slides3_WTO.pdf

# History and negotiation process of international trade agreements The history and negotiation process of international trade agreements, primarily shaped by the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), is a story of progressive liberalization and institutional development aimed at fostering global commerce through principles of reciprocity and non-discrimination [3](#page=3) [4](#page=4). ### 1.1 Origins of GATT and early negotiation rounds The foundation for modern international trade agreements was laid on October 30, 1947, when 23 countries agreed to reduce and bind tariffs among themselves. This initial agreement, which covered approximately 20% of world trade and involved the negotiation of 45,000 tariff lines, officially gave birth to the General Agreement on Tariffs and Trade (GATT) on January 1, 1948 [3](#page=3). From its inception until 1995, GATT members engaged in a series of negotiation "Rounds". The primary objective of these early rounds was the reduction of tariffs. By the mid-1970s, the scope of these negotiations expanded to include discussions on non-tariff measures, and safeguard measures began to emerge as a component of trade agreements [4](#page=4). ### 1.2 The GATT negotiation process The core of the GATT negotiation process revolved around the concept of "market access" for national exporters. Countries sought to gain better access to foreign markets for their goods and services, and in return, they offered similar market access to foreign exporters within their own domestic market. This fundamental principle is known as **reciprocity** [6](#page=6). Furthermore, the benefits of this improved market access were extended to all GATT member countries, embodying the principle of **non-discrimination**. This principle is further reinforced by the **Most Favored Nation (MFN)** clause, which ensures that all exporters are treated equally when trading with another GATT member [6](#page=6) [9](#page=9). The negotiation protocol established for these discussions followed a structured, albeit complex, process: 1. **Requests for Concessions:** Before negotiations commenced, each participating country submitted lists detailing specific product-level concessions it desired from other participating nations [6](#page=6). 2. **Offers of Concessions:** At the opening of talks, each country presented its own lists of product-level concessions it was willing to offer to other countries, in response to the requests received [6](#page=6). 3. **Bilateral Negotiations:** Pairs of countries engaged in direct negotiations over concessions of mutual interest, effectively conducting simultaneous, interconnected bargaining [6](#page=6). 4. **Third-Party Review:** As bilateral agreements were finalized, other participating countries could review them and potentially adjust their own offers or agreements in response [6](#page=6). #### 1.2.1 Illustration of the negotiation process A simplified illustration demonstrates this process: Norway, a significant ski producer, wishes for Switzerland, a major importer of skis, to reduce its import tariffs on skis. The Norwegian and Swiss trade representatives would meet to discuss specific tariff reductions [7](#page=7). Norway might estimate that a five percent reduction in the Swiss import tariff on skis (e.g., from twelve percent to seven percent) would lead to an additional 200,000 dollars in Norwegian ski exports to Switzerland. Switzerland, in turn, might negotiate for a reduction in Norwegian tariffs on watches, aiming for a reciprocal benefit that would also generate approximately 200,000 dollars in extra Swiss watch exports to Norway (e.g., reducing Norwegian tariffs from eight percent to four percent). This exchange represents the principle of reciprocity in action [8](#page=8). Following these bilateral agreements, Norway and Switzerland would announce their concessions to all GATT members. Thanks to the MFN principle enshrined in Article I of GATT, these tariff reductions on skis and watches would then apply to all GATT members, irrespective of their direct involvement in the bilateral negotiation. This multilateral extension simplifies tariff schedules and ensures equal treatment for all exporters [10](#page=10) [9](#page=9). ### 1.3 Tariff structures and negotiation leverage GATT members operate with three distinct tariff levels for each product, though negotiations primarily focus on one: 1. **Bound Tariff:** This represents the maximum tariff rate that a country commits not to exceed, unless special circumstances arise. It signifies a binding commitment [11](#page=11). 2. **Applied Tariff:** This is the actual tariff rate that member countries apply to imports, which can be lower than the bound tariff [11](#page=11). 3. **Preferential Tariff:** Offered to countries that have signed specific trade agreements, this tariff is lower than the applied tariff but not necessarily zero. It is a discriminatory measure between preferential partners [11](#page=11). The difference between the bound tariff and the applied tariff is referred to as "tariff water" and represents the room available for negotiation. The difference between the applied tariff and the preferential tariff is known as the "preferential margin" [12](#page=12). Throughout the GATT era, significant progress was made in reducing average tariffs. By 1999, average tariffs had fallen from approximately twenty percent in 1947 to below five percent [17](#page=17). ### 1.4 The creation of the World Trade Organization (WTO) As the number of GATT members grew to 128, managing the organization through a simple secretariat became increasingly challenging. Consequently, the World Trade Organization (WTO) was established to provide a more robust institutional framework for ongoing trade discussions and, crucially, for the settlement of trade disputes. The WTO continues the work of GATT, aiming to ensure the smooth, predictable, and free flow of trade around the world [18](#page=18). --- # The WTO dispute settlement mechanism and exceptions to non-discrimination This section explores the WTO's Dispute Settlement Understanding (DSU), its historical context, current operational challenges, and the critical exceptions to the core principle of non-discrimination in international trade. ### 2.1 The WTO Dispute Settlement Understanding (DSU) The Dispute Settlement Understanding (DSU) functions as the judicial arm of the World Trade Organization, arbitrating disputes between member states that allege violations of WTO rules. While a dispute settlement mechanism existed during the General Agreement on Tariffs and Trade (GATT) era, it suffered from significant inefficiencies, including a lack of strict timetables, the requirement for unanimous consent to adopt rulings, and prolonged, inconclusive case resolutions. The establishment of the WTO aimed to rectify these issues [19](#page=19). #### 2.1.1 Initiation and Stages of a Dispute A formal dispute under the DSU is initiated only at the request of member countries, though informal resolution between parties is always possible. The process involves several stages [20](#page=20): * **Stage 1: Consultation (up to 60 days)**: Parties engage in discussions to resolve their differences independently [22](#page=22). * **Stage 2: The Panel (45 days for appointment, 6 months for conclusion)**: A panel of impartial experts, not representing their governments, is convened. This panel produces a report that serves as the initial ruling [22](#page=22). * **Appellate Body**: If any party disagrees with the panel's report, they can appeal to the Appellate Body. The Appellate Body consists of seven members, with three required for an appeal, all independent of their governments and appointed for renewable four-year terms. It can uphold, modify, or reverse the legal findings of the panel within 60 to 90 days [22](#page=22). The rulings of the Appellate Body are binding, requiring member states to change their policies or behaviors. Failure to comply can lead to authorized retaliations [22](#page=22). > **Tip:** The DSU is widely utilized by all WTO members, including both developing and developed countries, highlighting its importance [24](#page=24). #### 2.1.2 Current Challenges and Future Directions The DSU is currently facing significant operational challenges, primarily due to the paralysis of the Appellate Body. A group of countries, notably led by the United States, has blocked the appointment of new judges, citing concerns over the WTO's functioning and the DSU's tendency to rule against them on specific issues. The US perspective views WTO rules as a contract, while some other members see it as an evolving body with jurisprudence carrying precedential weight [23](#page=23). The consequence of this impasse is that if a guilty party appeals a ruling, the appeal cannot proceed due to the lack of a functioning Appellate Body, leading to a breakdown in the dispute resolution process. This can prompt countries to resort to unilateral actions like retaliations and trade wars [25](#page=25). To address this, a group of WTO Members, including the European Union, China, Canada, Brazil, and Japan, established the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) in 2020. The MPIA aims to replicate the Appellate Body's core functions for disputes among its participating members, of which there are currently about 60 [26](#page=26). > **Tip:** The dispute settlement mechanism is considered arguably the single most important achievement of the WTO [25](#page=25). ### 2.2 Exceptions to Non-Discrimination While the principle of non-discrimination is central to the WTO, several exceptions allow for differential treatment under specific circumstances, often to address unfair trade practices or to support developing economies. #### 2.2.1 Anti-dumping Duties Dumping occurs when a company sells or exports a product at a price considered "too low," typically at least 2% below its production cost or the "normal value". This becomes a concern when it constitutes unfair competition that harms the domestic industry in the importing country. In such cases, the importing country may impose an additional tax, known as an anti-dumping duty, to counteract the dumped price [27](#page=27) [28](#page=28). **Conditions for Imposing Anti-Dumping Duties:** 1. **Dumping Margin:** The export price must be at least 2% lower than the "normal value". The "normal value" is generally the price of the like product in the ordinary course of trade for consumption in the exporting country's market, or to other markets if the domestic market is insufficient [28](#page=28). * **Example Calculation:** If a product's normal value is 105 Swiss Francs (CHF) and it's exported to Switzerland for 90 CHF, the dumping margin is calculated as: $$ \text{Dumping Margin (DM)} = \frac{P_{\text{Switzerland}} - P_{\text{normal}}}{P_{\text{Switzerland}}} = \frac{105 - 90}{90} = 16.67\% $$ Since this margin exceeds 2%, this criterion is met [30](#page=30). 2. **Causal Link:** There must be a material injury or a credible threat of material injury to the domestic industry, or a material retardation of the establishment of a domestic industry. This involves examining factors such as declines in sales, profits, output, employment, and wages. The definition of the affected industry and the product in question is crucial for this assessment [31](#page=31). **Legal Process:** 1. A domestic producer identifies low-priced imports and petitions the government for an investigation [33](#page=33). 2. The government investigates to determine if dumping is occurring and if it's causing injury to the domestic industry [33](#page=33). 3. Three outcomes are possible: * No dumping or no injury found: Case closed [34](#page=34). * Dumping and injury confirmed: The exporter is asked to adjust prices, or face duties [34](#page=34). * Anti-dumping duty imposed: The duty is typically equal to the dumping margin [34](#page=34). > **Tip:** The imposition of an anti-dumping duty on specific exporters does not preclude other exporters from the same country from facing different import conditions, and the affected exporter can challenge the duty through the WTO's dispute settlement mechanism [35](#page=35). #### 2.2.2 Countervailing Duties Government subsidies can distort international competition by providing cost advantages to domestic firms. Prohibited subsidies are those linked to export performance or the use of domestic over imported goods, as they are overtly protectionist. Actionable subsidies are those that can harm domestic industries in importing or third countries. Subsidies for purposes like R&D are generally permissible if not directly linked to exports or imports [36](#page=36). A country may impose countervailing duties if it believes foreign exporters have received subsidies, are selling at "too low a price" due to these subsidies, and this is causing damage to its domestic industry. Similar to anti-dumping duties, the importer's government may first ask the exporting firm to raise its export price. A common example is a government subsidizing energy production, which lowers costs for energy-intensive industries and enhances their competitiveness [37](#page=37). #### 2.2.3 Special and Differentiated Treatment for Developing Countries Developing countries have historically received special consideration in trade negotiations, benefiting from non-reciprocity in tariff concessions during negotiation rounds. The principle of reciprocity typically implies an exchange of equivalent market access concessions; however, developing countries are not always required to grant such equivalent access, acknowledging that their domestic markets might be more vulnerable to disruption from competition with advanced economies [38](#page=38). Approximately two-thirds of WTO members are classified as developing countries and benefit from "Special and Differentiated Treatment" (SDT). This includes [39](#page=39): * Extended timelines to comply with WTO commitments [39](#page=39). * Less reciprocity in market access negotiations [39](#page=39). * Potential exemptions from safeguard measures imposed by developed countries [39](#page=39). * Greater ease in imposing import restrictions compared to developed countries [39](#page=39). * Access to legal assistance from the WTO [39](#page=39). * Least-developed countries receive even more extensive exceptions [39](#page=39). > **Tip:** The determination of developing country status is typically self-declared by the country itself. China's decision to forgo its developing country status in future WTO negotiations is a strategic move to stabilize its relationship with the US and demonstrate commitment to international law [40](#page=40) [41](#page=41). #### 2.2.4 The Generalized System of Preferences (GSP) Under the GSP, developed countries offer preferential access, often duty-free, for certain goods originating from developing countries. In practice, this system is not always "generalized" as its name suggests, with many non-competing goods, particularly agricultural products from countries with strong domestic agricultural sectors, often excluded from duty-free entry. Similarly, more elaborate manufactured products, which could be more beneficial for economic development, are frequently omitted from the scheme compared to unprocessed raw materials [42](#page=42). #### 2.2.5 Free Trade Agreements (FTAs) and Customs Unions (CUs) Countries have long pursued lower trade barriers with their neighbors through Free Trade Agreements (FTAs), often regional in nature. These agreements create blocs where trade is freer among members than with non-members, inherently leading to discrimination against external trade. Famous examples include the European Union (EU), the United States-Mexico-Canada Agreement (USMCA), Mercosur, and ASEAN [43](#page=43). **Impact of FTAs and CUs:** * **Trade Creation:** They boost trade within the bloc [44](#page=44). * **Trade Diversion:** They make goods from outside the bloc more expensive, leading to trade diversion [44](#page=44). * **Welfare Effects:** Consumers generally benefit, while producers face increased competition but also improved export market access. Governments may experience a loss of tariff revenue, though this can be mitigated by mutual recognition of norms, which avoids loss of tariff revenue [44](#page=44). **Rules of Origin:** To prevent trade deflection (where goods from outside the FTA enter through the member with the lowest external tariff to avoid higher tariffs), FTAs employ Rules of Origin. These rules determine a product's origin, typically based on a significant share of value added within the FTA member countries. Products not meeting these criteria face the Most Favored Nation (MFN) tariff. Cumbersome rules of origin or small preferential margins can sometimes lead exporters to opt for the MFN tariff instead [45](#page=45). **Customs Unions (CUs):** CUs take FTAs a step further by requiring a Common External Tariff (CET). This necessitates a higher degree of political cooperation and a surrender of sovereignty over independent trade policy, as the same tariff applies to imported goods regardless of which CU member country imports them. For example, within the EU, a car imported from the US would face the same tariff whether imported by Germany or Italy [49](#page=49). --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | General Agreement on Tariffs and Trade (GATT) | An international agreement that sought to regulate international trade by reducing or eliminating trade barriers such as tariffs and quotas, initially established after World War II. | | Rounds of Negotiations (under GATT) | Periodic meetings among GATT member countries aimed at reducing tariffs and other trade barriers through multilateral bargaining. | | Market Access | The ability of a country's exporters to sell their goods and services in another country's market, often influenced by tariffs, quotas, and other trade regulations. | | Reciprocity | A principle in international trade negotiations where countries agree to reduce trade barriers on a mutual basis; if country A lowers tariffs on goods from country B, country B is expected to offer similar concessions to country A. | | Non-discrimination | A core principle in international trade agreements, ensuring that all trading partners are treated equally. It includes the Most Favored Nation (MFN) principle and the National Treatment principle. | | Most Favored Nation (MFN) Principle | A principle under WTO law that requires a country to grant the same trade advantages to all other WTO members. If a country grants a special favor to one trading partner, it must do so for all others. | | Tariff | A tax imposed on imported goods, often used to protect domestic industries or to generate revenue. | | Bound Tariff | The maximum tariff rate that a country commits not to exceed for a specific product, as listed in its WTO tariff schedule. | | Applied Tariff | The tariff rate that a country actually applies to imports at any given time, which may be lower than the bound tariff. | | Preferential Tariff | A lower tariff rate offered to specific trading partners, typically under the terms of a Free Trade Agreement or Customs Union, which is lower than the applied tariff. | | Tariff Water | The difference between a country's bound tariff rate and its applied tariff rate, representing potential room for future tariff reductions or a buffer against policy changes. | | World Trade Organization (WTO) | An international organization established to oversee and regulate global trade, succeeding the GATT and providing a framework for trade negotiations and dispute settlement. | | Dispute Settlement Understanding (DSU) | The mechanism within the WTO that provides a framework for resolving trade disputes between member countries, involving consultations, panels, and the Appellate Body. | | Panel (in WTO disputes) | A group of independent experts appointed to examine the facts of a dispute, hear arguments from the parties, and issue a report with findings and recommendations on whether WTO rules have been violated. | | Appellate Body (in WTO disputes) | A standing body within the WTO dispute settlement system that hears appeals from panel rulings, examining legal interpretations and findings of law. | | Dumping | The practice of exporting a product at a price lower than its normal value, often below production cost, which can be considered unfair competition if it harms the domestic industry of the importing country. | | Anti-dumping Duty | An additional tariff imposed by an importing country on dumped goods to counteract the injurious effect of the dumping on its domestic industry. | | Normal Value | The price of a like product when destined for consumption in the exporting country's domestic market, or the price to other export markets if the domestic market is insufficient. | | Dumping Margin | The percentage difference between the export price of a product and its normal value, used to determine the amount of anti-dumping duty to be imposed. | | Material Injury | Significant harm to a domestic industry caused by dumped or subsidized imports, which can be economic (e.g., loss of profits, sales, or employment) or a threat thereof. | | Countervailing Duty | A tariff imposed by an importing country to offset subsidies provided by the exporting country's government that have distorted competition and harmed the importing country's domestic industry. | | Government Subsidies | Financial assistance or support provided by a government to its domestic industries, which can sometimes distort international trade by giving firms a cost advantage. | | Prohibited Subsidies | Subsidies that are explicitly forbidden under WTO rules, such as those directly linked to export performance or the use of domestic over imported goods. | | Actionable Subsidies | Subsidies that are not prohibited but can be challenged if they cause adverse effects to the domestic industry of another member country or negatively impact trade. | | Special and Differentiated Treatment (SDT) | A set of provisions within WTO agreements that allow developing countries special access to trade benefits and exemptions, recognizing their developmental needs. | | Generalized System of Preferences (GSP) | A system under which developed countries grant preferential tariff treatment to imports from developing countries, aiming to promote their exports and economic development. | | Free Trade Agreement (FTA) | An agreement between two or more countries to eliminate or reduce tariffs and other trade barriers on substantially all trade among themselves, while maintaining independent trade policies with non-member countries. | | Customs Union (CU) | An agreement that combines a free trade area with a common external trade policy; members eliminate internal trade barriers and adopt a uniform tariff for goods imported from outside the union. | | Common External Tariff (CET) | A uniform tariff rate applied by all member countries of a customs union to goods imported from outside the union. | | Trade Creation | An economic effect of regional trade agreements where lower internal trade barriers lead to increased trade between member countries, shifting production to more efficient producers. | | Trade Diversion | An economic effect of regional trade agreements where imports from a more efficient non-member country are replaced by imports from a less efficient member country due to preferential tariffs. | | Rules of Origin | Criteria used to determine the national source of a product, often required to qualify for preferential tariff treatment under Free Trade Agreements. |