GENERAL PRESENTATION OF THE WTO AGREEMENT. Gabrielle Marceau 1

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1 GENERAL PRESENTATION OF THE WTO AGREEMENT by Gabrielle Marceau 1 1 Gabrielle Marceau, Ph.D. is Counsellor in the WTO Secretariat. The opinions expressed are strictly personal and cannot be attributed to the WTO Secretariat or the WTO Members. This paper is based on a previous paper which I did with my previous colleague Ichiro Araki entitled "GATT/WTO CODE OF CONDUCT The Legal Management of International Trade Relations", first published in Global Governance, Jin-Young Chung (Ed.), 1997, The Sejong Institute. All mistakes are mine only.

2 I. INTRODUCTION...4 II. NATURE AND SCOPE OF INTERNATIONAL TRADE PROBLEMS...4 A. TARIFFS...4 B. QUANTITATIVE RESTRICTIONS...5 C. VOLUNTARY EXPORT RESTRAINT AGREEMENTS...5 D. ADMINISTRATIVE RULES AT THE BORDER...5 E. TRADE REMEDIES...5 F. DISGUISED RESTRICTIONS ON TRADE...6 G. DISCRIMINATORY REGULATIONS...6 H. UNEVEN ENFORCEMENT OF DOMESTIC POLICIES...6 III. THE BIRTH OF THE GATT...7 IV. GUIDING PRINCIPLES AND RULES OF THE GATT...10 A. BASIC MARKET ACCESS PRINCIPLES AND DISCIPLINES Tariff reductions (bound) and reciprocity The Elimination of quantitative restrictions The principle of the Most-Favoured-Nation clause The National treatment obligation...11 B. POSSIBILITY OF SAFEGUARD MEASURES General safeguard measures Safeguard measures for balance-of payment problems Safeguard or protection for the establishment of a particular industry to stimulate its economic development ("infant industry")...12 C. RULES ON UNDISTORTED COMPETITION Measures against certain subsidies granted by the exporting country...12 (a) Possibility of imposing countervailing duties (surtax) against imports...12 (b) The disciplines over subsidies Measures to combat dumping by the exporting country Rules on state- trading enterprises...13 D. PRIVILEGES AND POSITIVE DISCRIMINATION IN FAVOUR OF THE DEVELOPING COUNTRIES...13 E. EXCEPTIONS Regional groupings General and security exceptions Transparency...14 V. THE EVOLUTION OF THE GATT AND THE STEPS TOWARDS THE URUGUAY ROUND OF NEGOTIATION

3 VI. THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS AND THE WTO AGREEMENT...17 A. THE WTO AS AN INTERNATIONAL ORGANIZATION Institutional character of the WTO...18 (a) Functions of the WTO...18 (b) Legal Structure of the WTO...19 B. THE MULTILATERAL TRADE AGREEMENTS OF THE WTO Multilateral Trade Agreements on Goods, Annex 1A...19 (a) The GATT (b) Agreement on Subsidies and Countervailing Measures...20 (c) Agreement on Antidumping Measures...21 (d) Agreement on Safeguards...22 (e) The Agreement on Textiles and Clothing and the Textile Monitoring Body...23 (f) Agreement on Agriculture...23 (g) The SPS Agreement...24 (h) The TBT Agreement...24 (i) Other Agreements Trade in Services, Annex 1B Intellectual Property, Annex 1C...26 C. DISPUTE SETTLEMENT, ANNEX D. TRADE POLICY REVIEW MECHANISM, ANNEX E. GENERAL PRINCIPLES OF THE PLURILATERAL AGREEMENTS, ANNEX Agreement on Government Procurement Agreement on Civil Aircraft...30 VII. DEVELOPING COUNTRIES IN WORLD TRADE...30 A. AMENDMENT OF ARTICLE XVIII, GOVERNMENTAL ASSISTANCE TO ECONOMIC DEVELOPMENT (1955)...31 B. ADOPTION OF PART IV - TRADE AND DEVELOPMENT ( )...31 C. CREATION OF THE ITC (1964)...31 D. THE GENERALIZED SYSTEM OF PREFERENCES (1971)...31 E. THE TOKYO ROUND DECISIONS (1979)...31 F. THE URUGUAY ROUND...31 VIII. CONCLUSION

4 I. INTRODUCTION Mankind has been engaged in trade -- buying, selling and bartering goods and services -- for many millennia, but it was not until formal and distinct borders were established that "international" trade formally came into being. From the beginning, states for various reasons wanted to regulate the flow of international trade, most notably to raise revenues and to protect vested interests within their territories. Later, state regulation of international trade was rationalized as a positive policy measure by the philosophy of mercantilism, which links trade surpluses directly with national strength, and aims at maximizing exports and minimizing imports with a view to accumulating foreign exchange reserves. Many have argued, however, that a policy of mercantilism cannot be justified on economic grounds. Free trade maximizes the welfare of all nations, and mercantilism, in the long run, is a selfdefeating policy. Nonetheless, tariffs and other regulation of international trade were imposed by selfaggrandizing states that sought to use trade for their own purposes. As a result, when regulation receded, trade flourished; and when regulation was intense, trade languished. The most recent and particularly disastrous experience was the downward spiral of shrinking trade during the Great Depression. The need to "regulate" the regulation of trade was recognized as early as in the middle of the nineteenth century. It was only after the world had witnessed the scourge of the Great Depression and World War II that these trade agreements started to be multilateralized and institutionalized. The unsuccessful attempt to create an International Trade Organization (ITO) immediately after the Second World War left the General Agreement on Tariffs and Trade (GATT), negotiated in 1947, as the sole legal instrument governing trade on a provisional basis. Rapidly the GATT became the central forum where international trade relations evolved continuously. The World Trade Organization (WTO), which has been operational since 1995, now provides world trade partners with an authentic international trade organization administering various multilateral agreements. The present paper focuses on the GATT/WTO as an institution, and describes and analyzes the trade related problems faced by countries together with the solutions proposed by the GATT/WTO and the tolls used, i.e. the GATT/WTO principles and rules. This paper is divided into eight Sections. Section I serves as an introduction; Section II elaborates general problems associated with international trade; Section III briefly explains the difficult birth of the GATT; Section IV explains the basic principles of the GATT; Section V explains the evolution of the GATT into a de facto international organisation and the steps towards the conclusion of the Uruguay Round; Section VI presents the WTO as an international organization; Section VII focuses on developing countries; and Section VIII concludes. II. NATURE AND SCOPE OF INTERNATIONAL TRADE PROBLEMS To understand the nature and scope of international trade problems, one has to look at how international trade is regulated at the national level. Because many, if not all, trade problems stem from each country's attempt to regulate the flow of trade in goods and services, we will try to identify and analyze various regulatory measures. These principles are described in the attached table "A" hereafter, and are presented by order of their economic, political and GATT ranking. It should be noted that the solutions proposed by the GATT principles are discussed in Section IV. A. TARIFFS The levying of tariffs by customs services is one of the oldest functions of governments. Even today, tariffs provide an important source of revenue for governments, in particular, for many 4

5 developing countries. In economic terms, tariffs distort the costs of production and consumption, even though they are transparent instruments which may be controlled through legislation or regulation. High tariffs can have devastating effects on international trade, as was the case of the infamous Smoot- Hawley Tariff Act of 1930, which raised the average US tariff level from 38 to 52 percent and significantly contributed to the "downward spiral" in world trade in the 1930s. Reducing tariffs, therefore, has been one of the main features of international economic negotiations and, as further elaborated in section IV, the favoured trade instrument of the GATT/WTO in preference to non-tariff instrument. B. QUANTITATIVE RESTRICTIONS Quotas are restrictions on the number, volume or value of imported goods. Quotas impose absolute limits on imports. If quotas are used, the consumers of the importing country will pay higher prices for the product (according to basic supply and demand economics), and it is often the exporters, the producers of the exporting country, that will gain the benefit from higher prices resulting from reduced exports following the imposition of quotas. Quotas and other quantitative restrictions ("QRs") are not transparent, and usually they are politically easy to implement through administrative acts. There are also important administrative problems associated with the allocation of quotas: how to allocate quotas and to whom and for how long? The existence of discretion may lead to potential situations of bribery. Trade negotiators have long been aware of the undesirability of QRs. Efforts to control the spread of QRs even preceded the GATT. In 1927, at the initiative of the League of Nations, an agreement was reached on the Geneva Convention on Import and Export Prohibition and Restriction, which unfortunately did not come into effect. As further discussed below, the GATT/WTO prohibits QRs in principle. C. VOLUNTARY EXPORT RESTRAINT AGREEMENTS Another problem arises with the use of bilateral agreements that impose voluntary export restraints ("VERs") where two countries or a country and a firm or a group of firms decide informally or otherwise to limit the exportation of certain products. VERs are economically worse than quotas because all the rents are transferred to the exporting country, while prices are increased for consumers of the importing countries. These agreements do not provide any legal security since they are informal and non-transparent. VERs are now clearly regulated by the WTO Agreement and must be phased out. D. ADMINISTRATIVE RULES AT THE BORDER Restrictions at the border can take a more subtle form than outright quantitative restrictions. Arbitrary administration of customs valuation rules or discriminatory issuance of import licenses can also have similar effects. Arbitrary application of the rules of origin can also act as quota-type measures. All these administrative manipulations of import formalities and procedures are not transparent and can counteract the results of market access agreements and tariff reductions. E. TRADE REMEDIES Trade remedies are usually concerned with measures against (illegal) subsidies and dumping. States have been providing subsidies to firms for a long time. Subsidies themselves are often adequate means of import protection, but if subsidized products are exported, they can cause "injury" to the industry of the country into which such products are exported. In order to counteract the effects of such subsidies on the price of exported goods, the importing country may impose at its border a surtax to raise the price of the imported subsidized product so that it loses the benefit of such subsidies. States may, however, abuse these trade remedies in alleging that imports have benefitted from excessive and unfair subsidies in order to raise the prices of imports so as to protect their domestic industry producing similar goods. A similar pattern exists with regard to dumping. When goods are exported at a price 5

6 which does not cover the cost of production of such a product or which is lower than the price of the same product in the domestic market of the exporter, one may fear that the exporter act this way in order to eliminate competition in the country of export so that after competition is eliminated, the foreign producer can impose monopolistic prices. In these circumstances countries may also want to impose a surtax at the border in order to ensure that the imported dumped good is not sold at such a threatening low price. After World War I, antidumping surtaxes were already used by Canada and the USA because of fears of cartelized exports, mainly from Germany. As we will see later, despite the effort of the GATT/WTO to address this issue, problems still remain because there are widely divergent views on this issue among major trading nations. F. DISGUISED RESTRICTIONS ON TRADE Border measures can be taken to achieve goals such as protection of human, animal, plant life or health, but under the cover of these legitimate policies they can become a prime tool of protectionism. The identification of the real purpose of a specific measure often involves a difficult interpretative question. As the case of an import ban of furs from animals caught with leg-hold traps illustrates, what seems to be a disguised restriction on trade in the eyes of one group, may, for another group, be the only means to achieve a legitimate policy objective. The settlement of these apparently conflicting goals (protection of animal health or environmental issues for instance, and free-trade) has recently become a primary source of international trade conflicts. G. DISCRIMINATORY REGULATIONS Ideally, once the imported goods have been cleared through customs, they would be put in free circulation on equal terms with domestic products. However, in reality, they can still face discrimination. Governments can impose higher taxes on imported goods or impose on them discriminatory regulations in various areas. Discriminatory domestic regulations are particularly problematic for trade in services, because the control of trade in services is not usually carried out at the border, but is implemented through domestic regulation. Almost all the difficult issues in the General Agreement on Trade in Services (GATS) involve heavily regulated industries -- banking, insurance, maritime transport, telecommunications, etc. H. UNEVEN ENFORCEMENT OF DOMESTIC POLICIES Finally, the way states implement various domestic policies can affect the conditions under which foreign goods and services compete with their domestic counterparts. These policies include for instance, industrial policy (e.g., nurturing of an aircraft industry), intellectual property protection (e.g., enactment and enforcement of patent and copyright laws) and competition policy (e.g., prohibition of cartels). Recently, this issue of uneven enforcement of policies has been labelled "level playing fields". Perhaps the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the General Agreement on Services (GATS) 2 was the first attempt to tackle these issues in a multilateral context. Thus far we have briefly identified the ways in which states regulate the flow of international trade and the international trade "problems", these practices may cause. Exporters of foreign products and foreign producers are among those who are affected by these trade measures. Foreign producers and exporters often bring grievances to their own governments. Those governments in turn request the importing country to rectify the situation. Under normal circumstances, negotiations will ensue, resulting in a bilateral, plurilateral or multilateral agreement. Sometimes, however, states are tempted 2 And some may say the Agreement on Technical Barriers to Trade (TBT) and the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) as well are agreements which attempt to tackle uneven domestic regulation levels and enforcement. 6

7 to settle a dispute unilaterally. Until the WTO, unilateral enforcement of trade policy has become one of the world's major trade problems. That is why the negotiations concerning dispute settlement became so important during the Uruguay Round. The WTO dispute settlement rules explicitly prohibit unilateral measures. Before analysing the solutions proposed by the GATT/WTO, the next section will look at the historical background of the GATT, which help to understand why the GATT exists and what was the intentions albeit limited of its drafters. III. THE BIRTH OF THE GATT The ideas behind today's multilateral trading system date back to World War II when the United States and Great Britain began negotiations about the shape of the post-war international economy. At that time, many state leaders and economists believed the Great Depression and to some extent the Second World War had been caused by "beggar-thy-neighbour" trade policies 3. It became clear that trade privileges had to be multilateralized. After the conclusion of the Bretton Woods Conference, where the International Monetary Fund and the World Bank were created, it became more and more evident that obstacles to trade also had to be reduced in order to stimulate world trade expansion. The United States then began a real campaign on the need for the international free trade rules. Their slogan to negotiate a world trade agreement was: "If goods don't cross the borders, soldiers will." 4 In 1945, the United States invited some countries to multilateral tariff reduction negotiations, thereby sowing the seeds for what was going to become the future GATT. At this time, the United Nations Economic and Social Council (ECOSOC) was being established. It began work on becoming a major co-ordinating body for international economic cooperation. At the first meeting of ECOSOC, the United States called for a "United Nations Conference on Trade and Employment" with the purpose of drafting a charter for an International Trade Organization and also to pursue negotiations for reductions in world-trade tariffs. In 1946, the United States published its famous "Suggested Charter for an International Trade Organization" which formed the basis for the negotiations that took place during the preparatory meetings. It was in the context of the negotiations for an international trade organization that the negotiations of the GATT were conducted. 5 The negotiations for an international trade organization (ITO) lasted one year and negotiators met five times: a first Session of the Preparatory Committee took place in London in November 1946; the London Conference outlined the procedures that would be followed for multilateral tariff negotiations and suggested that a "General Agreement on Tariffs and Trade" would be necessary "to safeguard the value of tariffs concessions" and to include "such other provisions as may be appropriate" 6. "The theory of the GATT was that it would be a specific trade agreement within the 3 Beggar-thy-neighbour policies is define as "trade or economic measures, such as export subsidies, import quotas and tariffs, taken with the intention of improving domestic economic conditions, e.g. raising employment, which have the effect of being a cost to other countries. Such policies may lead to similar measures by others in response. Beggar-thy-neighbour policies are considered to have been a major factor in deepening and prolonging the Great Depression of the 1930's. Walter Goode, Dictionary of Trade Policy Terms, Gardner R. Sterling Dollar Diplomacy, p.3. 5 Professor Jackson wrote, "The preparatory work for GATT is unusually full and complex... and... it is "mingled" with that of the ITO." Jackson (1969), p Jackson reports that the London Conference was divided into committees roughly corresponding with each of the major subjects of the United States draft ITO Charter. The Committee II (commercial policy) was the committee charged with developing that portion of the text of the ITO Charter that was ultimately drawn up for many clauses of the GATT. Jackson J., GATT Law (1969), p.42. For a detailed presentation of the various 7

8 broader institutional context of the ITO Charter and that the ITO would furnish the necessary organizational and secretariat support for GATT". 7 The ITO Draft was completed by the end of August 1947, but the GATT negotiations were concluded in the autumn, with the signature of 22 contracting parties. 8 Finally a third Session took place in Havana, Cuba, in November 1947 where the stillborn ITO Charter (often called the Havana Charter) was concluded. The ITO, created in Chapter VII of the Havana Charter, was going to be the central organization of the United Nations responsible for co-ordinating the various aspects of international economic co-operation among States including the results of the GATT. 9 In addition to negotiating tariffs reductions, representatives on the Tariff Agreement Committee had to identify which provisions (disciplines), if any, should be included in the GATT, taking into consideration the need to ensure that tariff concessions would be have to be safeguarded. It was finally decided that most provisions of Chapter IV of the Havana Charter on commercial policies would be included therein in order to ensure the respect and the balance of the results of these tariff negotiations. 10 It was, however, envisaged that if the ITO Charter came into force, changes in the GATT would occur automatically. 11 Before the Havana meeting, on 30 October 1947, the Final Act of the Second Session of the Preparatory Committee was signed, authenticating the GATT and its Protocol of Provisional Application, which entered into force on 1 January The GATT was brought into effect through a Protocol of Provisional Application for at least two reasons. First, it allowed prospective signatories to avoid having to present the GATT with the Havana Charter for domestic approval. Second, it allowed parties to the protocol to lock in the benefits of tariff reductions even if the ITO ran into trouble. committees of the ITO negotiations see section IV:A "Drafting of the General Agreement and the Havana Charter" at page 9 of the GATT: Analytical Index. 7 Idem, p The first 23 countries that participated to the GATT negotiations were: Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia (Zimbabwe), Syria, South Africa, United Kingdom, United States. 9 The main purpose and objectives of the ITO were those of the United Nations: "stability and well-being which are necessary for peaceful and friendly relations among nations" (Article 1) and the specific means of the Havana Charter were co-operation in the field of trade and employment. In order to achieve these goals the Havana Charter contained a comprehensive approach to international trade in goods and services and it wanted to regulate both acts of States and acts of enterprises. The Charter was divided into seven main chapters which dealt with the following subjects: fair labour standards and employment (Chapter II); specific needs of European reconstruction and the special rights of developing countries (Chapter III); a wide range of commercial policies that affect the flow of trade i.e. tariffs, preferences, internal taxation, regulation, quotas, subsidies, dumping and safeguard measures (Chapter IV); standards relating to restrictive business practices used by firms (Chapter V); inter-governmental commodity agreements (Chapter VI); the structure and function of the ITO (Chapter VII); and the settlement of disputes (Chapter VIII, where the possibility of references to the International Court of Justice and also the use of arbitration were envisaged). The Havana Charter represented a prophetic recognition of need to coordinate all aspects of commercial policies in international trade which are now confirmed in the WTO Agreement. The emphasis put on the relationship between domestic employment and international trade (Chapter I) is also indicative of the conviction of the negotiators that international stability and well-being can only be achieved in relating and integrating domestic and external economic policies. 10 Other provisions dealing with domestic policies, or which were not of immediate application, were explicitly omitted since the US Administration only had the authority to negotiate international trade agreements. This authority was conferred upon the President of the United States by the Reciprocal Trade Agreements Act of US Congress has never fully delegated the power to regulate international commerce to the President, and the US delegates had to act within the confines of the 1934 law. If they had acted beyond this authority, they would have had to request Congressional approval for the agreement, which was almost impossible to attain at that juncture. 11 Indeed at the first and second session of the contracting parties to the GATT after the demise of the ITO, many such changes to the ITO provisions were carried into the GATT. 8

9 The ratification of the ITO ran into trouble. By the time the Havana Charter was completed in 1948, a new Congress hostile to the trade policies of the previous Administration had been elected in the United States. In December 1950, the US administration quietly issued a press release in which it stated that it would not be re-submitting the Charter to Congress for approval. There was not much point in other countries continuing without the leading economic power. The demise of the ITO did not, however, signal the end of multilateral trade arrangements. The GATT, as further discussed below in Section V, continued to grow not only in membership but in scope. At the end of the Havana Conference, participating countries adopted a resolution establishing an Interim Commission for the International Trade Organization (ICITO) which was going to perform interim functions pending the establishment of the ITO. The ICITO consisted of the governments which were entitled to original membership of the ITO. 12 In 1948, the ICITO made arrangements with the Secretary-General of the United Nations regarding personnel for the ICITO and the benefits, privileges and immunities provided in the Convention on Privileges and Immunities of Specialized Agencies adopted by the General Assembly of the United Nations, as far as possible, were extended to ICITO staff to it. 13 This arrangement between ICITO and the CONTRACTING PARTIES 14 lasted until the end of 1995, when the CONTRACTING PARTIES decided to terminate the old GATT. 15 Returning to the birth of the GATT in 1948, GATT contracting parties met twice in 1948 and introduced into the text of the GATT the changes brought about by the ITO corresponding clauses. In spring 1949 the contracting parties organised a second major round of tariffs negotiations in Annecy, France. A third round was planned in Torquay, England in By that time it had become clear that the ITO would never be ratified by the USA. After that failure two attempts to set up a formal organisation to support the GATT were rejected by the US government. There is no doubt that the GATT turned out to be a totally different agreement that it was envisaged. 12 Note that China, Iran, Iraq, Lebanon and others are therefore members to the ICITO, although they are not members of the GATT or WTO, having either left the GATT or never ratified it. 13 Australia, Benelux, Brazil, Canada, China, Colombia, Egypt, El Salvador, United States, France, Greece, India, Italy, India, Mexico, Norway, the Philippines and the United Kingdom constitute the Executive Committee of ICITO. In the GATT, wherever reference is made to the contracting parties acting jointly, they are designated as the CONTRACTING PARTIES (Article XXV:1). We also follow this convention in this Chapter. 14 And in fact ICITO's only role has been in relation with the GATT. 15 However, a transitional decision was proposed by the Preparatory Committee of the World Trade Organization (WTO) dated 8 December 1994, confirmed by the General Council of the WTO on 31 January 1995, and was signed by the Executive Secretary for the ICITO, the Chairman of the CONTRACTING PARTIES for the GATT 1947 and the Chairman for the Preparatory Committee for the WTO. The decision envisages that all assets and liabilities of the GATT 1947 and the ICITO shall be assets and liabilities of the WTO and that the staff of the ICITO shall perform the duties of the Secretariat of the WTO until the appointment of the staff of the Secretariat of the WTO. See the "Agreement on the Transfer of Assets, Liabilities, records, staff and functions from the ICITO and the GATT to the WTO" WT/L/36, 31 January

10 IV. GUIDING PRINCIPLES AND RULES OF THE GATT 16 The basic principle of the GATT 17 is that countries should use tariffs -- reduced through reciprocal concessions -- on foreign goods on a non-discriminatory manner independent of the origin of the goods -- the "most-favoured-nation" (MFN) clause -- as the only "acceptable" form of protection. These two basic principles (negotiated tariffs applied on an MFN basis) constitute PART I of the GATT. PART II contains the other related obligations, the purpose of which is to ensure the non-evasion of those principles assessed in PART I. The most fundamental of these obligations are: the national treatment ("NT") clause; the prohibition against quantitative restrictions ("QRs"); the possibility of safeguard, antidumping and countervailing measures against subsidies; and certain other exceptions. Special treatment for developing countries was introduced into PART IV of the GATT in (and entered into force in January 1966) and specific provisions for developing countries are now included into the WTO agreements. All these principles contained in the initial GATT of 1947 still constitute the backbone of the WTO, and indeed the provisions of GATT 1947 are components of the GATT 1994 of the WTO Agreement. 18 See Table B for the basic principles of GATT. As will be discussed later, the same GATT basic rules have been improved, clarified, expanded, or amended in more specific multilateral trade agreements of the WTO agreement. It is therefore important to understand the object and functioning of those basic GATT rules. A. BASIC MARKET ACCESS PRINCIPLES AND DISCIPLINES 1. Tariff reductions (bound) and reciprocity Tariffs are taxes on the value, weight or volume of products collected at the border upon importation of goods. They are the only form of protection authorized by the GATT because, unlike other forms, they show the "level of protection" in a transparent manner. Pursuant to Article II of the GATT, products imported into the territory of a GATT/WTO Member must be exempt from ordinary customs duties in excess of those set forth in that countries' tariffs' listings (Schedules). The efforts to reduce tariffs in the GATT produced excellent results in 8 negotiating rounds (in the lowering of the average industrial tariff in developed countries from nearly 40% in 1947 to less than 4% after the Uruguay Round negotiations in 1993) and may have convinced Members to undertake the important general tariffication exercise of all agricultural products in the context of the negotiation of the WTO Agreement on Agriculture. In principle tariffs, as any other trade privileges, must be imposed in a non-discriminatory manner on all imports regardless of origin and exceptions are clearly defined. Tariffs concessions (market access concessions) are contained in each Members' Schedule and Article II of GATT prohibit WTO Members from imposing on imported products a treatment less favorable that the maximum level of tariff listed in its Schedule. Today, WTO Members must respect the same principle for their market-access commitments in the area of services, which commitment (albeit of different nature and negotiated differently) are also contained in Members' Schedules. 16 See Table "B" hereafter. 17 At the opening of the London Conference the USA representative expressed the five basic principles of what was to become the ITO (and as well the commercial policies of the GATT): " 1) existing barriers to international trade should be substantially reduced; 2) International trade should be multilateral rather than bilateral; 3) International trade should be nondiscriminatory; 4) stabilization policies for industry and agriculture were so intimately related to international trade policies that the two must be consistent and co-ordinated; 5) The rules for international commerce should be drafted so that they apply with equal fairness and equal force to the external trade of all nations regardless of whether their internal economies were organized upon the basis of individualism, collectivism, or some combination of the two." Taken from Jackson J., GATT Law, (1969), p See discussion in section VI below. 10

11 During the Uruguay Round Members agreed to "tariffy" all their agricultural products with a view to accelerating the liberalization of the commerce of agricultural products which had not been well covered by the rules of the GATT. 2. The Elimination of quantitative restrictions Quotas are restrictions on the number, volume or value of products imported or exported. Quantitative restrictions on imports or exports are prohibited under Article XI of GATT, essentially because they prevent competition and their administration is less transparent than that of tariffs. Contrary to tariffs, quotas fix absolute limits for imports. Their allocation also poses major problems: "which country gets what quota and for how long." In this context Article XIII provides that when quotas are allowed to be imposed, Members must do so on a non-discriminatory basis. Finally, if tariffs are imposed, consumers in the importing country pay more for the imported products. However, the money from the imposition of tariffs could be redistributed to the same consumers. When quotas are imposed, the consumers in the importing country generally pay higher prices. In most cases, it is the exporters (producers in the exporting country) who profit from the higher prices as their products are exported in limited supply. The principle of a prohibition of market access restrictions now exists as well in the GATS. 3. The principle of the Most-Favoured-Nation clause The "most-favoured-nation" ("MFN", Article I of GATT) and "national treatment" ("NT", Article III of GATT) principles, are two sides of the "non-discrimination" principle formally introduced in multilateral trade relations by the GATT. They are the external and internal expressions of the idea that all trade partners must be offered the same privileges. The MFN clause provides that "any advantage, favour, privilege or immunity" granted by a Member to a product originating in or destined for another country shall be accorded "immediately and unconditionally" to the like products of all other Members. This provision reinforced the effect of tariff reductions, since any concession granted by a Member is automatically extended to all other Members. It applies not only to tariffs but also to a wide range of measures that regulate all stages of the marketing and sale of a product. If a country decides to collect a 10 per cent tariff on imports of certain shoes, all like shoes from all Member countries of the WTO/GATT must enjoy the same tariff level. The principle of external non-discrimination also exist for authorized quantitative restrictions (Article XIII discussed below with the rule prohibiting quantitative restrictions (Article XI of GATT)). The principle of MFN now exists as well in the GATS and the TRIPS. 4. The National treatment obligation Article III on national treatment provides that no domestic regulation can be such as to afford protection to the domestic production. In particular Article III provides that once in the territory of a Member, products from other Members must not be treated, in respect of internal taxes and regulations, in a less favourable manner than similar domestically produced goods. If a country decides to impose a sales tax of 10 per cent on certain locally produced shoes, no "like" or "similar" shoes from any WTO/GATT Member country may be subject to a sales tax higher than 10 per cent. The determination of the "likeness" or "similarity" between imported and local shoes is a factual issue that depends, among other things on the physical characteristics, consumers' preferences and end uses of the said goods. In case of a dispute, the panel and the Appellate Body would have to determine whether the imported and domestically produced goods affected by the challenged regulation effectively belong to the same "market" and thus ought to be treated without discrimination. 11

12 The principle of national treatment now exists as well in the GATS and the TRIPS. B. POSSIBILITY OF SAFEGUARD MEASURES 1. General safeguard measures Since the beginning of GATT it was recognized that certain "safety valves" were needed in the case of increases in trade or imports, even if fair. Safeguard measures are designed to allow importing countries to impose quotas or customs duties to limit a sudden increase in imports. Article XIX of the General Agreement (today together with the WTO Agreement on Safeguards) allows a Member to take protectionist measures, increase a tariff or impose a quota for a limited period, in the event of a sudden increase of (fair) imports that cause or threaten to cause serious injury to a domestic industry. In the WTO Agreement there are provisions for specific safeguards measures in the sectors of agriculture and textiles. 2. Safeguard measures for balance-of payment problems Article XII authorizes the temporary imposition of quotas in the case of a balance-ofpayments crisis. The WTO Understanding on Balance-of-Payments Provisions and the 1979 BOP Decision now impose additional conditions or disciplines on those countries that want to benefit from the conditional right to impose trade restrictions for balance-of-payments reasons. Article XVIII:B offers a special procedure for safeguard measures for balance-of-payment of developing countries. 3. Safeguard or protection for the establishment of a particular industry to stimulate its economic development ("infant industry") Article XVIII:C also allows developing countries to impose quotas or increase tariffs above bindings, with a view to promoting the establishment of a particular and new industry, to stimulate its economic development if such WTO Members respect the prescriptions of Article XVIII:C, including its notification, consultations and negotiation requirements. C. RULES ON UNDISTORTED COMPETITION A related, fundamental GATT principle is one of free competition in trade -- the most efficient firm of any nationality should win favours of customers world-wide. This competition for trade should not be distorted by governmental intervention. 1. Measures against certain subsidies granted by the exporting country (a) Possibility of imposing countervailing duties (surtax) against imports Article VI of the GATT (today, together with the Agreement on Subsidies and Countervailing duties provide that countervailing duties) allows importing countries to impose at the border surcharges on imports to compensate the effects of certain subsidies granted by a government if such specific subsidies cause injury to a domestic industry producing like products. (b) The disciplines over subsidies The provision of direct subsidies to production, as opposed to export subsidies, are usually considered by economists as the best trade measure to improve efficiency without distorting international trade. Production subsidies are also transparent and can even be difficult to justify politically since one domestic industry is favoured at the expense of another. In this context, GATT has 12

13 never penalized production subsidies but has strongly discouraged export subsidies. At the time a distinction was made between export subsidies on primary products and other subsidies. Export subsidies on primary products were tolerated as long as they did not result in granting to the signatory country "having more than an equitable share of world export in such product", a criteria which always remained ambiguous. However, with the conclusion of the Uruguay Round the subsides have been defined into three categories - prohibited, actionable and non-actionable with related disciplines. There are also more specific and predictable disciplines on the use of export subsidies in the agriculture sector, all of which is further discussed hereafter. 2. Measures to combat dumping by the exporting country Article VI (today together with the Agreement on Dumping) authorizes a Member to apply anti-dumping duties (a surtax on imported products), representing the price difference between the "normal value", (usually the price of the product in the domestic market of the exporting country or, alternatively a third-country market price or the full cost of production of the said exported good), if such dumped imports cause injury to a domestic industry in the territory of the importing country. It should be noted that the GATT does not address pricing practices of private firms and does not condemn dumping as such. The GATT only permits the importing country to protect itself in allowing a surtax at the border which covers the dumping margin if injury is caused to domestic industry producing products like those dumped imports. 3. Rules on state- trading enterprises GATT/WTO Members have the rights to establish and maintain State enterprise or grant to any enterprise, formally or in effect, exclusive or special privileges, but such enterprise shall, in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders. Generally such non-discrimination principles have been understood to include the most-favoured nation principles and the national treatment principle and require that such enterprises shall, having due regard to the other provisions of this Agreement, make any such purchases or sales solely in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford the enterprises of the other contracting parties adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases or sales. In other words GATT/WTO Members cannot hide behind a state trading enterprise to avoid their GATT/WTO obligations. D. PRIVILEGES AND POSITIVE DISCRIMINATION IN FAVOUR OF THE DEVELOPING COUNTRIES The GATT grappled from the outset with the role and place of developing countries in the system it had established. The whole debate centred on the extent to which these countries should be subject to the set of principles and obligations deriving from the General Agreement. The history of the GATT shows that the outcome of the debate has been a constant easing of their obligations. More particularly, in the 1970s the Member countries adopted the "Enabling Clause", an exception to the rule in the Most-Favoured Nation clause which allows developed countries to grant tariff preferences to products from developing countries without breaching Article I of the GATT. The other two decisions taken in 1979 concerned trade measures that developing countries could take for balance-ofpayments or safeguard purposes. Under the WTO, the rights of developing countries have been increased. 13

14 E. EXCEPTIONS 1. Regional groupings Although they are an exception to the MFN principle, regional preferences existed when the GATT was created and could not be ignored. Still today they are a fundamental feature of the current international trading system. Regional arrangements as such are neither good nor bad for international trade and most economists agree that it is only when such an agreement is implemented that its real impact can be determined. In fact, there were regional preferences well before the GATT, which were never formally abolished. Article XXIV imposes conditions to ensure that regional groupings created in the framework of the WTO/GATT contribute overall to developing trade. Recently again the Appellate Body declared that it is for the Member invoking Article XXIV as a defense or justification for violating basic GATT/WTO obligations to demonstrate that the regional trade agreement at issue is fully compatible with Article XXIV and that the measure challenged was necessary for the formation of the regional trade agreement. 2. General and security exceptions Articles XX and XXI contain a list of objectives which may justify a country derogating from its obligations under the General Agreement. Article XXI concerns measure taken for the purposes of national security and Article XX refers to measures necessary, for instance, for the protection of public morals, the environment, health of humans animal or plant life or relating to prison labour or to the conservation of natural resources. Article XX provides that these derogations must not constitute a means of arbitrary or unjustified discrimination between countries where the same conditions prevail, nor a disguised restriction on international trade. 3. Transparency In the GATT context transparency is to be discussed with reference to obligation of Members (and before GATT contracting parties) to publish domestically any regulation or laws that may affect international trade. This obligation of publication is contained in Article X of GATT. The first paragraph obligates Members to publish promptly, in their own language any measures (laws, regulations, judicial decisions, etc.) relating to GATT matter, as well as any international agreement affecting international trade policy, to allow government and trading entities to become familiar with them. Another transparency requirement refers to the obligation of GATT contracting parties to notify other Members, through the WTO Secretariat, of all laws and regulations of general application 19 concerned with WTO matters. This includes all actions and measures covered by the WTO provisions, especially those actions affecting the rights of other Members, and obligates Members to provide due consideration to requests by other Members for information on such regulations. This obligation, which binds only Member governments, ensures for transparency at two levels: first domestically, individuals and other members of civil society may have access to their own government documents and papers notified to WTO if the domestic system allows for such procedure; 20 second, at the WTO level, most documents notified to the WTO are circulated to all Members, are accessible to anyone who request a copy and, since the adoption of the Decision on Derestriction discussed below, are posted on the WTO Web Site. The GATT 1947 contained many notification requirements for measures of general application. 19 Members are also obliged to notify any specific measure that affect matters covered by WTO provisions. 20 For instance in the United Sates, the government is oblige to make available to the public most of its position papers and other submissions to WTO bodies. 14

15 Both these domestic publication and WTO notification obligations have been expanded in the various multilateral trade agreements of the WTO. V. THE EVOLUTION OF THE GATT AND THE STEPS TOWARDS THE URUGUAY ROUND OF NEGOTIATION As mentioned, the GATT was an interim agreement containing the results of the tariff reduction negotiations and represented an effort to restrict the primary sources of trade diversion on a multilateral basis. It was not an international treaty and was never intended to be an international organization, as it was supposed to be eventually administered under the umbrella of the ITO. However, the demise of the Havana Charter created a void which the GATT eventually filled. The GATT developed its own quasiinstitutions and an ability to function through custom and practice. On 11 August 1952, the Executive Secretary of the GATT and the Secretary-General of the United Nations exchanged letters confirming that the existing de facto working arrangements between the Secretariat of the ICITO and the UN made it unnecessary to have a special or formal arrangement relating to the GATT. Nevertheless, this has not prevented the development of an effective practical interaction with the United Nations, its organs and agencies. The GATT also evolved through periodic rounds of multilateral trade negotiations covering substantive aspects of the Agreement. Chronologically, the important stages of the GATT negotiations can be summarized as follows: During the second Round of trade negotiations, held from April to August 1949 at Annecy, France, the contracting parties exchanged some 5,000 tariff concessions. At this third Session, they also dealt with the accession of ten more countries. From September 1950 to April 1951, at Torquay, England, the contracting parties exchanged some 8,700 tariff concessions, yielding tariff reductions of about 25 per cent from the 1948 level. Four more countries acceded to the GATT. During the fifth Session of the CONTRACTING PARTIES, the United States indicated that the ITO Charter would not be re-submitted to the US Congress; this, in effect, meant that the ITO would not come into operation. The fourth Round was completed in May 1956 at Geneva and produced some $2.5 billion worth of tariff reductions. 21 The fifth Round opened in September 1960 and was divided into two phases: the first was concerned with negotiations with EEC member states for the creation of a single schedule of concessions for the Community based on its Common External Tariff; and the second was a further general round of tariff negotiations. Named in honour of US Under-Secretary of State Douglas Dillon, who proposed the negotiations, the Round concluded in July 1962 and resulted in about 4,400 tariff concessions covering $4.9 billion of trade At the beginning of the year, the GATT commercial policy course for officials of developing countries was inaugurated. The contracting parties at their 13th Session in 1958, attended by Ministers, subsequently established three committees in GATT: Committee I to convene a further tariff negotiating conference; Committee II to review the agricultural policies of member governments and Committee III to tackle the problems facing developing countries in their trade. The establishment of the European Economic Community during the previous year also demanded large-scale tariff negotiations under Article XXIV:6 of the General Agreement. In 1958, GATT published Trends in International Trade in October. Known as the "Haberler Report" in honour of Professor Gottfried Haberler, the chairman of the panel of eminent economists, it provided initial guidelines for the work of GATT. 22 In 1961, The Short-Term Arrangement covering cotton textiles was agreed as an exception to the GATT rules. The arrangement permitted the negotiation of quota restrictions affecting the exports of cottonproducing countries. In 1962 the "Short-term" Arrangement became the "Long-term" Arrangement, lasting until 1974 when the Multifibre Arrangement entered into force. 15