapter that recognised "that special governmental assistance may be required in order to promote the establishment or reconstruction of particular industries and that such assistance may take the form of protective measures."
The second session of the preparatory committee met in 1947 in Geneva and developing countries continued to press for measures such as differential internal taxation and preferences to secure their interests. They argued that the charter was designed to help developed countries and provided no support to developing countries, some of whom had just gained independence, to develop their own economies. The El Savador delegate succinctly described this as- "The industrialized countries’ concept of equilibrium was very formal, while the underdeveloped countries felt that there should be a basic criterion —unequal treatment for unequally developed countries." The conference reached an impasse on the issue of quantitative restrictions without prior approval from the ITO. Criticism of the Charter started building up in the United States, while the administration no longer thought it a priority. This needs to be contextualised given the position of the United States in the early years of the post-war world, where, as the Bretton Woods negotiations show, it constantly found itself as crossroads with its allies in building a ‘new deal for the new world order.’
Another feature of the Charter was interesting from the perspective of developing countries. There were no legal links between the Bretton Woods institutions and the United Nations leading to a systemic division between public international law and international economic law. The relationship between the two regimes has been succinctly described by Finger and Tamiotti who note that while the United Nations became increasingly fragmented, the Bretton Woods institutions started subsuming more of the United Nations' work by bringing development within its framework. However, the Havana Charter for the ITO provided for a redressal mechanism at the International Court of Justice.
The final Act of the conference had 53 signatories. However, the Charter failed to get ratified. Some countries refused to ratify till they saw how the United States would act. Eventually, the ITO never came into being because of staunch protest against the Havana Charter from the United States. However, in spite of its failure, the ITO was instrumental to how international trade would shape up. For instance, the Soviet Union, which had not taken part in the negotiations thus far, was willing to join the ITO in an attempt to get the support from developing countries. Further, the attempt to create it led to the establishment of the GATT regulated international trade till it was succeeded by the World Trade Organisation in 1995.
2. GATT regimeEdit
As the ITO ran into its own set of problems, the GATT continued with its objective of trade liberalisation. In the beginning, the GATT regime was dominated by the same diplomats who had negotiated it. They represented the parties and also staffed the small secretariat. Eventually, trade law as a discipline got more professionalised and came under the increasing influence of trained lawyers.
Nine "rounds", as the eight multilateral meetings that occurred from 1947 to 1994 were called, of negotiations have been undertaken under the GATT. The rounds can be divided into two phases. During the first few rounds, which occured in the context of post-Second World War reconstruction in Europe and Asia, it aimed to add members and fix tariff levels. There were also gaps in the GATT’s scope, considered to be the responsibility of the ITO.
|Year||Negotiating Rounds till the Uruguay Round|
|Oct. 30, 1947||The General Agreement on Tariffs and Trade (GATT) is negotiated, with 23 original contracting parties. However, it can be said that the GATT did not enter definitively into force yet because the participating member states would not subject all of their international trade to the Agreement.|
|1948||The First round of GATT negotiations is held in the Geneva. The GATT is officially born.|
|1949||The Second round of GATT negotiations is held in the Annecy. This leads to tariff reductions and ten new accessions and 11 new nations acceded to the GATT.|
|1950||The Third round of GATT negotiations is held in Torquay. Thirty-eight countries participate in the Round which results in 8,700 tariff concessions.|
|1956||The Fourth round of GATT negotiations is held in Geneva. It produces $2.5 billion worth of tariff reductions.|
|1960-62||The Fifth round of GATT negotiations is held in Geneva. It is named after U.S. Undersecretary of State Douglas Dillon, who proposed the negotiations. This Round focuses primarily on issues related to the founding of the European Economic Community and its Common External Tariff.|
|1964-67||The Sixth round of GATT negotiations is also held in Geneva. It is named after the assassinated US President John Kennedy. The Round involved 48 countries, lasted 37 months and achieved tariff concessions of US$40 billion of trade.|
|1973-79||The Seventh round of GATT negotiations is launched in Tokyo and held in Geneva. Similar to the previous rounds, this Round produced tariff reductions and six codes on non-tariff measures|
Since the inception of the original GATT in 1947, agriculture has been an exception to general trade liberalization trends in the multilateral trading system, and it has proven to be a persistently divisive trade issue, including in the multilateral Uruguay and Doha Rounds. A number of rationales have been offered for why agricultural production should be viewed differently, from a normative perspective, from other commodities or manufactured goods (often captured in the term “multifunctionality” of agriculture), as a matter of trade policy, and hence justify exceptional levels or forms of protectionism.
Even though Rounds are lengthy they can have some benefits such as-
1) Rounds are conducive to making trade offs that also makes agreement easier to achieve. A country might be willing to make a concession that would be difficult to justice politically. However, a package would provide for concessions from other countries in other sectors too.
2) Developing countries have a bigger chance of influencing the multilateral system in a round than in bilateral relationships with major trading nations.
As the GATT negotiations were ongoing, there were two important global developments that marked the 20th century- decolonisation and the Cold War. Even though not all Members to the GATT were uniformly liberal, it became a forum for the leading western States to assert the bedrock principle of capitalism - free trade. The final round of GATT negotiations in 1986 (described below) was followed by the fall of the Berlin Wall in 1989. From 1990 onwards, during the course of the Uruguay Round, proposals were tabled for the formation of a multilateral trade organization. By 1994, the Clinton administration started seeing the value in a multilateral institution and the WTO was born.
3. Uruguay RoundEdit
The Uruguay Round launched with a Ministerial Declaration in Punta del Este in September 1986. Originally planned to last four years, the Uruguay Round negotiations took seven and a half years to conclude at the Marrakesh Ministerial Conference. The Round went beyond reviewing the GATT and completely transformed the existing trade order with the creation of a new institution, the WTO, established a Trade Policy Review Mechanism and even introduced entirely new issues beyond what many of states initially thought was achievable or advisable such as agreements on services liberalization (General Agreement on Trade in Services) and on “behind the-border” issues such as intellectual property rights, and sanitary and phytosanitary standards. Additionally, the dispute settlement mechanism was strengthened.
|Date||Key Events in the Uruguay Round|
|1986||Uruguay Round of GATT negotiations is launched at Punta del Este in September 1986|
|1990||The European Union and Canada have proposed the creation of a Multilateral Trade Organization (MTO). The ministerial held in Brussels in December is intended to be the closing session of the Uruguay Round, but ends in a deadlock.|
|1991||The Dunkel Draft of the Uruguay Round Final Act is completed in December, including a charter for the proposed MTO.|
|1993||The Quad countries (Canada, the European Union, Japan and the United States) reach agreement on a market access deal in a July summit meeting of the G7 in Tokyo. By December most negotiations are concluded.|
|1994||The Uruguay Round agreements are signed in Marrakesh, Morocco. These include numerous agreements that are all made part of a single undertaking.|
From the start of the 1982 Ministerial Meeting, developing states lamented the new negotiations on services when no agreement had been reached on more traditional issues such as textiles and agriculture. Agriculture is one of the most politically contested component of trade. By the 1980s, agriculture occupied only a small percentage of of developed country economies, but it continued to be a major component of the economies of developing countries. Previous attempts to liberalise agriculture had failed due to an uncommon ally, the European Communities which had taken a more protectionist stance due to its economic vulnerability in the 20th century. On the other hand, the movement into services was far more in developed countries. Developed states contended that unless efforts were made to liberalise services, international trade would fail to be as beneficial for them as it had been in the past. Finally, it was decided that services would be negotiated separately from goods.
It's important to understand the success of the negotiations in the global context in which they occured. The Cold War had just ended and several states, including China and states of the former Soviet Union were applying for membership. Some states thought that the end of the Cold War was a good opportunity to invest in the "peace dividend" while others saw it as an opportunity to have a more cooperative international legal system via international organisations as deliverers of “global public goods.” According to Sylvia Ostry, “Without US leadership, the Uruguay Round would simply not have happened..,but the WTO would also not exist without the cooperative efforts of a number of middle powers and, in particular, the major power of the EU.”
Several Uruguay Round agreements have been severely criticised by civil society groups- Trade-Related Intellectual Property Rights Agreement which allegedly imposes western intellectual property standards on developing countries; Sanitary and Phyto-sanitary Measures Agreement, which allegedly constrains Members from establishing standards for food products that reflect their particular risk preferences; the General Agreement on Trade in Services (GATS) which allegedly restrains governments in regulating local service markets.
4. World Trade OrganisationEdit
The idea for a new institution was proposed by Professor John H. Jackson and by the 1990s, Canada and the European Community because they feared that the GATT regime was too weak, fragmented and provisional to adopt and enforce disciplines on the new issues. One of the most interesting features of this new institution was its dispute settlement mechanism that functionalised compulsory arbitration between Parties in trade disputes. Initially, the United States was opposed to the creation of a new institution, but it finally agreed at the very end of the Uruguay Round negotiations.
In accordance with the Final Act of the Uruguay Round, the heads of delegations to GATT in Geneva met in December 1994 and decided that the WTO would enter into force on January 1, 1995. Thereafter, a special session of the GATT Contracting Parties decided that the GATT of 1947 would terminate on December 31, 1995. In reality, the provisions of the GATT 1947 would continue in force through their inclusion in GATT 1994, one of the WTO agreements.
There are several differences between GATT 1947 and the WTO that range from the superficial to the substantive. Some of these are-
- The Directors-Generals of the GATT were technocrats and civil servants but the Directors-General of the WTO have largely been politicians who had previously been trade ministers or prime ministers
- The issues that arise in the WTO go far beyond what was envision in the GATT
- Economic and political power is more widely distributed in the WTO compared to the GATT. Even though the European Union and the United States remain arguably the most influential members of the WTO, they hold much less influence than they did during the GATT period.
The WTO framework includes Multilateral Trade Agreements in a single undertaking (General Agreement on Tariffs and Trade 1994, and related trade in goods agreements on agriculture, textiles, cloth, antidumping, import licensing procedures etc. in Annex 1A, General Agreement on Trade in Services in Annex 1B, Agreement on Trade-Related Aspects of Intellectual Property Rights in Annex 1C, Dispute Settlement Understanding in Annex 2 and Trade Policy Review Mechanism in Annex 3). All Members are legally bound to oblige with the Multilateral trade agreements. It also included four Plurilateral Trade Agreements such as trade in civil aircraft, government procurement, dairy products and bovine meat. Membership in Plurilateral agreements is optional. Normally, in international law "specific" has a particular connotation with the understanding that specific agreement preside over general agreements. However, this is not the case in WTO law. Measures get tested under both the specific agreement and the general agreement.
It might interest you to know that till the very last hours of the Uruguay Round, the proposed new body was called the Multilateral Trade Organization (MTO). The European Community had proposed the term multilateral because it noted that an institution to which the largest economies, such as China, Russia and Saudi Arabia, were not a party could not be called a "world" institution.
However, in the final stages of the negotiations, the M in MTO was flipped to a W, when the United States became adamant that the term “world” was easier to explain and to pronounce than the term “multilateral”. Given that the United States had withheld its support for the institution till then, the change in name seemed to be a small price to pay.
So insistent was the United States on this name change that it even deployed its intellectual property lawyers to analyse a potential clash with the World Tourism Organisation (also called WTO) that was based in Madrid!
Finally, a diplomatic solution was found: It was decided that the World Trade Organisation would henceforth be referred to as the WTO-OMC, with the latter three letters standing for the name of the organization in the other two official languages of French and Spanish. The World Tourism Organisation sometimes supplements this differentiation by referring to itself as the UNWTO.
5. Doha RoundEdit
In the month immediately following 9/11 attacks, and the concurrent rise in global solidarity, the WTO member states decided to launch new negotiations at the Fourth Ministerial Conference in Doha, Qatar. The entire package is called the Doha Development Agenda (DDA). It was designed to support developing countries' interests and concerns. The issues that were most integral to developing states was concessions on agriculture, reduction of trade-distorting tariffs on agriculture, relationship of TRIPS to public health and “special and differential treatment” to developing countries by introducing greater flexibility in implementing WTO agreements, such as a longer timeframe for compliance and phased introduction of new standards and measures.
There was intense disagreement between developed and developing countries to classify agricultural products as “sensitive products” or “special products” to which tariff reduction commitments would not apply in full or at all and over special safeguard regimes in the agricultural sector.
Interestingly, even though numerous developing states spoke up against negotiations on ‘new issues’ such as investment, competition, government procurement transparency and trade facilitation, the draft specifically committed Ministers to agree to such negotiations, and did not provide for options.
One of the most successful results of the Doha Round was the Trade Facilitation Agreement (TFA), which came into force in 2017. The objective of Agreement is to reduce the costs of trade. As goods travel across borders, they have to pass inspection, comply with laws on border fees and paperwork etc. Clearing customs can be expensive and time-consuming which effects the volume of trade that takes place. The costs of transiting goods are often heightened due to redundant requirements for information and differences in technological levels between states. Trade facilitation aims to cut red tape in customs and border procedures through improved trade-related infrastructure.
On 31 May 2011, Pascal Lamy, then Director-General of the WTO, formally pronounced before the WTO Trade Negotiating Committee that the DDA as we know it is ‘dead’ The Draft Consolidated Negotiating Text on trade facilitation issued on 21 April 2011 has more than 800 square brackets!
IV. Key Principles of the WTO FrameworkEdit
1. Non- discriminationEdit
A country should not discriminate between its trading partners (giving them equally “most-favoured-nation” or MFN status); and it should not discriminate between its own and foreign products, services or nationals (giving them “national treatment”). The Most Favoured Nation principle forbids Members to discriminate among ‘like’ goods or services or intellectual property originating from other Members, by imposing an equal treatment by the members of GATT of imports and domestic products. Further, according to the National Treatment principle, even once the imported goods or services or intellectual property enters the market, there should be no discrimination between these goods or services or intellectual property and locally produced goods or services or intellectual property.
At the same time, the international trade order provides for some exceptions to the general non-discrimination principle. For instance, member states can join a free trade agreement that applies only to goods traded within the group. Or they can give developing countries special access to their markets.
This principle is rooted in the idea that allowing all countries to trade with each other on a level playing field would act an important counterweight to the economic factionalism that characterized the inter-war years and that was widely seen as contributing to the outbreak of World War II.
2. Free TradeEdit
Free trade means the removal of barriers to trade like tariffs, and of other trade-distorting measures like quotas, so that goods and services can move more freely among member countries. It is said to promote economic growth, create jobs and promote development. However, the WTO does allow member states to make these changes gradually via “progressive liberalization” and in some rare instances, it allows tariffs and other forms of protection. From the GATT 1947, there have been 9 rounds of trade negotiations to achieve this objective which reduced tariffs on industrial products to less than 4%. However, there are some exceptions to free trade built into the system. For instance, there are exceptions on environment, health, and national security grounds.
The WTO is an attempt by governments to make the business environment stable and predictable for foreign companies, investors and governments. How this plays out in practice is that all barriers are converted to tariff barriers. Further, when countries agree to open their markets for goods or services, they “bind” their commitments. For goods, these bindings amount to ceilings on customs tariff rates. Thereafter, a member state can change its bindings, but only after negotiating with its trading partners, and in most cases, giving them some concession for the loss in trade. Many WTO agreements require governments to disclose their policies and practices publicly within the country or by notifying the WTO. Finally, the Trade Policy Review Mechanism which surveys domestic trade policies is another method of encouraging transparency.
4. More CompetitiveEdit
The WTO promotes fair competition by discouraging “unfair” practices such as export subsidies and dumping products at below cost to gain market share. The Anti-dumping Agreement is an excellent example of how the WTO promotes competitive practices by allowing governments to impose duties when there are trade distortions caused by dumping at unfairly low prices. Similarly, the Agreement on Government Procurement provides for open and transparent competition to be ensured in government procurement.
5. Encouraging DevelopmentEdit
The WTO also recognises the link between trade and development and promotes economic reform in "developing" countries. In the WTO system, there are no rules governing the classification of states as developed or developing, but is instead based on a self-classification system. However, this self-classification can be challenged by other Members. Interestingly, the very terminology of "developing" and "developed" and its underlying assumption of linear, economic progress that some states have to make has been challenged by some scholars who think its just a more politically correct terminology once imperialism could not be an acceptable bases for establishing hierarchy internationally. This discussion gains further complexity when we take into account the numbers of world leaders who represent these "developing" states embrace these terms and invoke them strategically.
The principle of free trade has always provoked controversies, starting from the Ancient Greeks, as described insightfully by Douglas Irwin in Against the Tide: An Intellectual History of Free Trade.
More recently, feminist critiques point out that markets are not natural manifestations of demand and supply but the result of careful and deliberate construction and intervention by states. This implies that a clear demarcation between the market and the state is flawed. Free markets delegitimises state intervention even when it is needed for redistribution.
Feminist Scholars have argued that free trade encourages employers and companies to outsource manufacturing jobs to low wage countries in the global South. However, the result of this has been that the jobs of these workers in the Global North are replaced by part-time service-sector jobs, which tend to be poorly paid and lack health and retirement benefits. In fact, in the American context, research by economists Michael Elsby, Bart Hobijn, and Aysegul Sahin demonstrated that free trade from developing countries was the reason behind the decline in labor’s share of income in the United States. Further, in an article for the Global Dispatch, “What ‘Free Trade’ Has Done to Central America,” Manuel Perez-Rocha and Julia Paley explain that Dominican Republic-Central American Free Trade Agreement displaces family farmers who can’t compete with U.S. grain imports and creates poor working conditions in export assembly plants.
Additionally, even the construction of the market is gendered because it is based on the exclusion of activities "that women ordinarily do". Huge section of women engage in work that is not recognised as labour and is thus, unpaid.
B. World Trade OrganisationEdit
I. Objectives, Scopes, FunctionsEdit
Established in 1995, the WTO acts as an umbrella organization that provides multilateral laws on goods, services and intellectual property, and provides a forum for negotiation, decision-making and dispute settlement.
The Preamble to the Marakkesh Agreement sets out the objectives of the WTO:
Recognizing that their relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding 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 develop-ment, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development...
Recognizing further that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development...
According to the Preamble , the two main ways to achieve the objectives of the WTO are agreements on:
- the reduction of trade barriers; and
- the elimination of discrimination.
The WTO is supposed to liason with the International Monetary Fund and the World Bank to promote greater coherence in international economic order. To this end, it has entered into Agreements wth these institutions that provide for varying levels of cooperation by sharing information, invitations to observe meetings of governing and other bodies, and consultations on certain issues.
1. Current MembershipEdit
The GATT which started with just 23 contracting parties had 128 when it transitioned to the WTO in 1995. At the time of writing this in 2022,The WTO has 164 members and 25 observer governments. The membership of the WTO is quasi-universal. It includes both states and customs territories that possess complete autonomy over their external relations. You will also note that both the European Communities and all the Member States of the European Union are Members of the WTO. This respects the division of competence between the European Communities and all member states on the various subject matters that falls within the ambit of the WTO. The Current WTO members are-
Afghanistan — 29 July 2016; Albania — 8 September 2000; Angola — 23 November 1996; Antigua and Barbuda — 1 January 1995; Argentina — 1 January 1995; Armenia — 5 February 2003; Australia — 1 January 1995; Austria — 1 January 1995; Bahrain, Kingdom of — 1 January 1995; Bangladesh — 1 January 1995; Barbados — 1 January 1995; Belgium — 1 January 1995; Belize — 1 January 1995 Benin — 22 February 1996; Bolivia, Plurinational State of — 12 September 1995; Botswana — 31 May 1995; Brazil — 1 January 1995; Brunei Darussalam — 1 January 1995; Bulgaria — 1 December 1996; Burkina Faso — 3 June 1995; Burundi — 23 July 1995; Cabo Verde — 23 July 2008; Cambodia — 13 October 2004; Cameroon — 13 December 1995; Canada — 1 January 1995; Central African Republic — 31 May 1995; Chad — 19 October 1996; Chile — 1 January 1995; China — 11 December 2001; Colombia — 30 April 1995; Congo — 27 March 1997; Costa Rica — 1 January 1995; Côte d’Ivoire — 1 January 1995; Croatia — 30 November 2000; Cuba — 20 April 1995; Cyprus — 30 July 1995; Czech Republic — 1 January 1995; Democratic Republic of the Congo— 1 January 1997; Denmark— 1 January 1995; Djibouti — 31 May 1995; Dominica — 1 January 1995; Dominican Republic — 9 March 1995; Ecuador — 21 January 1996; Egypt — 30 June 1995; El Salvador, 7 May 1995; Estonia — 13 November 1999; European Communities — 1 January 1995; Fiji — 14 January 1996; Finland — 1 January1995; Former Yugoslav Republic of Macedonia — 4 April 2003; France — 1 January 1995; Gabon — 1 January 1995; The Gambia— 23 October 1996; Georgia— 14 June 2000; Germany — 1 January 1995; Ghana — 1 January 1995; Greece — 1 January 1995; Grenada — 22 February 1996;Guatemala — 21 July 1995;Guinea — 25 October 1995;Guinea Bissau — 31 May 1995;Guyana — 1 January 1995; Haiti — 30 January 1996; Honduras — 1 January1995; Hong Kong,China — 1 January 1995; Hungary — 1 January 1995; Iceland — 1 January 1995; India — 1 January 1995; Indonesia— 1 January 1995; Ireland — 1 January 1995; Israel — 21 April 1995; Italy — 1 January 1995; Jamaica — 9 March 1995; Japan — 1 January 1995; Jordan — 11 April2000; Kenya — 1 January 1995; Korea,Republic of — 1 January 1995; Kuwait — 1 January 1995; Kyrgyz Republic — 20 December 1998;Latvia— 10 February 1999;Lesotho — 31 May 1995;Liechtenstein — 1 September1995;Lithuania — 31 May 2001;Luxembourg — 1 January 1995;Macao,China — 1 January 1995;Madagascar — 17 November 1995;Malawi — 31 May 1995;Malaysia — 1 January 1995;Maldives — 31 May 1995;Mali — 31 May 1995;Malta — 1 January 1995;Mauritania — 31 May 1995;Mauritius — 1 January 1995;Mexico — 1 January 1995;Moldov— 26 July2001;Mongolia — 29 January 1997;Morocco — 1 January 1995;Mozambique— 26 August 1995;Myanmar — 1 January 1995;Namibia — 1 January 1995;Nepal — 23 April 2004, Netherlands (including the Netherlands Antilles), 1 January 1995; New Zealand— 1 January 1995;Nicaragua — 3 September 1995; Niger — 13 December 1996; Norway — 1 January 1995;Oman — 9 November 2000;Pakistan — 1 January 1995;Panama — 6 September 1997;Papua New Guinea— 9 June 1996; Paraguay — 1 January 1995; Peru — 1 January 1995; Philippines — 1 January 1995; Poland — 1 July 1995;Portugal — 1 January1995; Qatar — 13 January 1996; Romania — 1 January 1995; Rwanda — 22 May 1996; Saint Kitts and Nevis — 21 February 1996; Saint Lucia — 1 January 1995;Saint Vincent and the Grenadines— 1 January 1995; Senegal — 1 January 1995; Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu — 1 January 2002; Sierra Leone — 23 July1995;Singapore — 1 January 1995; Slovak Republic — 1 January 1995; Slovenia — 30 July 1995; Solomon Islands —26 July 1996; South Africa—1 January 1995;Spain — 1 January 1995;Sri Lanka —1 January 1995;Suriname — 1 January 1995;Swaziland —1 January 1995;Sweden —1 January 1995;Switzerland —1 July 1995;Tanzania —1 January 1995;Thailand — 1 January 1995;Togo — 31 May 1995;Trinidad and Tobago—1 March 1995;Tunisia —29 March 1995;Turkey — 26 March 1995;Uganda —1 January 1995;United Arab Emirates— 10 April 1996;United Kingdom —1 January 1995; United States of America— 1 January 1995; Uruguay —1 January 1995;Venezuela — 1 January 1995;Zambia —1 January 1995;Zimbabwe— 5 March 1995
The WTO also has thirty Observer Governments. With the exception of the Holy See, these Observer Governments must start accession negotiations within five years of becoming an Observer. The IMF and the World Bank have permanent Observer status under their respective agreements with the WTO.
There are two ways of becoming a member to the WTO. First, Article XI of the Marakkesh Agreement provided for "original membership" till March 1997 which allowed Contracting Parties to the GATT 1947, and the European Communities, to join the WTO by
- accepting the terms of the Marakesh Agreement and the various WTO Trade Agreements; and
- making concessions and commitments for both trade in goods and services
All but one of the GATT Contracting Parties became WTO Members in this way.
Second, Article XII of the Marakkesh Agreement provides for accession. This provides that a state or customs territory can become a Member of the WTO by negotiating the terms of its accessions with states which re already members of the institution. In other words an admission ticket is negotiated.
There are four phases for accession. The first phase involves the submission of a memorandum by the state or customs territory applying for membership. This contains a report on all trade related policies and is examined by a WTO working party such as the candidate's economy in general, its framework for making and enforcing external trade policies, laws concerning imports and exports, intellectual property and services regimes. Once the working party has made some progress on the memorandum, the second phase begins. This involves bilateral negotiations between the candidate and individual Members to see what the candidate is willing to concede on. However, because of the most-favored-nation requirement, all WTO Members benefit from the market-opening concessions obtained by other Members. The remainder of the working party's examination and the bilateral negotiations take place parallely. The third phase involves drafting the terms of accession which is set out in the Protocol for Accession. This is submitted to the Ministerial Conference or the General Council. In the fourth and final phase, the Ministerial Conference or the General Council decides by consensus or, if consensus cannot be achieved, by a two-thirds majority of WTO Members on the application for membership. The standard practice is after 30 days after the protocol comes into force, the candidate becomes a member. An exception to standard protocol procedure is China's Accession Protocol which goes beyond WTO obligations to include provisions on transparency of laws and regulations, judicial review of administrative actors and the right to trade.
Crucially, there is no difference in status between “original Members” and Members who have acceded.
3. Withdrawals and ExpulsionEdit
Any Member may, at any time, unilaterally withdraw from the WTO after providing a 6 month notice of the decision to withdraw. However, no member has withdrawn from the WTO yet. Disappointed with the decision in EC – Bananas III, a number of Caribbean countries had threatened withdrawal but had not gone ahead with it. Additionally, there is no procedure to expel a Member who breaches their obligations under the WTO agreements. There is however a provision providing for expulsion of a Member who fails to accept an amendment.
III. Institutional StructureEdit
1. Basic StructureEdit
Article IV of the Marrakesh Agreement provides for the basic institutional structure of the WTO. The institutional structure of the WTO includes, at the highest level, the Ministerial Conference, then the General Council, the Dispute Settlement Body and the Trade Policy Review Body and, at lower levels, specialised councils, committees and working parties. It also includes quasi-judicial and other non-political bodies, as well as the WTO Secretariat. Notably, however, the WTO does not have any permanent body through which the ‘dialogue’ between the WTO, NGOs and civil society can take place.
a. Ministerial ConferenceEdit
The Ministerial Conference is the highest body of the WTO. It is composed of representatives, often Ministers, from all Members and has decision-making powers on all matters under any of the multilateral WTO agreements. These powers include- adopting authoritative interpretations of the WTO agreements, granting waivers, appointing the Director-General and adopting staff regulations. However, it is debated whether the Ministerial Conference also has the powers to make legally binding decisions. Since 1995, there have been only eleven sessions of the Ministerial Conference: Singapore (1996), Geneva (1998), Seattle (1999), Doha (2001), Cancún (2003), Hongkong (2005), Geneva (2011), Bali (2013), Nairobi (2015), Buenos Aires (2017) and Geneva (2021). The Ministerial Conference and the General Council have the exclusive authority to adopt interpretations of provisions of the WTO agreements.
b. General Council, DSB, and TPRBEdit
The General Council is composed of ambassador-level diplomats and normally meets once every two months. The General Council is responsible for the continuing, ‘day-to-day’ management of the WTO and its many activities. In between sessions of the Ministerial Conference, the General Council exercises the full powers of the Ministerial Conference. This includes decisions on the annual budget and liasons with inter-governmental and non-governmental organisations. The General Council also acts as the Dispute Settlement Body and the Trade Policy Review Body both of which convene at least once a month. However, the Dispute Settlement Body and the Trade Policy Review Body have different Chairman than the General Council and also have their separate Rules of Procedure.
c. Specialised CouncilsEdit
There are three WTO specialised councils - the Council for Trade in Goods; the Council for Trade in Services (CTS); and the Council for TRIPS. There are also Working Committee that deal with matters of general concern and report to the General Council directly. These include Committees on Trade and Development, Balance-of-Payments Restrictions, Budget, Finance and Administration; Trade and the Environment; and Regional Trade Agreements.
d. Trade Negotiations CommitteeEdit
The Trade Negotiations Committee was established by the Ministerial Conference at its Doha Session in November 2001.It reports on the progress of the negotiations to each regular meeting of the General Council. These negotiations take place either in special sessions of standing WTO bodies such as the Dispute Settlement Body and the Council for Trade in Services, or in specially created negotiating groups on market access and on rules.
e. WTO SecretariatEdit
One of the ex-directors of the WTO Secretariat once remarked that "[the Secretariat is] arguably the most powerful international civil servant that nobody has ever heard of".
The WTO Secretariat is based in Geneva and is headed by a Director-General, who is appointed by the Ministerial Conference. The Ministerial Conference adopts regulations set-ting out the powers, duties, conditions of service and the term of office of the Director-General. Ultimately, the WTO is a ‘Member-driven’ organisation and it is the Members, not the WTO Secretariat, that takes decisions. At best they facilitate the decision-making processes within the WTO. They seldom act as initiators of proposals for action or reform. In a speech in January 2003, Dr Supachai Panitchpakdi, former WTO Director General, speaking about his role and that of the WTO Secretariat clarified that-
As you know the WTO is a ‘member-driven’ organization. In the negotiations, Member governments negotiate directly with each other. As Chairman of the TNC, I shall be doing my utmost to keep all Members on board, facilitate their discussions, mediate in their problems and consult with all. And the WTO Secretariat, through its technical assistance work programme, is working hard to help developing and least-developed-country Members prepare effectively for the negotiations. But we cannot make any decisions on behalf of Members, we cannot unplug blockages when Members’ positions are intractable and we cannot force consensus. It is Members who have the very difficult responsibility of developing policy positions, negotiating concessions and deciding how far they are able to go in any given area
The Secretariat also comprises of four Deputy Director Generals who assist the Director-General. The Secretariat is further divided into Divisions, such as the Rules Division, Services Division or the Information and Media Division/ Each of these Divisions is headed by a Director who reports to Deputy Directors-General or directly to the Director-General. Only citizens of Members can be employed in the WTO Secretariat but beyond that, there are no national quotas. The working languages within the WTO Secretariat are English, French and Spanish.
Article 27.1 of the Dispute Settlement Understanding provides that “the Secretariat shall have the responsibility of assisting panels, especially on the legal, historical and procedural aspects of the matters dealt with, and of providing secretarial and technical support”.
According to Joost Pauwelyn, the Secretariat has a more a substantive role in the dispute settlement proceedings in practice. These include-
- proposal of names of individuals who can serve as panelists;
- deciding the timetable;
- deciding the issues to be deliberated upon
- drafting of questions to the parties;
- participation in hearings
- the drafting of the Panel/ Appellate Body reports.
Some of this can be explained by the fact that panelists are often retired diplomats with little legal expertise, but staff lawyers, in contrast, must have a law degree with a specialisation in WTO law.
Crucially, Pauwelyn notes that an outsized role of the Secretariat "may threaten the legitimacy, trust and compliance pull of WTO rulings and may have an impact on substantive outcomes, in particular: an increased reliance on precedent; convoluted writing style and length of reports and proceedings; expansive scope and ambition of rulings; collegiality and low number of dissents."
IV. Questions raised by the structure of the WTOEdit
The WTO considered itself as a solely state driven institution for years. In fact, there is no procedure for an individual to volunteer any information to the Panel. This is curious because farmers, unskilled labourers and women are documented to be impacted by it policies too. It is only when the Panel deems appropriate does it seek out "information or technical advice" from individuals. This is usually academic scholars. In fact, when an NGO tried to get the panel to read an unsolicited amicus brief in a dispute, the parties argued that the participating governments were "uniquely qualified to make legal arguments regarding panel reports and the parameters of WTO obligations." Only recently has it started providing sections of the civil society access to documents, the consultation process and dispute settlement mechanism. This has been lauded by scholars who have been arguing for greater participation of NGOs and other actors in the process.
An excellent example of the role of NGOs is the campaign for access to affordable medicines against infectious diseases such as HIV. The patents for most of these essential medicines are held by multinational corporations and thus, this issue is governed by the TRIPS Agreement. In 1999, a number of NGOs launched a massive campaign for the production of affordable generics for patients in developing countries. By the year 2001, the WTO members in the Doha Declaration affirmed that TRIPS should not prevent countries from protecting public health and promoting access to essential medicines. In 2003, they enabled countries that cannot produce such medicines to import pharmaceuticals made under compulsory licence, and in 2005 this decision was turned into a permanent amendment to the TRIPS.
The composition of the NGO community active at the WTO has been studied WTO Secretariat. The study shows that the most influential NGO players in world trade matters are highly specialized organizations that are based in Geneva, or have an office there, such as the International Institute for Sustainable Development (IISD), the Center for International Environmental Law (CIEL), and the International Centre for Trade and Sustainable Development (ICTSD). In comparison, NGOs actually from the Global South have less of a voice.
There have also been informal social movements such as the protests during the Seattle ministerial conference in 1999 which saw disenchantment with the WTO from trade unions concerned about immense competition from cheap labor from developing countries, environmentalists concerned about the outsourcing of hazardous activities, consumer unions concerned about unsafe imports and labor rights and human rights activists concerned about the lack of labour protections in other countries.
V. Treaty making and Decision MakingEdit
1. Normal procedureEdit
Pursuant to Article IX:1 of the Marakkesh Agreement, the normal procedure at the WTO is decision-making by consensus followed under GATT 1947. Except as otherwise provided, where a decision cannot be arrived at by consensus, the matter at issue shall be decided by voting. The matter is considered to have decided by consensus if no Member presents a formal objection to the proposal. This means that the chairperson does not actively ask every delegation whether it supports the proposed decision. On the contrary, the chairperson merely asks, for example, whether the decision can be adopted and if no one raises their voice in opposition, the chairperson will announce that the decision has been taken or adopted. In theory, this gives all Members veto power. John Jackson points out that-
The practice is that some countries that have difficulty with a particular decision will nevertheless remain silent out of deference to countries with a substantially higher stake in the pragmatic economic consequences of a decision.
In case there is no consensus, a voting takes place. A peculiar feature of the World Trade Organisation, in contrast to the United Nations, World Bank and IMF, is that each member only has one vote, irrespective of their economic might. Thus, this concept of state equality in the truest sense makes it difficult for a state or a group of states to stand tall against the tide off contrary opinion. Crucially, the European Communities has a number of votes equal to the number of their member States which are Members of the WTO.
The Rules of Procedure set out the quorum requirement. Usually a simple majority of the Members is enough to constitute a quorum. Once quoram is met, decisions are taken by a majority of votes cast.
2. Special ProcedureEdit
There are instances where the decision-making procedures which deviate from the normal procedure described above. For instance, the DSB takes certain decisions, such as decisions on the establishment of a panel or adoption of panel and Appellate Body reports, by reverse consensus meaning that the DSB must approve the decision unless there is a consensus against it. This means that a single Member can always prevent this reverse consensus by insisting that decision needs to be approved.
There is also a special procedure for amendment where an individual Member or Specialised Council can submit a proposal to the Ministerial Conference or the General Council to make an amendment. In the first ninety days, the Ministerial Conference or the General Council try to reach consensus on the proposal for amendment. If consensus cannot be reached, the Ministerial Conference or the General Council resorts to voting. This requires two-thirds majority of the Members.
Finally, the adoption of the annual budget and financial regulations also deviates from the normal decision-making procedure. Pursuant to Article VII:3 of the Marakkesh Agreement, the General Council adopts the annual budget and the financial regulations by a two-thirds majority comprising of more than half of the Members of the WTO.
C. Most-Favoured Nation PrincipleEdit
I. Domestic Administration of TariffsEdit
Tariffs are not defined in multilateral treaties but are commonly accepted to mean taxes imposed by one country on imports. The kind of product determines the tariff rate, as reflected in the importing country’s tariff schedule. Initially, tariffs were thought to be a source of revenue for the government but with the increased use of income tax, they contribute only marginally to revenue generation especially for developed countries. Today, tariffs are mostly imposed to help out domestic producers who may be unable to compete with the low prices or great sales of foreign producers or for political reasons as affecting exports of targeted countries for political reasons can facilitate stronger or weaker relationship with these countries.
Most tariffs today are ad valorem tariffs, requiring the importer to pay a certain percentage of the goods’ value in duty. Thus, valuation of the imported goods is an important determinant of the ultimate import duty. The primary basis for customs valuation is “transaction value” or the price actually paid or payable for the goods when sold for export to the country of importation.
On the other hand, non-add valorem taxes are not based on the value of the goods. Instead it may be based on a unit of quantity such as weight, length, area, volume or numbers of the good or determined by technical factors related to the content, composition or nature of the goods concerned. For example, the duty can be based on the percentage content of the agricultural component.
Often, the burden of a tariff falls on the domestic consumer in the importing country since they raise the price of the goods. However, in practice, market power of the importing country can make the foreign exporter shoulder some of the burden too. Due to globalisation and increasingly complex supply chains, tariffs on raw materials can impose a high burden on manufacturers too.
II. MFN principleEdit
Once tariff commitments have been agreed to in tariff negotiations and become tariff bindings under Article II of the GATT, these must be extended to all members of the GATT/WTO system under the Most Favoured Nation principle. According to the Most Favoured Nation principle, any benefits or immunities given to one class of product from an exporting country has to be given to all exporters of "like products" from other countries. Members are forbidden to discriminate among ‘like’ products by imposing an equal treatment by the members of GATT of imports and domestic products. For example, if Germany imposes a 10 per cent tariff on Japanese cars, it cannot impose a 20 per cent tariff on Australian cars.
a. Like ProductsEdit
Determination of the threshold requirements of “like products” has been the subject of much debate in both case law and in scholarly commentary. Some cases have adopted quite narrow interpretations of “like products”, essentially requiring products to be almost identical in their physical characteristics. One school of thought prefers a narrow interpretations of the term "like product" to avoid the free rider issue where a country can get benefits without making any corollary concessions. On the other hand, people who argue for a broad understanding of "like products" which turns on whether the products are substitutable or not from the perspective of consumers regardless of any major physical differences. This, they argue, allows for a more consistent application of the requirement.
Is a red marker pen and a blue marker pen "like products"? What about an android smartphone and an android tablet? And a cup of Americano and a cap of Capuccino? Finally, what about Beyond Meat (vegan meat) and meat?
Without reference to any secondary material, answer each of these questions. In doing so determine a legal test to determine when two products are like each other. This should be based solely on your intuitive choices.
The Spain- Unroasted Coffee is a perfect example of this debate. On 8 July 1979, the Spanish authorities enacted the Royal Decree No.1764/79 which changed the tariff classification of unroasted, decaffeinated coffee and accorded them treatment that was less favourable than mild coffee. Before this decree, there had been no difference in the tariff treatment to imports of unroasted coffee. At the time, Spain's imports of unroasted coffee from Brazil were constituted of almost entirely "unwashed Arabica". Brazil requested consultations with Spain, arguing that the imposition of tariff was discriminatory against Brazil.
|Product description||Duty Rate Imposed by Spain via the Royal Decree for
unroasted non-decaffeinated coffee beans
|Unwashed Arabica||7% ad valorem|
|Robusta||7% ad valorem|
|Other||7% ad valorem|
Brazil argued that the coffee was one single product and all variations of coffee should be considered a "like product". Further, "mild" and "unwashed Arabica" coffees came from the same species of plant, and often from the same variety of tree. On the other hand Spain argued that even though "mild" and "unwashed Arabica" coffees might belong to the same kind of plant, there were certain differences in quality due to difference in climatic conditions and farming methods. Spain stressed that aroma and taste, essential features in determining trade and consumption of these products, were completely different in "washed" and "unwashed" Arabica coffees. Finally Spain lay emphasis on the nature of the Spanish market where consumers' preference for the various types of coffee was well established compared to other markets. The Panel did not consider that such differences were sufficient reason to allow for a different tariff treatment. It pointed out that it was not unusual in the case of agricultural products that the taste and aroma of the end-product would differ.
While determining likeness is a controversial exercise, it is usually admitted that when the only differentiating factor between two products is their origin then the products are like. Factors that are also taken into account include-
- physical characteristics of the product
- consumer habits and tastes
- end uses of the product
- tariff classification of the products.
Determination of "likeness" takes place on a case to case basis, taking into account all these factors.
Furthermore, Article 1 of GATT explicitly states that any trade advantages granted one member must be 'unconditionally' and ‘immediately’ offered to all members of WTO. This means that if a country is accorded any trade advantage, the same trade advantage shall be accorded ‘unconditionally and immediately’ to all other members of WTO. So, the Appellate Body Report on Canada–Autos concluded that the measures maintained by Canada did not afford the same import duty exception immediately and unconditionally to motor vehicles imported from all WTO members, as required by the MFN principle of GATT 1994. There are differing interpretations of this requirement. For instance, some cases provide that there can be no conditions that force other countries to make further concessions. Another line of cases is that there can be no conditions altogether. A further interpretation is that some conditions may be applied but these cannot discriminate according to country of origin. In Belgium – Family Allowances, Belgium imposed a charge on foreign goods purchased by public bodies when these goods originated in a country whose system of family allowances did not meet specific requirements that rendered their system comparable to that in place in Belgium. Only few states were given an exemption. A GATT Panel held that conditioning the imposition of this internal tax on what kind of system of family allowances foreign countries had adopted violated the Most Favoured Nation principle.
In EC-Seal Products, the Appellate Body further clarified the meaning of "unconditionality" and said that it did not prevent a state from attaching conditions that might grant it an advantage. Instead what the provision was meant to capture was the prohibition on condition that might have a detrimental impact on competitive opportunities for imported products.
While the MFN principle has often been called the “corner-stone” of the multilateral trading system, two major exceptions to the principle increasingly challenge its pre-eminence: first, the proliferation of Preferential Trade Agreements (PTAs), negotiated on a bilateral, regional, or cross-regional basis among sub-sets of members of the WTO, that by their nature treat members more favourably than non-members; and second, special and differential treatment of developing countries, including the existence of unilateral, non-reciprocal preferences granted to many such countries by developed countries.
The principled justification is that the MFN principle reduces factionalism by preventing member states from being opportunistic for foreign policy or national security reasons. However, MFN principle leads to the free rider problem. This means that when two countries negotiate concessions under the MFN principle, a third country has to incentive to make concessions to get identical benefits and can thus, free ride on the concessions that A and B have made to each other. This is the reason for the uptick of the Preferential Trade Agreements over the past decade. In 2021, there were upwards of 460 Preferential Trade Agreements, mostly bilateral, in force. The requirements of PTAs are the Member states who enter into PTAs have to notify thee WTO pursuant to which the Committee on Regional Trade Agreements, created by the WTO General Council, reviews the PTA and make recommendations to the General Council. Review of PTA is also possible through a formal complaint to the Dispute Settlement Body of the WTO.
D. National Treatment PrincipleEdit
the national treatment principle is a core non-discriminatory principle of the international trade order. Broadly, it means that the commerce of any state is treated no less favourably than the domestic product. This prevents countries from taking discriminatory measures on imports on the one hand, and to prevent countries from offsetting the effects of tariffs through non-tariff measures. For instance, in a case where Member A reduces the import tariff on product X from ten percent to five percent, only to impose a five percent domestic consumption tax only on imported product X, effectively offsetting the five percentage point tariff cut. The text of Article III of the GATT provides that-
(1) The Contracting Parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.
(2) The products of the territory of any Contracting Party imported into the territory of any other Contracting Party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no Contracting Party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.
(3) (. . .)
(4) The products of the territory of any Contracting Party imported into the territory of any other Contracting Party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.
(Similar National Treatment like obligations are there in many WTO Agreements but once we have understood Art. III of the GATT comprehensively, the others will get easier to understand).
Article II of the GATT which deals with Schedules of Concessions applies to measures of a fiscal nature taken at the border, relating to the entry of goods into the country. On the other hand, the measures Article III relates to are internal measures-
- internal fiscal measures or measures that flow from the taxation powers of the state such as sales tax, value added tax; and
- internal non-fiscal measures or measures that flow from the regulatory powers of the state such as penalties or fines.
Different paragraphs of Article III apply to different kinds of measures. There is a general obligation in Article III.2 that applies to all internal measures followed by Article III(2) that provides for a specific obligation that applies to fiscal measures and then Article III(4) that consists of specific obligations that applies to non-fiscal measures.
II. Article III.2 first sentenceEdit
As explained previously, the national treatment principle in Article III.2 applies to "internal taxes" but not customs duties or income taxes. Common examples of internal taxes are value added taxes, sales taxes and excise taxes. Article III.2 contains two sentences which contain two separate obligations.
The first sentence states-
The products of the territory of any Contracting Party imported into the territory of any other Contracting Party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.
In other words, imported products that are "like" domestic products shall not be subject to internal fiscal measures in excess of the domestic one.
Interestingly, Article III.1 notes that internal taxes "should not be applied to imported or domestic products so as to afford protection to domestic production." In Article III.2 first sentence, the violation of Article III.1 is presumed when there are like products and the imported products are taxed in excess of domestic products.
In Canada – Periodical case, it was decided that there are two questions that have to be answered in the affirmative to claim a violation of the first sentence of Article III:2. First that the imported & domestic products are like products and second, the imported products are taxed in excess of the domestic products.
The requirements whether the measure is inconsistent with Art. III.2, first sentence, can be broken down into-
- Whether the impugned measure is an internal tax that is directly or indirectly applied on the products in question
- Whether the imported & domestic products are like products
- Whether the imported products are taxed in excess of the domestic products.
As described in the section on the MFN principle, the word "like" is as important as it is amorphous in WTO law. The Appellate Body has noted that trying to clearly and exhaustively define "like" products is futile. Instead-
"...the concept of “likeness” is a relative one that evokes the image of an accordion. The accordion of “likeness” stretches and squeezes in different places as different provisions of the WTO Agreement are applied. The width of the accordion in any one of those places must be determined by the particular provision in which the term “like” is encountered as well as by the context and the circumstances that prevail in any given case to which that provision may apply"
In the late 70s, the Working Party on Border Tax Adjustments identified some criteria for determining, on a case-by-case basis, whether a product is a like product:
- the product’s end-uses in a given market
- consumer tastes and habits in a given market (for instance, in a country new to wine consumption, consumers may differentiate wine only by colours whereas in countries that have been consuming wine for a while will see consumers have strong preferences where different kinds of red wines may not be substitutes for each other.
- the product’s properties, nature, and quality
Crucially these requirements are not exhaustive and have to be weighed on a case-by-case basis. The Appellate Body has underlined their function as tools to assist in the task of sorting, examining, and evaluating the relevant evidence.
If the imported and domestic products are ‘like products’, and if the taxes applied to the imported products are ‘in excess of’ those applied to the like domestic products, then the measure is inconsistent with Article III:2, sentence 1. Therefore, ‘even the smallest amount of “excess” is too much.
III. Article III.2, second sentenceEdit
Article III.2, second sentence-
Moreover, no Contracting Party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.
Thus, there might be a certain type of tax that is not a violation of the first sentence but it might still be a violation of the second sentence. Article III.2 also has an interpretative note that qualifies the second sentence by stating the following-
A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed.
The requirements to see whether the measure is inconsistent with Art. III.2 can be broken down into-
- Whether the impugned measure is an internal tax that is directly or indirectly applied on the products in question
- Whether the imported & domestic products are directly competitive or substitutable
- Whether these products are similarly taxed
- Whether the dissimilar taxation is applied to give protection to domestic producers?
As with the term "like" products, the term "directly competitive or substitutable" has also not been defined anywhere. It is understood however that the term is broader than "like products" as understood in Article III.2, first sentence as it includes products that are imperfectly substitutable. In Korea – Alcoholic Beverages, Korea had adopted a dual retailing system for domestic and imported beef and a Panel was established by the Dispute Settlement Body to examine the consistency of two Korean tax laws- the Korean Liquor Tax Law of 1949 and the Korean Education Tax Law of 1982 with Article III:2 of the GATT 1994. The European Communities and the United States argued that the contested measures were inconsistent with Article III:2 of the GATT 1994 because they accord preferential tax treatment to soju, a traditional Korean alcoholic beverage, as compared with certain imported "western-style" alcoholic beverages. The Panel held that soju, whiskies, brandies, cognac, rum, gin, tequila, liqueurs and admixtures are directly competitive or substitutable products. The Panel also concluded that "Korea has taxed the imported products in a dissimilar manner and the tax differential is more than de minimis" and that "the dissimilar taxation is applied in a manner so as to afford protection to domestic production." This decision was appealed to the Appellate Body. In its submissions, Korea contended that the Panel misinterpreted and misapplied the term "directly competitive or substitutable product", especially the word "directly" which, in Korea's view, is at the heart of the term at issue. At some level all products are competitive, in that they compete for the consumer's limited budget, and it is therefore "directly" which gives meaning to the legal text and prevents Article III:2 from becoming an "unbridled instrument of tax harmonization and deregulation. The Appellate Body rejected the panel’s interpretation and made it clear that a formal difference in treatment between imported products and like domestic products, even if based exclusively on the origin of the products, is neither necessary, nor sufficient, to show a violation of Article III:4. Rather, what is relevant is whether such regulatory differences modified the conditions of competition to the detriment of imported products.
IV. Article III.4Edit
The products of the territory of any Contracting Party imported into the territory of any other Contracting Party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.
The requirements to see whether the measure is inconsistent with Art. III. 4 can be broken down to-
- Whether the measure at issue is a law, regulation or requirement covered by Article III.4
- Whether the imported and domestic products are "like" products
- Whether the imported products are given less favourable treatment?
Examples of measures that fall within Article III.4 are minimum price requirements, a ban on advertising, regulations that cause higher transportation costs. then in Canada—Autos, the Panel noted that the word ‘affecting’ in GATT 1994 Article III:4 has been interpreted since the Italian Machinery case to cover not only laws and regulations which directly govern the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between domestic and imported products.
In Japan – Alcoholic Beverages, the measure at issue was the Japanese Liquor Tax Law that established a system of internal taxes applicable to all liquors at different tax rates depending on which category they fell within. The Japanese Liquor Tax Law, which is the law, at issue taxed soju at a lower rate than the other products. The Panel noted that the scope of ‘like product’ in Art. 3:4 is boarder than that of the concept of ‘like product’ in Art. 3: 2 first sentence.
In US – Reformulated Gasoline (1996),different treatment of United States and foreign refiners of gasoline in terms of base-line standards designed to present & control air pollution was held to violate Article III(4). It was undisputed that the products were like products since the imported gasoline was chemically identical to a batch of domestic gasoline. The Appellate Body held that the argument by the USA that it faced greater administrative difficulties applying the domestic measures in question to foreign refiners was not a sufficient justification for less favourable treatment under Article XX.
In the Korea- Beef case, the measures at issues were Korea's measures affecting the importation, distribution and sale of beef such as Korea's “dual retail system” for sale of domestic imported beef and Korea's agricultural domestic support programmes. Large shops were allowed to continue carrying both domestic and imported beef, provided they established physically separate sales areas. Retailers selling imported beef were required to display a sign reading ‘Specialized Imported Beef Store’. The Appellate Body concluded that Korea's dual retail system (requiring imported beef to be sold in separate stores) accorded “less favorable” treatment to imported beef than to like domestic beef. According to the Appellate Body, the dual retail system virtually cut off imported beef from access to the “normal” distribution outlets for beef, which modified the conditions of competition for imported beef. In this connection, the Appellate Body said that formally different treatment of imported and domestic products is not necessarily “less favorable” for imports within the meaning of Art. III: 4.
E. General Agreement on Trade in ServicesEdit
As developing countries started gaining a comparative advantage in the production of many manufactured goods, developed countries got preoccupied with exploiting their comparative advantage in many service sectors, such as financial services, telecommunications, transportation, and professional services, by broadening the scope of the multilateral trade regime to include the liberalization of international trade in services.
This move to liberalisation of services was encouraged by other global changes that challenged the existing assumption that services was purely a domestic matter. First, due to great changes in technology, it became apparent that services would not require close physical proximity. Second, regulatory reform movements in many countries post the Second World War during the 1970s and 1980s resulted in the privatization of many service sectors, raising further potential for international competition in these sectors. Third, until then services were seen as contributors to the production of goods but not as separate markets. However, with the rise in out-sourcing, it became increasingly clear that service could be a independent market altogether.
In the Uruguay Round, negotiating a multilateral agreement on international trade in services became a priority for many developed countries and resulted in the General Agreement on Trade in Services (GATS) that came into force in 1995.
Similar to the GATT, the primary objectives of the GATS were as follows-
- 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;
- promoting trade and development through progressive liberalization.
Notably, however, GATT and the GATS were neither negotiated nor concluded simultaneously. As a result, negotiators did not pay particular attention to the issue of overlap between these two instruments. The Appellate Body dealt with this issue for the first time in its report on Canada—Periodicals, where it noted that "the ordinary meaning of the texts of GATT 1994 and GATS as well as Article II:2 of the WTO Agreement, taken together, indicate that obligations under GATT 1994 and GATS can co-exist and that one does not override the other."
Services are intangible and non-durable products of commercial value necessitating simultaneous production and consumption. The only reference point in the GATS where the services is even remotely defined is in Article I:3(b), where it states that ‘services’ includes any ‘service in any sector except services supplied in the exercise of governmental authority’. In US—Gambling the Appellate Body held that-
the structure of the GATS necessarily implies two things. First, because the GATS covers all services except those supplied in the exercise of governmental authority, it follows that a Member may schedule a specific commitment in respect of any service. Secondly, because a Member’s obligations regarding a particular service depend on the specific commitments that it has made with respect to the sector or subsector within which that service falls, a specific service cannot fall within two different sectors or subsectors. In other words, the sectors and subsectors in a Member’s Schedule must be mutually exclusive
The GATS applies to “measures by members affecting trade in services”. It distinguishes between two sets of obligations:
- obligations for to all Members for all services sectors or the rules of general application such as a most favoured nation (MFN) obligation or rules on domestic regulations or transparency; and
- obligations applying only to sectors and sub-sectors for which Members, on an individual basis, decide to be bound, or the specific obligations on market access, national treatment
Theoretically, all services are covered by the GATS, regardless of whether they constitute the end product or rather an element in the production of a product. However, there are two categories of services that are exempt- services ‘supplied in the exercise of governmental authority’, which are defined in GATS Article I:3(c) as ‘any service which is supplied neither on a commercial basis nor in competition with one or more service suppliers’ and traffic rights and services directly related to the exercise of traffic rights. Transparency obligations (Article III) and the obligation to provide most favored nation treatment (Article II) are of general application whereas ‘Market access’ (Article XVI) and ‘national treatment’ (Article XVII) are specific obligations, only applying once a Member agrees to be bound.
According to Article XX of the GATS, when Members make a decision as to the sector that they wish to commit for market access and/or national treatment, they list such a commitment, and the conditions attached thereto, in a schedule of commitments. A schedule includes two parts: the horizontal section and the sector specific section.
Notably, negotiations under the GATS are guided by the principle of progressive liberalisation. According to Article XIX: 1, Members agree to achieve progressively greater levels of liberalisation, in successive Rounds of negotiations through reduction or elimination of the adverse effects of measures on trade in services.
a. Trade in ServicesEdit
Article I of the Agreement defines four modes of supply of international trade in services:
- from the territory of one member into the territory of another member (Mode 1 cross-border supply)
- in the territory of one member to the service consumer of any other member (Mode 2 consumption abroad)
- by a service supplier of one member, through commercial presence in the territory of another member (Mode 3 commercial presence); and
- by a service supplier of one member, through the presence of natural persons of a member in the territory of any other member (Mode 4 presence of natural persons)
The jurisprudence on these modes of services is limited. However, in Mexico—Telecoms, the Panel interpreted mode 1 ("from the territory of one member into the territory of another member") and mode 3 ("by a service supplier of one member, through commercial presence in the territory of another member"). With regard to Mode 1, it stated:
"... Subparagraph (a) is silent as regards the supplier of the service. The words of this provision do not address the service supplier or specify where the service supplier must operate, or be present in some way, much less imply any degree of presence of the supplier in the territory into which the service is supplied. The silence of subparagraph (a) with respect to the supplier suggests that the place where the supplier itself operates, or is present, is not directly relevant to the definition of cross-border supply."
Common examples of Mode 1 would be banking or legal services transmitted via telecommunications or mail.
Mode 2 ("n the territory of one member to the service consumer of any other member") refers to situations where a service consumer moves into another member's territory to obtain a service. For example, when a client from country X travels to country Y in order to get counselling from his lawyer or a patient travels to a different country for treatment.
In Mexico—Telecoms, the Panel also deliberated on mode 3 and stated-
"The definition of services supplied through a commercial presence makes explicit the location of the service supplier. It provides that a service supplier has a commercial presence—any type of business or professional establishment—in the territory of any other Member. The definition is silent with respect to any other territorial requirement (as in cross-border supply under mode 1) or nationality of the service consumer (as in consumption abroad under mode 2). Supply of a service through commercial presence would therefore not exclude a service that originates in the territory in which a commercial presence is established (such as Mexico), but is delivered into the territory of any other Member (such as the United States)."
Mode 3 ("by a service supplier of one member, through commercial presence in the territory of another member") is effectively a mode of liberalizing investment. ‘Commercial presence’ is defined in Art. XXVIII (Definitions) to imply "any type of business or professional establishment, including through (i) the constitution, acquisition or maintenance of a juridical person, or (ii) the creation or maintenance of a branch or a representative office, within the territory of a Member for the purpose of supplying a service".
For instance, it allows domestic subsidiaries of foreign banks to sell banking services and thus, allows foreign investment into the domestic economy's banking sector. Notably, however, a Member is not bound by this simply by membership of the GATS but by agreeing to the specific liberalization of certain service sectors pursuant to the Schedule of Specific Commitments.
Mode 4 ("by a service supplier of one member, through the presence of natural persons of a member in the territory of any other member") is geared at liberalizing the temporary presence of natural persons. While the Annex clarifies in paragraph 2 that the GATS does not apply to measures affecting natural persons seeking access to the employment market of a member, nor to measures related to residence, citizenship, or employment on a permanent basis, largely the Agreement is silent on the duration of the stay that makes it "temporary". Understandably this is the most politicised and publicly debated of the four modes of service supply. The lack of definition of "temporary" has meant that anything from a few months to a few years could be considered temporary further diluting the distinction between Mode 4 and migration. However, most of the current commitments in Mode 4 concern highly skilled personnel who are paid well and have an employment contract before they move.
b. Affecting Trade in ServicesEdit
Determination of whether a particular measure is a measure affecting trade in services is integral for the correct application of the GATS.
In EC—Bananas III, the Appellate Body opted for a wide understanding of the term ‘affecting trade in services’:
"The use of the term “affecting” reflects the intent of the drafters to give a broad reach to the GATS. The ordinary meaning of the word “affecting” implies a measure that has “an effect on”, which indicates a broad scope of application."
This was further discussed in Canada—Autos, in which Canada submitted that the measure at issue does not affect trade in services. the Appellate Body elaborated and noted that-
"[A]t least two key legal issues must be examined to determine whether a measure is one “affecting trade in services”: first, where there is “trade in services” in the sense of Article I:2; and, second, whether the measure in issue “affects” such trade in services within the meaning of Article I:1.4"
The Appellate Body noted that it could be said that there were trade in services if specific commitments had been negotiated in a given case. In the absence of specific commitments, the complaining party had to classify the service as falling under any of the four modes. Thereafter, the Appellate Body noted that it became necessary to explain how exactly a particular measure affects trade in goods or in services.
IV. Critique of GATSEdit
The move to liberalize international trade in services has attracted intense criticisms from many quarters. An ongoing criticism is that it poses serious threats to the domestic political autonomy of states to decide issues concerning essential services such as water, health care, and education. For instance, the Alliance for Democracy circulated a pamphlet "Don't let the WTO get hold of our water" which captures some of the concerns of civil society about the implications of the GATS negotiations for water distribution services. It says that progressive liberalization under the GATS "means moving towards privatization of all services, including public services. It also means deregulation of services at the local, State and national levels and subjecting them to the WTO's global rules for the benefit of transnational corporations."
Crucially, these critiques are not only mounted by NGOs, but also by inter-governmental organizations (IGOs), such as the World Health Organization (WHO) or the United Nations High Commissioner for Human Rights (UNHCHR).
In response, the WTO Secretariat has authored several publications, such as a Special Study, Market Access: Unfinished Business, a brief booklet, GATS: Fact and Fiction, and a Joint Study with the WHO, WTO Agreements & Public Health, debunking frequently traded myths. Further, proponents of the GATS note that services supplied in the exercise of governmental authority is excluded from the scope of the GATs and ultimately, commitments are further subject to modification or withdrawal under Article XXI (subject to negotiation of trade compensation). Critics respond to this by pointing out that in theory a Member might be free to choose whether or not to undertake a market access commitment, in reality, economically-weaker states may be pressured into agreeing to commitments they would not have otherwise.
There is some degree of overlap between BITs and the GATS, particularly when it comes to the national treatment obligation which is a key element of most treaties. The obligation is normally without sector related exclusions, and thus extends to subsectors not subjected to commitments under mode 3 of the GATS. A commonly cited example of a GATS-plus provision in practically all Bilateral Investment Treaties is the compensation requirement for expropriations, which may even extend to intangible assets such as the right to make profits and distribute dividends that is enforceable through the investor-state arbitration mechanism. Additionally, contra the WTO framework, BITs also provide for the possibility of retroactive monetary compensation for damages suffered. The treaties thus tend to have more bite than the GATS in many situations, with potentially costly consequences for governments launching regulatory reforms for whatever policy reasons. Unsurprisingly then there have been just a handful of GATS-related disputes since 1995 whereas there have been more than 170 services-related arbitrations under BITs.
The WTO Agreement on Financial Services- Negotiations on financial services had limited progress by the time the GATS was concluded. By 1997, Members concluded an Agreement on Financial Services which allowed the commercial presence of foreign financial service suppliers by eliminating or relaxing restrictions on foreign ownership of local financial institutions, and limitations on the expansion of existing operations.
The WTO Basic Telecommunications Agreement- This was concluded in February 1997, and included commitments relating to international voice services, local services, data transmission services, leased lines, cellular/mobile telephony services, mobile satellite services, and fixed satellite services, and relaxed restrictions on foreign ownership or control of telecommunication services and facilities.
G. General ExceptionsEdit
I. General Interpretative IssuesEdit
As trade unions, environmental bodies, human rights organisations have contended from time immemorial, exceptions are needed to allow members to adopt and maintain measures that promotes or protects other societal values and interest even though the legislation or measures are inconsistent with obligations such as the general prohibition of quantitative restrictions (Art.XI) or with the obligation to provide national treatment with regard to internal taxation and regulation (Art. III imposed by GATT).
Article XX of the GATT consists of an introductory clause, commonly known as the ‘chapeau’, and 10 subsequent clauses-
"Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any [Member] of measures ("The Chapeau"):
a. necessary to protect public morals;
b. necessary to protect human, animal or plant life or health;
d. necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;
f. imposed for the protection of national treasures of artistic, historic or archaeo-logical value;
g. relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;..."
Clauses (c), (e), (f), (h), (i) and (j), which are omitted above, concern gold and silver; the products of prison labour; national treasures; intergovernmental commodity agreements; materials necessary to a domestic processing industry; and products in short supply. They have never been invoked in a WTO or GATT dispute and thus, I will not rely on them for the analysis in this section. Article XIV of the GATS is also titled ‘General Exceptions’ and begins with a chapeau identical to that of Article XX of the GATT 1994.The subparagraphs of Article XIV following the chapeau provide for measures:
(a) necessary to protect public morals or to maintain public order;
(b) necessary to protect human, animal or plant life or health;
(c) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to:
(i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on services contracts;
(ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;
(d) inconsistent with Article XVII, provided that the difference in treatment is aimed at ensuring the equitable or effective imposition or collection of direct taxes in respect of services or service suppliers of other Members;
(e) inconsistent with Article II, provided that the difference in treatment is the result of an agreement on the avoidance of double taxation or provisions on the avoidance of double taxation in any other international agreement or arrangement by which the Member is bound
The provisions of Article XX are exceptions, and not primary obligations. Thus, Article XX is only invoked after the measure at issue has been found prima facie inconsistent with one of the primary obligations in the GATT 1994. Once the complainant has established such an inconsistency, the respondent may invoke one or more of the exceptions to justify the measure using the following two tiered test-
1) That the measure meets the requirements set out in one of the subparagraphs of Article XX, i.e. that it "relates to or is necessary to achieve the objective set out in the relevant subparagraph; and
2) That the measure is not inconsistent with the chapeau
For instance, in Brazil – Retreaded Tyre, Brazil had imposed an import ban on retreaded tyres, which had a shorter lifespan and thus, led to the creation of tyre dumps that increased the incidence of cancer, dengue, reproductive problems, environmental contamination, and other associated risks. Brazil argued that the ban was justified under Article XX(b) ("necessary to protect human, animal or plant life or health") which bore particular concern for developing countries, and was not inconsistent with the requirements of the chapeau. The European Communities on the other hand argued that even though Brazil tried to pretend that the case was about human life and health, this was not the case. As the first prong of its analysis, the Appellate Body noted that the Panel had found the ban prima facie inconsistent with Article XI:1 of the GATT 1994 because it was a quantitative restriction on imports. As the second prong of its analysis, the Appellate Body noted that the purpose of the ban was to protect human life and health and found that the ban was necessary to achieve that objective. Finally, the Appellate Body found that Brazil was applying the ban in a manner constituting arbitrary or unjustifiable discrimination by providing exemptions to some countries but not others for reasons unrelated to the protection of life or health. Thus, the import ban could not be justified under Article XX(b) and was inconsistent with Article XI:1 of the GATT 1994.
Notably, in the case of subparagraphs (a), (b) and (d) of Article XX, the measure must be ‘necessary’ to achieve the objective listed. Thus, the Appellate Body and Panel has devoted considerable energies into interpreting the term ‘necessary’ in Article XX. If construed too narrowly, it could stop Members from pursuing important values like health and the environment. If construed too broadly, it could undermine the basic obligations of the GATT 1994 and its purpose of liberalising international trade.
In the same case of Brazil- Retreaded Tyres, the Appellate Body explained the analysis that must be undertaken to determine whether a measure is ‘necessary’:
In order to determine whether a measure is ‘necessary’ within the meaning of Article XX(b) of the GATT 1994, a panel must assess all the relevant factors, particularly the extent of the contribution to the achievement of a measure's objective and its trade restrictiveness, in the light of the importance of the interests or values at stake. If this analysis yields a preliminary conclusion that the measure is necessary, this result must be confirmed by comparing the measure with its possible alternatives, which may be less trade restrictive while providing an equivalent contribution to the achievement of the objective pursued. It rests upon the complaining Member to identify possible alternatives to the measure at issue that the responding Member could have taken. … [I]n order to qualify as an alternative, a measure proposed by the complaining Member must be not only less trade restrictive than the measure at issue, but should also ‘preserve for the responding Member its right to achieve its desired level of protection with respect to the objective pursued’. … If the responding Member demonstrates that the measure proposed by the complaining Member is not a genuine alternative or is not ‘reasonably available’, taking into account the interests or values being pursued and the responding Member's desired level of protection, it follows that the measure at issue is necessary.
In other words, the following analysis has to be completed to determine that the measure is necessary to achieve an objective in one of the subparagraphs of Article XX-
Step 1: Check whether the the importance of the objective that the measure is designed to achieve and the degree to which the measure restricts international trade.
Step 2: Check whether there is an alternative measure proposed by the complainant that is (a) is less trade-restrictive; (b) is consistent with the GATT 1994; (c) is reasonably available to the respondent; and (d) meets the level of protection the respondent seeks to achieve.
b. Relates toEdit
Unlike clauses (a), (b) and (d) of Article XX (which use the word ‘necessary’), subparagraph (g) requires only that measures ‘relates’ to the conservation of exhaustible natural resources. In US – Gasoline, the Appellate Body held that the word ‘relating’ does not require "the same kind or degree of connection or relationship between the measure under appraisal and the state interest or policy sought to be promoted or realized" as the term necessary. However, despite "relate to" implying a lesser degree of connection between measure and objective than ‘necessary’, it is not necessarily satisfied in every case.
For instance, in China – Raw Materials, China argued that export restrictions on certain high-polluting raw materials ‘related’ to conservation. However, the Panel explained that-
"A policy of restricting extraction would be more in line with a policy to achieve conservation than one confined to restricting exports. For the purpose of conservation of a resource, it is not relevant whether the resource is consumed domestically or abroad; what matters is its pace of extraction. For the Panel, measures that increase the costs of refractory-grade bauxite and fluorspar to foreign consumers but decrease their costs to domestic users are difficult to reconcile with the goal of conserving refractory-grade bauxite and fluorspar."
Thus, China’s measures were not ‘primarily aimed at’ and did not have ‘a close and genuine relationship’ with conservation and therefore did not satisfy Article XX(g).
The chapeau is meant to prevent the ‘abuse’ of the exceptions. In other words, no state by invoking the exception should be allowed to abuse the exception. The Chapeau contains two essential requirements:
- the measure at issue must not be applied in a manner that constitutes ‘arbitrary or unjustifiable discrimination’; and
- the measure must not be a ‘disguised restriction on international trade’
In the Chapeau analysis a balance is struck between the right of a member to use the exception versus the rights of other members under other provisions of the GATT. The exception should not be made so large that the primary obligation should cease to exist. Similarly, the primary obligation should not be read so widely that the exception is useless.
Crucially, the term ‘discrimination’ is modified with the qualifiers ‘arbitrary’ or ‘unjustifiable’, implying that not all discrimination is prohibited. As the Appellate Body noted in US – Gasoline, to interpret the chapeau otherwise would be to "empty [it] of its contents and to deprive the exceptions in paragraphs (a) to (j) of meaning’ because the chapeau would simply replicate the underlying obligations."
Instead discrimination under the Chapeau exists when like countries in a like situation are being discriminated against. Further, the Complainant must show that the discrimination is not backed by a rational basis. Respondent must show either that there is no rational basis or that it is backed by a justification that achieves a legitimate objective.
The first condition prohibits measures that discriminate arbitrarily or unjustifiably on products from countries where the "same conditions prevail".
The second condition concerns illegitimate restrictions on international trade that are “disguised” by an ostensible legitimate objective.
These conditions in the chapeau have been invoked against perfectly legitimate invocations of the exception in several WTO disputes. For example, in US— Shrimp, the United States said that in order to protect turtles, shrimp should be caught in waters where there are no turtles or caught with artisanal techniques or caught in a country which mandates by law the use of turtle excluding devices. The question was whether this measure violates the Chapeau. The first two parts of the US measure "shrimp should be caught in waters where there are no turtles" or the "use of artisanal techniques" is justified because it will definitely achieve the legitimate objective of protecting turtles. The third aspect of the "law mandating the use of turtle excluding devices" is where things get interesting.
The certification process under the US law required the country to apply to USTR and show to USTR that (A) it has a law that mandates the use of turtle excluding device (b) the law is enforced regularly. If these two conditions are met, the USTR gave a certification. In practice, the USTR only certifies those countries that mandate by law the use of turtle excluding device of the identical standards as used by the United States. The aim of the measure is to protect turtles. However, in effect, exporting Members were required to adopt essentially the same policy as that applied in the United States. The Appellate Body admonished the United States for "failing to take into consideration the different conditions which may occur in the territories of other Members".
Thus, the United States was allowed to prohibit imports of shrimp in order to protect sea turtles, but it had done so in a manner that discriminated arbitrarily and unjustifiably against shrimp from India, Malaysia, Pakistan, and Thailand.
Similarly, in EC—Seal Products, the European Union was allowed to prohibit seal products on public morals grounds, but because it had provided an exception for seal products resulting from traditional indigenous hunts, it was found that it had discriminated arbitrarily and unjustifiably against seal products from Canada and Norway.
Scholars have tried to reduce the discretion of the Panel or Appellate Body by arguing for a “predominant motive test,” under which public interest measures would be deemed justified under the exceptions as long as their primary objective is one of those permitted by GATT Article XX or GATS Article XIV.
Some measures taken by various governments in response to the COVID pandemic are consistent with the WTO. These include elimination of tariffs on medicines and other critical supplies, suspension of the antidumping duties on medical goods etc.
Other responses are less clearly compliant with WTO rules. These include export restrictions and limitations on patent protections.
For the latter, States had the option of choosing between two defences- Article XI:2(a) of the General Agreement on Tariffs and Trade 1994 (GATT), which allows members to temporarily apply export restrictions “to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party,” and of Article XX(b) (General Exceptions) of the GATT to “protect human, animal or plant life or health.” Some members also resorted to Article XXI (Security Exceptions) of the GATT.
It is clear that the measures were to protect health in the face of a gobal pandemic so the only point of contention really is whether the measures are “necessary”. Given that COVID-19 has been classified as a pandemic by the WHO, it is unlikely that the necessity prong will be read strictly however, as per the third prong of the neecessity test, Members would still have to show that there was no alternate, more WTO-consistent measure to achieve the same objective as the challenged measure.
H. Rules on Unfair TradeEdit
Anti-dumping is easily the most widely invoked trade remedy. It is commonly understood that most anti-dumping actions have been brought by major importing countries, often against exporters in smaller countries. Interestingly, however, developing countries are becoming some of the most ardent users of the anti-dumping regime.
Article VI of the GATT provides for the right of contracting parties to apply anti-dumping measures that are measures against imports of a product at an export price below its "normal value" if such dumped imports causes or threatens to cause injury to a domestic industry in the territory of the importing contracting party or materially retards the establishment of a domestic industry producing like products.
A product is to be considered as being introduced into the commerce of an importing country at less than its normal value if the price at which the product is exported from one country to another is:
- less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country, or
- in the absence of such domestic price, is less than either (a) the highest comparable price for the like product for export to any third country in the ordinary course of trade, or (b) the cost of production of the product in the country of origin plus a reasonable addition for selling costs and profit
Under Article 3, determination of injury for purposes of Article VI of GATT 1994 shall be based on positive evidence and involve an objective examination of both a) the volume of the dumped imports and the effect of the dumped imports on prices in the domestic market for like products, and b) the consequent impact of these imports on domestic producers of such products. Relevant considerations to be taken into account are decline in sales, profits, output, market share, productivity, return on investments, or utilization of capacity; factors affecting domestic prices; the magnitude of the margin of dumping; actual and potential negative effects on cash flow, inventories, employment, wages, growth and ability to raise capital or investments.
Under Article 3.5 of the Anti-dumping Agreement it must be demonstrated that the dumped imports are, through the effects of dumping, "causing" injury within the meaning of this Agreement. This is based on an examination of all relevant evidence before the authorities. Causation has often caused contention. The prevailing approach in the USA and many other countries is to adopt a bifurcated approach to the determination of the causation issue by, on the one hand, determining the existence of dumping and the margin of dumping, while on the other hand looking at trends over some recent representative period, for example three years, relating to the condition of the domestic industry. If the volume of dumped imports or the margin of dumping has been increasing, while the financial condition of the domestic industry, in various dimensions, has been deteriorating, causation will typically simply be inferred.
Under Article 5.8, investigations shall be terminated when a dumping margin is de minimis (less than 2 per cent of the normal value) or when the volume of dumped products is negligible.
Under Article 17.6, when the matter comes before the Dispute Settlement Body at the WTO, it first required to check whether the domestic authorities’ evaluation of those facts was unbiased and objective. If it finds that it was unbiased, then it is bound to defer to the judgment of domestic authorities.
The classic example of when the Anti-dumping Agreement kicks in is when exporters price their goods less in foreign markets than they would have done in domestic markets even though exports ordinarily involve additional costs such as transport because they might have a more established presence in their domestic market allowing them to shoulder the costs. Similar to predatory pricing domestically, which is governed by competition law anti-dumping is based on the economic logic that a foreign exporter in the face of price competition from domestic rivals, may cut its prices below its costs, incurring a loss in the short-run, to drive out competition, and then raising prices in the longer term.
A normative rationale for anti-dumping regime is to protect long-standing domestic communities (often marginalised) that are dependent on particular industries and are threatened by dumped imports. However, it is not clear why this concern is limited dumped imports and not low priced imports more generally. Canadian anti-dumping law has an unusual provision, in this regard, authorizing the domestic anti-dumping authority, Canadian International Trade Tribunal to hold a public interest hearing to determine whether imposing anti-dumping duties would be contrary to the public interest. Another rationale is provided by Alan Sykes who argues that original GATT member countries used anti-dumping regime as a safety valve against the impacts of import competition in particular sectors would prove politically unsustainable. This theory has been criticised recently since it is not apparent why this justifies anti-dumping duties rather than a safeguards regime.
II. Subsidies and Countervailing DutiesEdit
If Member country X agrees to a tariff reduction on steel plates from 10% to 0 in exchange for similar commitments by another Member Y, it could still negate the aim of the concessions by providing subsidies to domestic producers. Of course, protecting tariff concessions is but one of the many reasons that the WTO regulates subsidies. Understandably then, after anti-dumping actions, countervailing duty actions are generally the most used trade remedy.
Under Article VI of the GATT, Members can impose countervailing duties on imports into their domestic markets in an amount not in excess of the estimated bounty or subsidy determined to have been granted, directly or indirectly, on the manufacture, production, or export of such product in the country of origin or exportation. Under Article VI, as with dumping, no countervailing duties may be imposed unless there has been a determination that the subsidy has caused or has threatened to cause material injury, or cause material retardation to an industry producing like products.
The Uruguay Round Subsidies and Countervailing Measures (SCM) Agreement is part of the single undertaking that all members of the WTO were required to commit themselves to. Article 1 of the SCM Agreement contains a fairly detailed definition of a subsidy with three basic elements:
- a financial contribution
- by a government or any public body within the territory of a Member
- which confers a benefit.
It has been clarified by the Appellate Body that "a public body" is a body that possesses, exercises or is vested with functions and powers normally associated with governmental authority. However, not all state-owned enterprises are "public bodies".
A contentious issue is the determining which entities fall within the definition of public bodies in the case of China. According to Mark Wu, the distinguishing features of China are a mixed economic structure with market state partnerships but also state financing, control and involvement in the economy. This gets particularly interesting when the entity itself is located outside of China but has links to the Chinese states and provides subsidies to other domestic firms that compete with foreign firms in international trade. Given this, Wu argues against the narrow interpretation of public body that persists today.
The Appellate Body in Canada – Aircraft has interpreted the term "benefit" to mean the conferment of a financial contribution on terms that are more advantageous than those that would have been available to the recipient on the market. The determination is based on benefit to the recipient, not cost to the government.
To determine benefit that exceeds what might be available on the market necessitates a comparison with the market. In US-Softwood Lumber from Canada, the USA argued that the prevailing market conditions in Canada did not reflect the fair market value of timber in Canada because of the large involvement of Canadian governments in that market. Reversing the decision of the Panel that prevailing market prices may not be disregarded simply because they are distorted, the Appellate Body held that an investigating authority may use a benchmark other than private prices in the country of provision where it has been established that private prices in that country are distorted.
III. Safeguards and Adjustment Assistance PoliciesEdit
Article XIX of the GATT sets out the basic safeguard regime:
"If, as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall be free, in respect of such product, and to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part or to withdraw or modify the concession."
Even though this section will focus only on the GATT safeguard regime under Article XIX of the GATT and the Uruguay Agreement on Safeguards, the trading system also has specific safeguard regimes in Article 5 of the Agreement on Agriculture, Article X of the General Agreement on Trade in Services nd Article 6 of the Agreement on Apparel, Textiles, and Clothing.
As you can see, it is important that the increase in imports is due to “unforeseen developments”. This begs the question that at what exact moment in time should the developments be unforeseen and by whom? It was decided in Argentina – Footwear that the relevant time to determine whether developments have been unforeseen is when the last tariff concession was given to the particular product class. In other words, an unforeseen development is one that was “unexpected” by trade negotiators when the concessions were being negotiated. In the same case, the Appellate Body held that determination of an increase in imports were based over a representative period, not simply the end points of this period and emphasized that not any increase is sufficient. Rather, the increase must have been “recent enough, sudden enough, sharp enough, and significant enough, both quantitatively and qualitatively, to cause or threaten to cause serious injury.” It was later also clarified that an absolute increase in imports that satisfies such requirements is acceptable even if the increase is not examined in relative terms.
Notably, the safeguards regime calls for a "serious injury" as opposed to the term “material injury” which is the requirement in anti-dumping and countervailing duty investigations. This implies a higher threshold for injury. Under Article 4 of the Agreement on Safeguards, “serious injury” means “a significant overall impairment in the position of a domestic industry.”
The safeguard regimes is geared at letting declining domestic industries from the emergence of a rapidly increasing imports markets to restructure themselves and become competitive again hence moderating the adjustment costs faced by investors, workers, and dependent communities. Kenneth Adam and Alan Sykes argue that the safeguards regime acts as a safety valve to convince countries to liberalise their markets with little hesitation.
K. Trade and Intellectual Property LawEdit
The GATT had very limited rules on intellectual property. The most important provision was Article III:4 which provided that IP laws and regulations ought to give imported products no less favourable treatment than that accorded to national products. Further, Article IX:6 provided for the protection of distinctive regional or geographical names. The World Intellectual Property Organization (WIPO) administered two intellectual property related instruments namely the Paris Convention and the Berne Convention. The Paris Convention dealt with patents and trademarks. Crucially, it had a National Treatment rule, but not an Most Favoured Nation rule, and it also set no minimum level of protection for patents. The Berne Convention dealt with copyrights and contained both the National Treatment and Most Favoured Nation rules.
The TRIPS mandate appeared in Part I of the Declaration dealing with trade in goods (Part II dealt with trade in services) at the Uruguay Round at the behest of the United States to promote international trade with adequate protection of intellectual property rights. As the United States slowly lost its comparative advantage in low-skilled manufacturing industries to developing countries, they sought better protection of their comparative advantage in scientific and technological innovation through stronger protection of intellectual property rights.
Trade-related aspects of intellectual property rights, including trade in counterfeit goods
In order to reduce the distortions and impediments to international trade, and taking into account the need to promote effective and adequate protection of intellectual property rights, and to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade, the negotiations shall aim to clarify GATT provisions and elaborate as appropriate new rules and disciplines.
Negotiations shall aim to develop a multilateral framework of principles, rules and disciplines dealing with international trade in counterfeit goods, taking into account work already undertaken in the GATT. These negotiations shall be without prejudice to other complementary initiatives that may be taken in the World Intellectual Property Organization and elsewhere to deal with these matters
Some see the TRIPS as a result of intensive lobbying and bargaining by developed states and pharmaceutical companies and developing states. From the very beginning many developing countries were apprehensive about the agreement. In their view, the protection and enforcement of IPRs was not trade-related and WIPO, and not the WTO, was the appropriate forum in which to deal with IP issues. Further, developed countries were the owners of nearly 99 per cent of global patents and other forms of IP, any agreement for their protection would only favour them at the cost of developing countries.
While developed states got stronger intellectual property protection, developing states got reduced tariffs on textiles and agriculture. Notably, however, the bargaining power between these groups was far from equal which affected the final bargain. For instance, developing states were required to “phase out” their quotas on the most sensitive items of textiles and clothing on the last day of the ten-year transitional period whereas developing states had to “phase in” product patents for pharmaceuticals on the first day of the identical transitional period. Further, even though the TRIPS forced developing states to strengthen IP laws, it gave them no assurance of technical assistance or foreign investment in return.
According to Jagdish Bhagwati-
“TRIPS does not involve mutual gain; rather, it positions the WTO primarily as a collector of intellectual property-related rents on behalf of multinational corporations.”
TRIPS contains three important features.
First, it lays out substantive requirements in the areas of copyrights, trademarks, geographical indications, industrial designs, patents, layout-designs of integrated circuits, and undisclosed information, including trade secrets and test data.
For instance, the TRIPS incorporates basic provisions of the Berne Convention. The minimum term of protection for copyrighted works is 50 years from the initial date of authorized publication or 50 years from the making of the work. The TRIPS also includes provisions of the erstwhile Paris Convention on trademarks providing that all marks which have sufficient distinctiveness have to be accepted for registration by all members in Article 15. Then according to Article 19, this can only be cancelled after an uninterrupted time period of three years or more of non-use, unless some valid reasons can be shown for non-use. Further, according to Article 18, registration and renewal of registration of a trademark has to be for at least seven years. On the question of patents, the TRIPS Agreement notes that countries must be ready to provide patents must be available any invention (products or processes) provided that they are new, involve an inventive step and are capable of industrial application for a period of at least 20 years from the date of filing. According to Article 27, this should be without discrimination as to the place of invention, field of technology or whether the products are imported or locally produced. The only exceptions would be those inventions necessary to protect the public order or morality, including to protect human, animal or plant life or health or the environment.
Like the other WTO Agreements, these substantive requirements in the TRIPS have to be read with National Treatment principle is enshrined in Article 3 of the TRIPS Agreement and the Most Favoured Nation principle is enshrined in Article 4 of TRIPS. Further, Article 6 provides for the "doctrine of exhaustion" meaning that that nothing in the TRIPS Agreement shall be used to address the issue of the exhaustion of intellectual property rights. This allows countries to choose whether they want to adopt a doctrine of national exhaustion or a doctrine of international exhaustion. Under a doctrine of national exhaustion, once an intellectual property holder sells goods in a domestic market, it relinquishes all rights with respect to the goods in subsequent transactions within that market, but not in other markets where the intellectual property holder has enforceable intellectual property rights. Under the doctrine of international exhaustion the first sale by an intellectual property rights holder in any market extinguishes its rights in all markets, leaving open the possibility of parallel importation of goods from lower-priced markets into higher-priced markets. Article 7 of the Agreement provides that the protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations. Article 8 provides that members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of the Agreement.
The TRIPS had some enforcement and remedial requirements. There were also several transitional arrangements for developing and least-developed countries giving them extra time to ensure that their domestic IP laws were in harmony with the TRIPS Agreement, but these have largely now expired (Article 65) and with some exceptions for pharmaceutical patent protection, some of which has been extended to 2033.
Finally, the TRIPS Agreement subjects WTO members with intellectual property disputes to the mandatory jurisdiction of the WTO’s dispute settlement procedures
III. Essential medicines debateEdit
TRIPS has literally become an issue of life or death. While there may be several reasons affecting the accessibility of essential medicines to much of society, it often boils down to the high prices of these medicines that are a result of intellectual property laws. Developing countries make for less than 10% of the global pharmaceutical market.
Several NGOs have raised he following concerns in relation to TRIPS:
- Higher patent protection leads to increase in prices for medicines. This has a disproportionate impact on developing countries.
- TRIPS will also impact local manufacturing capacity
- Developing countries are often pressurised by industrialized countries and the pharmaceutical industry to implement patent legislation that goes beyond the obligations of TRIPS, commonly referred to as "TRIPS plus."
Scholars have criticised the TRIPS Agreement for impeding access to the most basic medicines. For instance, in EU-Canada Patent Protection of Pharmaceuticals, a WTO Panel reviewed the Canadian Patent Act which exempted generic drugs from the 20 year protection period given to patents. This Act also allowed those that acquired regulatory approval to manufacture and store the products for six months prior to the expiry of the patent, but for sale after the patent expires. However. Art. 28.1 of TRIPS gives patent holders the right to exclude others from making, using, selling, offering for sale or importing the patented product during the term of the patent. Hence, The European Union challenged the Canadian Patent Act for violating TRIPS. For Canada to invoke an exception under TRIPS it would have to cumulatively satisfy the following requirements-
- It would have to prove that the exception is "limited"
- It would have to prove that the exception does not "unreasonably conflict with normal exploitation of the patent"
- It would have to prove that the exception does not "unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties."
The Panel held that the second exemption that the Canadian Patent Act provided, i.e. allowing those with regulatory approval to store the products for six months, would be inconsistent with the TRIPS Agreement since it hampers with the patent owner's rights to exclude the "making" and "using" the patented product entirely during the last six months of the patent term.
There are several other examples of medicines becoming practically unaffordable for people in the Global South. Till 2012, Nexaver which is a drug for kidney and liver cancer was not allowed to be manufactured in India because the patent holder refused and it was being sold at a whooping 3200 EUR for a single monthly treatment, making it practically unaffordable for everyone but the top 1% of the population in India!
The compulsory licensing provisions, which authorize third parties to produce a patented product without the consent of the patent owner, in Article 31 of TRIPS has the possibility for alleviating some of the concerns about access to essential medicines. However, the wording of Article 31 is currently too vague to be helpful. For example, Article 31 states that issuance of a compulsory license, efforts must be made within a “reasonable period of time” to obtain authorization from the intellectual property holder on “reasonable commercial terms”, but none of these terms are defined, nor is the requirement that there be payment of “adequate remuneration” where a compulsory license is issued.
IV. TRIPS plus protections in PTAsEdit
TRIPs Plus refers to higher level of intellectual property protection norms demanded by the developed countries that are not prescribed by the WTO's TRIPs regime.
For instance, Article 39.3 of the TRIPS Agreement provides:
“Members, when requiring, as a condition of approving the marketing of pharmaceutical or of agricultural chemical products which utilize new chemical entities, the submission of undisclosed test or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use. In addition, Members shall protect such data against disclosure, except where necessary to protect the public, or unless steps are taken to ensure that the data are protected against unfair commercial use.”
Thus, Article 39.3 of the TRIPS Agreement requires only two obligations in relation to pharmaceutical products, i.e., the protection "against unfair commercial use" and the protection "against disclosure." On the other hand, the North American Free Trade Agreement (NAFTA), provides for additional requirements such as a minimum duration for such protection, and prohibition on reliance on data submitted by originators to regulatory authorities. Similarly, the Trans-Pacific Partnership (TPP) Agreement also included new protections for the undisclosed test or other data for biological products, an area not covered by Article 39.3 of the TRIPS Agreement.
N. Settlement of DisputesEdit
International organisations have come under great fire for being overtly political. For instance, there has been substantial critique of the United Nations Security Council's permanent membership and veto and the International Monetary Fund's weighted vote system that gives the United States more than 70% of the voting share and countries like Jamaica less than 1%.
As explained in the previous section on the GATT, the fall of the Berlin Wall and the end of the Cold War provided an ideological opening for the GATT members to gradually embrace greater legalism of the dispute settlement system.
The GATT membership created panels of first five and then three members to write a report, but it was diplomats in Geneva who were on the panels and it was these diplomats who controlled the process. The initial panel reports were a matter of a few pages, were often vague, using compromise language, constituting over time, in Robert Hudec’s words, a “diplomat’s jurisprudence.”
Gradually the Members grew more comfortable with the idea of greater legalization in light of their experience with the system. Nevertheless, dissatisfaction with GATT dispute settlement remained in the 1980s as defendants continued to block the establishment of panels and the adoption of reports, and a consensus emerged that the system should be reformed. According to Joseph Weiler-
A dominant feature of the GATT was its self-referential and even communitarian ethos explicable in constructivist terms. The GATT successfully managed a relative insulation from the ‘outside’ world of international relations and established among its practitioners a closely knit environment revolving round a certain set of shared normative values (of free trade) and shared institutional (and personal) ambitions situated in a matrix of long-term first-name contacts and friendly personal relationships. GATT operatives became a classical ‘network’. ... Within this ethos there was an institutional goal to prevent trade disputes from spilling over or, indeed, spilling out into the wider circles of international relations: a trade dispute was an ‘internal’ affair which had, as far as possible, to be resolved (‘settled’) as quickly and smoothly as possible within the organization.
Simultaneously, members of the GATT were also getting dissatisfied with the functioning of the dispute-settlement system. Particularly, the ability of parties to needlessly delay the appointment of Panels, settlement of their terms of reference, and adoption of their findings. In the Uruguay Round several states argued for a strengthened dispute settlement system. The main changes were as follows-
- Strict deadlines on various stages in the dispute-settlement process.
- Use of the negative consensus rule. This has meant that Panel (and Appellate Body) decisions are now effectively adopted automatically by the WTO General Council.
- Creation of a standing Appellate Body
- Prohibition of any unilateral action seeking to redress violation of obligations.
At least on paper, the dispute settlement system offers an opportunity for countries which are economically weak to challenge trade measures taken by economically stronger countries.
The rules governing dispute settlement are in large part set out in the Understanding on Rules and Procedures Governing the Settlement of Disputes which is commonly called the Dispute Settlement Understanding (DSU).
III. Scope of WTO DisputesEdit
Only WTO members can initiate a dispute. Article 3.7 gives Members the responsibility to decide whether it would be fruitful to bring a case before the WTO, reflecting the principle that disputes should be brought in good faith.
The scope of disputes is limited to the disputes concerning rights and obligations arising from the provisions of those agreements listed in Appendix 1 of the DSU. These are most commonly referred to as "covered agreements". It includes all multilateral agreements on trade in goods, the TRIPS and the GATS. It also includes Plutilateral Agreements included in Annex 4.
This means that even if regional trade agreements encompass clauses that are worded similar to provisions of the GATT, they cannot be used as the basis for a complaint in the WTO dispute settlement process. Article 3.3 of the DSU refers to violation of WTO obligations "by a measure taken by another Member". Thus, identification of the measure is important. However, the DSU does not define what constitutes as a measure. Can legislative acts be challenged? What about the behaviour of private individuals? In the absence of specific provisions in the DSU, all of these concerns need to be clarified by jurisprudence.
Further, the Panel and the Appellate Body are not legal bodies that have general jurisdiction akin to the International Court of Justice. Instead, the mandate of WTO dispute settlement is limited by Article 3(2) of the Dispute Settlement Understanding. This is what the provision states-
The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.
This provision prohibits panels and the WTO Appellate Body from adding or subtracting from the obligations of WTO members, thus going beyond the obligations contained in the WTO agreements themselves. This has been interpreted by some scholars to imply that principles of general international law are largely inapplicable to the WTO system. Afterall, a literal interpretation of Article 3(2) DSU suggests that only the customary principles of interpretation apply to WTO disputes, to the exclusion of other international law. Nonetheless, the Panel in Korea—Government Procurement observed that they "can see no basis … for an a contrario implication that rules of international law other than rules of interpretation do not apply". The Panel further noted that "to the extent that there is no conflict or inconsistency, or an expression in a covered WTO agreement that implies differently, … the customary rules of international law apply to the WTO treaties and to the process of treaty formation under the WTO."
Currently, the WTO dispute settlement system lacks jurisdiction with respect to breaches of non-trade obligations such as human rights violation. Thus, WTO remedies are not available to enforce human rights.
Finally, interpretations of provisions of covered agreements in the WTO are different from "authoritative agreements" provided in Article IX:2 of the Marakkesh Agreement which provides that the Ministerial Conference and General Council have the "exclusive authority to adopt interpretations" that are binding on all Members.
IV. The Stages in a Typical WTO DisputeEdit
As per Article 4 of the DSU the proceedings always begin with consultations aimed at clearing the factual situation between the parties to the dispute. Parties have broad discretion regarding the manner in which consultations are to be conducted. In case, consultations do not resolve the dispute within sixty days after the request for consultations, the complainant may request the DSB to establish a panel. This may also happen earlier if the respondent either did not respect the deadlines for responding to the request for consultations or if the consulting parties jointly consider that consultations have failed to settle the dispute.
Article 12 of the DSU contains the rules governing panel proceedings. Article 12.1 of the DSU directs a panel to follow the Working Procedures contained in Appendix 3 to the DSU, but at the same time authorises a panel to do otherwise. A panel will fix the timetable for its work and decide on detailed ad hoc working procedures.
Before the First Substantive Meeting where the panel meets the Parties, each side is required to submit their ‘first written submission’ to the Panel. Thereafter the Panel provides the space for a ‘rebuttal submission’ which is followed by the Second Substantive Meeting. Throughout the process, Panels have the discretion to seek information and technical advice from experts in order to help them to understand and evaluate the evidence submitted and the arguments made by the parties. Panels submit their draft reports to the parties for a so-called ‘interim review’. After this interim review, the panel finalises the report and issues it to the parties. Finally, when the report is available in the three official languages, the report is made public by circulating it to all WTO Members. Although proceedings, on paper, are not supposed to take more than 9 months, they often taken around twelve months.
Within sixty days of it being circulated to all Members, a panel report is either adopted by the DSB or appealed to the Appellate Body.
Previously, parties have also appealed isolated panel findings they disagreed with, even though these findings were part of a reasoning which ultimately upheld that party’s position.
In contrast to panels, the Appellate Body has detailed standard working procedures set out in the Working Procedures for Appellate Review on the basis of the mandate and pursuant to the procedure stipulated in Article 17.9 of the DSU. Once there is a notice of appeal, the Appellate Body proceedings. Unlike in panel proceedings, third parties have broad rights to participate in appellate review proceedings. After the oral hearing and before finalising its report, the division responsible for deciding an appeal exchanges views on the issues raised by the appeal with the Members of the Appellate Body not sitting on the division. When the report is available in the three official languages, it is circulated to all WTO Members and made public. Appellate review proceedings shall not exceed ninety days, and they very seldom do exceed this time limit. Within thirty days of its circulation, the Appellate Body report, together with the panel report, as upheld, modified or reversed by the Appellate Body, is adopted by the DSB.
VI. Developing countries in dispute settlementEdit
About two thirds of the WTO’s members are developing countries. Understandably then, the DSU also have some procedural safeguards to protect the interests of developing states in the following ways:
- WTO agreements contain special provisions on developing countries
- Committee on Trade and Development
- WTO Secretariat provides technical assistance for developing countries.
For instance, Article 4(10) of the DSU discusses Special Attention to the Problems of Developing Countries. However, according to Lekgowe-
The provision only urges and advises members to give special attention to the particular problems and interests of developing countries and therefore is not a mandatory provision. The provision is more declaratory than operative and does not provide any operative content, it does not state exactly who gets what assistance from whom. As a result, it does not create an enforceable obligation on the part of the members.
Article 12.10 of the DSU gives developing countries extra time in responding to a complaint brought against them. Crucially this advantage is only available for developing countries that are respondents.
Further, Article 8.10 provides that developing countries can request for at least one member from the Panel to be from a developing country when the dispute involves a developing country member and a developed country member. Notably, the appointment is not automatic, as some nations have insisted it ought to be.
Finally, Article 24 provides for a elaborate mediation process to discourage developed country members from initiating trade disputes without "due restraint".
The WTO Secretariat provides for legal advisers to help developing countries in any WTO dispute. The service is offered by the WTO’s Training and Technical Cooperation Institute. Then, some states also helped set up an Advisory Centre on WTO law in 2001. All least-developed countries are automatically eligible for advice. Other developing countries and transition economies have to be fee-paying members in order to receive advice. The WTO also holds regular training sessions on trade policy in Geneva. Funding for these WTO sessions come from the WTO’s regular budget, voluntary contributions from WTO members, and cost-sharing either by countries involved in an event or by international organizations.
Yet there is a sense that most developing countries have been unable to meaningfully invoke the DSU. This can be attributed to several reasons including-
- lack of bargaining power which becomes particularly relevant during consultations which is aimed at a negotiated solution
- fear of extralegal retaliation by more powerful trading partners
- costs and resource constraints which can affect things such as the ability to collect information and evidence on the effects of WTO-inconsistent measures, hiring quality lawyers and economists etc. For context, the legal fees incurred in the Measures Affecting Consumer Photographic Film and Paper was recorded by the Panel Report to be in excess of 10 Million US dollars
- lack of legal capacity and expertise
- asymmetries or unevenness in the effectiveness of remedies as the WTO only provides for prospective remedies
According to Bernard Hoekman, an independent Special Prosecutor can be appointed to identify potential WTO violations on behalf of developing countries.
VII. Challenges and Proposal for ReformEdit
Proposals for reforms to the DSM are largely of two kinds- the proposals that attempt to strengthen the existing dispute-settlement system, and those that attempt to prune it. Each of these proposals ought to be analysed carefully-
- European Communities and Canada advocated for increased transparency by making written submissions of the parties available to the public when filed and making oral proceedings before Panels and the Appellate Body (subject to confidentiality protections) open to the public
- The African Group and India proposed an amendment to the wording of Article 13 of the DSU that would result in increased opportunities for participation by non-state interveners through the filing of amicus curiae briefs and perhaps participation in oral hearings before Panels and the Appellate Body
Commentators have also urged reforms in the direction of
- Allowing private parties to initiate complaints (which has so far been limited to states) and
- Allowing WTO rules to have “direct effect” in the domestic legal systems of member states
- Allowing collective retaliation rights/obligations, where all member countries are obliged or entitled to adopt retaliatory sanctions against another member’s violation, whether they are directly affected or not.
More recently, the USA has challenged the Dispute Settlement Body as involving excessive “judicial legislation,” and has thus, used the consensus rule to block the reappointment of South Korean judge Seung Wha Chang to the Appellate Body rendering the Appellate Body unable to function by December 2019. This is the perfect example to reflect on how sovereignty works in the WTO system– every State expects that other sovereign States are held accountable to the fullest extent of their WTO obligations but is itself held to nothing more than what it has consented to.
Scholars who believe that the WTO should have a more limited role argue that Panel or Appellate Body decisions should not be adopted if some significant minority, for example, one-third, of member countries object to a decision. Chimni makes the suggestion that DSB should grant a margin of appreciation to the regulatory powers of a State.
This chapter has attempted to provide a relatively straightforward account of the principles and fundamental components of international trade law however we have many emerging issues facially related to other areas of international law such as economic migration, climate change, digital trade, emerging security threats, contingent protection regime that would have an immense bearing on the future of the discipline. Let's look at the changes we can expect by analysing two trends: (a) digital trade and (b) climate change.
On the issue of digital trade, there is no question that digital trade has become ubiquitous over the last decade and will only become more prominent in the years to come. Some of the key contentious areas include the divergence of services and goods disciplines in international trade law; classifications of digital services in the services classification schedule; trade secret protection under TRIPS and other recent FTAs; restrictions on forced disclosure of source code and algorithms; applications of exceptions in trade agreements to protect policy space for domestic regulation. That being said, several WTO Members have strongly expressed the desire to achieve significant progress on electronic commerce so that WTO agreements remain relevant in the age of the digital economy.
On the issue of climate change, states are keen to factor environmental considerations into their trade policies. A notable example is the effort by six countries (Costa Rica, Fiji, Iceland, New Zealand, Norway and Switzerland) to negotiate the Agreement on Climate Change Trade and Sustainability. Further, States are also increasingly bolstering the “Trade and Sustainable Development” chapters in their Free Trade Agreements. However, these chapters have been criticised for being too weak. Other trade-related instruments are also being brought to bear to meet climate-related goals. For instance, EU’s Carbon Border Adjustment Mechanism (CBAM) is intended to equalise the price of carbon between domestic products and imports and ensure that the EU's climate objectives are not undermined by production being relocated to countries with less ambitious climate change-related policies.
All in all, it is an exciting time to be interested in trade law. While there is no telling how these new issues will transform the discipline in the years to come, it is likely that the same principles will play a prominent role in the debate.
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- ↑ This is the text of your footnote.
- ↑ The first footnote. Please adhere to OSCOLA when formating citations. Whenever possible, provide a link with the citation, ideally to an open-access source.
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