CHAPTER 2: INTRODUCTION TO INTERNATIONAL TRADE

BASIC INFORMATION OF WORLD TRADE ORGANIZATION

World Trade Organization (WTO)

~ is the only global international organization dealing with the rules of trade between nations.

~ it operates a global system of trade rules, it acts as a forum for negotiating trade agreements, it
settles trade disputes between its members and it supports the needs of developing countries.

 The WTO’s top decision-making body is the Ministerial Conference. Below this is the General
Council and various other councils and committees.
 The WTO has over 160 members representing 98 per cent of world trade. Over 20 countries
are seeking to join the WTO.

Location: Geneva, Switzerland

Established: January 1, 1995
Created by: Uruguay Round Negotiations (1986-1994)
Secretariat Staff: 623
Head: Ngozi Okonjo – Iweala (Director – General)

2.2 Uruguay Round: The Birth of the WTO

The Uruguay Round was the largest international trade negotiation. It took place within the
framework of the General Agreement on Tariffs and Trade (GATT) and was launched at
Punts del Este, Uruguay on September 20, 1986 and formally concluded at Marrakesh,
Morocco, on April 15, 1994.
The Uruguay Round was by far the most ambitious round of multilateral trade negotiations,
covering ‘virtually every outstanding trade policy issue’. To the surprise of many, the
Uruguay Round had fulfilled much of the goals set out in the Punta del Este Declaration.
The Marrakesh Agreement establishing the WTO, contained in the Final Act signed at the
Marrakesh Ministerial Meeting is the charter of the organization.
As envisaged in the Final Act, the WTO Agreement entered into force definitively on Jan. 1,
1995. The WTO has now become the second most important international organization in
the world after the United Nations.
2.3 The WTO as an International Organization

The raison d’être and policy objectives of the WTO are set out in the first establishment of a
‘Multilateral Trade Organization’.
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.

 The increase in the standard of living;

 The attainment of full employment;
 The growth of real income and effective demand; and
 The expansion of production of, and trade in, goods and services.
The main function of WTO is to ensure that trade flows as smoothly, predictably and freely
as possible.
The WTO membership is not exclusive to states. Separate customs territories possessing full
autonomy with regard to their external commercial relations and other matters covered by
the WTO Agreement are also eligible to join the WTO.
The institutional structure of WTO, according to a WTO Deputy Director – General, there are,
at present, a total of seventy WTO bodies, of which thirty-four are standing ones. At the
highest level of the institutional structure stands the Ministerial Conference. At the second
level is the General Council and at the level below the General council are the CTG, CTS and
the CTRIPS.
The present WTO, as did the GATT in the past, does not prescribe free trade as such. Rather
the GATT and the agreements in the annexes of the WTO Agreement set out a number of
principles and rules which encourage and ensure trade liberalization.

2.4 Trade without Discrimination or Principles of Non-Discrimination

Non-discrimination is central to WTO law and is reflected in all of the key treaties of the
WTO. In fact, as highlighted in the third Preambular paragraph of the WTO Agreement, ‘the
elimination of discriminatory treatment in international trade relations’ is one of the means
to attain the objectives of the WTO. The WTO law boasts two principles of non-
discrimination, namely MFN obligation and NT obligation.

2.4.1. MFN Treatment under the GATT

In other words, “like” products from all WTO Members must be accorded the same
treatment as the most advantageous treatment accorded by a member to the products of
any one state or territory under the jurisdiction of that member.
2.4.2. MFN Treatment under the GATS
Article II(1) of the GATS prohibits discrimination between like services and service suppliers
from different countries in the following terms: ‘ With respect to any measure covered by
this Agreement, each member shall accord immediately and unconditionally to services and
service suppliers of any other member treatment no less favourable than that it accords to
like services and service suppliers of any other country.

2.4.3. NT in the GATT

In other words, the NT obligation applies to imported products regardless of whether
members have made tariff concessions them or not. In broad terms, the NT obligation
prohibits a WTO member from discriminating against foreign products in favor of domestic
products.

2.4.4. NT in the GATS

The NT obligation does not have for trade in services such general application; it applies only
to the extent a WTO member has explicitly committed itself to grant ‘NT’ in respect of
specific service sectors. Once a WTO member has committed itself to grant NT, it must
accord to services and service suppliers of any other member treatment no less favourable
than it accords to its own like services and service suppliers.

2.5 The Rules on Market Access

The rules on market access are at the core of WTO law. According from the WTO Agreement,
the substantial reduction of tariffs and other barriers to trade is one of the two means to
attain the WTO's objects of higher standards of living, full employment, growth and
sustainable economic development. The two types of barriers to international trade, namely
'tariff' and 'NTBs'.

2.5.1. Negotiations to Reduce Tariff Barriers to Trade in Goods

The history of the GATT 1947, the first negotiation on tariff reduction was conducted and
concluded along with negotiations of the text of the GATT 1947 itself.
The principle of reciprocity and mutual advantage constitutes the first basic principle
governing negotiations on tariff reductions. The results of tariff negotiations are referred to
as 'tariff concessions' 'tariff bindings', which constitute a commitment not to raise the
customs duty on a particular product above an agreed level.
2.5.2. Non-Tariff Barriers (‘NTBs’)
The category of NTBs includes quantitative restrictions (such as quotas) and NTBs.
Differently from the case of customs duties, the GATT sets out a general prohibition on
quantitative restrictions, is them on import or export.

2.6 Anti-dumping, Subsidies and Countervailing Duties

Dumping and subsidies are two common forms of unfair trade. WTO law provides relatively
detailed rules for dumping and for certain types of subsidies.

Dumping and Anti-Dumping Measures

Article VI of the GATT and Article 2(1) of the ADA define dumping as the bringing of a
product onto the market of another country at a price less than its ‘normal value’. WTO law
does not prohibit dumping as such, but this imposes obligations on and regulates the actions
of WTO members.

Determination of dumping
A determination of dumping starts first with the determination of the ‘NV’.
After establishing the ‘NV’, the export price is compared with the ‘NV’ to determine if
dumping exists. In order to ensure a fair comparison between the EP and NV, Article 2(4)
provides further that adjustment should be made to the NV, EP or both.
The second determination to be made after a finding of dumping concerns ‘injury’. This is
provided in Article 3 of the ADA entitled ‘Determination of injury’,
The Appellate Body indicated that Article 3(1) allows an investing authority to determine an
injury based on all relevant reasoning and facts before it, not just on disclosed or discernible
reasoning or facts.

Subsidies and Countervailing Measures

WTO law also includes rules on subsidization as another unfair trade practice.
Subsidies are very sensitive matters in international trade relations since internally it helps
promote important and fully legitimate objectives of economic policy; but externally, they
may have adverse effects on the interests of trading partners whose industries may suffer.
Article 1(1) of the SCM defines a ‘subsidy’ as a financial contribution by a government or
public body, which confers a benefit.
Subsidies were classified into three types, namely:
 Actionable Subsidy
 The complaining country has to show that the subsidy has an adverse effect
on its interests.
 If domestic producers are hurt by imports of subsidized products,
countervailing duty can be imposed.
 Non-actionable Subsidy(however, expired in 2000)
 Prohibited Subsidy
  Also referred as ‘red light’ subsidies, are prohibited because they aim to
affect trade and are most likely to cause adverse effect to other members.
 Require recipients to meet certain export targets, or to use domestic goods
instead of imported goods.
WTO law contains a number of rules which constitute ‘economic development exceptions’ in
favor of DCs. These rules, as explained above, are developed to take into account the need
of these members for greater flexibility in the time necessary for the implementation of
WTO agreements.

2.7 General Exceptions

General Exceptions
General exceptions are key provisions of the GATT and GATS, allowing members to justify on
a number of non-trade policy grounds measures that would otherwise be inconsistent with
the WTO Agreement. These grounds include protecting the environment, public health and
public morals, and preventing deceptive practices.
The general exceptions provide a mechanism for balancing trade liberalization with other
important policy objectives that members may choose to pursue.

Security Exceptions
The security exceptions serve a similar function, in that they ensure that the GATT 1994 and
the GATS do not require members to compromise their essential security interests.
It is an anomaly, a unique provision in international trade law that grants the member states
freedom to avoid trade rules to protect national security.

2.8 Trade in Goods and the WTO’S Agreements

2.8.1. Tariff
A tariff is mainly provided for in the GATT. This Agreement shows a strong preference for
tariffs over other instruments of protection. Tariffs may be levied on a per unit basis or on an
'ad valorem' (according to value) basis. Tariff concessions that countries give or receive upon
accession to the WTO or as a part of negotiations are recorded as 'bound' tariffs in their
tariff schedules. For the included products, countries are not to impose a tariff on the WTO
members higher than the commitment or 'binding' indicated in the schedule.
2.8.1.C. Key Aspects of Tariffs
1. A Tariff is Binding
 Tariff concessions that a member gives are 'bound' and ceiling, not floor, tariffs.

2. A Tariff is Subject to Reductions

 In addition to being bound, a tariff is also subject to reductions. According to the
WTO, developed countries' tariff reductions were for the most part being phased in
over five years from 1 January 1995.

2.9 Agriculture

The Agreement on Agriculture came into force on January 1, 1995. The preamble to the
Agreement recognizes that the agreed long-term objective of the reform process initiated by
the Uruguay Round reform program is to establish a fair market-oriented agricultural trading
system.

Key Aspects of the Agreement

The agreement establishes a number of generally applicable rules with regard to trade-
related agricultural measures, primarily in the areas of MA, domestic support and export
competition.

1. Market Access
a. Tariff-only Protection
~ On the MA side, the Uruguay Round resulted in a key systematic change: the
switch from a situation where a myriad of NTBs impeded agricultural trade flows to
a regime of bound tariff-only protection plus reduction commitments.

b. Tariff Reductions
~ The Agreement requires that developed country members have agreed to reduce,
over a six-year period beginning in 1995, their tariff by on average 36 per cent of all
agricultural products, with a minimum reduction of 15 per cent for any product.

c. Prohibition of Non-tariff Border Measures

~ Article 4.2 of the Agreement prohibits the use of agriculture-specific NTBs. Such
measures include quantitative import restrictions, variable import levies, minimum
import prices, discretionary import licensing procedures, voluntary export restraint
agreements and NTBs maintained through state-trading enterprises.
 d. Special Safeguard Provisions
~ Members have the right to invoke for tariffed products the ‘special safeguard’
provisions of the Agreement, provided that a reservation to this effect appears
beside the products concerned in the relevant member’s schedule.

2. Domestic Support

 Amber Box
 Blue Box
 Green Box

3. Export Subsidies

 It refers to the granting of support by governments to some beneficiary entity or

entities to achieve export objectives. Export subsidies may involve direct payments
to a firm, industry, producers of a certain agricultural product to achieve some type
of export performance.

2.10 Standard and Safety

2.10.A. Sanitary and Phytosanitary Measures

The Agreement on the Application of Sanitary and Phyto-Sanitary Measures sets out the
basic rules for food safety and animal and plant health standards.
It allows countries to set their own standards. But it also says regulations must be based on
science. They should be applied only to the extent necessary to protect human, animal or
plant life or health. And they should not arbitrarily or unjustifiably discriminate between
countries where identical or similar conditions prevail.
The SPS Agreement allows members to adopt and enforce measures necessary to protect
human, animal or plant life or health, subject to the requirement that these measures are
not applied in a manner which would result to unjustifiable discrimination between
members where the same conditions prevail.
a. Non-discrimination
b. Harmonization
c. Equivalence
d. Appropriate level of protection (ALOP)
e. Risk Assessment
f. Transparency
2.10.B. Technical Barriers to Trade

The Technical Barriers to Trade (TBT) Agreement aims to ensure that technical regulations,
standards, and conformity assessment procedures are non-discriminatory and do not create
unnecessary obstacles to trade. At the same time, it recognizes WTO members' right to
implement measures to achieve legitimate policy objectives, such as the protection of
human health and safety, or protection of the environment.
The TBT Agreement strongly encourages members to base their measures on international
standards as a means to facilitate trade. Through its transparency provisions, it also aims to
create a predictable trading environment.
The TBT Agreement distinguishes three kinds of technical barriers to trade, as follows:
 Technical regulation: document that lays down product characteristics or their
related processes and production methods, including the applicable administrative
provisions with which compliance is mandatory;

 Standard: document approved by a recognized body, that provides, for common and
repeated use, rules, guidelines or characteristics for products or related processes
and production methods, with which compliance is not mandatory; and

 Conformity assessment procedures: any procedure used, directly or indirectly, to

determine that relevant requirements in technical regulations or standards are full
filled.

Key Aspects of TBT Agreement

a. No-discrimination
b. No unnecessary obstacles to international trade
c. Transparency
d. Scientific Justification
e. Harmonization
f. Equivalence
g. Recognition

2.11 Textiles

The Agreement on Textiles and Clothing and all restrictions thereunder terminated on
January 1, 2005. The expiry of the ten-year transition period of ATC implementation means
that trade in textile and clothing products is no longer subject to quotas under a special
regime outside normal WTO/GATT rules but is now governed by the general rules and
disciplines embodied in the multilateral trading system.
2.12 Anti-Dumping, Subsidy and Countervailing Measures, and Safeguard

Binding tariffs, and applying them equally to all trading partners, are key to the smooth flow
of trade in goods.

2.12.A. Anti-Dumping Measures

A product is to be considered as being dumped i.e., introduced into the commerce of
another country at less than its normal value, if the export price of the product 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.
Therefore, dumping occurs when a product is sold for export to another country at less than
its 'normal value (NV).

2.12.B. Subsidies and Countervailing Measures

Subsidies and countervailing measures are provided for in the SCM. This agreement fulfills
two functions: it disciplines the use of subsidies; and it regulates the actions that member
may take to counter the effects of subsidies.
Under the SCM, countervailing duty may be charged only after the importing country has
conducted a detailed investigation, similar to that required for anti-dumping action.

2.12.C. Safeguards
Safeguards are provided for in the Agreement on Safeguard dealing with emergency
protection from imports. A WTO member may restrict imports of a product temporarily if its
domestic industry is injured or threatened with injury caused by a surge in these imports.

2.13 Non-Tariff Barriers (‘NTBs’)

A. Import Licensing
The WTO Agreement on Import Licensing Procedures sets out rules for all members on the
use of import licensing systems to regulate their trade. The provisions of the ILP include
guidelines for what constitutes a fair and non-discriminatory application of such procedures
with the goal of protecting members from unreasonable requirements or delays associated
with a licensing regime.
The ILP or import licensing procedure covers 2 system:
 Automatic import licensing system
 Non-automatic import licensing system
2.14 Customs Valuation

The Agreement on Customs Valuation recognizes the need for a fair, uniform and neutral
system for the valuation of goods for customs purposes that precludes the use of arbitrary
or fictitious customs values the basis for the valuation of goods for customs purposes should,
to the greatest extent possible.
The CVA provides the six customs valuation methods:
1. Transaction value,
2. Transaction value of identical goods,
3. Transaction value of similar goods,
4. Deductive value,
5. Computed value,
6. Fall-back method

2.14.C. Preshipment Inspection

The Agreement on Preshipment Inspection recognizes the need of DCs to do so for as long
and in so far as it is necessary to verify the quality, quantity or price of imported goods; is
mindful that such programs must be carried out without giving rise to unnecessary delays or
unequal treatment.
The Agreement recognizes that GATT principles and obligations apply to the activities of
preshipment inspection agencies mandated by governments.

2.14.D. Rules of Origin

The Agreement on Rules of Origin aims at long-term harmonization of rules of origin, other
than rules of origin relating to the granting of tariff preferences, and to ensure that such
rules do not themselves create unnecessary obstacles to trade; also, to ensure that RoO are
prepared and applied in an impartial, transparent, predictable, consistent and neutral
manner.
The RoO Agreement sets up a work programme on harmonization, to be initiated as soon as
possible after the completion of the Uruguay Round and to be completed within three years
of initiation (Article 9.2) it would be based upon a set of principles, including making rules of
origin objective, understandable and predictable.
The RoO Agreement sets out disciplines to govern the application of RoO divided into two
periods as follows:
 Disciplines during the Transition Period
 Disciplines after the Transition Period
2.15. Agreement on Trade-Related Investment Measures

Agreement on Trade-Related Investment Measures (hereinafter the ‘TRIMs Agreement’)

recognizes that certain investment measures restrict and distort trade. It provides that no
member shall apply any TRIM inconsistent with Articles III (NT) and XI (prohibition of
quantitative restrictions) of the GATT.
The TRIMs Agreement requires mandatory notification of all non-conforming TRIMs and
their elimination within two years for developed countries, within five years for DCs, and
within seven years for LDCs (Article 5). It establishes a Committee on TRIMs that will, among
other functions, monitor the implementation of these commitments. The agreement also
provides for consideration, at a later date, of whether it should be complemented with
provisions on investment and competition policy more broadly (Article 9).