The Fate of Taamail's Export - Assignment Example

The Fate of Taamail's Export 1. Introduction The principle of special economic needs for the least developed countries (LDCs) was recognized in the GATT 1965, where the preferential treatment of such countries in matters of trade, tariffs and other legal measures was deemed a necessary vehicle to both trade liberalizations and also for enhancing the economic development of the LDCs (Mckenzie, 2005). Consequently, the World Trade Organization (WTO) has recognized the need for the preferential treatment of the developing countries in matters of trade as provided for under the Article I:1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994), targeting the most-favoured-nations (MFN) (GATT, 1979). Therefore, the World Trade Organization (WTO) regulatory context relevant in this case goes back to the Generalized System of Preferences as established under the Enabling clause of the GATT, allowing for the preferential treatment of the developing countries over their developed counterparts in matters of trade relationships (EC, 2004). The relevant legal issue is whether the recent change in the Generalized System of Preferences (GSP) as developed by Solia are in violation of Article I and Article III of the GATT of 1994. The most relevant legal issue under this case however, is the existing inconsistency between the provisions of Article I: 1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994), as required to apply to all the members of the World Trade organization, and the Enabling Clause as implemented by the member states of the GATT. The provisions of Article I: 1 of GATT 1994 requires that any preferential treatment in relation to tariffs that is offered to one of the member states should “immediately and unconditionally” be accorded to all the other members in relation to similar products and other associated trade measures (GATT, 1979). On the other hand, the Enabling clause of the GATT provides for preferential treatment of some nations over the others in relation to similar products and associated trade measures, based on certain considerations and requirements for fulfilment of assigned conditions under their specified Generalized System of Preferences (Mckenzie, 2005). Nevertheless, the applicability of the Generalized System of Preferences as provided under the Enabling clause of the GATT should be subjected to authorization, and subsequent WTO waiver of Article I: 1 of GATT for a specified period of time (Gowa & Hicks, 2012). Taamail is a textile manufacturing and exporting company that is based in Findonia, a least developed country (LDC), soon to be elevated to the status of a developing country. On the other hand, Solia is an already developed country, which consumes approximately 60% of the textile products that are exported by Taamail. Solia has implemented a system of Generalized System of Preferences, which allows for preferential treatment in tariffs, for the products imported from the LDCs. Solia has implemented a GSP regulation that favours countries that will enact terrorism fighting policies under its special 'terrorism action waiver' GSP. Further, Solia has implemented a 5% ad valorem tax on all imported textile products that will begin on September 2015. Therefore, the two legal issues requiring to be addressed under this case are; (1) is the 'terrorism action waiver' GSP introduced by Solia a violation of the Article I: 1 of GATT?, and (2), does the introduction of a 5% ad valorem import Tariffs for textile products imported to Solia amount to the violation of Article III of the GATT? 2. Description of possible impacts of Taamail’s business stemming from regulatory changes The regulatory changes enacted by Solia are likely to have an adverse effect on Taamail’s business. The fact that Solia has enacted a special 'terrorism action waiver' GSP requiring that the member states enact policies targeted at fighting terrorism in order to qualify for the duty free import of listed products, means that Fugit's products, which are the competitor products for Taamail’s business in Solia will have a favourable advantage. Bodiland, the country in which Fugit Textile Company is situated has already enacted laws that are targeted at fighting terrorism. This means that Fugit’s product will now be imported in Solia duty free. On the other hand, Findonia is not a terrorism prone country, which means that it may not enact policies targeted at fighting terrorism. Therefore, considering the fact that Bodiland is an already developed country which competes for the textile market in Solia with Findonia, a LDC that is soon to be elevated to a developing country, it is highly likely that Bodiland will end up benefiting more from the trade with Solia, compared to Findonia. Previously, Taamail was favoured by Solia’s GSP, which allowed Taamail to export its product to Solia at 0% import duty. This enabled Taamail to be able to compete effectively in the Solia textile market, managing to curve a market where it could export 60% of its total textile product exports. Even after the enactment of the recent GSP changes by Solia, Taamail may not be affected, since the import tariff duty for the LDCs, which Findonia currently belongs to, have not been changed and thus it remains at 0%. However, the change will affect Taamail’s business negatively, since Fujit which is its main competitor in the market did not benefit from the 0% import duty previously, since it is a company from an already developed country. Considering the fact that its country has now qualified for free import duty courtesy of being able to meet the 'terrorism action waiver' GSP recently enacted by Solia, Fujit can now be able to export its products more easily now, than it did before. The overall effect is that it will be able to compete more favourably compared to Taamail which is a company from a LDC. This simply means that Taamail is now likely to lose part of its market share in the Solia textile market to Fujit. The overall impact of Taamail’s business is that it will affect the economy of Findonia negatively, since with a lost market share in the Solia textile market which was its largest export market, sales and productivity will decrease, thus decreasing the tax payable to Findonia. Consequently, the economic growth of Findonia will decline. 3. The legality of Solia's GSP act under WTO Law The legality of Solia’s GSP can be assessed based on two different WTO legal provisions. First, it can be assessed based on the internal market protectionism law as provided under the Article III of GATT. Secondly, it can be assessed based on the favourable treatment of trading partner’s law as provided under Article I of the GATT. First, Solia's GSP act under WTO Law, as assessed based on the provisions of Article III of GATT, is illegal. This is because, according to the provisions of Article III of GATT, a country should not apply tax or regulatory measures that are targeted at creating unfavourable competitive environment for imported products, while favouring the domestic production (GATT, 1979). Thus, the purpose of Article III of GATT is to avoid the protectionism of the internal markets of the World Trade organization member states, through the application of internal measures. The intention of the enactment of Article III of the GATT, according to the ruling in the case of Appellate Body Report, Japan — Alcoholic Beverages II, provided in p. 16, is to treat both the imported and the similar domestic products the same, once the imported goods have been cleared through customs (World Trade Organization, 2015). Nevertheless, Solia has gone ahead to enact a 5% ad valorem tax on all imports from developed countries, among which the textile products are listed. The introduction of the 5% ad valorem tax, which is targeted at taxing the property value of all the products imported into the country at a rate of 5% of the total importation value, is meant to reduce the profitability of the imported products from other countries, while giving a competitive profitability advantage to the domestically produced goods. This was clarified as an illegality under the Appellate Body Report, Canada — Periodicals, p. 18, which clarified that the fundamental purpose of Article III of GATT 1994 as that one of creating an equally competitive environment for and within all member states (World Trade Organization, 2015) Thus the national treatment obligation is meant to ensure that countries will not apply international measures to undermine equal internal markets competitiveness for imported and domestic similar products (Horn & Mavroidis, 2004). The introduction of a tax on imports is a measure that is taken by countries to ensure that they limit the quantity of the products imported into the country from other countries, since an importation tax makes importation more expensive. The major aim of imposing such a tax is to ensure that the domestically produced goods have a favourable competitive advantage over the imported goods, since their overall cost of delivery to the market is much lower, compared to the cost of delivery of the imported goods that have been charged an importation tax. Thus, according to the Panel Report, US — Section 337, paragraph 5-10, the WTO member states are prohibited from enacting tax and regulatory measures that create protection for the domestic production, and thus obligates the member states to provide equality of competitive products that is similar to that of the domestically produced goods (World Trade Organization, 2015). Therefore, it can be concluded that Solia's GSP act of enacting a tax regulation, requiring charging 5% ad valorem tax on all imported products from the member states, is in violation of the provisions of Article III of GATT. Thus, it can be termed as an illegality. Further, the competitiveness of the imported and the domestically produced goods requires to be treated the same, regardless of whether the products are directly competitive products or substitutable goods. According to the findings and conclusions provided in the Appellate Body Report, Korea — Alcoholic Beverages, para. 120, the equality of the competitive condition for both the domestically produced and the imported goods should be guaranteed by the member states of the WTO for all similar products (World Trade Organization, 2015). This should apply to all similar goods, notwithstanding whether the imported goods are directly competitive goods or whether they are substitute goods. In addition, findings and conclusions of the Appellate Body Report, Canada — Periodicals, p. 18, provides that the requirement for the creation of equality between the domestically produced goods and similar imported goods is not restricted to the products that are subject to tariff concessions only, but also to all other products that are subject of trade between member countries (World Trade Organization, 2015). The relevance of this emphasis is to underline the need to ensure that all imported products from the member states of the WTO are granted equal competitive opportunities as the domestically produced goods. Therefore, the enactment of the 5% ad valorem tax by Solia as a regulatory measure for products imported from other domestic product is an illegality, since it goes against the provisions of Article III of GATT 1994. Secondly, the legality of Solia’s GSP can be assessed based on the favourable treatment of trading partner’s law as provided under Article I of the GATT 1994. The provisions of Article I: 1 of GATT 1994 requires that an advantage, favourable treatment or privilege that is accorded to a contracting party or products to a contracting party should be accorded to all other contracting parties or similar products immediately and unconditionally (Mckenzie, 2005). This simply means that any favourable treatment, advantage or privilege that a member state to the WTO grants to one of the other member states should be replicated to all the other territories, that all member states may have equal competitive opportunities. However, the enactment of the 'terrorism action waiver' GSP by Solia goes against this provision, because it gives the countries which are able to enact terrorism policies an advantage that is not replicated to all the other member states. Therefore, the action of Solia enacting the 'terrorism action waiver' GSP can be termed as an illegality. However, since Solia is a western developed nation, its action of enacting the 'terrorism action waiver' GSP may not be deemed entirely an illegality, since the Enabling clause of the GATT allows for the preferential treatment of some countries over the others, as a means of inducing the countries to implement certain target measures (Sykes,1998). Therefore, Solia can legally treat or accord some countries a preferential treatment in matters of trade and tariff regulation, in return for such countries enacting measures that would ensure improvement of the trade conditions between the countries. However, the Generalized System of Preferences (GSP), as provided for under the Enabling clause of the GATT is inconsistent with the provisions of Article I: 1 of GATT 1994, requiring that the preferential treatment should be replicated to all the member states (Mckenzie, 2005). In this respect, it is required that the WTO member states should seek a time-limited WTO waivers of GATT or even a waiver from other necessary GATT obligations, in order to implement the GSPs that are more favourable to some nations than others (Grimmett, 2011). Therefore, it would be expected that Solia would seek a limited WTO waiver to implement it’s recently enacted 'terrorism action waiver' GSP, so that its implementation can become legal. It is only through the authorization of the WTO, that the GSPs seeking to confer some privileges, favourable treatment and privileges to some member countries over the others can be legalized (Grimmett, 2011). Thus, considering the fact that Solia’s GSP enactment was not authorised by WTO, it can be conclude to be an illegality. 4. A possible strategy to get your situation and claim heard by Findonia's government and the WTO's organs The strategy to have the claim of the illegality of Solia’s recent GSP enactment heard by both the Findonia government and the relevant WTO organs entails the presentation of the adverse effects of the enactment to both authorities. First, the strategy is to present the negative implication of the Solia’s GSP enactment to both the business of Taamail and to the overall economic development of Findonia, and request Findonia government to challenge the legality of the 'terrorism action waiver' GSP. The enactment of the 'terrorism action waiver' GSP by Solia is detrimental to the business of Taamail, since it gives its competitor, Fujit, a competitive advantage in the Solia textile market, which is against the provisions of the most favoured nation (‘MFN’) obligation of the art I of GATT (GATT, 1979). This article provides for non-discrimination of the member states of the WTO or their products in any of the internal markets of a member state (Mckenzie, 2005). Since the enacted 'terrorism action waiver' GSP would allow Fujit to export its textile products to Solia under free import duty, yet Fujit is a company from a developed nation that does not qualify for any preferential treatment under the Enabling Clause of GATT, the competitiveness of Taamail in Solia market will be jeopardized. Taamail exports 60% of its total textile products exports to the Solia market. Therefore, its sales and profitability will be adversely affected by the new GSP enactments by Solia, which will in turn affect the tax payable by the company to Findonia. This will eventually affect Findonia’s economic development, and its pending elevation from a LDC to a developing country. Therefore, the strategy to be heard by the Findonia government will entail the presentation of the claim that the acts of Solia in enacting the new GSP will not only affect Taamail as a company, but also Findonia as a least developed country. Therefore, Findonia should take the action of challenging the legality of Solia’s new GSP enactment, on the basis of violating the provisions of Article I of the GATT 1994, as provided under the most favoured nation (‘MFN’) obligation (Mckenzie, 2005). This provision requires that any action seeking to accord a favourable treatment, privilege or advantage to a product or a nation should immediately do the same to all the other member states, without any conditionality (Gowa & Hicks, 2012). Therefore, the strategy would be to request Findonia government to challenge the legality of ‘terrorism action waiver' GSP, so that the GSP can be scrapped, and allow Taamail to continue conducting trade with Solia just like it happened before the new GSP changes were enacted. Secondly, Taamail Company can sue Solia directly to the relevant WTO organs. The strategy would be to present the violation of Article I of the GATT 1994 by Solia, through enacting 'terrorism action waiver' GSP without first seeking authorisation from the WTO. The enactment of any form of tax or regulatory laws that confers a favourable treatment, a competitive advantage or a privilege to any of the WTO member should be replicated to all the other member states, for the provision of equality of competitive opportunities (Mckenzie, 2005). Therefore, any such enactment that grants such advantage, privilege or favour to certain member states while neglecting others is an illegality. In this respect, the strategy would be to show the relevant WTO organs that Solia accorded Bodiland a favourable treatment through the ‘terrorism action waiver’ GSP regulation, which it did not replicate to all the other member states. This action therefore conferred a competitive advantage on Bodiland over Findonia, as an eligible member state. Therefore, the strategy would entail requesting the relevant WTO organ to scrap off the regulatory enactment, and allow the countries to compete for the Solia textile market as they did before. Nevertheless, as provided for under the Enabling clause of the GATT, it would be legal to enact such tax or regulatory laws, only to the extent that a country first obtains authorisation from the WTO (EC, 2004). The authorisation entails the application for subsequent time-limited WTO waivers of GATT Article I and other necessary GATT obligations (Grimmett, 2011). Therefore, since Solia did not seek the authorisation of WTO before enacting the regulatory GSP. Thus, Taamail company can sue Solia directly to the relevant WTO organs, and the strategy would be to request the relevant WTO organs to find that Solia committed an illegality by enacting and implementing a 'terrorism action waiver' GSP without first seeking authorisation from the WTO, and thus request that the special ‘terrorism action waiver’ GSP be abolished on that basis. References EC. (2004). Conditions for the Granting of Tariff Preferences in Developing Countries. Appellate Body Report WT/DS246/AB/R. GATT. (28 November 1979). Differential and More Favourable Treatment. Reciprocity and Fuller Participation of Developing Countries’, Ministerial Conference Decision, L/4903, available at http://www.wto.org/english/docs_e/legal_e/enabling1979_e.htm [the ‘Enabling Clause’] Grimmett, J. (2011). Trade Preferences for Developing Countries and the World Trade Organization (WTO). Congressional Research Service, 1-9. Horn, H. & Mavroidis, P.C. (2004). Still Hazy after All These Years: The Interpretation of National Treatment in the GATT/WTO Case-Law on Tax Discrimination. European Journal of International Law 15(1), 39–69. Mckenzie, M. (2005). Case note European Communities-conditions for the granting of tariff preferences to developing countries. Melbourne Journal of International Law, 1-23. Sykes, A.O. (1998). Comparative Advantage and the Normative Economics of International Trade Policy. Journal of International Economic Law, 49-82. Gowa, J. & Hicks, R. (2012). The Most-Favoured Nation Rule in Principle and Practice: Discrimination in the GATT'. The Review of International Organizations7(3), 247–66. World Trade Organization. (2015). WTO ANALYTICAL INDEX: The General Agreement on Tariffs and Trade (GATT 1947). Web. April 6, 2015. Accessed: https://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_02_e.htm Read More