While tariffs are legal in WTO and are commonly used by governments to protect domestic industries and to raise revenues, quotas are generally outlawed. Article XI of GATT 1994 sets out a general prohibition of quantitative restrictions, whether on imports or exports. In some special cases and for specific reasons, such as safeguard action, balance-of-payment, protection of public health or national security, quantitative restrictions can be introduced under strictly defined criteria.
Article XIII of GATT 1994 stipulates that prohibitions and quantitative restrictions, when applied, should be administered on a non-discriminatory basis, i.e. to all trading partners equally. In applying import restrictions, Members should aim at a distribution of trade approaching as closely as possible the shares various supplying countries would have obtained in the absence of the restrictions. Furthermore, quotas should be allocated among supplying countries based upon the proportions supplied by the various supplying countries during a previous representative period.
The “tariffication” of all non-tariff import restrictions for agricultural products provided a substantial increase in the level of market predictability for agricultural products. More than 30% of agricultural produce had been subject to quotas or import restrictions. Virtually all such measures have now been converted to tariffs which, while initially providing substantially the same level of protection as previous non-tariff measures, are being reduced during the six years of implementation of the Uruguay Round agricultural agreement. The market access commitments on agriculture will also eliminate previous import bans on certain products.
Following the establishment of the GATT in 1948, average tariff levels fell progressively and dramatically through a series of seven trade rounds. The Uruguay Round added to that success, cutting tariffs substantially, sometimes to zero, while raising the overall level of bound tariffs significantly. The commitments on market access through tariff reductions made by over 120 countries in the Uruguay Round are contained in some 22,500 pages of national tariff schedules.
Tariff reduction, for the most part phased in over five years, will result in a 40% cut in developed countries’ tariffs on industrial products, form an average of 6.3% to 3.8%, and a jump from 20 to 44% in the value of imported industrial products that receive duty-free treatment in developed countries. At the higher end of the tariff structure, the proportion of imports into developed countries from all sources that encounter tariffs above 15% will decline from 7 to 5% and from 9 to 5% for imports from developing countries.
The Uruguay Round increased the percentage of bound product lines from 78 to 99% for developed countries, 21 to 73% for developing economies and from 73 to 98% for economies in transition results which are providing a substantially higher degree of market security for traders and investors.
The contractual nature of a bound tariff concession lies in the fact that the tariff rate cannot be increased beyond the bound level. However, countries would not enter into this kind of commitment without the possibility of revision when the situation of a domestic industry so requires. The GATT 1994 allows for the possibility of renegotiations. A Member desiring to withdraw or modify tariff bindings has to renegotiate them with other interested Members and provide compensation, that is, substantially equivalent tariff concessions on other products.
The principle of transparency is realized through four schemes:
1) The obligation of notification: A WTO Member should notify the relevant WTO committees and explain any changes in trade policy, legislation and judicial decisions so long as they fall within the administration of the WTO.
2) Consultation: When a Member brings a charge against another over a trade dispute, the dispute should first be solved through consultation, political decision and mediation and then be handled by expert groups. For example, if the commodity trading council of the WTO discovers a change in the rise of tariff duties of car imports to Japan or more difficulties in auto importing by its sale networks, the council will conduct consultation among its members so as to demand that the Japanese government make changes within a rational time limit.
3) Transparency in domestic law making: Transparency should be reflected in domestic law making. Whenever a domestic law or regulation is created, opinions of the relevant departments should be solicited extensively. In addition, the opinions and suggestions concerning the same trades and industries abroad should also be considered. The Chinese government, for example, has begun housecleaning of rules, regulations, administrative documents, and internal documents of every department in line with the requirements of the basic rules of the WTO.
4) Unified implementation: Laws and regulations affecting trade are to be implemented uniformly in every region of the Member-state. Treatment has to be nondiscriminatory, enabling equal conditions for market participants to engage in fair competition.
The WTO is not the “free-trade” institution as it is sometimes described - if only because it permits tariffs and, in limited circumstances, other forms of protection. It is more accurate to say it is a system of rules dedicated to open, fair and undistorted competition. Rules on non-discrimination are designed to secure fair conditions of trade and so too are those on dumping and subsidies.
Dumping refers to such a trade practice that enterprises export products at very low prices in order to capture markets abroad and to eliminate competition. Article VI of GATT 1994 defines dumping as the introduction of a product into the commerce of an importing country at less than its normal value, that is, less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting Member.
Subsidies are benefits provided by governments to producers and exporters of products which improve their competitiveness in international trade and thereby distort competition.
Both dumping and subsidies are considered to be unfair practices; the difference is that the former is adopted by firms and enterprises, whereas the latter, by Member governments. Anti-dumping duties may be applied in order to offset or prevent dumping, and countervailing duties for the purpose of offsetting any subsidy on the manufacture, production or export of any merchandise. In both cases, such duties may only be imposed if imports of dumped or subsidized products cause or threaten to cause material injury to an established industry in the importing country or materially retard the establishment of a domestic industry.
Over three-quarters of the WTO Members are developing countries and countries in the process of economic reform from non-market systems. During the seven-year course of the Uruguay—between 1986 and 1993 - over 60 such countries implemented trade liberalization programs. Some did so as part of their accession negotiations to the GATT while others acted on an autonomous basis. At the same time, developing countries and transition economies took a much more active and influential role in the Uruguay negotiations than in any previous round.
This trend effectively killed the notion that the trading system existed only for industrialized countries. It also changed the previous emphasis on exempting developing countries from certain GATT provisions and agreements. With the end of Uruguay, developing countries showed themselves prepared to take on most of the obligations that are required of developed countries. They were, however, given transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions particularly so for the poorest, «least-developed» countries. In addition, a Ministerial decision on measures in favor of least-developed countries gives extra flexibility to those countries in implementing WTO agreements; calls for an acceleration in the implementation of market access concessions affecting goods of export interest to those countries; and seeks increased technical assistance for them. Thus, the value to development of pursuing, as far as is reasonable, open market-oriented policies, based on WTO principles, is widely recognized. But so is the need for some flexibility with respect to the speed at which those policies are pursued.
Nevertheless, the provisions of the GATT intended to favor developing countries remain in place in the WTO. In particular, Part IV of GATT 1994 contains three articles, introduced in 1965, encouraging industrial countries to assist developing nation members “as a matter of conscious and purposeful effort” in their trading conditions and not to expect reciprocity for concessions made to developing countries in negotiations. A second measure, agreed at the end of the Tokyo Round in 1979 and normally referred to as the “enabling clause”, provides a permanent legal basis for the market access concession made by developed to developing countries under the generalized system of preferences (GSP).
Single undertaking implies that WTO members must accept all of the obligations of the GATT, GATS, TRIPs and any other corollary agreements. This ends the «free ride» of some developing countries which under the old GATT could receive the benefits of some trade concessions without having to join in and undertake their full obligations.
1. Which techniques may be employed by states to lower imports?
2. Are export controls compatible with GATT?
3. What are like products for MFN purposes?
4. Discuss the major exceptions to the GATT’s MFN obligation.
5. Describe the national treatment obligation under the GATT.
1. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p.139-228
2. Jackson/Davey/Sykes, 372-435, 436-463, 501-558, 596-665, 941-950, 983-988.
3. Trading into the Future – WTO, 3rd edition, Revised August 2003. p.21-55.
4. “Domestic Administration of Tariffs”, Trebilcock & Howse, The Regulation of International Trade, 2005, (Supplement, Volume II, pages 6 - 9)
WTO envisages regulates instruments countries may use under strict conditions to regulate access to their markets. These instruments can be in form tariff and nontariff restrictions. In this respect WTO sets up rules on usage of tariffs, safeguards, measures under balance of payment provisions, technical barriers to trade, sanitary and phytosanitary measures, trade-related investment measures.
A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary. Purpose of tariff is, that governments get revenue through tariffs, and an important source of income for developing countries in particular.
Tariffs provide protection to local industry, for domestic products become relatively cheaper than like imported products after the imposition of tariffs. Differential tariffs can be used to bring about a rational allocation of foreign exchange if it is scarce, for example, high tariffs on luxury goods and low tariffs on industrial machinery.
There are three basic types of tariff:
· Ad valorem, levied as a percentage of the value of the imported product
· Specific, levied on the basis of the quantity of an imported product
· Combined
For example, the ad valorem tariff on a bicycle is 6% and, in addition, $30 specific tariff per bicycle. If the imported value of 5 bicycles is $1,000, the cost of importing the five bicycles will be $1,210.
Earlier, various Members had different systems of tariff classification, which made it difficult for a country to assess the impact of the tariffs of another country on its own export prospects. Now, Members are required to convert their customs tariff to the Harmonized Commodity Description and Coding System (HS). In HS classification, broad categories of products are assigned numbers going from one to two digits. Thereafter, further divisions and subdivisions are made on the basis of the decimal system. For example:
85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles
8501 Electrical motors and generators (excluding generating sets)
8501.10 Motors of an output not exceeding 37.5W
8501.10 10 Synchronous motors of an output not exceeding 18W
8501.10 93 AC (alternating current) Motors
8501.20 Universal AC/DC motors of an output exceeding 37.5 W
Through the addition of numbers on the right, more and more subdivisions can be made, and the products can be further differentiated. In this way, comparison of tariffs among different countries becomes easy.
The GATT agreement establishes the rule for countries to bind their tariff rates. Implications of tariff binding are that, countries can bind tariffs on some products at particular levels through multilateral or bilateral trade negotiations. A Member normally cannot raise the levels of tariffs beyond the bound levels, but is free to apply the tariff on a product at a level lower than the bound level.
There are two major of approaches of tariff binding – ‘formula approach’ and ‘request-offer approach’:
Formula approach: In the Multilateral Trade Negotiations, this approach is preferred.
· reducing tariffs by a certain percentage over a period of time;
· laying down a peak level beyond which a Member would not apply tariffs on the bound items;
· prescribing an overall reduction of the average tariff level by a certain percentage, with a minimum percentage reduction in each tariff line;
· laying down a minimum percentage of the tariff lines to be covered by binding.
Once the formula is decided, Members work out their charts of reductions, which are examined by other Members and then recorded in the “schedule”.
Request-offer approach: Two countries sit down and each gives its own request list and offer list to the other for tariff reduction. An attempt will be made to achieve reciprocity as far as possible, that is, equalizing the reduction of total customs duty on each side. For example, if the average value of the export of product P from country A to B is US$200,000 and the tariff is proposed to be reduced by 3%, the loss of revenue to B is US$6,000. This would be the measure of the concession which A should made for B. The final results will be applied to all Members of the WTO.
If country A has to decide on the product to be included in the request list to be presented to country B, A would normally choose a product on the following considerations:
· the existing and potential production prospects for this product in A should be good;
· there should be a good demand or high potential of demand for this product in B;
· the tariff on this product in B should be high, adversely affecting the export of A at present.
Similarly, while choosing a product for inclusion in the offer list, A will take the following points into consideration:
· the product should be needed in A;
· the product should be of export interest to B;
· the reduction of the tariff on this item should not have the possibility of damaging the prospects of the firms producing the product in A.
Increase in tariff beyond binding:
If a Member wishes to raise the tariff on a product above the bound level, it has to offer compensatory concession on some other items.
The Member informs the Council for Trade in Goods about its proposal, and the Council authorizes a negotiation for this purpose;
The negotiation will take place specifically with the following members:
· the member with which the tariff binding concession was initially negotiated, that is initial negotiating rights (INR)
· the member having principal supply interest
· the member having the highest ratio of export of the product in question into the modifying Member country compared to its total export of that product
· other members having a significant share in the market of the modifying Member
Negotiation will take place to decide on the products which will be subjected to tariff reduction and the depth of the reduction in order to offer an almost equivalent concession to the proposed withdrawal or modification of the concession in question, and the final results will apply to all Members;
If agreement is not reached, the modifying Member will be free to take the action as proposed by it, and other Members will be free to withdraw substantially equivalent concessions. The withdrawal has to take place within six months of the action of the modifying Member. A notice of withdrawal has to be given and withdrawal can be effected after 30 days of the notice.