Gatt Law: Importance of Non-Discrimination Essay

Introduction

When trade law was proposed after the World War II, it was considered as the latest agreement to be negotiated under the General Agreement on Tariffs and Trade (GATT) and was thus a new agreement having a pronounced effect on the global economy other than NAFTA. After getting approved from Bretton Woods Conference, GATT introduced trade as a means for recovering economy on a large scale. The main purpose behind negotiating the ITO was to acquire the initial tariff reductions. However the ITO failure in 1950 induced the idea of barriers reduction in international trade, thereby leaving behind the GATT agreement. The GATT agreement later took the form of a series of agreements which identified GATT as a treaty, not an organisation. In 1990s WTO get hold of GATT functions.

The Uruguay Round is the eighth broad trade negotiation round under the sponsorship of the GATT, which is the most extensive step undertaken by the GATT system and possibly by any similar endeavour in history (Collins & Bosworth, 1994, p. 63). Thus GATT serve as the basic rules for following International trade in goods among WTO members by a series of additional agreements negotiated in successive rounds of GATT negotiations (Condon, 2002, p. 22).

WTO when came into existence on 1 January 1995 declared charter entirely institutional and procedural and draw upon the GATT and its Uruguay Round resolutions in its Annexes for compliance. The WTO Agreement not being a mere replacement of the GATT under the Uruguay Round of GATT Trade negotiations introduced a mundane institutional framework in order to conduct various trade relations among its members¹. According to Rao (2000), WTO not only presented GATT with a new form but also modified many of its birth defects (Rao, 2000, p. 75)².

Trade Policies and WTO Agreement – The Principles

As of the early 1990s, a well-oiled GATT machine existed, allowing contracting parties to manage developments in the trading system, including a capacity for surveillance of trade policies and assisting conflict resolution through consultations, negotiations, mediation, and dispute settlement (Hoekman & Kostecki, 1995, p. 13). The GATT while regulating the use of trade policies by WTO members does not indicate about the concern that whether governments should use domestic policies or trade policies to achieve particular objectives. That means the efficiency issue is not addressed directly due to the premise that is set about inefficient instruments such as trade policy must be accepted, and that the best that can be achieved is to discipline the use of different types of trade policies. Thus, it provides opportunity to the countries to use free trade policies while encouraging them to utilise the least trade-distorting measures (Hoekman & Kostecki, 2001, p. 145). According to Bossche (2005) “Liberal international trade policies have a firm institutional basis in the multilateral trading system of the WTO” (Bossche, 2005, p. 6).

Trade in services is a wide and important area to which multilateral trading system was extended during the Uruguay Round and was expected to provide the same advantages to developing countries as the rule-based multilateral trading system in merchandise trade. A number of areas of export interest to developing economies have already been committed to liberalisation by major importing industrial economies, although according to a Services Council report there is a long way to go (Das, 2001, p. 61). In addition, GATS was unique in that it allowed WTO members, including developing country members, to negotiate the conditions under which Foreign Service suppliers may establish themselves in the importing countries. The terms and conditions to this effect are bound in the schedules of the members concerned.

The WTO agreements fulfil the standards of TBT (Agreement on Technical Barriers to Trade) and the agreement on SPS (Sanitary and Phytosanitary Measures)³. This way the TBT and SPS Agreements seek to strike a balance in order to avoid unnecessary trade restrictions while recognising the sovereign rights of Governments to adopt whatever standards are appropriate to fulfil legitimate objectives (Sampson, 2005, p. 115). The legal texts that regulate everyday activities are basically composed of a number of simple, fundamental principles that run throughout all of these documents. These principles serve as the vital components of what we call as the ‘multilateral trading system’.

The principles of non-discrimination that are the cornerstone of multilateral trading system are:

1. Most-favoured-nation (MFN) clause – Equal treatment to all⁴
2. National Treatment obligation – Equal treatment to foreigners and locals⁵

The non-discrimination factor of GATT law provided opportunity to the developing nations in the form of TRIPS Agreement by offering potential benefits for developing countries by creating a framework conducive to technology transfer and foreign direct investment (Das, 2001, p. 61). The non discriminating principles of MFN and national treatment belong actually to the TRIPS Agreement. Expansion of the coverage of the multilateral trading system to new areas has made the post-Uruguay Round system more meaningful to the developing economies, this is not to deny that implementation of some of the agreements is difficult. Although many developing economies were not able to take advantage of some of the improved market access opportunities immediately, they were expected to do so in the future as their domestic supply capacities increased. However, tightened discipline and wider coverage prove to be effective and beneficial only if an efficient means of dispute settlement supports the system (Das, 2001, p. 61)

Most-favoured-nation (MFN)

The MFN principle is the treatment which fulfils the first article of the GATT while being the topmost priority in the General Agreement on Trade in Services (GATT)⁶ and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)⁷. The MFN ensures ‘equal treatment to all’ and does not allow any discrimination on the basis of trading partners within WTO members (WTO, 2008a).

MFN Treatment implies with all the custom duties, charges and formalities that are covered under the MFN and is qualified to be granted by any member irrespective of product origination or destination for any other country must be accorded to the like product for all other WTO members. The same criteria applies equally to exports and imports while not discriminating between like products on the basis of their origin or destination (Sampson, 2005, p. 80).

This feature of non-discrimination was sought to be maintained by all the contracting parties of the GATT, with a few exceptions to incorporate special needs for budget balancing in some of the developing countries, protection of infant industries for a few years, and protection of health of humans, plants and animals. Despite a few cases of use of these escape clauses, the MFN constituted the backbone of the entire multilateral trade negotiation processes for all these years. Bagwell and Staiger (1999) offered essentially a static analytical framework to interpret the fundamental principles of GATT: reciprocity and non-discrimination. These principles were seen as complementary in generating efficient multilateral trade operations and do not support the reasoning to extend and include any consideration of environmental externalities, however (Rao, 2000, p. 18).

In the beginning, the opposition to trade agreements was confined to agreements with developing nations, where stark differentials in social and environmental agreements could much more easily be highlighted than in abstract discussions of multilateral trade principles such as MFN treatment. Trade instruments were perceived as leverage to pressurize developing countries so as to comply with US domestic conceptions of what international social and environmental regulations should be. Soon, however, the new groupings started considering the trade liberalisation, claiming that it would undermine American social or environmental standards or, in the more right-wing terms, US sovereignty. In the process, these groups could appeal to a diffuse feeling that was the legacy of the recession of the early 1990s and the ongoing trend of corporate restructuring. Trade liberalisation could increasingly be cited as the source of social ills, from declining living standards and wage inequality to job losses. MFN treatment negated the entire Globalisation backlash that initiated from the USA to other parts of the world while increasingly linking to trade liberalisation, and multinational corporations as the main culprits. From this perspective, MFN enabled the trade policy to transform into a sort of social work, or a palliative for grievances that could not be dealt with domestically. The effect of these groups was to make any type of trade liberalisation suspect, including multilateral market opening and its domestic policy mechanism such as fast-track authority (Deutsch & Speyer, 2001, p. 23).

National Treatment Obligation

Non-discriminatory treatment is best evidenced by the NT obligation which demands that imported and domestic products are treated alike. National Treatment enables import and local production of goods to be treated equally particularly after the situations when the foreign goods enter the market. The same is applicable to foreign and domestic services as well as trademarks, copyrights and patents. This principle of treating local and national products equally is common in all the three WTO Agreements⁸

GATT members while keeping the principle of National Treatment ahead, speak of concessions when ‘granting’ market access to foreign exporters, demand ‘reciprocity’ and ‘compensatory’ access to the foreign country’s market. Equipped and assisted by the principles like MFN and National Treatment, the success of the GATT in reducing MFN tariffs is easy to understand where countries interested in market access in a foreign country approaches it and offer concessions in return. It is the MFN principle that allows concessions that are made and extended to all GATT members, after which reciprocity calls for compensating concessions from all ‘benefiting’ countries. Sander & Inotai (1996) comment that “MFN and reciprocity thus work as accelerators of multilateral trade liberalisation, while backsliding is prevented by binding the lowered (average) MFN tariffs” (Sander & Inotai, 1996, p. 41).

National Treatment suggests another way to intensify trade between the industrialised countries via the liberalisation of public procurement. “National Treatment” being the main relevant instrument acted as a code while concerning and binding on all signatory states. This principle was developed while considering the growing importance of trade in services for growth and development of the world economy, the negotiators sought to bring services under multilateral rules and disciplines and create a framework for continuing trade liberalisation.

National treatment unconditionally applies through GATT that by playing its role does not ensure that trade liberalisation does not compensate by countries by imposing some domestic taxes and similar measures but by requiring that foreign products be treated no less favourably than identical domestic products, it becomes much more difficult for a contracting party to prevent foreign products from competing with domestic ones. Therefore the effect which is given to foreign suppliers and domestic buyers ensure confidence for the regulatory environment in which they must operate. This in turn facilitates the dispute settlement procedures regarding organisation of production, planning, and so forth. This way the national treatment principle uphold the onus in invoking the dispute-settlement cases brought to the GATT which is a very wide-ranging rule. The obligation applies whether or not a specific tariff commitment was made, and covers taxes and non-tax policies: all policies must be applied in a non-discriminatory fashion to similar (competing) domestic and foreign products.

Critics

Even at the formation of the GATT, the most obvious challenge arise from it was found that 11 of the 23 original signatories were developing countries. However, despite contributing fairly towards large proportion of the total membership, which soon grew to a majority position, developing countries maintained a low profile in the GATT. Though the developing countries made many attempts to gain authority of the GATT, they were usually through indirect channels. For instance, developing countries remained successful in pressurizing occasionally on the GATT through the G-77 in the UNCTAD and through majoritarian activities in the General Assembly but the activity of developing countries in other institutions contrasted with their limited participation in the GATT (Narlikar, 2003, p. 35).

Since there was unwillingness on the side of developing countries in active participation of the GATT, therefore every country was entitled to one vote⁹. Such an unwillingness of developing countries to participate in the GATT derived from the free trade ethos espoused by the GATT, which often contradicted the policies of greater protectionism and interventionism in the developing world, especially in the late 1950s and 1960s. At that time the GATT was seen as a poor substitute for the stillborn ITO but unlike the ITO, the original Articles of Agreement made no mention of economic development. Being formed on the basis of equality, GATT avoided distinctions between stronger and weaker parties, and was thereby seen to expose developing countries to unfair competition.

During the earlier GATT rounds only a small proportion of developing country exports were covered by the GATT regime. Therefore, following a strategy of import substitution and ignoring exports did not have a high cost. As high tariffs and other barriers existed in the industrial economies, developing countries paid more attention to getting preferential access to industrial country markets. The “special and differential” treatment clause of the GATT allowed them preferences in the industrial country markets. With the success of various GATT rounds, tariff barriers began to plummet and the lower MFN tariffs were available to all. This reduced the value and attraction of preferential treatment to the developing economies and with the passage of time, as a small number of so-called emerging market economies began to compete successfully with the industrial economies, it became more costly for them to offer special privileges to developing economies.

This shift in the mind set of policy makers in developing economies towards a relatively liberalised trading system was reflected in their attitude to and participation in the Uruguay Round. For the first time, many developing economies abandoned their traditional passive posture and participated actively throughout the round. Many of them became increasingly active as the round evolved. Developing economies were slowly learning the MTN ropes.

During the Uruguay Round, developing economies not only participated in formulating the new rules of the global trading system but also made offers in conventional areas and “new” areas. The first area was trade in manufactures, while the second set included trade in services, trade in agriculture, and Trade Related Aspects of Intellectual Property Rights (TRIPs) and the like. The most significant outcomes of the Uruguay Round resulted in betterment towards agriculture, textiles and apparel that were included in the multilateral trade regime (Das, 2001, p. 9). Agreement to abolish the MFA was seen as having far reaching implications for the developing economies. Besides, food crops in which some developing economies compete directly with industrial ones and of which other developing economies are large-scale importers came back under the normal rules.

Three broad categories of trade-policy instruments can be distinguished: measures that affect quantities, restricting the volume or value of transactions; those that affect prices, involving the imposition of a monetary fee (tax) on foreign suppliers or have an equivalent effect; and those that may indirectly affect quantities and/or prices (Hoekman & Kostecki, 1995, p. 11).

Dispute settlement enables a country to notice and consider those actions that are when taken by another government possess the effect of invalidating or impairing a concession (that is, the market-access commitments implied by the tariff bindings and safeguarded by the various rules and disciplines of the GATT), it may bring this to the attention of the government involved and ask that the action be offset. If satisfaction is not obtained this way, the country possesses the right to invoke the WTO’s dispute-settlement procedure. Since GATT and WTO serve as inter-governmental agreements, therefore private parties do not have legal eminence before the WTO’s dispute-settlement body. For the private sector handling disputes means to go through its government along with concerning that in the EU and US domestic legal orders, the GATT is not a self-executing treaty, which means that private parties cannot invoke GATT disciplines in domestic litigation either¹⁰. Dispute settlement procedures provide its members an incentive to raise disputes in the WTO, rather than seeking redress through unilateral retaliation. Such procedures are beneficial particularly for small countries as recourse to a multilateral body will frequently be their only option, as unilateral actions will not be effective and thus not be credible. However large or developed countries have as great a stake in the functioning of the regime, as in many instances disputes will involve other large trading nations. Moreover, for an export firm what counts is market access, independent of whether it is located in a small or large country, and the WTO helps guarantee that access (Hoekman & Kostecki, 1995, p. 31).

Critics often say that negotiating the rules or the code of conduct has become increasingly difficult over time. Recognising that tariffs were becoming less important as barriers to trade, the agenda of MTNs (New Transatlantic Marketplace) gradually grew to include mostly non-tariff policies. With the creation of the WTO it is likely that future MTNs will increasingly revolve around non-tariff measures and domestic policies that are deemed to have an impact on trade. The influence free trade has on the economic market has created an interface between trade policy and economic policy that is increasingly getting blurred, however agreeing on the elimination or reduction of NTMs is more difficult than negotiating downward the levels of tariffs.

One reason for such uncertainty refers to the less obvious condition that specific NTMs are detrimental to a country’s welfare. For example, it is easier to legally bind oneself into social milieu but difficult to assess attitudes towards environmental quality or product safety that differs across countries. In so far as this is reflected in differences in environmental or product standards, it may have a negative impact on trade. Alternatively, a country may seek to offset a market failure with a targeted subsidy programme. Economic theory suggests that under certain conditions subsidies will be the most efficient method of dealing with such problems, even if a side-effect of the subsidy is that it reduces imports. The implication is that negotiations on such issues may be zero-sum games (some countries may lose), in contrast to tariff reductions, which are positive-sum (all countries gain, even though certain groups in each country will lose unless they are compensated) (Hoekman & Kostecki, 1995, p. 33). Another problem, again in contrast to tariffs, is that it can be difficult to reduce the trade-restricting impact of NTMs incrementally.

For many NTMs, MFT and National treatment obligations are feasible to agree to the basic principles of transparency to seek to adopt dispute resolution procedures however; others experience pressures for the harmonisation of policies that are mounting. Although the GATT long before denied seeking traditional attempts to agree on common policies, differences in non-trade policies regarding the environment, labour standards, or anti-trust as they increasingly lead to claims that these result in unfair competition and should be countervailed. But still it is a key challenge for WTO Members going into the next millennium to deal with these pressures.

References

Bossche Peter Van den, (2005) The Law and Policy of the World Trade Organization: Text, Cases and materials, the Edinburgh Building Cambridge.

Collins M. Susan & Bosworth P. Barry, (1994) The New GATT: Implications for the United States: Brookings Institution: Washington, DC.

Condon J. Bradly, (2002) NAFTA, WTO, and Global Business Strategy: How Aids, Trade, and Terrorism Affect Our Economic Future: Quorum Books: Westport, CT.

Deutsch Klaus Gunter & Speyer Bernhard, (2001) The World Trade Organization Millennium Round: Freer Trade in the Twenty-First Century: Routledge: London.

Hoekman M. Bernard & Kostecki M. Michel, (2001) The Political Economy of the World Trading System: The WTO and Beyond: Oxford University Press: Oxford.

Hoekman M. Bernard & Kostecki M. Michel, (1995) The Political Economy of the World Trading System: From GATT to WTO: Oxford University Press: Oxford.

Narlikar Amrita, (2003) International Trade and Developing Countries: Bargaining Coalitions in the GATT & WTO: Routledge: London.

Rao P. K. (2000) The World Trade Organization and the Environment: St. Martin’s Press: London.

Sampson P. Gary, (2005) The WTO and Sustainable Development: United Nations University Press: Tokyo.

Sander Harald & Inotai Andras, (1996) World Trade after the Uruguay Round: Prospects and Policy Options for the Twenty-First Century: Routledge: London.

WTO, 2008a.

Footnotes

1. Article II of the Agreement.
2. The WTO Charter XVI.1 states clearly that GATT’s decisions, procedures and customary practices are guiding principles to the extent feasible.
3. The Sanitary and Phytosanitary Agreement emerged from the Uruguay Round with an objective to flesh out Article XX (b) in order to establish some basic principles for the adoption and maintenance of SPS measures.
4. Article I of the GATT (1994).
5. Article III.
6. Article II.
7. Article IV.
8. Article III of GATT, Article XVII of GATS and Article III of TRIPS.
9. WTO favoured this provision through Article IX:1 of the Agreement Establishing the WTO and allows developing countries the possibility of commanding a wide majority in GATT decision-making processes, irrespective of their small share in world trade.
10. Multilateral agreements must be translated into domestic law through implementing legislation.