International Trade Law - Essay Example

International Trade Law Introduction Before being able to interpret or critically assessed Article XXIV of the General Agreement on Tariffs and Trade, an overview of the principles and other facts of GATT and the World Trade Organization (WTO) should be discussed in order to have a basis on what Article XXIV of the General Agreement on Tariffs and Trade (GATT) is all about. While the aforementioned GATT article pertains to customs unions and free trade areas, the statements within its provisions conform to GATT and WTO facts and principles. The General Agreement on Tariffs and Trade was created by the United States and its allies after the Second World War. Its creation was an answer to the disruptions of trade that happened during the Great Depression and during World War II. The GATT was signed in 1948 and was considered as an after war opening of trade liberation in the World. GATT was an agreement between the contracting parties – the member nations in this case, to lessen or minimize trade barriers and place all nations on an equal footing in terms of trading relationships. In 1995, the GATT was changed into the World Trade Organization or WTO. The WTO is composed of the main provision within the GATT. However, the role now includes a system intended to improve GATT’s process for resolving trade disputes among the member nations. The GATT was based on several principles that were created in order to promote a more liberalized trade1. The first principle was nondiscrimination, which symbolizes the principle of most favored nation and national treatment. In the most favored nation principle, all member __________ 1Robert J. Carbaugh, International Economics, 6th Edition: South Western College Publishing, Cincinnati, Ohio, 1998. nations are bound to grant each other the same treatment they give to any nation in regards to trade matters. Hence, every member nation should treat each other equally without granting favors on one particular member due to certain biases. This permits comparative advantage to be the determining aspect of any trade pattern. Allowable to exceptions to the most favored nation principle are regional trade blocs. Under the national treatment principle, member nations should treat both their own domestic produce and goods equally with that of foreign goods or products, where domestic regulations and taxes cannot be subjectively imposed on foreign goods. Likewise, the GATT principle of non discrimination makes trade liberalization a public good. Meaning, what was produced by one nation in negotiation with another member nation must be available to all members. This paves way in the coordination of problem shared by all public goods; where each party should participate in the liberal trade and not just enjoy a free ride on the efforts of others in the liberalization process. Another principle is the principle of reciprocity which is embodied by the reciprocal trade agreements act. The combined impact on United States exports of the Great Depression and the foreign retaliatory tariffs imposed in reaction to the Smooth Hawley Act resulted in the reversal of the U.S. trade policy. In 1934, Congress passed the Reciprocal Trade Agreement Act which paved way for the trade liberalization act, which is specifically aimed in the reduction of tariff. The reciprocal trade act is composed of: 1) the negotiating authority and 2) generalized reductions2. The Reciprocal Trade Agreement Act also provides for the general reduction of tariffs __________ 2John Kline, State Government Influence in U.S. International Economic Policy (Lexington, Mass., pp. 87-91. through the most favored nation (MFN) clause. This clause provides the agreement between two nations to apply tariffs to each other at rates as low as those applied to any other nation, According to the provisions of the WTO there are two exceptions to the most favored nation clause: 1) industrial nations can grant preferential tariffs to imports from developing nations that are not granted to imports from other industrial nations and 2) nations belonging to the regional trading arrangement can eliminate tariffs applied to imports of goods coming from other members while maintaining tariffs on imports from non-member nations. A disadvantage of the GATT trade negotiation between 1940 to 1970 was that it had a limited number of member nations that were actively participating. Most nations which are developing countries have remained on the sidelines and became free riders on the liberalization activities of others. Said nations maintained protectionist policies to support domestic producers while realizing the benefits of the trade liberalization abroad. GATT also performs a role in the settlement of trade disputes. In general, trade disputes are matters that should be resolved between the disputing parties, where no third party was available for appeal and remedy. Consequently, conflicts remain unsettled for a period of years. And when the trade dispute has been settled, it is always the stronger country who wins at the expense of the weaker country. To prevent such situations, BATT imposed a dispute resolution process by formulating complaint procedures and providing a conciliation panel where the aggrieved country could express its grievances. While GATT may have created and provided such procedures, GATT is not included in the authority to enforce the conciliation panel’s recommendation or verdict. This disadvantage led to the creation of the World Trade Organization (WTO)3. __________ 3Bernard Hoekman, The WTO: Functions and Basic Principles. 2001. Body/Discussion Trading According to the GATT With regards trading, GATT obligated its members to use tariffs rather than quotas to protect their domestic industry. GATT’s presumption was that quotas were more trade altering than tariffs because it allows the user to choose between suppliers, was not predictable, transparent to the exporter and imposed a maximum ceiling or limit on imports of goods. In relation to this, there were exceptions to GATT’s prohibition of quotas. Member nations could use quotas to safeguard their balance of payments, promote economic development policies and allow the operation of domestic agricultural support programs. Voluntary-export-restraint agreements, which used quotas, also fell outside the quota restriction of GATT because the agreements were voluntary. The Rounds (Negotiations) GATT sponsored a series of negotiations or rounds to reduce tariff and non-tariff trade barriers. The first round of GATT negotiations was completed in 1947 where it accomplished tariff reductions averaging twenty-one percent (21%). But tariff reductions were much smaller in the GATT rounds of the 1940s and 1950s. The protectionists pressures heightened in the United States as war damaged industries in Japan and Europe were restructured or rebuilt. Bilateral bargaining was also introduced where tariff cuts on particular products were done all at the same time by participating member nations. However, this process was long and difficult since majority of the nations were not willing to consider tariff cuts on many of their goods. Hence a new system of trade was needed. From 1964 to 1967, the Kennedy Round of trade negotiations occurred, where a multi- lateral meeting of GATT members/participants concurred in forming of the negotiations, which changed or veered away from product-by-product system to an across-the-board format. Tariffs were applied to a wide range of goods where a given rate of reduction was applied to the whole group, which is a more streamlined approach. The Kennedy Round was able to cut tariffs on manufactured goods by an average of thirty-five percent (35%), and with an advalorem of 10.3 percent. GATT rounds from 1940 to 1960 were focused mainly on the reduction of tariffs. Since tariff rates in industrial nations decreased during the postwar period, the importance of non-tariff barriers puts emphasis on the issues of non-tariff misrepresentations within the international trade. The Tokyo Round of 1973 to 1979 was directed mainly at reducing or eliminating certain non-tariff barriers although additional tariff cutting was also addressed. The Tokyo Round also managed to accomplish the removal and lessening of many non-tariff barriers. Codes of conduct were created in six areas as follows4: 1. Customs Valuation 2. Import Licensing 3. Government Procurement 4. Technical Barriers to Trade 5. Anti-Dumping Procedures 6. Countervailing Duties The codes specify suitable government policies and procedures, where it aids the GATT committee to resolve international disputes in each respective area. __________ 4Ibid, Hoekman But during the 1980s, the GATT system has weakened due to bilateral arrangements and other trade distorting actions of member nations. Additionally, the world leaders felt that GATT needed to include areas such as intellectual property, services and agriculture within the trade. Concern was also aired for the developing countries that were bypassed in the previous GATT rounds of trade negotiations. These concerns led to the establishment of the Uruguay Round of 1986 to 1993. The Uruguay Round is the most comprehensive trade agreement that was done under the GATT. It surpassed the others because the Uruguay Round has created three new agreements as follows5: 1. It dealt more directly and extensively with non-tariff barriers to trade than any past agreement. 2. It brought several product sectors under international trade rules for the first time. 3. The agreement went a long way toward establishing a single set of trade rules applicable to all countries, limiting the ability of a country to pick and choose what trade obligations they would accept. Significantly, the Uruguay Round was also able to decrease or eliminate non-tariff barriers, where the government procurement code opened a wider range of markets for signatory nations. It likewise eliminated quotas on agricultural nations and instead relies on tariffs. The negotiations and agreements within the Uruguay Round accomplished important liberalization in the traditional trade areas. It also extended trade disciplines to three new areas which are 1) intellectual property, 2) services, 3) agriculture, 4) textiles and apparel, 5) aviation, 6) subsidies, and 7) antidumping. __________ 5Staffan B. Linder, An Essay on Trade and Transformation: New York: Wiley, 1991. The Uruguay Round paved the way for transforming the GATT into a more permanent international organization in the form of the World Trade Organization or WTO. The World Trade Organization is responsible in governing or overseeing the conduct of trade relations among its members. The World Trade Organization was created on January 1, 1995, the day on which the Uruguay Round took effect. The GATT obligations remain as the core of WTO. Nevertheless, the World Trade Organization Agreement necessitates that its members adhere not only to GATT rules, but also to the broad range of trade agreements that have been negotiated under the GATT in the past decades. This responsibility marks the end of the free rides of many GATT members especially the developing countries that benefited from the liberalization of goods, but refuse to join new pacts or negotiations in the GATT since the 1970s. WTO is different from GATT in the sense that WTO is a full-fledged international organization which has its headquarters in Geneva, Switzerland, while the GAT was basically a provisional treaty serviced by an ad hoc secretariat6. The WTO has a wider scope that the old GATT, bringing into the multilateral traditional system for the first time, trade in services, intellectual property and investment. The WTO also administers an integrated package of agreements to which all members are committed. In contrast the GATT framework included many side agreements (antidumping, and subsidies) whose memberships was limited to a few nations. In addition, WTO reverses policies of protection in certain “sensitive” areas (like agriculture and textiles) that were relatively put up with in the old GATT. The WTO is not a government entity, but is an organization made up of several member countries that retain their rights to establish how they will make national laws in conformity to their national obligations. In the course of various councils and committees, the WTO administers the many __________ 6WTO, Legal Texts: GATT 1947 (Article XVII – XXXVIII). agreements contained in the Uruguay Round, plus agreements on government procurement and civil aircraft. It manages the implementation of tariff cuts and reduction of non tariff measures agreed to in negotiations. It is also the watchdog of the international trade, because it regularly examines the trade management of members. Members are also required to update various trade measures which are maintained by the WTO in a large database file. The Principles of GATT/WTO and the RTA The major objective of WTO was the strengthening of the GATT trade-dispute settlement method where WTO addresses each of these weaknesses and brings the case to the dispute panel and sets time limits for the processing of the complaint. The decision of the panel may be taken to a newly created appellate body, but the accused party cannot block the final decision. A nation that loses a dispute must bring the offending practice into conformity, offer suitable compensation to the aggrieved party or face retaliation. The dispute settlement issue was essentially important to the United States as it is the most frequent user of the GATT dispute mechanism. The trade liberalization came from two kinds of approaches. The first one was from the nondiscriminatory principle that was discussed earlier and the second one was in the form of regional trading agreements or RTAs. Under the RTA, all member nations must concede in the imposition of lower barriers to trade within the group instead of trading with nonmember nations. While each member nation continues to manage its domestic policies, the trade policy of each member nation must include preferential treatment for group members. The Regional Trading Agreements for free trade areas and customs unions was exempted from the principle of nondiscrimination that was included in the World Trade Organization7. ___________ 7J. Sporas, Equalizing Trade? Oxford, Clarenton Press, 1983. In connection with the preceding paragraphs, the term economic integration has been defined by economists as “a process of eliminating restrictions on international trade, payments and factor mobility.” Hence, economic integration unites two or more national economies in a regional trading arrangement. In conformity to this, free trade area is an association of trading nations whose members agree to remove all tariff and non-tariff barriers among themselves. But each member maintains its own trade restrictions to countries or nations who are not members of the World Trade Organization. Likewise, a customs union is an agreement between two or more trading parties to remove all tariff and non-tariff trade barriers among themselves while imposing identical trade restrictions against non member nations. The consequence of having a common external trading policy is to have free trade between all members and imposing an equal trade restriction to outsiders. RTAs or Regional Trading Agreements enhances economic growths which generally allow economies to8: 1. Have large scale production. 2. Foster specialization 3. Attract foreign investments 4. Solidify domestic economic reforms. It is important to consider that when new regional trading agreements form or when existing ones expand the opportunities of not being a member nation increases. This fact is attributable to a decrease in market share as the exporting interest of a non-member nation outweighs its import competing interests. Regional Trading Agreements or RTAs are basically formed as follows: __________ 8Richard Harmsen, et al. “International Monetary Fund, World Economics and Financial Surveys: Regional Trading Arrangements the Uruguay Round and Beyond. Volume II, 1994, p. 99. 1. The first is by adhering to the provisions of Article XXIV which remained as is from 1947 to 1944. The Uruguay Round Agreement or URA only simplified this particular article but did not alter the provisions of Article XXIV that presents the operation and formation of customs unions and free trade areas that covers trade in goods. In article XXIV, customs unions and free trade areas are exempted from the Most Favorable Nation (MFN) principle. It follows that members of customs unions (CU) or free trade areas (FTA) should: a) conduct a free trade among themselves and b) post union or post FTA barriers on trade with nations who are not members of customs unions or free trade areas must not be “more restrictive that those that members had prior to their forming a customs unions or free trade areas.” 2. The second way of forming RTAs within developing countries is through the Enabling Clause of the Tokyo round Agreement in 1979. The Enabling Clause postulates that developing countries who are members of the World Trade Organization must be engaged in reciprocity and more participation in the liberalization of goods. The Enabling Clause also discusses the differential and more favorable treatment principle. Paragraph 2c allows that “preferential arrangements among developing countries in goods trade.” Within this provision, developing countries have agreements regarding tariff preferences9. Article XXIV (Customs Union and Free Trade Areas – Notification and Surveillance) A customs unions or free trade areas which is in line with Article XXIV does not evaluating its uniformity was not successful10. The reason for this could be attributed to the fact __________ 9US-Canada Free Trade Agreement, Summary of Major Provisions: Washington D.C.: Office of Public Affairs, Office of the Trade Representative, 1987. 10Asian Development Bank Incorporated. GATT/WTO Provisions and RTAs. http://www.adbi.org /discussion-paper/2007/06/2253.doha program/gattwto.provisions.and.rtas/ that preferential trade agreements are permanent and the treatment of all members is not on equal necessarily means that there was progress in global welfare, since the process incorporated in footing. The increase of Regional Trade Agreements is alarming because it could lead to the weakening of the multilateral trading system. This came under the scrutiny and discussion of the World Trade Organization, thus it created the Committee on Regional Trade Agreements (CRTA) to oversee the debate regarding RTA formations. This main role of the CRTA is to observe RTAs whether they are well-suited with the structure of multilateralism. RTAs which fall under Article XXIV are given to the Council for Trade in Goods (CTG), which gets its “terms of reference” and reassigns the agreement to the CRTA for assessment. The notification of agreements that are under the Enabling Clause of the Tokyo Round is given to the Committee on Trade and Development (CTD). The agreement is then discussed and debated on, but more often than not, no in-depth analysis by the CRTA is appealed for by the CTD. RTAs regarding trade in services which is finally ended by a WTO member (developed or developing) are given to the Council for Trade in Services (CTS). While the CTS decides to pass the agreement to the CRTA for scrutiny, this is in contrast to the case of RTAs that fall under GATT Article XXIV, where the scrutiny or assessment is not really mandatory and is often optional. The assessment or evaluation of the CRTA on the consistency of RTAs with the established multilateral trading system has by far no success due to political and legal complexities that were still left over from the GATT years. Such problems may be attributable to the uniformity of the CRTA’s judgment and the process by which a dispute is settled. Officiating members are hesitant to give out any information or consent to conclusions which could later be interpreted by a panel in-charge of dispute settlements. Moreover there are old disagreements regarding how the World Trade Organization interprets provisions where RTAs are based. This includes the fact that there are problems within the institution created from the absence of WTO rules or a discrepancy between the rules and those within the RTAs. Further, the increasing number of RTAs poses a risk of having trade policies that are illogical and currently being put into practice11. With regards to notification and surveillance, there are more than two hundred notification requirements within the various WTO agreements which is mandated by the council and ministerial resolutions. Similarly, the WTO has significant surveillance activities since it regularly evaluates trade policies and foreign trade administrations of each nation member. The World Trade Organization’s Trade Policy Review Mechanism (TPRM), institutes during the Uruguay Round formed a 1979 Understanding on Notification, Consultation and Surveillance where contracting parties concede to administer a customary and general review regarding developments within the trading structure. TPRM’s aim is to inspect the effect of each member nation’s trade policies and practices in relation to the current global trading system and adds to the improved transparency of the World Trade Organization rules on liberal trading. The TPRM was mainly created because the United States was the only country that was able to provide a review of global trade policies. It is actually an essential factor of the WTO since it promotes transparency and enhances communications, thus strengthening the multilateral trading system. In addition to this, the four biggest players involved in the world trade are: the European Union, the United States, Japan and Canada. The other sixteen largest players are under review every four years while the remaining members are evaluated every six years. And __________ 11Ibid, Carbaugh. for the least developed countries the period of examination regarding trading policies would be conducted for a longer period of time12. By being able to ascertain and have peer review on the trade policies of the biggest industrial countries’ markets, the TPRM gives developing countries a better chance to gain more knowledge and insights from the multilateral trading system. At the same instance the TPRM provides domestic interest groups with significant data regarding cost benefits of national trade policies. But although international trade can provide benefits to domestic producers and consumers, come economist state that the current international trading system hinders economic development in developing nations for it is believed that conventional international theories based on the principle of comparative advantage is irrelevant for said nations. In the formation of free trade areas, each nation produces what it does best and permits trade, which over the long run will benefit from lower prices and higher levels of output, income and consumption than could be achieved in isolation. In the global market, the comparative advantage is constantly changing depending on the shifts in technologies, input productivities and wages, as well as tastes and preferences. A free market compels adjustments to take place. Either the efficiency of an industry must improve or some other resources will come from low productivity uses in relation to the one with a high productivity. Tariffs and other trade barriers are viewed as tools that prevent the economy from undergoing adjustment, resulting in economic stagnation. Since RTAs dominate most WTO policies with regards to trade, the possible welfare implications of regional trade agreements come in the form of: 1) the static effects of economic integration on productive efficiency and consumer welfare; 2) and the dynamic effects of __________ 12Richard Freeman. “Immigration, Trade and the Labor Market. Cambridge, Mass.: National Bureau of Economic Research, 1988. economic integration which relate to a member nation’s long run rates of growth. Since a small change in the growth rate can lead to a substantial snowballing effect on national output, the dynamic effects of trade policy changes can produce substantially larger magnitudes than those based on static models13. Conclusion The formation of the customs union under the conditions of free trade affects world welfare in two opposing ways: 1) trade creation effect, and a welfare-increasing trade creation effect and 2) a welfare-reducing trade diversion effect. This depends on the relative strength of these two opposing forces. By chance, trade creation occurs when domestic production of one customs union member is replaced by another member’s lower cost imports. The welfare of the member countries is increased by trade creation because it leads to increased production specialization according to the principle of comparative advantage. The trade creation effect consists of consumption effect and production effect. The development of the customs unions and free trade areas that adheres to Article XXIV also generates a production effect that results in amore efficient use of world resources. Eliminating the tariff barriers means being able to compete against lower-cost and more efficient producers. Inefficient domestic producers drop out of the market resulting in a decline in home output.. The overall trade effect of this situations result to a more favorable production effect. Although a customs union may add to world welfare by way of trade creation, its trade diversification effect generally implies a welfare loss. Trade diversion occurs when imports __________ 13G. Grossman, et al. “Environmental Impacts of a North American Free Trade Arrangement” NBER Working paper Series, 1991, No. 3914, Cambridge, Massachusetts, National Bureau of Economic Research. from a low cost supplier within the union. This suggests that world production is reorganized less efficiently. Consequently the formation of a customs union will increase the welfare of its members as well as the rest of the world, if the positive trade creation more that offsets the negative trade diversion effect. In extreme cases where the union is made up of the entire world, there can only exist trade creation and not trade diversion. The scope of trade diversion is smaller when the customs union’s common external tariff is lower rather than higher. Because a lower tariff allows greater trade to take place with nonmember nations, there will be less replacement of cheaper imports from nonmember nations by relatively high cost of imports from partner nations. With freer trade domestic producers must compete or face the possibility of financial bankruptcy. In order to survive in expanded and more competitive markets, producers must undertake investments in new equipment, technologies and product lines. This will have the effect of holding down costs and permitting expanded levels of output. Capital investments may also rise if non-member nations decide to establish subsidiary operations inside the customs unions to avoid external tariff barriers14. The transition for a Market-Oriented Economy requires giving up ownership of privately owned properties and removing central planning systems for decent living standards. Therefore, to maintain healthy market economies would require: 1. establishment of sound fiscal and monetary policies; b) removing price controls; 3) opening economies to competitive market forces; 4) establishing private property rights and a legal system to protect those rights; and 5) reducing government involvement in the economy for an open trade. _________ 14P. Krugman, “Industrial Policy and the New International Economics. Cambridge, Massachusetts, MIT Press, 1986. Bibliography Asian Development Bank Incorporated. GATT/WTO Provisions and RTAs. http://www.adbi.org/discussion-paper/2007/06/2253.doha program/gattwto.provisions.and.rtas/ Brander, J. and Spencer, B. International R&D Rivalry and Industrial Strategy, Review of Economic Studies, 1983, pp.707-722. 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