Incoterms_® and Commercial Contracts

1.0 The Importance of Trade Rules for Business

Trade rules are critical for businesses that export goods and services, depend on imports for components or machinery, or face international competition. The WTO administers a series of rules that govern international trade in goods and services, as well as important intellectual property issues. Although still important, these rules are being overshadowed, as evidenced by an ever-increasing volume of trade benefitting from favourable treatment under regional trade agreements (RTAs) and preferential trade arrangements (PTAs), as discussed in Sections 4 and 5 of this chapter.¹

Business should be familiar with both the WTO and the relevant RTA and PTA rules in order to take full advantage of them, in terms both of opening up foreign markets and of protecting themselves against excessive or unfair competition.

The aim of the international trade rules administered by the WTO, and incorporated to a great extent in RTAs (which often also deal with certain areas not covered by the WTO, such as investment, labour rights and the environment), is to minimise, to the extent possible, government interference with international trade. The assumption is that market forces provide the most efficient way to allocate resources, and that efficient businesses can benefit most when trade distortions are reduced or eliminated. A liberal trading system also allows businesses to specialise in what they produce most efficiently and spurs competition, forcing domestic producers to become more efficient and giving consumers a wider range of choices, as well as less expensive products. The founders of the modern trading system also believed in the political importance of trade liberalisation. In their view, trade restrictions often led to political tension and even to war. The rules recognise, however, that there are situations where it may be necessary for governments to intervene, for example to protect their citizens from food that is unsafe to eat, or to protect their industries from unfairly traded (e.g., subsidised or dumped) imports.

Despite the increasing importance of RTAs, the WTO remains important for business, particularly in terms of removing obstacles to trade. Examples of the wide range of issues dealt with in the WTO since its creation two decades ago include:

* Arthur E. Appleton and Patrick F.J. Macrory are Partners in the law firm of Appleton Luff, based in Geneva and Washington, DC respectively. Mr Macrory is also Director of the International Trade Law Center at the International Law Institute in Washington, DC.
Dr Appleton is also an Adjunct Professor at the Johns Hopkins University School of Advanced International Studies (SAIS-Europe).

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• Can the EU impose a moratorium on the approval and sale of genetically modified agricultural products?
• Can a Member ban the importation of products that it believes are not produced under environmentally sound conditions?
• How can poorer Members provide medicines for their people at affordable prices while respecting the patent rights of the companies that developed the medicines?
• Is the United States permitted to ban the sale of all flavoured cigarettes except menthol cigarettes?
• Is the EU permitted to ban the sale of beef from cattle fed with growth hormones despite the lack of evidence that hormone-fed beef is harmful?
• Do international trade rules permit Airbus to benefit from EU Launch-Aid subsidies? Can the EU successfully challenge US subsidies to Boeing in the form of technology financed by the US Government in connection with the development of military aircraft, which Boeing then used to develop civil aircraft?
• Do trade rules permit China to restrict the export of raw materials that it deems to be in short supply?
• Is the EU permitted to ban the import of seal products on moral grounds?

These are some of the important societal and/or commercial questions that have been dealt with by the WTO, whose more than 160 Members account for almost all of world trade. Its remit stretches far beyond the traditional role of its predecessor, the General Agreement on Tariffs and Trade (GATT), which dealt only with trade in goods and mainly with border issues. The WTO, by contrast, administers rules that reach deep into the domestic economies of its Members, including matters such as the regulation of service industries and intellectual property rights, as well as the traditional rules on trade in goods. These rules, which are reflected in the national laws of the Members, affect the business community on a daily basis.

Smart business leaders take advantage of international, regional and bilateral trade rules throughout the supply chain of every good they sell and many services that they offer or need. They pay particular attention to new trade rules governing such matters as intellectual property.

Surprisingly, however, many business leaders are unfamiliar with WTO rules or even the basic principles of the trade system. Nor do they always take advantage of RTAs and PTAs, which can improve business performance, or be used to address commercial problems. This can have profound financial consequences for their business.

Not only does the business community need to understand the basic WTO rules, it should be familiar with how the WTO dispute settlement system works. Unlike most international organisations, the WTO’s ability to enforce international trading rules is backed up by a reasonably effective dispute settlement system.²However, the WTO system is only directly accessible to WTO Member governments, and not to businesses and other private parties. In other words, only Member governments can bring disputes. Moreover, the WTO dispute settlement system is available only to challenge actions by other Members, rather than the actions of private parties.³

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A business or a private party that is being hurt by a trade restriction imposed by a WTO Member must persuade its government to bring an action. Communication between the business community and their governments is thus essential.

Another important feature of the WTO is that, by practice, its decisions are taken by a consensus among its Members. As the membership has grown and diversified, this has made it increasingly difficult for the WTO to reach decisions, and is a major reason behind the almost complete failure (with the exception of the Trade Facilitation Agreement and the Naïrobi Commitment to abolish export subsidies) of the most recent round of trade negotiations (the “Doha Development Agenda”, discussed in Section 3.3 of this chapter). This in turn is one of the factors behind the enormous growth in recent years in the number of RTAs between and among individual WTO Members. As a result, while recognising that the WTO still has an important role to play, sophisticated businesses that follow trade policy are paying more attention to the strategic and commercial gains to be had from RTAs and PTAs.

Business leaders need to know that, contrary to the arguments made by some of its critics, the WTO is not run by a group of faceless bureaucrats operating in secrecy in Switzerland. Indeed, the WTO is one of the most member-driven of all international organisations. WTO Members make the decisions, almost always by consensus, with the WTO Secretariat providing information and administrative support in the decisionmaking process. WTO Members also manage the dispute settlement system. Only Members can initiate WTO disputes. There is no WTO Advocate-General or prosecutor with authority to bring cases.

This chapter first discusses the benefits of trade to the business community and to society at large. It then describes the origins of the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT). It also discusses the structure and functioning of the WTO and the growing importance of RTAs and PTAs. Finally, it provides information on how business can find out the “rules of the game”.

This chapter differs somewhat from other chapters as it discusses the history of the trading system. Understanding this history will make it easier for the business community to understand why the system is important and why the business community is an important stakeholder in the system and stands to profit greatly from it.

Later chapters discuss the substantive rules administered by the WTO, including its dispute settlement system, and explain how businesses can profit from these rules.

1.1 Why Trade?

International trade provides opportunities for business, but it can also pose challenges. While trade liberalisation offers more market opportunities for efficient businesses, domestic firms will have to compete harder, and some will not survive.⁴ This is particularly true in labour-intensive goods and services sectors where the temptation to outsource production to low-wage countries is greater.⁵

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Trade agreements can be difficult for many countries to negotiate in times of economic hardship since tariff concessions made in conjunction with the negotiation of trade agreements may adversely affect business interests that are already suffering from an economic downturn. Trade agreements usually produce gains for some sectors and losses for others. Businesses that import or export goods and services need to monitor multilateral and regional trade negotiations carefully, and interact with Member governments to ensure that their views are heard.

1.1.1 The Economic Benefits of Trade

On the economic front, international trade results in a more efficient allocation of resources, since it allows businesses to specialise in what they do best. It obviously makes sense for two countries to trade if each has an absolute advantage in producing particular goods. Ecuador, for example, is geographically and climatically well-suited to cultivate bananas, but not to grow wheat, whereas the converse is true of the United States and Canada. One would expect to see trade between these countries in bananas and wheat.

This much is obvious to the business community. What is not so obvious, but far more important, is that economic theory tells us that even where a country does not have an absolute advantage in producing any particular product, it may still benefit from trade. The Law of Comparative Advantage, developed in the early 19th Century by David Ricardo, an English economist, demonstrates that a country should gain from trade by specialising in producing items where it has a comparative economic advantage, even if it does not have an absolute advantage. Ricardo used the example of trade between England and Portugal in cloth and wine. As shown in the text box, his theory demonstrates that even if Portugal could produce both wine and cloth more efficiently (in terms of labour input) than England, it would still make sense for[Page27:]Portugal to specialise in producing wine and England to produce cloth and the two countries to trade, because England was comparatively more efficient at producing cloth, i.e., it required less additional labour than Portugal to produce cloth, than to produce wine. This is the most efficient way to allocate economic resources and results in increased production. Cloth makers in England and winemakers in Portugal would have the opportunity to expand their sales, and consumers in both countries would benefit from a greater choice and more competition. Of course, English winemakers and Portuguese cloth makers would face increased competition, which would force them to become more efficient if they wished to stay in business.

THE LAW OF COMPARATIVE ADVANTAGE

Suppose that Portugal can produce a bale of cloth for two units of labour and a barrel of wine for two units, while England requires six units to produce a barrel of wine and three units to produce a bale of cloth. Clearly Portugal has an absolute economic advantage with respect to both products, but England has a comparative advantage with respect to cloth because it can produce it with only 50% more labour than Portugal, whereas it requires three times as much labour to produce wine. With a total of 24 units, in the absence of trade Portugal could produce three bales of cloth and nine barrels of wine, while England could produce four bales of cloth and two barrels of wine, for a total of seven bales of cloth and 11 barrels of wine. If, on the other hand, each country specialises in production of the product as to which it has comparative advantage, England could produce eight bales of cloth and Portugal could produce 12 barrels of wine. Specialisation has resulted in increased production. Each country can trade the surplus that is not needed for its domestic market.

Since every country in the world is bound to have a comparative advantage for some product, Ricardo’s theory tell us that all countries should benefit by specialising and by trading. While more sophisticated economic theories of trade have been developed, the Law of Comparative Advantage still provides the essential economic rationale for international trade.⁶

In addition to resulting in more efficient allocation of economic resources, international trade, by expanding markets, allows businesses to reduce costs by taking advantage of economies of scale. Also, increased competition from imports encourages greater efficiency on the part of domestic manufacturers and provides consumers with a wider choice of products at more competitive prices.

In the last couple of decades, many developing countries have lowered their trade barriers, and in most cases this has produced strong economic growth.⁷China has lifted nearly 700 million people out of poverty since it liberalised its trade regime.⁸India’s economy has also begun a transformation since its 1991 decision to lower its trade barriers. Vietnam and Chile are other examples of countries that experienced tremendous growth after liberalising their trade regimes.

1.1.2 The Political Benefits of Trade

The founders of US liberal trade policy in the 1930s firmly believed that open trade resulted in peace, while trade restrictions led to political tension and ultimately to war. Cordell Hull, Franklin Roosevelt’s Secretary of State, who played a key role in the development of the modern trading system, expressed his view that “unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war.”⁹His view was prophetic; Japan’s attack on Pearl Harbor was prompted at least in part by a US embargo on sales of oil and other products to Japan. The recent troubles in Ukraine began, at least in part, when the Ukrainian Government, under pressure from Russia, changed its mind about signing a trade agreement with the European Union.

Conversely, the principal reason for creating the European Union was to integrate the economies of the Member States to such an extent as to end the possibility of another war in Western Europe. The preamble to the 1951 Treaty Establishing the European Coal and Steel Community, the first step towards the creation of the European Union, states that its purpose is “to substitute for age old rivalries the merging of their essential interests; to create, by establishing an economic community, the basis for a broader and deeper community among peoples long divided by bloody conflicts” – unusual language for an international agreement.¹⁰

1.2 The Rise of Protectionism in the 1930s and the US Response

The origins of the World Trade Organization lie in the economic dislocation caused by World War I and its aftermath. In the words of a US official who played an important role in the creation of the post-World War II international economic system:

The foundations of economic liberalism, badly shaken by the First World War, were all but[Page28:]demolished by the Great Depression. The gold standard disappeared; currencies were thrown into chaos; exchanges were subjected to national controls. There was a sharp contraction in the volume of the world’s trade…. Intensive economic nationalism marked the rest of the [1930s]. Exports were forced; imports were curtailed. All of the weapons of commercial warfare were brought into play: currencies were depreciated, exports subsidised, tariffs raised, exchanges controlled, quotas imposed, and discrimination practiced through preferential systems and barter deals. Each nation sought to sell much and buy little. A vicious restrictionism produced a further deterioration in world trade.¹¹

In 1934, in an effort to reverse this disastrous trend, the United States enacted the Reciprocal Trade Agreements Act, which authorised the US Government to enter into bilateral agreements with other countries designed to reduce trade barriers between them on a balanced basis, so that trade between the two countries would increase without changing the balance of payments between them. The text box below explains the rationale behind such agreements. Over the next 11 years the United States entered into 32 bilateral tariff-cutting agreements of this sort.¹²The international community used this balanced tariff-cutting methodology as a basis for later multilateral trade agreements.

THE RATIONALE UNDERLYING TRADE AGREEMENTS

Suppose that Countries A and B enter a bilateral trade agreement. Country A agrees to lower its tariff on cars from Country B by an amount estimated to increase imports of cars by US$1 billion. In return, Country B lowers its tariff on wine by an amount estimated to increase imports of wine by the same amount. The increased trade resulting from these tariff reductions will produce greater efficiency and give consumers more choice, yet the balance of trade between the two countries remains the same. In the real world, of course, the negotiations are much more complex since they involve many products, and, in the case of multilateral agreements, many countries. But the general concept of balanced trade reductions remains the same. And, as discussed in Chapter Thirteen (Dispute Settlement), where one WTO Member upsets the balance by imposing a trade restriction that is inconsistent with one of the WTO Agreements, it should eliminate the restriction. If it cannot do so, for political or other reasons, the trade balance should be restored either by the Member in violation offering tariff concessions to the complaining country on other products that will make up for the lost trade, or by the complaining country imposing tariffs on imports from the offending country to reduce imports by the amount of the lost trade.

1.3 The International Trade Organization

The US and UK planners of the post-World War II world were determined to avoid the mistakes of the interwar years. In particular, they recognised that the absence of any permanent international economic institutions had contributed greatly to economic problems. The 1944 Bretton Woods Conference therefore called for the establishment of the International Bank for Reconstruction and Development (the World Bank), whose original mission was to help reconstruct war-torn Europe, and the International Monetary Fund, which was to act as a lender of last resort to countries facing balanceof- payments difficulties, enabling them to avoid, or at least delay, the imposition of import controls. Negotiations began soon afterwards for the creation of a third major international economic organisation, the International Trade Organization (ITO), and these were completed in Havana in 1948. The ITO would have been a full-fledged international organisation, part of the United Nations family, whose role would be to administer the trade rules contained in the ITO (“Havana”) Charter, as well as rules[Page29:]relating to investment and other matters.¹³ However, for a variety of reasons the United States failed to ratify the Havana Charter, and as a result the ITO never came into existence.¹⁴

2.0 The General Agreement on Tariffs and Trade

In 1947 a group of 23 countries that were involved in the ITO negotiations concluded a separate tariff-cutting agreement, the General Agreement on Tariffs and Trade (GATT). The purpose was to kick-start the world economy through increased trade pending ratification of the Havana Charter, which was expected to take several years. The signatories understood that the GATT would be subsumed into the ITO once the latter was established. Most importantly, in addition to undertakings to cut tariffs, the GATT contained a series of rules – based on those contained in the Commercial Policy chapter of the ITO Charter – aimed at preventing countries from undercutting the value of their tariff concessions by restricting imports in other ways. Suppose, for example, that after signing the hypothetical trade agreement described in the textbox in Section 1.2, Country A passed a law limiting the value of imports of autos from Country B to US$500 million. To use the language of the GATT and the WTO, this would “nullify or impair” the value of Country A’s trade concession (US$1 billion), for which the Country B had “paid” by lowering its tariff on wine. For this reason, the GATT generally prohibits restrictions on imports other than tariffs.

The GATT rules are still in force today and form the essential underpinnings of the WTO system – so much so that more than four-fifths of the complaints filed under the dispute settlement mechanism include allegations of GATT-inconsistent measures.

CORE GATT PRINCIPLES

The core GATT principles consist of: (a) rules against discrimination (i) between imports from different sources, or (ii) against imports in favour of domestic products; (b) rules relating to tariffs; (c) a ban on import restrictions other than tariffs; and (d) the requirement of transparency. Many of these rules also appear in the specialised WTO Agreements, such as the Agreement on Technical Barriers to Trade and the Agreement on Trade-Related Aspects of Intellectual Property Rights, and they also appear in regional trade agreements. These rules can be used by businesses to remove barriers to their exports. They are discussed in detail in the next chapter.

Largely because the US negotiators only had authority from Congress to reduce tariffs, and due to the assumption that the ITO would come into being within a few years, the GATT was designed simply as a trade agreement rather than an international organisation. It contained virtually no provisions of an organisational nature.¹⁵However, when the ITO failed to come into existence, the GATT by default became the “organisation” that administered international trade rules. Through great ingenuity and the use of ad hoc arrangements, it managed for nearly 50 years to fill the void created by the stillbirth of the ITO. It acted as an international trade forum, administering the trade rules contained in the Agreement, and it established a dispute settlement mechanism, which because of inherent weaknesses described in Section 2.1.1 below, achieved only limited success.

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2.1 The Achievements of the GATT

The major accomplishment of the GATT was to organise eight rounds of tariff reductions, which lowered the average tariff imposed by developed countries on manufactured goods from over 40%, a serious impediment to trade, to under 4%, little more than a nuisance in most cases. The developed countries eliminated tariffs altogether on a number of products, such as aircraft, IT equipment, and pharmaceuticals.¹⁶ The reduction in tariffs greatly spurred international trade and the international business community and consumers have profited enormously as a result.

2.2 The Weaknesses of the GATT

The GATT developed a system for resolving disputes between its “contracting parties” (as its signatories were known). However, as a result of a number of built-in institutional deficiencies, the system was only moderately effective. Most importantly, under the consensus principle on which the GATT operated, a single party – including the respondent – could block the establishment of a “panel” (an ad hoc tribunal usually composed of three individuals appointed to rule on a dispute). Even if a panel were established, the losing party could block adoption by the GATT contracting parties of the panel report, which meant that it had no legal effect. There were no strict time limits, and no provision for appellate review of panel decisions, which were not always consistent with one another. Also, enforcement of decisions was fairly ineffective. While the system protected the sovereignty of the contracting parties, because any contracting party could prevent adoption of a panel report (a judgment), the system depended largely on a good citizenship model for its effectiveness. Although contracting parties often accepted adoption of panel reports that ruled against them where the issue was not particularly important, the losing party frequently blocked reports involving major trade matters, such as disputes concerning the European Community’s Common Agricultural Policy.

The GATT suffered from a number of other weaknesses:

• It only covered trade in goods, and did not apply to trade in services, which was unregulated at the international level. International trade in services was insignificant at the time of the creation of the GATT, but had become substantial by the 1980s.
• It did not apply to intellectual property rights, which like services were becoming increasingly important in international trade. The existing international conventions on intellectual property rights lacked effective enforcement mechanisms.
• As a result of the political power of agricultural interests, as well as security based concerns on the part of some countries to avoid overreliance on imports, there were major exceptions to the general rules with respect to trade in agricultural products. High tariffs, import quotas, and large subsidies greatly restricted international trade in agricultural products.
• The influential textile lobby in the developed countries secured removal of trade in textiles from the GATT framework. Textile trade was governed instead by a series of managed trade agreements, the last of which was the Multi-Fibre Arrangement. The Multi-Fibre Arrangement allowed import quotas, which were generally prohibited by the GATT.
• Although the GATT had achieved a great deal in terms of tariff reductions, it was not as effective in reducing non-tariff barriers to trade, which were becoming more significant as tariffs were lowered. The Tokyo Round, [Page31:]concluded in 1979, did result in a series of specialised agreements (known as “Codes”) that attempted to limit the use of non-tariff barriers, but these were only binding on those countries that chose to sign them (mostly developed countries), rather than on all GATT contracting parties.

2.3 The Uruguay Round

The eighth round of multilateral trade negotiations, the Uruguay Round, which lasted from 1986 to 1994, produced major changes to the international trading system and addressed many of the shortcomings of the GATT.

• It created the World Trade Organization, which unlike the GATT, was a true international organisation.
• As a result of pressure from major US and European service industries, such as banking and insurance,¹⁷ it brought trade in services into the system in the form of the General Agreement on Trade in Services (GATS).
• In response to demands by US and European industries that depended heavily on intellectual property rights, such as the pharmaceutical sector,¹⁸ movie producers and software developers, the Uruguay Round included the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which set minimum substantive and enforcement standards for each Member, and allowed the WTO dispute settlement system to be used to enforce intellectual property rights.
• The Uruguay Round eliminated several of the existing exceptions and waivers to GATT rules that applied to trade in agricultural products – in particular an exception that permitted import quotas on agricultural products in many circumstances. The Uruguay Round also brought trade in textiles into the GATT system. These changes were supposed to provide increased developed-country market access for products from businesses in developing countries, as a quid pro quo for their reluctant acceptance of the GATS and the TRIPS Agreement.¹⁹ In practice, however, the developed countries implemented these agreements in a way that if not contrary to their letter, certainly violated their spirit, and many developing country businesses did not reap the anticipated benefits.²⁰
• The negotiations produced agreements designed to reduce non-tariff barriers that were binding on all Members, unlike the Tokyo Round Codes, which bound only those GATT Contracting Parties that chose to sign them.
• The negotiators achieved a major overhaul of the dispute settlement system. They eliminated the single-member veto on establishment of a panel and adoption of a panel report. They agreed on strict time limits, and they created an Appellate Body to review panel decisions to ensure greater legal coherence and consistency. They greatly improved the mechanism for enforcing decisions. Many view the WTO dispute settlement system as the “crown jewel” or “linchpin” of the WTO system, and believe that it has contributed greatly to the WTO’s stability.

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3.0 The World Trade Organization

In April 2017, the World Trade Organization had 164 Members (up from 123 in 1995, when the Uruguay Round came into effect), which together account for almost all of world trade. All important trading countries are now Members of the WTO, and most other trading countries (21 in number) have applied to join.

On 1 January 1995 all GATT contracting parties automatically became Members of the WTO. Prospective WTO Members must negotiate accession by making trade concessions in bilateral negotiations with existing Members. Accession can take as little as two years, but in the case of China’s negotiation took 15 years.

Businesses are often active behind the scenes in accession negotiations. For example, China’s accession provided particular market-opening opportunities for service industries, such as banking and insurance, as well as businesses involved in the manufacture of goods, and many such businesses in the United States and the European Union pushed their governments to obtain market-opening concessions from China.

Major decisions, such as the initiation of a new trade round, are taken at conferences of the Trade Ministers, which generally take place every two years. More routine business is handled by the General Council, which consists of the Permanent Representatives (Ambassadors) to the WTO, and meets at least every two months.²¹ Beneath the General Council are various Councils and Committees, including a committee for each of the specialised agreements on trade in goods. Meetings of these bodies are attended by diplomats from Member governments. The WTO Secretariat supports their work by providing technical and administrative assistance as requested by the Members. The WTO Secretariat is relatively small (almost 650 staff members), and had a 2016 budget of approximately 197 million Swiss Francs.²² The Secretariat is headed by a Director-General.

3.1 Functions of the WTO

Members, through the WTO, engage in a wide range of activities. They negotiate trade agreements covering trade in goods and services, as well as rules applicable to intellectual property. They develop procedures and establish institutions for resolving trade disputes. They monitor the trade policies of Members, often in the form of formal trade policy reviews organised by a specialised division of the Secretariat. They organise courses and technical assistance programmes, which are usually administered by the Secretariat. Lastly, the WTO liaises with other international organisations, as well as non-governmental organisations that represent varied interests, including business interests.

3.2. WTO Treatment of Developed, Developing and Least-Developed Countries

The WTO Agreement recognises three categories of Member – developed, developing and least-developed. There is little guidance in the Agreement as to the definition of developing countries, other than a reference in Article XVIII of the GATT to “economies which can only support low standards of living and are in the early stages of development”. One of the curious feature of the GATT, carried forward into the WTO, is that Members decide for themselves whether to be classified as “developed” or “developing” countries, and there is no provision for graduation to “developed” status even when a Member reaches an advanced stage of development. Since there are minor advantages to being treated as a developing country, some Members still choose to classify themselves as “developing countries”, even though many view them[Page33:]as developed countries and even though they do not always claim the benefits.²³ More than two-thirds of the WTO Members are developing countries.

“Least-developed” countries (LDCs) are defined using the United Nations definition, which is based on a number of factors, including gross national income, human resource weakness and economic vulnerability. Of the 48 countries recognised as LDCs by the United Nations, 36 are WTO Members. The great majority are in Africa.

Developing and least-developed countries enjoy or enjoyed several advantages in the WTO system, principally the following:

• They are not expected to make reciprocal tariff cuts in trade negotiations;
• They were subject to lower market-opening obligations (e.g., tariff reductions, agricultural subsidy reductions) in the Uruguay Round;
• They were granted more time to implement these obligations and given technical assistance to implement them;
• They are eligible for tariff preferences from the developed countries under the Generalised System of Preferences, discussed in Section 5 below; and

They have the right to the appointment of a panellist from a developing country in dispute settlement proceedings.

Businesses with trade grievances involving least developed countries should realise WTO Members almost never initiate dispute settlement proceedings against LDCs. Many Members are also hesitant to initiate proceedings against developing countries in their region or with whom they share a close trade or historical relationship. For example, ASEAN members avoid litigation against other ASEAN members. The EU avoids litigation against the developing country members from the Asian, Pacific and Caribbean Group of countries (ACP). This means with many trade issues involving developing countries, especially LDCs, the business community cannot count on Member support for litigating solutions. Diplomatic approaches, which in many trade disputes are preferable and faster, may be more effective.

3.3 The Doha Development Agenda

In 2001 WTO Members launched a new round of negotiations, named the Doha Development Agenda (DDA), since a stated purpose of the round is to improve trading opportunities for developing countries. Unfortunately, after well over a decade of negotiations, the DDA has achieved little. The three major problem areas relate to: (1) trade in manufactured goods, where the developing countries are unwilling to make the level of tariff cuts that the developed countries insist upon; (2) trade in agricultural goods, where developing countries are not willing to lift market-access barriers, in the form of tariffs and tariff-rate quotas, to the extent demanded by the developed countries as a condition for developed countries reducing their farm subsidies; and (3) trade in services, where the market-opening offers are too minor to be of much interest to developed countries.

As noted in Chapter Three, Section 5, during its 2013 Ministerial Conference in Bali, the WTO Members did reach an important agreement on trade facilitation that should streamline customs procedures, as well as a few less important decisions affecting trade in agriculture and least-developed countries. However, no significant progress[Page34:]was made at the 2015 Nairobi Ministerial Conference, other than an agreement to end agricultural export subsidies, leading many to conclude that the DDA is dead.

The differences between the developed and developing countries are so significant that, for now, it seems unlikely that there will be another major negotiating round involving all Members of the WTO that covers a broad range of trade issues. Instead, the pattern in the future is likely to be a series of plurilateral (i.e., optional) agreements on individual topics negotiated by those Members who are most interested in lowering trade barriers. Several such agreements are being negotiated at the present time, such as the Trade in Services Agreement (discussed in Section 10.2 of Chapter Ten) and the Agreement on Trade in Environment Goods, designed to reduce or eliminate tariffs on products that benefit the environment. This approach is sometimes referred to as “Two-Speed” or “Variable Geometry”.

THE INFORMATION TECHNOLOGY AGREEMENT (ITA)

In December 1996, 29 WTO Members concluded the Information Technology Agreement (ITA). This agreement, whose coverage was expanded in 2015, is designed to eliminate tariffs on IT products. Since 1996, the membership of this plurilateral agreement has risen to more than 80 members and covers approximately 97% of world trade in IT products (approximately US$1.3 trillion per year).

As a result of the repeated disappointments in the DDA negotiations, there has been a considerable increase in the number of RTAs that have been implemented or are under negotiation. These agreements, which are of great importance to business, are discussed in Section 4 below.

3.3.1 Business in the Doha Round

One important difference between the Uruguay Round and the DDA was the extent of business involvement. Many US and EU business interests exerted a great deal of pressure on their governments to move forward with the Uruguay Round, because of the market-opening opportunities they saw with respect to both goods and services. In addition, the industries that rely heavily on intellectual property rights were keen to bring such rights under the jurisdiction of the WTO, so as to have an effective means of enforcing them. There appears to have been far less interest in the DDA on the part of business, and this may be one of the reasons for the DDA’s failure.

3.4 Gaps in the WTO Framework of Interest to Business

The developed countries wanted to include agreements on investment and competition in the DDA.²⁴ Developing countries vehemently opposed negotiations on these topics and these subjects were dropped from the negotiations at an early stage. Many RTAs do contain provisions on these topics, which are very important for the business community.

Business must now deal with hundreds of bilateral investment agreements and several different types of competition (antitrust) laws in countries where they operate. Incorporating investment and competition rules into the WTO Agreement would result in a more transparent investment and competition framework and provide business with greater certainty. Developing countries are however reluctant to surrender sovereignty at the international level in such important and sensitive areas.

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4.0 Regional Trade Agreements

The business community needs to pay particular attention to regional trade agreements as they are growing in scope and economic importance. The scope of recent EU and US RTAs greatly exceeds that of the WTO Agreements.

Business can be both winners and losers from RTAs and most develop strategies accordingly. Of particular importance is the fact that many RTAs negotiated by developed countries expand existing WTO disciplines in areas such as intellectual property and government procurement (WTOPlus or WTO+), and frequently extend into new areas such as investment, competition law, labour rights and environmental protection.

While Article I of the GATT requires WTO Members to give equal tariff treatment to imports from other Members (Most-Favoured-Nation or MFN), Article XXIV of the GATT permits two or more WTO Members to agree to eliminate tariffs on most of the trade between them, while maintaining their MFN tariffs against products imported from other Members. The GATT recognises two types of regional trade agreements (RTAs): a free trade agreement (FTA) and a customs union. The term RTA is a misnomer, as many RTAs are between countries in different parts of the world.

There are many more FTAs than customs unions. In both cases the parties agree to eliminate tariffs on “substantially all” of the trade between them, but in the case of an FTA, they maintain their own external tariffs, whereas in the case of a customs union, they impose a common external tariff. The North American Free Trade Agreement (NAFTA), between Canada, the United States and Mexico, is an example of an FTA; while the European Union is an example of a customs union.

Article XXIV of the GATT only applies to trade in goods. Article V of the General Agreement on Trade in Services authorises similar agreements involving trade in services.

In part because of the failure of the Doha Round to produce any meaningful trade liberalisation, RTAs are becoming an increasingly important feature of the world trading system. As of April 2017, approximately 270 RTAs were in force, and it is estimated that they cover at least half of world trade.²⁵ Every Member of the WTO is a party to at least one RTA.²⁶ As of January 2017, the European Union was party to almost 40 RTAs involving around 50 countries covering goods and or services, and the United States to 14, covering 20 countries. The number would have increased to 25 if the United States had not withdrawn from the TPP in January 2017. ²⁷

A number of significant RTAs, are being negotiated, including the Transatlantic Trade and Investment Partnership (TTIP), between the United States and the European Union, which together account for half of world GDP and nearly one-third of world trade. However, TTIP is facing considerable opposition mainly due to its investment provisions.

In addition to TTIP, negotiations are underway for the Regional Comprehensive Economic Partnership (RCEP), which includes the Association of Southeast Asian Nations (ASEAN) members²⁸ and all countries with which ASEAN has an FTA (Australia, China, Japan, India, South Korea and New Zealand); and the Tripartite Agreement, which includes the 26 countries that are currently members of three African RTAs – COMESA, SADC and the East African Community, and is seen as a stepping stone towards an African-wide FTA, called the Continental Free Trade Area. Because of their size, TPP, TTIP, RCEP and the Tripartite Agreement are often referred to as “mega-regional” trade agreements

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Businesses should pay close attention to the negotiation of RTAs, to ensure that goods and services they are interested in importing and exporting are not excluded from coverage. They should also be involved to the extent possible in the drafting of the Rules of Origin, which are critical in determining whether a product traded between parties to an RTA is eligible for duty-free treatment. Rules of Origin are discussed in Chapter Three, Section 2.1.

While the economic benefits associated with open trade are often an important reason for states to enter into an RTA, political motives can also play a significant role. As explained earlier, one of the principal reasons behind the creation of the European Coal and Steel Community, the precursor of the European Union, was to prevent another war between France and Germany. MERCOSUR was formed in part to reduce political tension between Argentina and Brazil, as well as to promote democracy within the region. And an important motive behind Mexico’s interest in the NAFTA was to lock in domestic economic reforms.

Early RTAs generally only covered trade in goods. Modern (“Second Generation”) RTAs often apply to a wide range of economic activity, including the newer WTO subjects of trade in services, and intellectual property, as well as investment, labour rights, environmental issues and competition.

NON-TRADITIONAL SUBJECTS COVERED IN MODERN FTAs

Investment
Electronic Commerce
Competition
State-Owned Enterprises
Labour
Environment
Cooperation and Capacity Building
Competition and Business Facilitation
Small and Medium Sized Enterprises
Regulatory Coherence
Anti-corruption

Important aspects of RTAs are discussed in subsequent chapters that deal with specific issues, such as tariffs and non-tariff barriers. Some key points to note are:

• The GATT and GATS rules regarding RTAs are fairly simple:
• In the case of goods, they must cover “substantially all the trade” between the parties²⁹ and in the case of services they must have “substantial sectoral coverage”.
• They must normally come into effect within 10 years, but full implementation has been stretched on numerous occasions.
• In the case of a Customs Union the common external tariff should not exceed the pre-existing rates of the parties, but this has not always happened. • They must be notified to the WTO.³⁰[Page37:]
• Whether or not RTAs contribute to global welfare is a much-debated question. They are of course designed to increase trade among the parties. But they may also reduce imports from more efficient non-member countries (trade diversion). “The net welfare effect of [RTAs] depends on the relative magnitude of the opposing trends.”³¹ In addition, rules of origin, used to determine whether a product qualifies for RTA treatment, can be extremely complicated and can be used for protectionist purposes. See Chapter Three, Section 2.1.1.1 for an example.
• The European Union is converting the unilateral tariff preferences that it used to provide under the Lomé and Cotonou Conventions to the ACP countries (former colonies in Africa, the Caribbean and the Pacific) to RTAs, called Economic Partnership Agreements. One of these, with the Caribbean countries, is in effect; other agreements are at various stages of negotiation, signature and approval.³²

Details of the tariff rules under RTAs are provided in Chapter Two, Section 4.1.

5.0 Preferential Trade Arrangements

The “Enabling Clause,” adopted by the GATT contracting parties during the Tokyo Round, authorises (but does not require) developed countries to give unilateral tariff preferences to imports from developing countries.³³ Most developed countries provide such preferences, as do Russia, Belarus, Kazakhstan and Turkey.³⁴ However, because such preferences, known collectively as the Generalised System of Preferences (GSP), are optional, developed countries that decide to accord tariff preferences to developing countries have considerable leeway in structuring their programmes in terms of country and product coverage, and the opportunities for developing countries to challenge country or product exclusions are very limited. The only constraint on developed-country latitude is that the country according GSP treatment may not discriminate between similarly situated countries.³⁵

The US and EU programmes, as well as some regional preference programmes, are discussed in Chapter Two, Section 4.2.

6.0 Ascertaining the “Rules of the Game”

Before engaging in international trade, business must find out as much as it can about the relevant rules and regulations. If planning to export a product, it will need to know what tariff will be applicable to its exports, what regulations (such as safety requirements, emission limits and food standards) will apply, and whether there are any relevant intellectual property issues. If planning to export a service, it will need to know whether and the extent to which the country in question has opened the relevant market to foreign competition, and the details of the regulatory regime. Fortunately, a great deal of information is readily available, largely as a result of the cornerstone WTO principle of transparency, discussed in Chapter Two, Section 7.

The WTO website provides a wealth of useful information that businesses can use for strategic planning purposes. WTO Members, in particular the developed country Members, also maintain helpful websites that can be of tremendous assistance to the business community.

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6.1 Information on the WTO Website

The WTO website (www.wto.org) contains an enormous amount of information relating to trade, including commitments made by the Members in areas such as tariffs and services, non-tariff measures imposed by Members, details of regional trade agreements and preferential trade arrangements entered into by Members, and periodic reviews of the trade policies of Members. The website is not as user-friendly as it might be, but it has improved greatly in recent years.

6.1.1 The Schedules

The goods and services commitments made by WTO Members, such as bound tariff rates and services market-opening commitments, are contained in schedules filed with the WTO and are available on line.³⁶ (Please consult the endnotes for current links.)

6.1.2 Integrated Trade Intelligence Portals

The Integrated Trade Intelligence Portals (ITIPs) are a fairly new and extremely useful feature of the WTO website. I-TIP Goods contains details of nearly all non-tariff measures imposed by Members,³⁷ and can be searched by Member or by product category. I-TIP Services provides details of services commitments made by each Member under the GATS and under RTAs, as well as information on applied regimes and statistics.³⁸

6.1.3 Regional Trade Agreements Information System

The Regional Trade Agreements Information System³⁹ contains details of RTAs entered into by each Member, including links to the texts of the agreements. The System also provides useful economic and trade information with respect to each Member, such as basic economic indicators, average bound and applied tariff rates, average bound rates by product group, and exports to major trading partners.⁴⁰ Detailed information on Preferential Trade Arrangements is also available,⁴¹ and includes links to the relevant laws and regulations.

6.1.4 Trade Policy Reviews

The WTO conducts periodic trade policy reviews of each Member.⁴² The lengthy reports contain detailed chapters examining the trade policies and practices of the Member and describe its trade policy-making institutions and its macroeconomic situation. These reports provide useful information to a business considering exporting goods and services to a new destination.

6.2 Other Sources of Information

The EU operates a useful system that provides alerts to new notifications under the Agreement on Technical Barriers to Trade, by Member and/or product area.⁴³ The US National Institute of Standards operates a similar system, but access is limited to US citizens, industries and organisations.⁴⁴ Signing up to one or both of these systems should give interested businesses enough warning of proposed new technical regulations to be able to try to persuade their governments to file comments with the Member in question.

When it formulates its business strategy, a business should review the tariff commitments, and/or if relevant the services commitments, of a given Member to which it is planning to export goods or services. It should also look on the WTO website, and that Member’s websites, to ascertain any applicable regulations. Likewise, if the Members are bound by commitments made in a regional or bilateral trade agreement, relevant commitments should also be ascertained.

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