1 PP–SMAIT–December 2009

PROFESSIONAL PROGRAMME EXAMINATION

DECEMBER 2009

STRATEGIC MANAGEMENT, ALLIANCES AND

INTERNATIONAL TRADE
Time allowed : 3 hours Maximum marks : 100
PART A
(Answer ANY TWO questions from this part)
Question 1
(a) “Organisations are becoming more responsive, flexible and adaptable to changing
business situation.” Comment with example. (5 marks)
(b) IOC Ltd. has changed its vision statement to capture the collective aspirations
of its stakeholders to create a ‘shared vision’ rather than ‘vision shared’.
Comment. (5 marks)
(c) Discuss Porter’s Five Forces Model of industry analysis. (5 marks)
(d) Describe the main approaches to evaluation of strategic alternatives.
(5 marks)
Answer 1(a)
It is correctly remarked that organizations are becoming more responsive, flexible,
and adaptable to changing business situations. Today, businesses are becoming more
complex due to rapid changes in environment. It is becoming increasingly difficult to
predict the environment accurately. The internal and external environments of
organizations are now driven by multitudes of forces that were hitherto non-existent.
Earlier, the changes in technology were not so rapid but today the information from all
over the globe is pouring in through the computers. The world in fact has shrunk. This
has created fierce competition as the customers and stakeholders have become more
aware of their rights.
The number of events that affect domestic and world market are now far too many
and too often. Over reliance on experience in such situations may really work out to be
very costly for companies. For example, Reliance has shifted to more creativity, innovation
and new ways of looking at business and doing it in novel ways. The earlier concepts of
having highly specialized departments and developing specialization of labour is losing
its credibility. Organizations are becoming more responsive, flexible, and adaptable to
changing business situations. In such an environment which is charged with high level
of competition, developing competitive edge for survival and growth has become
imperative for companies. For example ITC began as a tobacco company. Over the
years, it has diversified into paper (ITC Bhadrachalam), hotels (Welcome Group), food
(ITC Agro), and garments (Wills Lifestyle) in order to take advantage of changing
environments and to achieve its growth objectives.
Answer 1(b)
“Shared Vision’ connotes the idea of stakeholders’ acceptance and commitment to
the vision whereas ‘Vision Shared” gives the impression of compliance of the vision

1
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imposed from the top management. The former creates a sense of communality that
permeates the organization and gives coherence to diverse activities. On the other
hand, the latter connotes sharing of values already decided by the higher management.
The former indicates bottom up approach and the latter top down approach of the
management.
Answer 1(c)
Porter’s five forces model of industry analysis
The nature of competition in an industry in large part determines the content of
strategy, especially business-level strategy. Based as it is on the fundamental economics
of the industry, the very profit potential of an industry is determined by competitive
interactions between different market forces. Where these interactions are intense, profits
tend to be whittled away by the activities of competing firms. Where they are mild and
competitors appear docile, profit potential tends to be high.
All these forces assist in identifying the presence or absence of potential high returns.
The clear understanding of these forces and their influences on competition within an
industry enables the strategist to identify the most advantageous strategic position.
The five forces that influence the intensity of competition are explained below:
(i) Intensity of Rivalry among Competitors : Some industries appear inactive because
of a low level of rivalry among competitors. An example might be industrial
fasteners, the manufacturers of nuts and bolts and other devices used to connect
the components of products.

(ii) Power of Buyers : From an industry’s point of view, the buyers can usually be
classified into three major categories i.e.: consumers, industrial customers, and
commercial customers. Consumers include the purchasers of the firm’s service
or product for their own use. Goodyear, for example, sells tyres directly to the
people who use them in their cars and two wheelers. Industrial buyers include
the companies which purchase the firm’s product or service to be used as a
component in its product. Continuing with the Goodyear example, automobile
manufacturers who put Goodyear tyres on new cars would be one group of its
industrial buyers. Commercial customers include other companies that sell
Goodyear’s products to consumers.

(iii) Power of Suppliers : The suppliers of goods and services to an industry have the
power to influence their customers through their ability to set price and control
quality, delivery time, and order quantity. If these customers cannot manage
successfully one supplier against another to protect their interest, then the
industry’s profits can be drained off by the suppliers.

(iv) Substitute Products : Substitute products refer to those products of industries

which serve similar consumer needs. Existence of close substitutes represents
a strong competitive threat which limits the price fixation power and the profitability
of the firm. Conversely, if the firm’s products have very few substitutes, then the
company has the opportunity to raise prices and earn additional profits. It is an
eye opener for the firms to select those lines which have least substitutes.
 3 PP–SMAIT–December 2009
(v) Potential Entrants : New entrants to an industry pose several threats to existing
competitors. New competitors can reduce the market share of all participants
by dividing the pie into more pieces. As a result of this they may also bring new
technology or greater resources not available to present competitors and capture
a high market share position quickly to the detriment of all existing participants.
Answer 1(d)
Once the organization identifies various strategic alternatives, the next important
step of strategic management process is to make a choice from among available
alternative strategies. The rationale of strategic choice is to direct resources towards
objectives in accordance with chosen strategy.
Different approaches are developed by experts to evaluate strategic alternatives
and choose the best among them subject to given conditions. We can classify the
evaluation approach in the following categories:
(i) Simple Approach
(ii) Analytical Models Approach.
(i) Simple Approach
Let the strategic alternatives be grouped on the basis of key variables, viz., potential
market growth and the firm’s competitive position. This is a logical starting point since
the appropriateness of the strategic choice depends upon the firm’s position in relation
to the external market and its competitive position assuming that the firm has or can
secure the necessary financial resources. The alternative strategies may thus be said to
comprise the following combinations of the two variables:
(1) Low market growth potential/Weak competitive position.
(2) High market growth potential/Weak competitive position.
(3) Low market growth potential/Strong competitive position.
(4) High market growth potential/Strong competitive position.
The quadrant 1 which represent the defensive situation in the following diagram
shows low market growth potential and weak competitive position. The organization may
seriously consider the defensive retrenchment or divestment—and use excess cash to
invest in areas where profit potential is greater.
High
↑
Mixed Growth
Market Growth

(2) (4)

Defensive Neutral
(1) (3)
↓
Low
Weak ← Competitive Position ← Strong
Alternative Strategies Reflecting Possible Situations
PP–SMAIT–December 2009 4
The quadrant 2 depicts the mixed situation where an organization has high market
growth potential and weak competitive position. In this situation, some variant of the
combination or mixed strategy is called for.
In quadrant 3 the organization is in neutral situation where the organisations having
low market growth potential but strong competitive position. In this situation, organization
should normally favour a stable growth strategy so as to maintain its market share.
The Quadrant 4 depicts growth situation which reflects high market growth potential
and strong competitive position. These strategies are ideally suited for growing organization
situation.
(ii) Analytical Models Approach
A number of analytical conceptual models have been developed by experts for
managers to evaluate strategic alternatives before making a choice. Some of them
include: Growth share Matrix—Boston Consulting Group (BCG) Model; General Electric’s
Stoplight Grid, Life Cycle Theory, etc.
Question 2
Read the following extract from the annual report of Sterlite Industries (India) Ltd.
and answer the questions given at the end :
“Our business and operations are subject to a variety of risks and uncertainties
which are no different from any other company in general and our competitors in
particular. Risks are identified through a formal risk management programme with
the active involvement of business managers and senior management personnel at
both the subsidiary level as well as the corporate level. Each significant risk has an
‘owner’ within the group at a senior level, and the impact to the group, if a risk
materialises and its likelihood of crystallization is regularly reviewed. A risk register
and matrix is maintained, which is regularly updated in consultation with business
managers. The risk management process is coordinated by our management
assurance function and is regularly reviewed by our Audit Committee. Key business
decisions are discussed at the monthly meetings of the Executive Committee and
senior managers address risk management issues when presenting initiatives to
the Executive Committee. The overall internal control environment and risk
management programme is reviewed by our Audit Committee on behalf of the Board
of directors.
The areas identified for risk management by the company include – Treasury
Management; Commodity Risks; Political, Legal, Economic and Regulatory Risks;
Ore Reserves and Resources; Delivery of expansion projects on time and within
budget; ASSET use and Insurance; Safety, Health and Environment Risks;
Operational Risks; Financial Risks; Liquidity; Foreign Currency; Interest Risks;
Counterparty Risks; and Employees.
During the year 2008-09, the world witnessed several mine closures, production
cutbacks and deferral of projects. Despite such negative market sentiments and a
depressed outlook for demand, we remain focused on our basic objectives of
achieving a least-cost position and developing low capital cost projects on or ahead
of schedule and within budgets. Thus the year 2009-10 augurs well.”
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Questions —
(i) What is risk management ?
(ii) What are the major steps in risk management process ?
(iii) Who is responsible for putting in place risk management process ?
(iv) What is the risk management style in the company ?
(v) What could be the possible reasons to have negligible provision for bad and
doubtful debts ? (4 marks each)

Answer 2(i)
Risk Management’ is an integral part of business process. It is the process for
identifying and assessing opportunities and avoiding and mitigating losses. It is a logical
and systematic process of establishing the context, identifying, analyzing, evaluating,
treating, monitoring and communicating risks associated with any of the business activity,
functions in a way that enables an organization to minimize losses and maximize
opportunities/gains. In practice, it is about identifying potential variations from what is
planned targets and managing those to maximize opportunity, minimize loss and improve
decisions and outcomes. Corporate risk has been classified into (a) Enterprise risk
management and (b) Project risk management.
Answer 2(ii)
Risk management process consists of following main steps:
(i) Risk identification : Risk cannot be managed unless it is first identified. Once
the context of the business has been defined, the next step is to utilize the
information to identify as many risks as possible. The aim of risk identification
step is to identify possible risks which may affect, either negatively or positively,
the objectives of the business and the functioning of the enterprise.
(ii) Risk assessment : Every organization is continuously exposed to an endless
number of new or changing threats and vulnerabilities that may affect its operation
or the fulfillment of its objectives. Identification, analysis and evaluation of these
threats and vulnerabilities are the only way to understand and measure the
impact of the risk involved and hence to decide on the appropriate measures
and controls to manage them.
(iii) Risk measurement and analysis : Risk measurement includes a determination
of (a) The probability or chance of the losses that will occur, (b) The impact of
the losses upon the financial affairs of the firm, and (c) The ability to predict the
losses during the financial period.
The risk analysis assists in determining which risks have a greater consequence
or impact than others. This helps to provide a better understanding of the possible
impact of risk, or the likelihood of its occurring, in order to make a decision
about committing resources to control the risk.
(iv) Risk evaluation : Risk evaluation implies ranking in terms of importance, and
ranking suggests measuring some aspect of the factors to be ranked. Risk
PP–SMAIT–December 2009 6
evaluation involves comparing the level of risk found during the analysis process
with previously established risk criteria, and deciding whether these risks require
treatment.
(v) Risk treatment : Risk treatment is basically concerned with identifying options
for treating or controlling risk, in order to either reduce or eliminate negative
consequences, or to reduce the likelihood of an adverse occurrence. Risk
treatment should also aim to enhance positive outcomes. It is often either not
possible or cost-effective to implement all treatment strategies
(vi) Risk monitoring and review : Risk monitor and review is an essential and integral
step in the risk management process. A business owner must monitor risks and
review the effectiveness of the treatment plan; strategies and management
system which have been set up to effectively manage the risk.
Answer 2(iii)
Part IV(C) of Clause 49 of the Listing Agreement requires laying down procedures
for informing the board members about the risk management and internal control systems
in critical areas of operation. The CEO and CFO are responsible for putting in place risk
management and internal control system in critical areas of operations of their companies.
These procedures have to be periodically reviewed to ensure that executive management
controls risk through means of a properly defined framework. Simply stated, the company
has to adopt appropriate risk management policies, commensurate with its size and
requirement of business, and. review these periodically in the light of changing economic
and corporate scenario. In the present case, for practical purposes, each significant risk
has a “owner’ within the Group at a senior level. The risk management issues are discussed
at the Executive Committee meetings held every month and the overall risk management
programmes are reviewed by the Audit Committee on behalf of Board of Directors.
Answer 2(iv)
The company has a participative style of risk management involving the top, middle
and lower management at the holding and subsidiary companies. The company has in
place a formal risk identification programme at the holding and subsidiary level where
the board identifies and manages of various business risks. The holding, subsidiary and
departments manage risk continuously and systematically. Such a risk management
process is essentially a part and parcel of the operations and management function of
the company at corporate level.
Answer 2(v)
The company could have negligible provision of bad and doubtful debt by proper
management of default risk. This is to manage the uncertainty associated with realization
of receivables from the customers. The underlying objective is to ensure timely receipt
of contractual interest and principal from the short-term and long-term debtors. It involves
(i) insisting on payment by letter of credit; (ii) receiving part payment in advance; and (iii)
strict receivable management.
Question 3
(a) Critically examine the major characteristics of information systems (IS). (8 marks)
 7 PP–SMAIT–December 2009
(b) In the context of Management Information Systems (MIS), state, with reasons
in brief, whether the following statements are correct or incorrect :
(i) Study of MIS is about the use of computers.
(ii) More data in reports means more information for managers.
(iii) Accuracy in reporting is of vital importance.
(iv) Strategic information meets information requirements of the top management.
(2 marks each)
(c) “Internal control can provide only reasonable, but not absolute assurance that
the objectives are achieved.” Critically examine the statement with four inherent
limitations of internal control systems. (4 marks)
Answer 3(a)
Information system refers to a set of people, procedures and resources that collects,
transforms, and disseminates information in an organization.
In other words an information system is a system of collecting, storing, retrieving
and processing data for providing appropriate and timely information to managers at
different levels of organization hierarchy for helping them in performing managerial
activities. It consists of people, procedures, methods, equipments and other resources
that work together in a desired manner to provide necessary information supports to
managers with an objective to increase effectiveness of management
The major characteristics of Information Systems are as follows :
(i) Repetitiveness : The information produced by these systems is
usually repetitive in nature at periodic intervals such as daily, weekly, or monthly.
(ii) Predictability : The information they produce usually does not contain any surprises
for the manager or the users of the information.
(iii) Emphasis on the past : The information generated by the systems usually
describe the past.
(iv) Detailed nature : The information produced is very detailed.
(v) Internal origin : The data for operational system usually spring entirely from
internal sources.
(vi) Structured form : The form of the data input and the form of the output produced
by the operational information systems is structured.
(vii) Great accuracy : The accuracy of the data used as input to such systems and
of the output produced by such systems is usually very high.
However, there is no such tailor made information system which can be universally
applied to all situations. Therefore it has to be adjusted as per the requirements and
objectives of an organization.

Answer 3(b)
In the context of Management information system (MIS) correctness or incorrectness
of the following statements are clarified below:
(i) The statement is incorrect. MIS may or may not be computer based on use of
computer. Computerization is just a tool for installation of required MIS, depending
PP–SMAIT–December 2009 8
on several factors like how critical is the response time required for getting the
information, how big is the organization and how complex are the needs of
information processing.
(ii) The statement is incorrect because what is important is the quality of data
and information in reports rather than the quantity of data and information. In
fact, the data provided in reports should meet information requirements of
management. Unorganized mass of data may create confusion than bringing
clarity to the issues.
(iii) The statement is correct at the operating level because the degree of accuracy
is closely related to the decision problem. For example, accuracy is really
important in medicine, control of aircrafts, design of dams, bridges, flyovers
and railway tracks.
(iv) The statement is correct because the top level management requires strategic
internal and external information for formulating long-term objectives, strategies
and major policies and programmes of the company. It is the top management, who
is concerned with the determining, maintaining and supplying of required information.
Answer 3(c)
Internal control system means all the policies and procedures (internal controls)
adopted by the management of an entity to assist in achieving management’s objective
of ensuring, as far as practicable, the orderly and efficient conduct of its business,
including adherence to management policies, the safeguarding of assets, the prevention
and detection of fraud and error, the accuracy and completeness of the accounting
records, and the timely preparation of reliable financial information.
Experience proves that best of internal control system in any organization can provide
only reasonable, but not absolute assurance that the objectives are achieved. The four
inherent limitations of internal control are as under:
(i) Management’s usual desire is that a control should be cost-effective, i.e., the
cost of a control procedure should not be disproportionate to the potential loss
due to fraud or error.
(ii) Most of the controls tend to be directed at anticipated types of transactions and
not at transactions of unusual nature.
(iii) The potential for human error due to carelessness, distraction, mistakes of
judgement or the misunderstanding of instructions can not be ruled out.
(iv) The possibility of circumvention of controls through collusion with parties outside
the entity or with employees of the entity may be present.
PART B
(Answer ANY ONE question from this part.)
Question 4
(a) Explain whether every technical collaboration is a strategic alliance. (5 marks)
(b) Explain briefly the various types of strategic alliances. (5 marks)
(c) What are the advantages of a technical collaboration ? (5 marks)
(d) What are the important factors for the success of a technical collaboration ?
(5 marks)
 9 PP–SMAIT–December 2009
Answer 4(a)
Every technical collaboration is a strategic alliance. Any arrangement or agreement
under which two or more firms cooperate in order to achieve certain commercial objectives
is referred to as strategic alliance. A true strategic alliance is a written arrangement
between two companies that complement each other in a particular identified area. It is
a commitment by the two companies to provide capabilities or cross servicing in certain
identified areas.
Strategic alliance has three distinguishing characteristics:
(i) the two or more firms that unite to pursue a set of agreed goals remain independent
subsequent to the formation of an alliance.
(ii) the partner firms share the benefits of the alliance and control over the
performance of assigned tasks.
(iii) the partner firms contribute on a continuing basis in one or more key strategic
areas e.g. technology, products and so forth.
Answer 4(b)
Various types of strategic alliances are as follows:
— Joint Venture.
— Equity strategic alliances.
— Non-equity strategic alliances.
— Global strategic alliances.
— Research & Development.
— Management contract.
— Franchising.
— Supply or purchase agreement.
— Marketing or distribution agreement.
— Agreement to provide technical services.
— Licensing of know-how, technology, design or patent.
Answer 4(c)
Advantages of a technical collaboration are as follows:
— Move to decisively seize opportunities before they disappear.
— Respond more quickly to change.
— Adapt with greater flexibility.
— Gain overseas presence.
— Gain overseas expertise and technology.
— Increase a company’s market share.
— Gain access to a new market or beat others to that market.
PP–SMAIT–December 2009 10
— Quickly shore up internal weaknesses.
— Gain a new skill or area of competence.
— Rapidly meet a company’s need for key resources.
— Gain a means of Distribution in International market.
— Overcome legal or Regulatory barriers.
— Diversification of business.
— Avoiding competition.
— Focus on New Products and Restructuring.
— Gaining cost and quality competitiveness defend business interests, updating
technology.
— Increasing efficiency through economies of scale, specialisation etc.
Answer 4(d)
Certain key success factors are:
— Mutual Trust : Mutual trust at senior management level carry ventures through
turbulent times.
— An ability to compromise : When there are two strong companies, the ability to
compromise is not easy to achieve. If you expect to receive some valuable
technology, production or marketing know how from a partner, you must be willing
to give something.
— Favourable business condition : Launching an alliance when favourable business
conditions exist makes a venture life considerably easier for its partners.
— Alliance Autonomy : The autonomy mandates a high degree of responsibility and
good judgement by the ventures management.
— Dynamic management structure.
— Encouragement of calculated initiatives.
— Systematic task setting.
— Equal distribution of authority.
— Streamlined communication channels.
— Development of multi-manager roles.
The benefits of alliances can be leveraged by adequate internal communication mecha-
nisms. Managing alliances will test even the most competent of executives. The capabili-
ties include not only careful planning and implementation, but also a broad perspective
and an open mind.
Question 5
Modern Pharmaceuticals Ltd., India (hereinafter called the First Party), is entering
into a joint-venture agreement with Afro-Drugs, Nigeria (hereinafter called the Second
 11 PP–SMAIT–December 2009
Party) to incorporate a new company in India for setting-up a pharmaceutical
manufacturing project. In this context, answer the following :
(a) What is the nature of the joint-venture project ? (5 marks)
(b) Draft the following clauses to be included in the joint-venture agreement/articles
of association of the new company :
(i) Allotment of shares to the first Party and second party with lock-in-period.
(ii) Suitable restrictions on the transfer of shares during the lock-in-period.
(iii) Exit route.
(iv) Right to first refusal in case any party decides to exit.
(v) Arbitration under the London Court of International Arbitration.
(3 marks each)
Answer 5(a)
The nature of the joint-venture project is equity joint venture. The equity joint venture
is an arrangement whereby a separate legal entity is created in accordance with the
agreement of two or more parties. The parties undertake to provide money or other
resources as their contribution to the assets or other capital of that legal entity. The
entity is generally established as a limited liability company and is distinct from either of
the parties which participate in its creation. The newly created company, thus, becomes
the owner of the resources contributed by the parties to the joint venture arrangement.
Each of the parties in turn becomes the owner of the company having equity in the
company.
The parties to a joint venture agreement agree on purposes and functions of the
newly created entity, the proportion of capital contribution by each party and the share
of each party in the profits of the company and on other matters such as its management,
operation, duration and termination and exit route etc.
Answer 5(b)
The drafts of clauses are as under in the joint venture agreement/articles of
association of the new company:
(i) The New Company shall initially allot 51% (fifty one per cent) shares to the
Mordern Pharmaciutical Ltd. (herein after called FIRST PARTY) and 49% (forty
nine per cent) shares to the Afro-drugs, Nigeria (herein after called SECOND
PARTY) in the total paid-up capital of the New Company. The initial allotment of
shares shall be subject to a lock-in-period of three (3) years from the date of
allotment of shares by the New Company.
(ii) The shares held by the FIRST and SECOND PARTY during the locked-in-period
can be transferred to and amongst the promoters. They shall, however, not sell,
transfer, pledge and assign their shares and voting rights to any third party
during the locked-in period, save and except to banks and financial institution or
any other government or statutory body to fulfill the conditions for seeking loan
and investments for the Company.
(iii) In case of unavoidable circumstances like statutory hurdles, non cooperation
or irreconcilable difference, if either PARTY would have to exit from the New
PP–SMAIT–December 2009 12
Company, the Board of Directors shall appoint and engage independent chartered
accountants of neutral nationality to evaluate and determine the ‘Net Asset
Value’ of the shares as per the latest available Balance Sheet and Profit and
Loss Account of the new company.
(iv) The continuing PARTY shall have ‘the right to first refusal’ in case any PARTY
decides to exit. The exiting PARTY shall, therefore, offer its entire shares to
the continuing PARTY at the Net Asset Value price. Valuation shall be made by
a independent chartered accountants of neutral nationality.
(v) Any dispute arising out of or in connection with this joint-venture agreement,
including any question regarding its existence, validity or termination, shall be
referred to and finally resolved by arbitration under the Rules of the London
Court of International Arbitration (LCIA) at London.
PART C
(Answer ANY TWO questions from this part.)
Question 6
Write notes on any four of the following :
(i) Controversy on Regional Free Trade Agreements.
(ii) Advantages of India joining the Association of South-East Asian Nations
(ASEAN).
(iii) Main objectives of the World Trade Organisation (WTO).
(iv) Rules of origin.
(v) Dispute Settlement System – rules-based or justice-based. (5 marks each)

Answer 6(i)
Regional Free trade agreements are considered policy compulsions, but highly
controversial in terms of economic advantages. On the one hand, RFTAs are promoted
as the instrument of forging partnerships to strengthen their position in the global economy
and to sustain economic growth. These are considered vehicles of mutual gains between
developing countries by opening up of the trade and services sectors bilaterally. However,
there is question about the economic gains from the Regional FTAs. It may cause
increasing unaccountable concentration of power and decision making; environmental
degradation; eroding workers rights; brain drain from poor countries to reach countries;
protectionism for the rich and open market for poor; positive or negative form of
interdependence. There are also concerns about the non-transparent/transparent pricing
mechanism and massive hidden subsidies and recurring trade deficits.
Answer 6(ii)
Advantages of India joining the ASEAN
— Enhancing India’s close economic cooperation and to work towards an India-
ASEAN Regional Trade and Investment Area (RTIA) as a long term objective.
— Minimising barriers and deepen economic linkages of India.
— Increasing intra-regional trade and investment.
 13 PP–SMAIT–December 2009
— Increasing economic efficiency.
— Creating a larger market with greater opportunities and larger economies of
scale for the businesses; and
— Enhancing the attractiveness to capital and talent.
Answer 6(iii)
Main objectives of the WTO
— Promotion of free trade among member countries
— Expanding trade in goods and services,
— Optimal use of the world’s resources in accordance with the objective of
sustainable development, and environmental protection.
— Ensuring that developing countries, especially the least developed countries
(LDCs), secure a proper share in the growth of international trade.
— Removal of obstacles to free trade.
— Administration of Rules, Regulations for settlement of trade related dispute among
member countries under Dispute Settlement Mechanism.
— Providing technical advice in trade related matter to all member countries.
Answer 6(iv)
“Rules of origin” are the criteria used to define where a product was made. They are
an essential part of trade rules because a number of policies discriminate between
exporting countries: quotas, preferential tariffs, anti-dumping actions, countervailing duty
and more. Rules of origin are also used to compile trade statistics, and for “made in”
labels that are attached to products. This first-ever agreement on the subject under WTO
requires its members to ensure that their rules of origin are transparent; they do not have
restricting, distorting or disruptive effects on international trade.They are administered
in a consistent, uniform, impartial and reasonable manner; and that they are based on a
positive standards (in other words, they should state what does confer origin rather than
what does not). For the longer term, the agreement aims for common (“harmonized”)
rules of origin among all WTO members.
Answer 6(v)
Dispute Settlement System
The WTO dispute settlement system is a rule-oriented system where
recommendations and rulings must aim at achieving a satisfactory settlement in
accordance with the rights and obligations of the Members under the WTO Agreement.
As a result, all solutions to matters formally raised under the consultation and dispute
settlement provisions of the WTO agreements must not nullify and impair benefits accruing
to any Member under those agreements.
Under the DSU, the “players” in a dispute settlement process are subject to certain
rules aimed at ensuring due process and unbiased recommendations and rulings. For
PP–SMAIT–December 2009 14
instance, there must not be any ex parte communications with the panel or Appellate
Body members concerning matters under consideration by the panel or the Appellate
Body.
The WTO dispute settlement mechanism provides for three main ways of resolving
disputes: (i) bilateral consultations; (ii) good offices, conciliation and mediation; and (iii)
adjudication, including arbitration.
With the exception of arbitration, adjudication cannot be requested until consultations
have taken place or unsuccessful attempts to consult have been made. The Dispute
Settlement Mechanism contains rules and procedures to be followed by WTO Members.
Question 7
(a) Prepare an executive note for the Director (R&D) explaining the roles and functions
of the Trade-Related Aspects of Intellectual Property Rights (TRIPS), World
Intellectual Property Organisation (WIPO) and Patent Cooperation Treaty (PCT).
(10 marks)
(b) Briefly explain the dispute settlement procedure of the WTO with particular
reference to dispute settlement body and provision for appeal and decision-
making process. (10 marks)
Answer 7(a)
The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) is an attempt to narrow the gaps in the way these rights are protected around
the world, and to bring them under common international rules. When there are trade
disputes over intellectual property rights, the WTO’s dispute settlement system is available.
The second part of the TRIPS agreement looks at different kinds of intellectual property
rights and how to protect them. The purpose is to ensure that adequate standards of
protection exist in all member countries. The Council for Trade-Related Aspects of
Intellectual Property Rights monitors the working of the agreement. The areas covered
under the TRIPS agreement include Copyright and related rights, such as Trademarks,
including service marks, Geographical indications, Industrial designs, Patents, Layout-
designs (topographies) of integrated circuits, Undisclosed information including trade
secrets.
The World Intellectual Property Organization (WIPO) is an international organization
dedicated to helping ensure that the rights of creators and owners of intellectual property
are protected worldwide and that inventors and authors are, thus, recognized and rewarded
for their ingenuity. In 1974, WIPO became a specialized agency of the United Nations
system of organizations, with a mandate to administer intellectual property matters
recognized by the member states of the UN. WIPO expanded its role and further
demonstrated the importance of intellectual property rights in the management of
globalized trade in 1996 by entering into a cooperative agreement with the World Trade
Organization.
WIPO seeks to:
— Harmonize national intellectual property legislation and procedures.
— Provide services for international applications for industrial property rights.
 15 PP–SMAIT–December 2009
— Exchange intellectual property information.
— Provide legal and technical assistance to developing and other countries.
— Facilitate the resolution of private intellectual property disputes.
— Marshal information technology as a tool for storing, accessing, and using valuable
intellectual property information.
Patent Cooperation Treaty (PCT) implements the concept of a single international
patent application which has legal effect in the countries which are bound by the treaty
and which are designated by the applicant. Once such an application is filed, an applicant
receives valuable information about the potential patentability of his invention (through
the international search report and the optional international preliminary examination
report) and has more time than under the traditional patent system to decide in which of
the designated countries to continue with the application. Thus, the PCT system
consolidates and streamlines patenting procedures and reduces costs, providing applicants
with a solid basis for important decision-making.

Answer 7(b)

The operation of the WTO dispute settlement process involves the Dispute Settlement
Body, the panels and the Appellate body, the parties and the WTO Secretariat. The
General Council discharges its responsibilities with respect to dispute settlement through
the Dispute Settlement Body, which is composed, of representatives of all WTO members.
Panels and the Appellate Body are the entities in charge of adjudicating disputes. The
former are composed of experts selected on an ad hoc basis. The latter is a permanent
group of seven experts in trade issues and trade law in charge of reviewing the legal
aspects of the reports issued by panels.

As a general rule the DSB is to take decisions by consensus, as is the case for all
decision-making in the WTO. It is deemed to have decided by consensus on a matter
submitted for its consideration, if no WTO Member, present at the meeting of the DSB
when the decision is taken, formally objects to the proposed decisions. However, a
radically different procedure is followed in decision-making at four key stages in the
dispute settlement process: establishment of panel, adoption of panel and Appellate
Body reports and authorization for retaliation. At these stages the decision is taken to
accept the request or adopt the report unless there is a consensus against it.

Only WTO Members can take part in dispute settlement under the WTO. WTO dispute
settlement is not open to WTO observers, other international organizations, non-
governmental organizations, local governments or private persons.

The WTO dispute settlement mechanism provides for three main ways of resolving
disputes: (i) bilateral consultations; (ii) good offices, conciliation and mediation; and (iii)
adjudication, including arbitration. With the exception of arbitration, adjudication cannot
be requested until consultations have taken place or unsuccessful attempts to consult
have been made.

Either side can appeal a panel’s ruling. Sometimes both sides do so. Appeals have
to be based on points of law such as legal interpretation. They cannot reexamine existing
evidence or examine new evidence.
PP–SMAIT–December 2009 16
The appeal can uphold, modify or reverse the panel’s legal findings and conclusions.
Normally appeals should not last more than 60 days, with an absolute maximum of 90
days. The Dispute Settlement Body has to accept or reject the appeals report within 30
days and rejection is only possible by consensus.
These approximate time lines for each stage of a dispute settlement procedure are
target figures. In addition, the countries can settle their dispute themselves at any stage.
The approximate period of settlement of dispute is 1 year (without appeal) and 1 year 3
months (With appeal).
Question 8
Attempt any five of the following :
(i) Explain ‘domestic industry’ in the context of dumped goods. (4 marks)
(ii) Explain the ‘principle of distortion’. (4 marks)
(iii) “Presently Indian exporters are facing non-tariff barriers and quantitative
restrictions from the European Union facing economic slowdown.” In this context,
distinguish between the ‘non-tariff barriers’ and ‘quantitative restrictions’.
(4 marks)
(iv) The Indian manufacturers of industrial goods and chemicals have complained
to the Director General of Safeguard, Ministry of Finance, about heavy losses
suffered by them due to cheap import of industrial goods and chemicals from
China. State whether the Director General of Safeguard should exercise total
control over import of industrial goods and chemicals or impose import duties
on the imported industrial goods and chemicals. (4 marks)
(v) The European Union has registered complaint with the WTO that India is restricting
import of foreign liquor by imposing very high duties. Comment on the Indian
plea that sale of liquor in India is a State subject. (4 marks)
(vi) US has imposed a 98.4% anti-dumping duty against the Chinese imports of
steel pipes, besides additional countervailing duties to off-set the subsidies
given by China on steel pipes. What remedy is available to China ?
(4 marks)
Answer 8(i)
Domestic industry in the context of dumped goods means the Indian producers of
like articles as a whole or those producers whose collective output constitutes a major
proportion of total Indian production. Producers who are related to the exporters or
importers or are themselves importers of the allegedly dumped goods shall be deemed
not to form part of the domestic industry.
Answer 8(ii)
Essentially, trade is distorted if prices are higher or lower than normal, and if quantities
produced, bought, and sold are also higher or lower than normal — i.e. higher than the
levels that would usually exist in a competitive market. For example, import carriers and
domestic subsidies can raise crop prices on a country’s internal market. The higher
prices can encourage over-production, and if the surplus is to be sold on world markets,
where prices are lower, then export subsidies have to be paid. When some countries
 17 PP–SMAIT–December 2009
subsidize and others do not, the result can be that the subsidizing countries are producing
considerably more than they normally would.
Answer 8(iii)
Non tariff barriers are technical regulations and standards; import licensing; rules for
the valuation of goods at customs; preshipment inspection; further checks on imports;
investment measures.
Quantitative Restrictions, on the other hand, refer to specific limits imposed by
countries on the quantity or value of goods that can be imported or exported to regulate
or prohibit international trade. Quantitative Restrictions specifically refer to measures
such as licensing requirements for exports/imports, quotas and ceilings.
Answer 8(iv)
The Director General (DG) of Safeguard, on the complaints of the India manufacturers,
cannot put total control over import of industrial goods and chemicals imported from
China because a total control violates the WTO multilateral trading norms.
The right course of action is that DG Safeguard can carry out safeguard investigations
against import of industrial goods and chemicals. The investigations if lead to the
conclusion that there is sharp increase in the import of industrial chemicals, leading to
losses for the domestic industry, it can impose 200-day temporary import duties on the
import of industrial chemical. The safeguard duty could be in place up to three years if
the injury continues. Safeguard duty usually takes the form of increased duties and acts
as quantitative restriction on imports.
The WTO allows use of ‘Special Safeguard Measures (SSM)’ to its members for
preventing injury to a local industry due to imports. The SSM leads to imposition of
additional import duties on products after it is conclusively proved that there has been a
surge in the import of an identified product leading to domestic market disruption and
injury to the industry. India can use the WTO approved SSM where special import duties
are imposed to prevent import surges to help Indian industry against cheap imports.
Answer 8(v)
There is a threefold distribution of legislative powers stipulated in Article 246 read
with Schedule VII of the Constitution of India. List I of the Union list in Schedule VII
comprises of 99 items or subjects over which the Union shall have the exclusive powers
of legislation. List II comprises of 61 items over which the State Legislature shall have
the exclusive powers of legislation. List III the concurrent list comprises of 52 items
over which the Parliament and the Legislatures of States shall have concurrent powers.
Imposition of excise duties on alcoholic liquor for human consumption, opium etc is
the legislative competence of the State Government under Article 246 read with
Schedule VII of State List.
Answer 8(vi)
The Chinese Government can seek and question the safeguard investigation report
of the US Government on the import of steel pipes by the US industry. In case the
investigation lacks of factual data, the Chinese Government can ask for withdrawal of
the antidumping and countervailing duties. China can use the WTO’s dispute settlement
procedure to seek the withdrawal of the subsidy.