Principles of the trading system

Trade without discrimination

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1. Most-favoured-nation (MFN): treating other people equally

Under the WTO agreements,
countries cannot normally discriminate between their trading partners. Grant someone a special favour
(such as a lower customs duty rate for one of their products) and you have to do the same for all other
WTO members.
This principle is known as most-favoured-nation (MFN) treatment (see box). It is so important that it is
the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods.
MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and
the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in
each agreement the principle is handled slightly differently. Together, those three agreements cover all
three main areas of trade handled by the WTO.
Some exceptions are allowed. For example, countries can set up a free trade agreement that applies
only to goods traded within the group discriminating against goods from outside. Or they can give
developing countries special access to their markets. Or a country can raise barriers against products
that are considered to be traded unfairly from specific countries. And in services, countries are
allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions
under strict conditions. In general, MFN means that every time a country lowers a trade barrier or
opens up a market, it has to do so for the same goods or services from all its trading partners
whether rich or poor, weak or strong.
2. National treatment: Treating foreigners and locals equally
Imported and locally-produced
goods should be treated equally at least after the foreign goods have entered the market. The same
should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and
patents. This principle of national treatment (giving others the same treatment as ones own
nationals) is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATSand
Article 3 of TRIPS), although once again the principle is handled slightly differently in each of these.
National treatment only applies once a product, service or item of intellectual property has entered
the market. Therefore, charging customs duty on an import is not a violation of national treatment
even if locally-produced products are not charged an equivalent tax.

Freer trade: gradually, through negotiation

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Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned
include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities
selectively. From time to time other issues such as red tape and exchange rate policies have also been
discussed.
Since GATTs creation in 1947-48 there have been eight rounds of trade negotiations. A ninth round,
under the Doha Development Agenda, is now underway. At first these focused on lowering tariffs
(customs duties) on imported goods. As a result of the negotiations, by the mid-1990s industrial
countries tariff rates on industrial goods had fallen steadily to less than 4%.
But by the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to the new
areas such as services and intellectual property.

Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow
countries to introduce changes gradually, through progressive liberalization. Developing countries are
usually given longer to fulfil their obligations.

Predictability: through binding and transparency

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Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the
promise gives businesses a clearer view of their future opportunities. With stability and predictability,
investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition
choice and lower prices. The multilateral trading system is an attempt by governments to make the
business environment stable and predictable.

The Uruguay Round increased bindings

Percentages of tariffs bound before and after the 1986-94 talks

Before

After

Developed countries

78

99

Developing countries

21

73

Transition economies

73

98

(These are tariff lines, so percentages are not weighted according to trade volume or value)

In the WTO, 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. Sometimes
countries tax imports at rates that are lower than the bound rates. Frequently this is the case in
developing countries. In developed countries the rates actually charged and the bound rates tend to be
the same.
A country can change its bindings, but only after negotiating with its trading partners, which could
mean compensating them for loss of trade. One of the achievements of the Uruguay Round of
multilateral trade talks was to increase the amount of trade under binding commitments (see table). In
agriculture, 100% of products now have bound tariffs. The result of all this: a substantially higher
degree of market security for traders and investors.
The system tries to improve predictability and stability in other ways as well. One way is to discourage
the use of quotas and other measures used to set limits on quantities of imports administering quotas
can lead to more red-tape and accusations of unfair play. Another is to make countries trade rules as
clear and public (transparent) as possible. Many WTO agreements require governments to disclose

their policies and practices publicly within the country or by notifying the WTO. The regular
surveillance of national trade policies through the Trade Policy Review Mechanism provides a further
means of encouraging transparency both domestically and at the multilateral level.

Promoting fair competition

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The WTO is sometimes described as a free trade institution, but that is not entirely accurate. The
system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it
is a system of rules dedicated to open, fair and undistorted competition.
The rules on non-discrimination MFN and national treatment are designed to secure fair conditions
of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies.
The issues are complex, and the rules try to establish what is fair or unfair, and how governments can
respond, in particular by charging additional import duties calculated to compensate for damage
caused by unfair trade.
Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual
property, services, for example. The agreement on government procurement (a plurilateral
agreement because it is signed by only a few WTO members) extends competition rules to purchases by
thousands of government entities in many countries. And so on.

Encouraging development and economic reform

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The WTO system contributes to development. On the other hand, developing countries need flexibility
in the time they take to implement the systems agreements. And the agreements themselves inherit
the earlier provisions of GATT that allow for special assistance and trade concessions for developing
countries.
Over three quarters of WTO members are developing countries and countries in transition to market
economies. During the seven and a half years of the Uruguay Round, over 60 of these countries
implemented trade liberalization programmes autonomously. At the same time, developing countries
and transition economies were much more active and influential in the Uruguay Round negotiations
than in any previous round, and they are even more so in the current Doha Development Agenda.
At the end of the Uruguay Round, developing countries were prepared to take on most of the
obligations that are required of developed countries. But the agreements did give them transition
periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions particularly so for the
poorest, least-developed countries. A ministerial decision adopted at the end of the round says
better-off countries should accelerate implementing market access commitments on goods exported by
the least-developed countries, and it seeks increased technical assistance for them. More recently,
developed countries have started to allow duty-free and quota-free imports for almost all products
from least-developed countries. On all of this, the WTO and its members are still going through a
learning process. The current Doha Development Agenda includes developing countries concerns about
the difficulties they face in implementing the Uruguay Round agreements.

UNDERSTANDING THE WTO: THE AGREEMENTS

Anti-dumping, subsidies, safeguards: contingencies,

etc
Binding tariffs, and applying them equally to all trading partners (most-favourednation treatment, or MFN) are key to the smooth flow of trade in goods. The WTO
agreements uphold the principles, but they also allow exceptions in some
circumstances. Three of these issues are:
actions taken against dumping (selling at an unfairly low price)
subsidies and special countervailing duties to offset the subsidies
emergency measures to limit imports temporarily, designed to safeguard
domestic industries.

Anti-dumping actions

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If a company exports a product at a price lower than the price it

normally charges on its own home market, it is said to be dumping
the product. Is this unfair competition? Opinions differ, but many
governments take action against dumping in order to defend their
domestic industries. The WTO agreement does not pass judgement. Its
focus is on how governments can or cannot react to dumping it
disciplines anti-dumping actions, and it is often called the AntiDumping Agreement. (This focus only on the reaction to dumping
contrasts with the approach of the Subsidies and Countervailing
Measures Agreement.)
The legal definitions are more precise, but broadly speaking the WTO
agreement allows governments to act against dumping where there is
genuine (material) injury to the competing domestic industry. In
order to do that the government has to be able to show that dumping
is taking place, calculate the extent of dumping (how much lower the
export price is compared to the exporters home market price), and
show that the dumping is causing injury or threatening to do so.
GATT (Article 6) allows countries to take action against dumping. The
Anti-Dumping Agreement clarifies and expands Article 6, and the two
operate together. They allow countries to act in a way that would
normally break the GATT principles of binding a tariff and not
discriminating between trading partners typically anti-dumping
action means charging extra import duty on the particular product
from the particular exporting country in order to bring its price closer
to the normal value or to remove the injury to domestic industry in
the importing country.
There are many different ways of calculating whether a particular
product is being dumped heavily or only lightly. The agreement
narrows down the range of possible options. It provides three methods
to calculate a products normal value. The main one is based on the
price in the exporters domestic market. When this cannot be used,
two alternatives are available the price charged by the exporter in
another country, or a calculation based on the combination of the
exporters production costs, other expenses and normal profit margins.
And the agreement also specifies how a fair comparison can be made
between the export price and what would be a normal price.
Calculating the extent of dumping on a product is not enough. Antidumping measures can only be applied if the dumping is hurting the
industry in the importing country. Therefore, a detailed investigation
has to be conducted according to specified rules first. The
investigation must evaluate all relevant economic factors that have a
bearing on the state of the industry in question. If the investigation
shows dumping is taking place and domestic industry is being hurt, the
exporting company can undertake to raise its price to an agreed level
in order to avoid anti-dumping import duty.
Detailed procedures are set out on how anti-dumping cases are to be

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Understanding the
WTO

Basics
Agreements
Settling disputes
Cross-cutting and
new issues
The Doha agenda
Developing
countries
The organization
Abbreviations

More introductory information

> The WTO in Brief
> 10 benefits
> 10 misunderstandings