INTERNATIONAL TRADE LAW

Class Notes by K. Kindiki 2006

University of Nairobi

THE INTELLECTUAL HISTORY OF INTERNATIONAL TRADE

Q. Do we need International Trade? Why Trade? Why is the analysis of exchange of
goods and services internationally important?
Douglas Irwin in Against The Tide traces the vices and virtues of foreign trade back to
the early civilization of the Greek and Roman writers. The views of these early thinkers
reflected a high degree of hostility/ambivalence about trading with foreigners but
mainly for non-economic reasons:
Foreign merchants and traders were regarded in these civilizations as of an inferior
social class. This general hostility to merchants and foreign commercial activities was
accentuated by the reasoning that contact with strangers would disrupt domestic life by
exposing citizens to the bad manners and corrupt morals of the barbarians.
On the other hand, early writers such as Plato acknowledge the gains from
specialization or division of labour although they were reluctant to extend the
implications of this acknowledgment explicitly to foreign trade.
Other writers like Plutarch took the view that God created the sea, geographic
separation and diversity in endowments in order to promote interactions through
international trade between/among the various people of the world. This is the doctrine
of universal economy developed by philosophers and theologians in the first few
centuries AD although dominant strands in medieval scholastic thoughts are reflected
e.g. in the writings of St Thomas Aquinas continue to be suspicious about commercial
activities and to worry that contract with foreigners would disrupt a civil life.
Natural law philosophers in the 17th & 18th centuries such as Hugo Grotius sought to
ressurect the Universal Economy Doctrine justifying a largely constrained freedom to
trade on the law of nations or jus gentium.
Around the same time, there emerged a doctrine known as mercantilism. This theory
emerged in Britain and Continental Europe in the 17th & 18th centuries. Unlike other
doctrines which used culture etc, to oppose economic trade, it used or was based on
economic rationale. Although mercantilism was not opposed to International Trade in
principle it argued for close regulation for two reasons:
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1. To maintain favourable balance of trade which argued for aggressive exports but
restrictive import policies. This was to ensure the net effect benefited the locals
and not the foreigners.
2. To promote the manufacturing of raw materials at home rather than importing
manufactured goods which would displace domestic production and
employment and hence arguments for export taxes on exported raw materials
and import duties on imported, manufactured or luxury goods.
This was to ensure promotion of the manufacturing or raw materials locally rather than
exporting them to be manufactured outside. This would be by:
i)
Taxing exports of raw materials very highly
ii)
Taxing imports of luxury goods highly so that they are not competitive
locally
Adam Smith and his student David Riccardo are regarded as the people who gave an
economic rationale to International Trade Law. Adam Smith in his book The Wealth of
Nations ITT6 mounts a very broad assault on mercantilist theories and their
argumentation of restricting International Trade.
He argues for free trade, laissez-faire. He argues for specialization as nations can gain
from it. He says the gains from specialization in domestic economic activities apply
equally in specialization in international trade. He says:
What is prudent in the conduct of every private family can scarcely be folly in that of a great
kingdom. If a foreign country can supply us with commodities cheaper than we can make, better
buy it of them with some part of the produce for our own industry.
Adam Smith explains this phenomena using the theory of comparative advantage i.e. a
country should produce what it can best, quickly and cheaper and exchange with other
countries. Adam Smith uses two countries and two commodities to illustrate this theory.
He says: It is the maxim of every prudent master of a family never to make at home
what it will cost him more to make than to buy. The tailor does not attempt to make his
own shoes but buys them from the shoemaker. The shoemaker does not attempt to
make his own clothes but employs a tailor. A farmer attempts to make neither the one
nor the other but employs those different artificers. All of them find it for their interest
to employ the whole industry in a way in which they have some advantage over their
neighbours and to purchase with part of its produce or what is the same thing with the
price of a part of it, whatever else they have occasioned for i.e. If P is a country and is
more efficient and productive in a given industry say farming, then X and X is more
efficient or productive than P in another industry say weaving and that both countries
are in need of both products, P should specialize in one, X in the other and trade
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between the two countries in the two products will be beneficial. It will conserve
resources and create value for both.
In 1817, David Riccardo took the theory of comparative advantage a step further by
arguing that even if P is more efficient and produces cheaper products than X, they
should find ways of each concentrating on one product i.e. a country may have absolute
comparative advantage. Despite this there is also need for specialization as there will
always be a need to trade.
He says if England can produce a given quantity of wine with the labour of 100 people
and a given quantity of cloth with the labour of 120 people yet Portugal uses 90 people
to produce the same quantity of wine and 80 people to produce the same quantity of
cloth, in both scenarios, although Portugal has absolute comparative advantage over
England with respect to production of both wine and cloth i.e. it could produce the
same quantity of products with fewer labour, then trade would still be mutually
advantageous.
Therefore, Portugal will need to specialize in one industry as trade is still beneficial.
SOURCES OF LAW
Treaty
Agreement between states in written form and governed by international law whether
conveyed in a single instrument or a series of related instruments (e.g. WTO
agreements) through whatever its particular designation. International organizations
can make treaties also. Treaties must be written.
Treaties are regulated by Vienna Convention on Law of Treaties (with regards to states)
and other treaties (regarding agreements between international organizations)
In the Eastern Greenland Case (Norway v Denmark) the ICJ ruled against Norway because
it was proceeding from a statement of a Minister over ownership of Greenland
unilateral declaration. There was no agreement.
Custom
Custom is formed through state practice and opinio juris. State practice must relate to a
considerable number of states coming to constitute a norm; It must however:
i)
be extensive
ii)
be consistent
iii)
have an element of duration

General Principles of Law recognized in various nations

International law sometimes borrows from principles developed in national legal
systems, but they must be general and appear to be common in many legal systems.
They act only as a gap filler where there is no treaty provision or rule of custom. For
instance, under contract law there is privity of contract restitutio in integrum the
wronged party is entitled to be compensated to restore one to the situation one had been
in previously.
Judicial Decisions and Writings of Publicists
They are subsidiary sources of law. International courts and tribunals are not bound by
the doctrine of stare decisis technically/legally they are not bound but in practice they
use those decisions. In the short period that WTO has been in international trade there
have been many cases and they have similarity whose jurisprudence can be useful.
Teachings of the most highly qualified publicists of various nations refer to eminent
scholars who have published authoritative works.
Equity
Article 38, paragraph 2 Nothing in this article prevents this court from making
decisions on the basis of equity. Equity ex aequo bono principle of the law of equity of
the parties. This is what applies in international law the agreement which the parties
agree to be equitable.
Soft law
For example resolutions of councils of ministers, decisions, declarations of political
organs of international organizations e.g. UNCTAD.
HISTORY OF INTERNATIONAL TRADE
The modern law of ITL can be described as a product of the second world war or to be
more precise the product of the pioneers of the planners of the post world war (second).
In the initial years, the law of IT was influenced heavily by the thinking of the major
players of the post world war period. High tariffs, discriminatory trade agreements,
input quotas, unilateralism and bilateralism were major characteristics. It was also a
period of low economic depression as a result of the war. This is the background
through which the development would take place.
Reasons motivating the planners
- The need to have free trade.

The need to have a regime based on non-discrimination (regime that tries to

eliminate restrictions/quotas, a regime that is aimed at reducing trade barriers
and opening up of markets)
- There was a perception that the failure of the US to join the League of Nations as
well as the failure of the league itself had been a disaster and the prospects for
peace and prosperity were linked to the establishment of a multilateral if not a
universal negotiation and a guardian for rules.
However, while the conclusion of agreements to establish the IMF and World Bank
and the UN itself and ICAO had been achieved by the end of 1945; the establishment
of a trading regime took a little more time than the others. Discussions on trade took
place between the US and UK officials from 1943 onwards and the basic assumption
in the negotiations remained that
(i)
Trade across national frontiers was to be increased, encouraged, promoted,
enhanced
(ii)
It was to be conducted primarily by private firms as opposed to government
enterprises.
(iii) That government intervention was to be the subject of a code of conduct
designed to limit interference with the movement of goods.
-

Until today, the three above remain the areas of convergence amongst countries
in ITL.

The Birth of GATT almost by Accident

The USA issued a document entitled Proposals for Expansion of World Trade and
Employment. It was for consideration by an international conference on trade and
employment purporting to represent consensus resulting from US/UK discussions that
had been going on for two years.
The proposals called for a detailed charter or code of conduct relating to governmental
constraints to international trade and also called for creation of an organization called
International Trade Organisation (ITO). The proposed code affirmed the principle of
unconditional Most Favoured Nation (MFN) treatment.
It prohibited quantitative restrictions or quotas with exceptions to specific industries e.g.
agriculture, textile and clothing. It also dealt with subsidies and with conforming state
trading to market condition, prevention of cartels with a few exceptions for countries
with balance of payment problems.
There was explicit mention of economic development. As for the proposed ITO, its role
was to administer the code (rules), to provide a forum for the settlement of disputes and
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perform other transactions such as the collection and dissemination of trade statistics. A
few days after the proposal, the USA invited 15 countries to enter into negotiations
looking to early conclusion of the multi-lateral agreement (i.e. USA said it is desirable
we establish ITO with its functions and at the same it invites other countries to first
conclude trade agreements parallel system with short-term objectives)
This proposal was then taken up by ECOSOC of the UN and made draft agreements of
ITO. At the same time the USA and the other 15 countries were doing their
negotiations. These negotiations led to trade agreements revolving around cutting of
tariffs (duties imposed on foreign goods by a country)
The negotiations were one-on-one sessions focusing on products for which one side was
an important market and the other side was the principle supplier with concessions on
such products paid for by concessions in which the roles were reversed. A total of 123
such negotiations took place, 22 involving the US and 101 involving the other pairs of
countries on various goods. Altogether, more than 1000 meetings took place over a
period of six months considering over 50,000 items of trade.
These arrangements negotiated substantial reduction of tariffs. This system was an
efficient way of carrying out negotiations. Once a simple bilateral agreement was
reached it was supplied to all other parties of the negotiations based on the MFN
principle. There was no need for all these negotiations. These became a guiding
principle of GATT (1948 1995)
The consequences of the Negotiations
The pace and volume of the negotiations could not have been maintained had they not
have been held all at the same time. The negotiations set precedence for the next round
of discussions from 1947. This was important in shaping trade law.
As understood from the initial invitations, all the concessions i.e. negotiated deductions
and by-laws with regard to tariffs were generalized to all participants pursuant to the
MFN principle.
All these concessions were put together in a single treaty called the General Agreement
on Trade and Tariffs (GATT). GATT not only comprised the schedules of trade by-laws,
it also contained a code of conduct designed to safeguard at least provisionally the
undertakings given and to commit the participants to a common standard of behaviour
with respect to international trade. At the conclusion of GATT, the work of ECOSOC
with regard to ITO Charter is also completed at the same time.
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By 1947, when GATT was opened for signatures (it entered into force on 1st January
1948), at the same time, the Havana Conference on Trade and Employment opened and
by 24 March 1948, the final Act of the conference was also adopted and a treaty signed
by 53 states. The US effort became contentious since it omitted the economic
development part as it did not give ways in which trade would promote standards of
living. The USA started hitting at the Havana Treaty as a side issue and opted for the
Marshall Plan a blueprint aimed to revitalize US. The Havana Treaty establishing the
ITO never saw the light of day and was ratified only by India. GATT therefore took
precedence and was the main body dealing with trade from 1948.

THE ARCHITECTURE OF GATT

Overview
This was dictated by the need for formal ratification. This is because trade is a
contentious issue. The agreement was designed in such a way as to avoid from having
legally binding norms to avoid submitting it to the national procedures of states
monism and dualism. The design of GATT has three elements.
Elements of GATT
1). Unlike other treaty making processes, the GATT process did not end up with a
final act. A final act normally records the undertakings by states at the end of a
law making international conference. In this instance, a protocol for provisional
application was adopted instead. These were therefore like provisional
normative guidelines because it would have been difficult to obtain consensus on
one agreement the protocol was to serve before the Havana Charter came into
application after which it would have no effect. GATT has thus been a protocol
for provisional application for 47 years.
2). The protocol for provisional application bound the signatories to apply part 1
and 3 of GATT without reservation but to apply part 2 to the fullest extent not
inconsistent with existing national legislation. Part 1 deals with the most basic
provisions like the MFN treaty provision, scheduled concessions etc. Part 2
contains procedural provisions, customs union, free trade areas etc and Part 3 is
about international taxation and regulation. All these provisions of GATT were
subject to Grandfather clauses, which provided national measures inconsistent
with the GATT provision were not unlawful if they were required by legislation
as of 30th October 1947, for the original members of GATT and as of date of
accession for countries that joined the GATT system later.
3). The aspect that shaped GATT was that it was established without any text
suggesting that an international organisation was formed. One would have

Dualism as in Kenya requires that a treaty ratified be enacted first into national legislation before taking effect.

expected an institutional framework to organize collective action to call meetings

to grant waivers, to hire staff, to conduct dispute settlement. Instead, they were
entrusted to an entity referred to as CONTRACTING PARTIES. All the
members of GATT acting as a collective unit discharge that function.
MAJOR PRINCIPLES OF GATT
The preamble of GATT looks to the raising of standards of living, ensuring full
employment and a large and steady growing volume of middle income and effective
demand by expanding the production and exchange of goods. cThe signatory states
aims to accomplish these goals by entering into reciprocal and mutually advantageous
arrangements directed to the substantial reduction of tariffs and other barriers of trade
and to the elimination of discriminatory treatment in international commerce.
1. Universal Most Favoured Nation Treatment
Trade should be conducted on the basis of non-discrimination (Art 1 GATT) whereby
states undertake to apply duties and similar charges on the import of goods equally
without regard as among contracting parties to the origin of goods.
2. Trade Barriers should not be increased
Governmental restraints on movement of goods should be kept to a minimum and if
changed then they should be reduced not increased (Art 2 GATT State parties
undertake to apply to all other CONTRACTING PARTIES the duties set forth in the
schedule submitted at the close of the tariff negotiations i.e. to bind the accepted offers
reflected in those schedules. Bound duties may be unbound every three years.
3. Principle of Tariffs Only
The accepted form of trade restraint is only customs tariff. A tax imposed by the
importing state as a condition of allowing importation of goods into its territory. The
assumption underlying this principle is although the importer pays the tariffs, the
foreign producer/exporter bears the burden, in terms of reduced market for his product
in competition with the producers in the importing country or in reduced profits from
sales in that country.
Tariff is the easiest restriction to apply, others are complicated such as licence schemes,
evaluation requirements, quotas etc. Tariffs may be formulated ad valorem (as a
percentage of the value of the goods). Specific tariffs are imposed per unit of measure
e.g. Kshs 3,000 per imported fridge. Tariffs measured by the value of competing
products of domestic origin are prohibited by article 7.
4. National Treatment Principle
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Internal taxes, charges and other regulations must not be imposed so as to discriminate
between domestic and imported products. States are not disabled from imposing sales
or consumption taxes or regulatory and labeling requirements on imported goods. But
neither in motive nor in effect may there be a distinction between the burden borne by
imported and domestic goods. Of course this principle has different nuances.
Together with MFN and Tariffs Only Principle, the entity of National Treatment
Principle emphasizes the tariffs as the only accepted form of trade protection and the
commitment against discriminatory treatment of goods based on their country of origin.
National treatment principle applies not only to tariffs bound in GATT schedules but to
all goods.
5. Regular Negotiations
CONTRACTING PARTIES are to meet regularly in negotiations looking to lowering
trade barriers on the basis of reciprocity within the multilateral framework. The GATT
text does not prescribe a specific interval between the rounds of multilateral trade
negotiations or even duration of the rounds.
QUALIFICATIONS OF THE GENERAL PRINCIPLES
The principles are not absolute but have qualifications
i.
Preservation of existing preferences
The drafters of GATT qualified the MFN principle in article 1 by explicit
authorization for states to maintain the imperial or commonwealth preferences, as
well as comparable arrangements for overseas territories or affiliated states of France,
Belgium and Netherlands.
ii.
The Grandfather Clauses or existing legislation
CONTRACTING STATES were not obligated to change existing legislation with
respect to the rules contained in part 2 of GATT which had provisions on dumping,
quotas etc. The Grandfather clause is the name of this and it made it possible for
several countries to join GATT without submitting the document for approval by
their national government.
The various GATT panels held in several places that the Grandfather clauses had
merit, that state parties were justified to implement a measure which would be
contrary to GATT only when such a measure was required by national legislation
under pre-existing law as contrasted to merely being authorized.

The effect of Grandfather clauses was that the code of conduct in international trade
was something less of a universally applicable set of laws yet the Grandfather
clauses were important in surmounting the resistance by a number of countries to
join the GATT.

iii.
Political exclusions (article 35)
The idea of GATT rested on the principle of trust and the commitment of countries
to treat each other or other parties on the basis of complete equality. In practice
however, this is not possible. Article 35 provides that when a state joins the GATT it
could announce that it will not enter into tariff negotiations with another state and it
intended not to apply the GATT in relation to that state. The decision of revoking
article 35 could only be made at the time of becoming a party not ten years into your
membership. That decision could be revoked at any time subsequently. Thus you
could exclude GATT provisions on basis of politics (issues of cold war)
iv.
National Security Consideration (article 21)
Countries could exclude the application of basic principles of GATT to certain states
or all foreign countries on the basis of national security. According to article 21,
nothing in the agreement is to prevent a party from taking any action which it
considers necessary for the protection of its essential security interests.
v.
Permissible Quotas
Some quotas are permitted especially in agriculture because all states intervene to
some extent as food security often has serious implications. In many cases, the
intervention is in the form of limits of output to estimated demand and this raises
the price of a given commodity. If the commodity in question was to be imported
freely such a program of intervention would collapse.
Accordingly, although article 11 L provides that all quotas, prohibitive restrictions
are restricted, paragraph 2c permits state parties to impose quotas of restrictive
output on any agricultural or fishing commodity if necessary for a governmental
program that restricts production of that commodity. The permitted quota will not
be such as would reduce the total of imports relative to the total of domestic
production as compared with the proportion which might reasonably be effected in
the absence of restrictions. Thus, increased domestic output or market share are not
acceptable motives for the imposition of import quotas.

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Several GATT panels have held that Art 11, para 2c authorizes import restrictions not
import prohibitions. A second condition permitting import quotas authorizes state
parties to impose restrictions in order to safeguard the external financial position
and the balance of trade.
vi.
General Exceptions
The GATT allows countries to exempt themselves from GATT principles in the
interests or for reasons of health, safety, morals and other similar grounds. Article 20
of GATT provides a country can exclude themselves from principles in for purposes
of protecting human, plant or animal life and health to secure compliance with
laws relating to protection of patents, trademarks, copyright and industrial property
i.e. IP rights. Also to ensure conservation of the exhaustible natural resources SPS
(sanitary and phytosanitary standards from TRIPS)
Some issues raised in article 20 were addressed in Uruguay Round and addressed in
the Agreement on Technical Barriers to Trade and Agreement on Sanitary and
Phytosanitary Measures.
ASSIGNMENT
Identify and critically discuss the main areas of contention between developed and
developing countries in the areas of agriculture, textile and clothing (20 mks)
OTHER MAIN PROVISIONS OF GATT
Escape Clauses
These were meant to enable states to reverse the process of opening up their markets if
it turned out differently from what was expected. In other words it was meant to make
trade freer and freer. A state can fail to uphold a treaty where there is a material breach
of fundamental provisions by another state in a bilateral treaty for instance
supervening impossibility rebus sic stantibus. The escape clauses could thus hold back
a country from the process of liberalization.
Article 18 The Open Season Clauses permits parties to withdraw any binding at
three-year intervals so long as the overall balance of concessions is maintained.
Article 19 Safeguard measures which authorizes emergency action imposing
restriction on imports of a particular product if as a result of unforeseen developments
and the effects of the obligations incurred by CONTRACTING PARTIES to the
agreement including tariff concessions, any product is imported into the territory is so
imported in such increased quantities and under such conditions as to cause or threaten
serious injury to domestic producers of like or directly competitive products.
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There are provisions on customs union and free trade areas article 24
The drafters of GATT had mixed feelings about customs unions (CU) and free trade
areas (FTA). On one hand, a customs union i.e. an arrangement whereby sovereign
states undertake not to impose duties or comparable charges on imports on goods or
one another is by definition consistent with the MFN treaty principle. On the other
hand, the customs union entails the elimination of barriers to the trade inter se and is
thus consistent with the objectives of GATT of eliminating barriers to trade.
Difference between CU & FTA
Under a customs union, member states both eliminate trade barriers inter se and adopt
a common set of trade barriers to products emanating from non-member states. In a
FTA only the trade barriers inter se are eliminated.
COMESA was initially an FTA, now its a common market. An FTA may have around six
states and trade barriers though eliminated; each state may have its own individual
barriers. A customs adopts common barriers or tariffs.
The compromise was to enact Art 24 which permits more states to enter into customs
unions or FTAs subject to:
1) The arrangement must cover substantially all the trade between or among the parties
to avoid aspects of preferential or discriminatory deals
2) That on the whole, the tariffs and other barriers to trade, be no higher or more
restrictive than the average of the tariffs in the constituent territories before the
formation of the customs union or free trade area.
3) If the formation of CU or FTA leads to the unbinding of bound duties, there is an
obligation to negotiate with the beneficiaries of the concession in order to reestablish the prior balance (in tariff negotiation, there must always be a balance)
4) If the CU or FTA is to be phased in (e.g. EAC & EU). Then there must be a plan or
schedule to do so within a reasonable period of time.
Provisions on dumping and subsidies
Subsidies refers to intervention by the state cash or otherwise that have the effect of
reducing the producers net cost of production. Dumping is the importation of goods
into a market which cost very low i.e. these are sales by an exporter at prices less than
the home market price.
It is agreed that dumping is an unfair trade practice. Dumping is condemned within
GATT but not prohibited. However, there is a remedy for dumping. The importing
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country is permitted to impose anti-dumping. These will nullify the effect of the low
prices. This is a defence by the importing country. The duty is designed to offset the
unfair pricing.
Subsidisation is state intervention either directly by cash payments or otherwise
indirectly in favour of producers which has the net effect of enabling producers to
produce at a lower cost than they would have were it not for the intervention. The
remedy for subsidization is to impose a countervailing duty. This can also be called an
anti-subsidy.

Waivers
This refers to the exemption of an obligation. A country may be exempted from an
obligation by the contracting party. This was the institutional mechanism of GATT.
Under the GATT a waiver of obligations could be granted to a state by the
CONTRACTING PARTY, all parties acting in concert by 2/3 majority. The waiver
normally is a negotiated document. A state would apply for a waiver and it would be
negotiated subject to annual reporting requirements.
Waivers have been retained under the WTO (Post Uruguay) and can be approved by
majority of the member states subject to the requirement that waivers will have a
terminal date and if the waiver extends beyond one year, then it would be subject to
annual review.
DISPUTE SETTLEMENT UNDER GATT
There was no dispute settlement body as such, rather disputes were settled by all
CONTRACTING PARTIES acting in concert. Under Article 23 GATT, if any
CONTRACTING PARTY should consider that any benefit accruing directly or indirectly
under the agreement is being nullified or impaired, the matter may be referred to the
CONTRACTING PARTIES which shall give a ruling on the matter as appropriate.
If the CONTRACTING PARTIES (dispute settlement body) consider that the matters are
serious, they may authorize the successful complainant state to suspend the application
to the GATT agreements, of such preferences, concessions under the agreement as may
be appropriate under the circumstances.
There developed with time, out of the rudimentary provisions in Article 22 & 23, a
dispute settlement system akin to arbitration. It had four elements:
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1. When it is determined that a challenged measure violates GATT, it would be

recommended that the respondent withdraws the measure. This is because
retaliation was not favoured as it would result to barriers of trade.
2. For many years, the disputes would be processed by the contestants delegates
making representations to the GATT panels or working parties whose membership
was from third parties (non-contestants). The current dispute settlement body of the
WTO works in panels. For many years the representatives/delegates were not
lawyers but with time more lawyers started representing their countries. Also the
panels and working parties were nominated from lawyers. Thus, the system became
rule based. Decisions were no longer made for political expediency but based on
rules of International Trade.
3. Until 1995, panels or working parties used to make recommendations only, not
decisions. This would be submitted to the GATT council (highest decision making
body) for approval, rejection or postponement.
Since the GATT council worked on the basis of consensus, it became frustrating to
implement the recommendations of the panels or working parties. This is because under
GATT all parties must agree. If there is an opposition then the recommendation would
not be passed.
Note: Consensus in International Trade does not mean unanimity but means the
absence of a formal objection.
Therefore, the new WTO dispute settlement process uses negative consensus i.e. the
recommendation of the panel is automatically binding unless every member agrees to
reject it. Note that this creates another extreme.
EVOLUTION OF GATT AND GATT LAW THROUGH TRADE NEGOTIATIONS
(1947 TO DATE)
The evolution of International Trade Law has been influenced by the changing political,
social, economic and cultural circumstances of the world. In 1947, the cold war was
going on, there was communism. Japan was outside the world economy. Majority of
states in Africa and the Caribbean were under colonization. This is no longer the case,
there are new entrants in International Trade. Their nuances/ideas led to the evolution
of GATT.
Globalisation and its effects e.g. Internet, E-commerce, shrinking boundaries, space and
time, faster movement of goods have led to the evolution of IT law. The emergence of
Middle East countries because of oil is also a major factor, the concretization of the
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European Union which is a force to reckon in International Trade, changes in

technology etc has led to evolving of normative standards in International Trade.
One of the principles of GATT was periodic negotiations which shaped International
Trade norms. The first five rounds took place between 1947 and 1961.
The first round Geneva Round:- It took place contemporaneously with drafting of the
GATT agreement. Its main objective was tariff reduction. The two successive rounds i.e.
Annecy France (1949) and Torquay England (1950 1951) (3rd & 4th) combined
modest tariff cutting with the condition of accession by new entrants into the regime.
The fourth Round Geneva Round (1955 1956) aimed at further tariff cutting.
Note: The pattern in the four rounds was for each country involved to exchange request
lists and subsequently exchange offer lists.
After the lists were made, they would be availed to all participants who would take
them into account in their own bilateral negotiations and preparation of revised lists. If
two countries might benefit from a proposed concession, the importing country might
make its offer subject to being paid by both of the potential beneficiaries.
Just after the close of the 4th GATT round in 1956, the Foreign Ministers of the Benelux
Countries (France, Germany & Italy) met in Italy to consider and approve the Spaak
report which looked to the establishment of a European common market.
Commissioning of the Spaak Committee was informed by the thinking that if GATT
could not deliver a significant tariff reduction, then these countries could use Article 24
provisions to achieve this. Some said these countries were turning their back on GATT
but this was not so.
On the one hand The Treaty of Rome establishing the EEC on the whole conformed to
the requirement of the creation of a customs union and Free Trade Area referred to in
Article 24 of GATT. On the other hand, the EEC came to be a principal force within the
GATT negotiating and acting as a unit and on substantially equal terms with the USA.
The 5th Round The Douglas Dillon Round had two aspects:a) It was aimed at further multilateral tariff cutting like the previous rounds
b) It involved negotiation between the EEC and other GATT parties pursuant to Article
24 (6) of GATT which deals with compensation for unbinding of duties of member
states of the EEC bound in prior GATT rounds.
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Whenever a customs union emerges there must be re-negotiation and re-balancing of

concessions.
The position of the EEC was that a common external tariff on a given item created by an
arithmetic average of the previous duties of the constituent countries as called for by the
Treaty of Rome did not require any compensation to third parties e.g. before common
external tariff, duty was:
Germany

15%

France

20%

Italy

25%

ad valorem

The argument was that the Benelux duty would be the average of the three i.e. 18%
The EEC argued that they did not need to compensate anyone because the loss from
25% and 20% to 18% would be cancelled by the increase from 15% to 18%. The position
was rejected.
The principle that third parties were entitled to make item-by-item claims for
compensation pursuant to Article 24(6) of GATT was adopted when:
i)
A customs union was formed or
ii)
When new members joined the union (expands)
The round was fairly successful and the EEC was integrated into GATT with little
friction. There was also tariff reduction however, the actual gains were modest. The
process of product by product negotiation was tedious and the question of agriculture
remained unresolved.
Kennedy Round
The US Government was at first divided on how to respond to the question of EEC.
Why divided?
1. From a political standpoint the establishment of the EEC would check German
communism from Western Europe.
2. Economically, even if EEC complied with Article 24, it may deprive outsiders like the
USA and others from the benefits of MFN and non-discriminatory principle. This
was injurious to the US as it would create trade diversion. (customs union created
trade diversion) i.e. If US goods competed on equal terms in the Italian market with
goods from Germany, once the CU came into effect, the same product originating
from Italy can come into Germany free of duty while the US product came in subject
16

to a common external tariff. Therefore, the US product would become uncompetitive

in the Italian market.
The significance of the trade diversion effect will depend, other things remaining
constant, on the height of the common external tariff i.e. the higher the tariff the more
uncompetitive the good from the third party, the more the trade diversion. Therefore,
US negotiated to keep the CET as low as possible. This meant getting away from the
prior confinement to article-by-article negotiation and securing the authority for across
the board or linear negotiations.
Therefore, GATT decided to hold further negotiation on the basis of linear negotiations
with the exception that product-by-product negotiations were required to achieve
reciprocity.
Tokyo Round
A striking feature here is an expanded trade agenda. Although article 18 of GATT talks
about trade negotiations aimed at reducing tariffs, the Kennedy Round was the last
negotiation focusing on tariffs only. Afterwards, the agenda expanded.
By the time the effects of the Kennedy Round were being felt in the early 70s tariffs
especially on industrial goods had drastically been reduced and no longer appeared to
be a major impediment to trade as they had been initially.
Other barriers to trade collectively known as Non-Tariff Barriers (NTBs) had taken on
increasing importance. Therefore, the focus of GATT became how to overcome these
NTBs. It was agreed then that NTBs could only be addressed by reforming International
Trade Law.
Some of these NTBs were based on statutory constraints such as
Bi-national laws;
Laws and regulations on government procurement;
Subsidy laws
Subsidies including export credits and tax rebates
It is in this context that the Tokyo Round was held to integrate the expanded trade
agenda into negotiations. It was agreed that although the new talks may not result in an
agreement favouring the interests of every party equally, it would still be appropriate if
the overall settlement was satisfactory to all the participants i.e. if a country wanted to
open up its procurement system to the nationals of other states (non-nationals) even if
this was not to be reciprocated by the other state, it would still be a good deal if the state
17

opening up its procurement system would benefit in any other way including latent
benefits other than similar confessions.
The Tokyo round was pushed for by mainly industrialized countries. Once this became
clear, a majority of industrializing countries took an opposed position and some chose
to show no interest in the talks because of this differential opinion, the Tokyo round
ended up not developing binding rules but in developing optional codes.
These codes were actually giving flesh to the GATT agreement or principles and also
dealing with the problem of NTBs. The codes were open to signature to all states but
were optional and would not require any minimum number of signatories before they
entered into force.
The codes were criticized as undermining the universality of GATT as an organisation.
More particularly the codes were thought to undermine the core principles of GATT
especially the MFN principle in article 1 e.g. the anti-dumping or subsidy code was
bilateral. It left out other signatories in GATT
Note: It was a conditional MFN i.e. you only benefit if you have signed.
Benefits of the code
1. In light of the differences that had emerged between industrialized and
industrializing countries, this was the only way to come up with a normative
framework for international trade in light of the opposition from GATT.
2. It enhanced the commitment of countries which had started wavering in their
commitment to GATT.
In the overall, the codes were negative since they departed from the principle of
universality, liberalization of trade and application to everyone. This same dilemma
faced the Uruguay negotiations. However here, there was an in between i.e. the core
multilateral agreements became compulsory. However, plurilateral agreements became
optional for countries.
The Tokyo codes can be seen as a major gap filler between GATT 1947 and GATT 1994.
Though weak, they enabled international regulation of trade to go on between those
years.
Although there was discontent on the results of the Tokyo round (73 77) especially
with industrializing countries, its main achievements was to re-affirm unity and
consistency in matters of international trade and after negotiations, a resolution was
adopted reaffirming that the existing rights of contracting parties would not be affected
18

by not being parties to the specialized agreements i.e. the codes including the rights
emanating from the Article 1 principle i.e. MFN. The codes remained a substantive body
of law, much of it technical but nonetheless important.
One great failure of the Tokyo Round was failure to develop a code on safeguards.
Safeguards are measures a country can take to relieve itself of sudden or unforeseen
importation of given products normally in the form of quantitative restrictions.
The Uruguay Round
While the salient development of the Tokyo Round was the expanded agenda, that of
the Uruguay Round was an exploded agenda. The agenda moved from trade in goods
(the focus of all the other rounds). As early as 1982, before even the effects of Tokyo had
been implemented, some countries started advocating for other talks. This was because
of:
1. The problem of US protectionism occasioned by trade deficits between itself, Japan
and other countries.
2. GATT was only restricted to trade in goods yet there was need to cover trade in
services. IP rights and international regulation of investment measures.
In 1985, a preparatory committee was formed to prepare an agenda for the 1986
ministerial meeting held in Punta del Este in Uruguay. The ministers set an agenda for a
new round of talks Uruguay round which would concentrate on:
Trade in goods
Trade related aspects of IP rights including patents, trademarks, copyrights
and counterfeiting
Trade in services e.g. banking, insurance, shipping and legal services
Trade related aspects of international investments
The question of reforming agriculture and how to deal with the problem of
subsidization (oversubsidisation) which had developed in developed
countries leading to overproduction of goods whereas other countries had
famine/acute food shortages
Safeguard measures to rescue clothing and textile industries falling in many
developing countries.
The ministers committed themselves to standstill and rollback measures. Standstill
measures involve not taking any trade restrictive or distorting measures inconsistent
with GATT or to take measures in exercise of GATT rights that would go beyond that
which is necessary to remedy a specific situation.
Rollback measures involve the elimination of any trade restrictive or distortive
measures previously taken without asking for GATT concessions instead.
19

The final item in the agenda brought by US was the need to have an effective dispute
settlement system to settle disputes taking into consideration an enlarged complicated
agenda. A dispute system that would be responsible for overseeing, monitoring and
implementation of the recommendation.

GATT WTO LAW AFTER THE URUGUAY ROUND

The final act of the Uruguay Round was formally signed at a ministerial meeting on 15 th
April 1994 in Marakesh, Morocco. The ministers representing third world countries
declared the Uruguay discussions complete and committed themselves to the
establishment of a new trade institution, World Trade Organisation (WTO) by 1st
January 1995. This was met.
In the same way, the Uruguay Round and WTO constitute a new start in ITL. There is no
doubt however, that it is in some respect a continuation of the GATT 1947 system.
Therefore, it simply formalized and put in writing rules discussed in the past 50 years
i.e. both continuity and novelty. See Article 16(1) WTO
Except as otherwise provided under this agreement or the multilateral trade
agreements, the WTO shall be guided by the decisions, procedures and customary
practices followed by the CONTRACTING PARTIES to GATT 1947 and the bodies
established in the framework of GATT 1947.
Thus in a real sense what the world agreed in the Uruguay Round was to subject a great
many aspects of International Economic activities to the principles that had been agreed
to half a century earlier by far fewer states and in the context of far smaller agenda
(WTOs first problem) i.e. rubberstamping norms of a smaller context and applying
them to the expanded agenda. Even in the expanded AG, certain aspects were left out:
e.g.
i)
Competition law
ii)
Nexus between international trade and the environment
See:
Dolphin and Tuna cases
Mexico accused US of harvesting fish using instruments that depleted the
endangered species:
iii)

Human rights question

Impact of trade on Socio-economic rights has not been appropriately addressed.
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iv)

Development and trade

Trade and development is controversial. Therefore, two schools of thoughts
emerge i.e.
a) Trade is business and not charity
b) Trade must be fair for it to lead to empowerment

In 2001, the Doha development agenda set out proposals of how to integrate
development and trade. However, in post Doha, this has not been successful.
Note: Post Uruguay:1. Not all areas were covered
2. Even the areas covered were not adequately covered (skeleton)
3. The unfinished agenda was to be discussed in the next round
Note:
The principles of GATT remain. For example, MFN, binding commitments that can only
be bound against compensation, National treatment with regard to most internal
regulations regarding trade, regular joint negotiations to reduce barriers to trade, more
international scrutiny than ever before over acts of individual states that may distort
trade flow and a system of settling trade disputes focused both on requirements of
compliance on trade with the decisions of impartial tribunals establishing legal
interpretations as contrasted with merely diffusing controversies.
Therefore, the Post-Uruguay GATT WTO system has four pillars i.e.
1. The traditional GATT system focusing on trade in goods fortified by renewed
commitments and augmented by 12 multilateral agreements that are binding on all
member states and two plurilateral agreements binding on only those states that
have accepted it. Some agreements expired in 1997 i.e. the International Dairy
Agreement and Bovine Agreement
2. Separate from the GATT but embraced within the WTO, all the WTO system
members are parties to the GATS (General Agreement on Trade in Services). This is
an agreement to begin to apply within the regime of trade in services. The same
principles of GATT e.g. non-discrimination, progressive liberalization but subject to
exceptions contained in the schedule.
3. TRIPS brings for the time being IP rights within the ambit of public international law
of trade. Therefore, MFN etc is applicable to IP. It provides the WTO enforcement
system to the application of century old treaties in the area of IP developed under
WIPO e.g. Paris Convention, Berne etc., i.e. TRIPS ties to consolidate other treaties on
IP.
21

4. The understanding on dispute settlement (DSO). This is a treaty that builds on the
system of settlement of trade disputes that had developed earlier on under Article 22
and 23 of GATT with exceptions and additions e.g. negative consensus a more
affecting mechanism. At the institutional level the Marrakech agreements establish a
new body known as the Trade Policy Review Body which provides systematic
surveillance of oversight on measures taken by states that may affect a multilateral
system i.e.
a) Four greatest economies under review every two years
b) Next sixteen economies under review every four years
c) The rest of the countries of the world under review every six years

1) This body pre-empts trade disputes and solves them.

2) The reviews also help a country to understand trade policies and
laws of the rest of the world
3) It helps the country being reviewed get a feedback on its
performance with regard to WTO rules.

All of the Tokyo codes were considered during the Uruguay Round and four of them
were renegotiated as plurilateral agreements optional i.e. Agreements on civil
aircrafts, government procurement, dairy products, bovine meat
All the other agreements i.e. multilateral agreements are an integral part of the GATT
WTO system and all members of GATT WTO have to be parties to them.
SUBSIDIES AND COUNTERVEILING MEASURES
The 1979 subsidies code had been built as the greatest achievements of the Tokyo
Round. The code established that apart from primary products, export subsidies were
unacceptable. The code also confirmed that a country could not impose counterveiling
duties on imported products unless it could justify:
i.
The imports had been subsidized and
ii.
There was material injury or threat of injury to a domestic industry as a result of
the subsidized imports
The code also established a dispute settlement procedure designed to afford remedies
not only to importing countries but also to exporting countries ascertaining injuries to
their industry as a result of other countries imposing subsidies on their goods.

22

The subsidies code proved disappointing because the outcome of complaints under the
dispute settlement procedure had been inconclusive and also because the subsidies that
caused most controversy were not export subsidies as defined but existed/consisted in
large part of government measures regarded as justifiable by many countries.
Uruguay
The Uruguay round departs from the distinction between exports and domestic
subsidies defined in the Tokyo Round. It defines subsidies in terms of financial
contribution by government conferring a benefit on the recipient and then divides
subsidies into three categories i.e.
- Prohibited subsidies (red light subsidies)
- Non-actionable subsidies (green light subsidies)
- In-between subsidies (yellow light subsidies)
Furthermore, whereas the Tokyo round subsidies code exempted developing countries
from application of the code. The Uruguay Round revised the code to exempt only the
least developed countries (LDCs) from the prohibition of subsidies and makes most of
its other provisions with some modifications and a grace period applicable to other
developing countries.
The prohibited subsidies include the previously condemned subsidies (export
subsidies) contigent on export performance but also substitution subsidies i.e.
subsidies contigent upon the use of domestic over imported goods.
The yellow light subsidies i.e. actionable subsidies are not defined except that they
must meet the test of specificity. They must meet this test de jure and de facto and they
should not come within the other two categories.
Green-light/non-actionable subsidies are the major innovation in the 1994 subsidies
code. They are subsidies that may not be challenged in the WTO dispute settlement
mechanism or be subject to countervailing measures under national law reflecting a
recognition that many governments undertake certain kinds of expenditure in the
production of goods which is not prohibited.
Note: Not every kind of subsidization is lawful.
The 1994 Uruguay agreement on subsidization provides that no member should cause
through the use of any subsidy adverse effect to the interest of other members. It
provides for a system of challenging subsidization through
o An international trade dispute settlement system.
o Under national law through countervailing duty proceedings
23

The Uruguay agreement divides adverse effects into three categories:

i)
Traditional injury to the domestic industry of another member which is
up to the complainant to establish
ii)
Nullification or impairment of benefits accruing to other members.
Burden of proof is on the complainant.
iii)
The dark amber subsidies. These are four types of subsidies
presumed to cause serious prejudice with the burden shifted on the
respondent state to show that long adverse effects were caused by the
challenged measures.
They include:
a) Total subsidization of a product exceeding 5% ad valorem
b) Subsidies to cover operating losses sustained by an
industry/enterprise
c) Direct forgiveness of a debt
Tokyo Round concentrated on export subsidies
Uruguay Round expanded this to include domestic subsidies

Dumping and Anti-Dumping

The GATT anti-dumping code dates back to the Kennedy Round and was amended to
conform as closely as possible to the subsidies code. The WTO or Uruguay Code on
anti-dumping has no striking innovations. It follows a scheme of prior versions but
spells in no more details terms that had been left out in 1969 & 1979.
Note: The definition of dumping set out in Article 6(1) of GATT remains i.e. contrary to
the laymans conception that dumping means getting number of overproduction, or
oversupply at whatever price available, dumping means introduction of a product into
the commerce of another country at less than normal value.
Normal value means in the first instance, home market price. If home market price is not
available or is insignificant, the comparison of challenged import price is with sales for
export to a third country or with cost of production to the country of origin plus a
reasonable addition of overheads and profits.
Article 6(1) of GATT says that dumping as thus defined is condemned if it causes or
threatens material injury to an established industry in the importing country. The
traditional remedy in dumping and injury are found typically by (administrative
24

authorities) is an anti-dumping duty equal to the margin of dumping applied to the

products of the exporter against which the finding runs.
The margin of dumping is the difference after various adjustments between the price at
which a product is sold at importing country and the normal value. Motive is not
important in dumping both under GATT and WTO anti-dumping agreement and
therefore in dumping proceedings predatory intent need not be proved.
The Uruguay Round/WTO anti-dumping code, building on its predecessors (Tokyo &
Kennedy) instructs on how to arrive at a conclusion that dumping has taken place. It
also contains provisions on how to gather evidence in anti-dumping proceedings and
on introducing transparency into the process.
Like the previous codes the WTO anti-dumping code sets out provisions for
determination of injury to an industry. It also sets out how to establish the link between
importation and injury (causal link). It sets out how an evaluation of all the relevant
economic factors can be carried out.
The 1979 Tokyo anti-dumping code stated that the anti-dumping duties were to remain
in force as long as they were necessary to counterveil dumping that was causing injury.
The WTO agreement repeats the provision and states that in addition anti-dumping
duties shall be terminated not later than three years from their imposition or from a
review unless a new determination is made that removal of the duty is likely to lead to
the continuance or renewal of dumping that causes injury.
Note: these are timeless under the WTO anti-dumping code
In addition to the anti-dumping duties imposed by importing countries, the WTO antidumping code makes like the Tokyo Code provision for dispute settlement but whereas
under Tokyo code disputes not resolved by consultation can be referred to the
committee on anti-dumping practices, under the WTO, disputes on dumping are to be
referred to the Dispute Settlement Mechanism.
RULES ON/OF INTERNATIONAL TRADE LAW IN DETAIL
AREAS:
1. Tariffs
2. Quotas or quantitative restrictions and import licensing
3. Customs clearance and related provisions
4. The issue of subsidies
5. State trading enterprises - their role in international trade
25

6.
7.
8.
9.

Technical regulations and production standards e.g. standardization of goods

Sanitary and phytosanitary measures
TRIPs
Trade Related Investment Measures

Tariffs
A tariff is a tax levied on products when passing a customs body/border. Governments
levy tariffs on imports and exports although in practice import tariffs are the most
common and the most important.
Customs tariffs are of various types:
a) Ad valorem
Tax which is a percentage of the value of imported products
b) Specific
Tax is a given amount of money per physical unit
c) A combination of (a) and (b)
The WTO agreements do not favour any one type of tariff. In practice however most
tariffs are ad valorem.
Each of these types of tariffs may have its own advantages in specific situations e.g.
1. Ad valorem taxes are more transparent
2. If the value of the product increases e.g. due to inflation, then tariff revenue will
keep pace with the increased prices.
Specific tariffs have the advantage of not requiring customs authorities to determine the
value of their imports when entering the country. They are also not sensitive to changes
in the value of the goods.
The customs tariff is in principle the only instrument of protection allowed in WTO
trade law. The rest are principles of free trade liberalization. The preference of tariffs is
consistent with economic theory in that tariffs are superior to quantitative restrictions.

Why Tariffs are preferable to Quotas

1. Tariffs maintain an automatic link between domestic and foreign process ensuring
that the most efficient supplier continues to supply (serve) the market. This link is
cut by quotas.
26

2. It is easier to ensure non-discrimination of foreign sources of supply using tariffs but

under a quota it is more difficult. Officials usually base quotas on arbitrary decisions.
This is why agriculture and textiles suffer from these quotas.
3. Tariffs are transparent once established every trader knows the price of market
access for specific products. This is not the case under a quota, where the conditions
of market access depend on timing e.g. on a first come first served allocation scheme,
the quotas may depend on past performance or historical utilization rates. Thirdly
quotas can involve corruption where it involves bribery to the officials.
4. Economic rationale for tariffs. Tariffs are also more transparent in that the level of
nominal protection under tariff is easily calculated while the nominal protection is
difficult under quotas.
5. Tariffs generate revenue for governments while under quotas the tariff equivalent
may go to intermediaries or exporters depending on allocation.
6. Tariffs reduce lobbying incentives. They benefit the whole industry reducing returns
for individual firms to lobby for protection. If quotas are an option, traders may seek
individual quota allocation that is as large as possible for themselves.
WTO Rules on Tariffs
1. Tariffs must be non-discriminatory pursuant to Article 1 MFN Principle. Remember
there are exceptions to MFN.
2. Tariffs must be bound. WTO members must not raise tariffs above the level they are
bound in their schedules Article 3 GATT94
By binding its tariff a member undertakes not to impose a tariff on a specific product
that is higher than the bound rates. A binding may be identical to the currently
applying rates or may consist of a negotiated rate that is lower than the currently
applied rate.
WTO members are constrained regarding the imposition of fees and other charges on
imports which have the same effect as tariffs called para-tariffs and are prohibited.
Note that tariffs only are permissible. Para-tariffs e.g. taxes on forex transactions,
internal taxes on imports and service fees affecting importers. Para-tariffs are prohibited
because they are non-transparent and subject to arbitrary application.
In contrast to GATT 47, GATT 94 WTO requires the nature and level of other duties
and charges be listed by tariff line in each WTO members schedule i.e. para-tariffs are
not permitted but could be allowed i.e. by imposing certain fees for specific services e.g.
consular services, statistics services, documentation, certification, inspection fees e.g. on
imports. However, allowance is made for the imposition of either fees, charges as long as
they are commensurate with the service rendered e.g. consular fees from consulate,
27

statistical data from government, transaction fees. All such service fees must be limited
in amount to the approximate cost of services rendered and shall not represent an
indirect protection to domestic products. The prohibition on para-tariffs (Art 8 GATT
94) applies even if a country has not bound its tariffs.
Tariff Escalation
It is a situation where duty rates on raw materials and intermediates are lower than
rates on processed commodities that embody the relevant inputs. The more escalated
the tariff structure maintained in export markets, the greater the difficulties for such
markets to generate value added at home, as low tariffs on raw materials usually duty
free provide an incentive not to process commodities before they are exported. This has
been a major problem in developing countries especially with regard to natural resource
based products e.g. fish, fisheries products, non-ferrous metals, minerals etc.,
Quantitative Restrictions (QRs)
Quantitative restrictions are opposite to tariffs. Article 11 to 14 GATT 94 prohibits QRs
except for agricultural commodities. QRs in agriculture are permitted if concurrent
measures are taken to restrict domestic production. Article 12 provides for further
exception to be able to solve the balance of payment problems. Article 13 needs to
ensure that QRs are non-discriminatory in cases where they are permissible.
Import licensing is a separate agreement of GATT, which applies, to all member states
of WTO. QRs are enforced through licensing hence Import licensing is a means of
enforcing quotas. The agreement develops the licensing code of GATT 47 as developed
in the Tokyo Round. It establishes requirements to enhance transparency of licensing
systems including the:
- need to publish licensing
- the right of importers to appeal against decisions of licensing and
- length of license validity
Customs Clearance and Related Provisions
Customs Clearance requires the evaluation and classification of imports for purposes
such as levying tariffs, to determine origin of these goods, to enforce foreign exchange
controls and to collect trade statistics etc. Customs procedures may become non-tariff
barriers to trade if officials for instance will collect and classify the goods or assign the
goods value greater than expected to them (over value).
Classification of goods for customs purposes is less troublesome than valuation because
most countries use internationally established systems of classification. The Tokyo
Round negotiated the customs valuation codes but all codes remained optional. This
28

code has been supplemented by WTO provisions, which include conditions on preshipment inspection (PSI) and rules of origin.
PSI involves inspection of goods by specialized firms before they are shipped to country
of importation. Governments engage services of PSI firms in order to reduce the scope
or chances for importers and exporters to engage in over-invoicing or under-invoicing.
Under invoicing will lead to under-taxation on the product. Over-invoicing to transfer of
foreign exchange by evading foreign exchange controls.
Under WTO rules on PSI, member states that use PSI firms must ensure that their
activities are carried out in an objective, transparent and non-discriminatory manner.
Verification of contract prices must be based on a comparison with the prices of
identical or similar goods offered for export from the same country for importation at
the same time.
Rule of Origin
A rule of origin is a criterion used by customs officials to determine the nationality of a
product or producer. It is important to know origin of goods for purposes where
discrimination is allowed lawfully and using the sources of supply. WTO contains an
agreement concerning rules of origin. Goods should be considered to originate from a
country because they wholly originate from there i.e. do not contain an imported
material.
Where two or more countries are involved in producing a product the country of origin
is the country in which the last substantial transformation took place.
Significant/substantial are defined as sufficient to give its product its essential
character.
Subsidies
The approach taken in WTO Agreement On Subsidies And Counterveiling Measures
is to concentrate on subsidies narrowly defined i.e. policies that directly impact on
governments budget and affect the production of goods. WTO law on subsidies has two
objectives and it tries to strike a balance between them:
(i)
To establish rules to avoid or reduce adverse effects on members and to prevent
the use of subsidies to nullify or impair trade concessions
(ii)
To regulate the use of countervailing duties by members seeking to offset the
injurious effect of foreign subsidization of products.

29

A key aspect of WTO rules is that certain subsidies are defined as non-actionable i.e.
cannot be countervailed by members even if they perceive the subsidies to have a
negative impact on their interests.
Uruguay Round defines subsidies to be deemed to exist if there is a financial
contribution by government or a public body. This may involve an actual or potential
transfer of funds such as grants, loans, loan guarantee or foregoing government revenue
e.g. tax concessions, credit.
Government funding of a private body to carry out a function which would normally be
vested on government and any form of income or price support is ordinarily vested in
government is also covered in the subsidies definition. In all these cases, a benefit must
be conferred by measure to the recipient. It applies to non-agricultural products.
There is a separate provision for agricultural products. There are three types of
subsidies actionable can be countervailed red light non-actionable not contested
prohibited.
Actionable measures are permitted but may, if they create adverse effects on WTO
members give rise to consultation or invocation of dispute settlement procedures or
imposition of countervailing measures. Adverse effects include injury to a domestic
industry, nullification or impairment of tariff concession or serious threats to countries.
Prohibited these are contingent formally on or in effect upon performance or on use of
domestic over imported goods.
Non-actionable subsidies cannot be contested permitted
These include specific subsidies that do not target a specific firm, industry or group of
industries.
State Trading Enterprises
From its inception, GATT CONTRACTING PARTIES were unconstrained with regard to
ownership of productive assets. However it was recognized that enterprises granted
exclusive trading rights and privileges would restrict trade and circumvent
liberalization commitment. The ways in which STEs may circumvent are:
1. Could circumvent the MFN treatment principle by discriminating among trading
partners in their purchasing or selling decisions
2. Could limit or expand above free level quantities of imports or exports.
3. They might impose price markups that exceed bound tariff levels
30

4. They could contravene the National Treatment Principle by discriminating against

imported products in matters affecting e.g. internal conditions of distribution/sale
5. They might affect competition on export markets if their exclusive privileges allow
them to undercut other supplies
In the WTO law, the council for trade in goods established a working party on STEs to
work under the council for trade in goods. Governments are required to notify all STEs
for review whether or not they are importing or exporting. Any WTO member that
believes another member has not adequately met its notification obligation may raise
the matter bilaterally and if this doesnt work, it may make a counter notification and
this working party aims at regulating the works of STEs and is supposed to report the
council on trade in goods.
Technical Regulations
Production standards (P.S), Technical Regulations (T.R.) & Certification Systems (C.S.)
are essential to the functioning of modern economies.
Standards and Regulations distinction:
Standards are usually voluntary, generally being defined by the industry or by nongovernmental standardization bodies. They are defined in WTO as documents
established by consensus and approved by a recognized body that provide for common
and repeated use, rules, guidelines or characteristics for activities of their results aimed
at the achievement of the optimum degree of order in a given context.
In contrast Technical Regulations are legally binding and are usually imposed to
safeguard public, animal health or the environment. C.S. comprise the procedures to
establish that products or production processes conform to the relevant
standards/regulations.
WTO rules do not require that members must have product standards. It doesnt also
write/ develop product standards. 94 agreement on Technical Barriers to Trade aimed
to ensure that mandatory technical regulations, voluntary standards and testing and
certification of products do not constitute unnecessary barriers to trade, should not
restrict the flow of international trade.
Sanitary and phytosanitary measures
SPS measures are requirements imposed by governments to ensure the safety of
products for human or animal consumption to protect plant life or environment
generally. Most governments establish minimum standards that plants, animals and
31

humans must meet before entry into the country. The standards apply equally to foreign
and domestically produced goods, plants and animals.
WTO agreement on application of SPS measures applies to all SPS measures that may
affect International Trade. SPS measure is any measure applied to protect human,
animal or plant health from risks arising from the establishment or spread of pest and
disease from additives or contaminants in food stuffs or to prevent other damage from
establishment or spread of pests.
SPS measures include all relevant regulation and procedures including product criteria,
processing and production methods, testing, inspection, certification and approval
procedures, quarantine treatments, provisions on relevant statistical procedures and
risk assessment methods and packaging and labeling requirement directly related to
food safety. There is no requirement that WTO members adopt SPS measures nor has
WTO drafted SPS laws. All it does is to require countries who wish to adopt SPS
measures to comply with certain norms.
SPS agreement stipulates that SPS measures may not unjustifiably discriminate against
WTO members. The measures should not be more trade restrictive than required to
achieve their objectives and may not constitute a disguised restriction on international
trade. They should be based on international standard guidelines or recommendations
if they exist unless it can be proved scientifically that an alternative to the guidelines is
preferable.
SPS measures must be based on scientific principles including an assessment on the risk
to human, animal and plant life or health taking into consideration risk assessment
techniques, which have been developed by relevant international organisations. The risk
assessment must identify the diseases the member wants to prevent in his territory, the
potential biological and ecological consequences associated with such diseases, an
evaluation of the likelihood of entry establishment or spread of these diseases and the
associated potential biological or economic consequences.
Risk assessment must use available scientific evidence as well as relevant processes and
production methods, inspection, sampling and testing methods and the prevalence of
certain diseases or pests and environmental conditions.
Read on TRIPs on investment measures
SECTOR SPECIFIC MULTILATERAL TRADE AGREEMENTS
It applies to all merchandise trade in all sectors but industry specific pressures for
protection in major trading countries created strong incentives for governments to grant
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special treatment to different sectors. These were mainly agriculture, textiles and
clothing and there has been pressure to reintegrate them into GATT.
Agriculture
Poor agrarian economies have a tendency of taxing agriculture higher relative to other
sectors. As nations become richer, their policy regimes often change from over taxing
farmers to assisting farmers. The post 1950 period saw substantial growth in agriculture
protection and insulation in advanced industrial economies and this spread to newly
industrialized economies.
These protectionist tendencies accelerated in the eighties to the point where some
protectionist countries went beyond self-sufficiency to generate food surpluses. This led
to budgetary pressures and increasing opposition to the cost of agricultural support
policies. It also led traditional agricultural exporting countries to insist that multilateral
trade negotiations should focus on reducing agricultural protection. The rationale for
intervention in agriculture is:
i)
To stabilize and increase farm incomes
ii)
To guarantee food security
iii)
To support the development of other sectors of the economy
iv)
To increase agricultural output
Food is political and this is illustrated by the fact that many of these reasons are noneconomic. Why do countries have different forms of intervention?
The Anderson Model
Protection for industry decreases as the capital to labour ratio increases thus,
industrialized countries with large capital stocks relative to labour are more open to
trade than countries with large stocks and labour (poor countries). However, in the case
of agriculture the opposite happens; in rich countries they end up supporting domestic
production and closing off market to foreign competition. While poor countries promote
imports explicitly or implicitly through import subsidies. They may waive duty if for
relief. They also do this indirectly by over taxing domestic production. In poor
countries, food takes a large amount of household expenditure while in rich countries it
takes a very small percentage.
Agriculture is also the main source of employment in poor countries while in rich
countries it accounts for less than 5%. Agriculture is less capital intensive in poor
countries. If agriculture is protected in a poor country, the resulting increases in food
prices have a large impact on the demand for labour and thus on wages. At the same
time, the wage increase puts upward pressure on the price of services and has a
negative impact on industry by lowering profit. As the gain per farmer is low in a
protectionist poor economy and the loss per industrialist is high the latter will be
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reduced to invest resources to support agricultural support policies and therefore

protecting agriculture in poor countries does not make political sense. This is the
Anderson Model.
WTO rules are contained in the WTO Agreement on Agriculture, which is sector
specific with four focal points:
1) Market access
2) Domestic Support
3) Export Competition
4) Sanitary and Phytosanitary measures
By 2000 export subsidies on agriculture were to be reduced by 36% in value terms and
21% in volume terms from their 1986 to 1990 base; the rates applying in both cases on a
commodity-by-commodity basis. For some commodities, only the agreed cost of 21% in
the volume of subsidized taxes was achieved. For market access it was agreed in the
Uruguay Round that NBTs would immediately be converted into tariffs and the
industrialized countries would reduce them by an average of 36% over 6 years and 24%
over 6 years for developing countries. All agricultural tariffs are bound and the tariff
bindings that were implemented by the WTO were in many cases higher than the actual
tariffs equivalent of NTBs that applied in 1986 1990 base period. Some being up to 60%
higher for developed countries and in developing countries over 150%. This is referred
to as tariff overhang. (It was higher for developing countries because such countries often
have more non-tariff barriers to trade)
In recognition of the fact that for some products bound and applied tariffs were set at
prohibitive levels, negotiation sought to impose minimum market access restrictions.
This required that the share of imports in domestic consumption for products subject to
prohibitive import restrictions increase to at least certain levels which are less in the case
of developing countries because of preferential treatment. The vehicle used to ensure
minimum market access is attained is the tariff rate quota TRQ under which a certain
volume of imports (quota) enters at a lower tariff and out of quota imports are subject to
a much higher tariff.
Market access rules formally introduced scope or room for discrimination in the
allocation of TRQs. Also the administration of such quotas tends to legitimize the role
for state trading agencies. A second major element for Uruguay was a provision that a
domestic production support was to decline by 20% by 2000.
Textile & Clothing
Trade policies towards trade and clothing were exempted from GATT disciplines from
1950s. Being labour intensive and requiring relatively low technological inputs, the
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production of textile and clothing is an activity in which many developing countries

have a comparative advantage.
As domestic industries in high-income nations come under pressure from cheaper
imports initially from Japan and subsequently from other Asian countries, the rich
countries successfully lobbied for trade restrictions. It resulted in bilateral
discriminatory trade restriction which steadily expanded in terms of products and in
terms of countries coverage. This led by the 1990s to a global web of quantitative
restrictions or quotas in the area of textiles and clothing. Protectionism was driven by
the desire to maintain in employment unskilled and semi-skilled workers.
It was on occasion of Japans accession to GATT in 1955, when it was still a developing
country and a major exporter of textiles and clothing, that the concept of market
disruption by textiles was first discussed extensively in the GATT. The first steps
towards formalization of a system of managed trade in this sector was the short-term
arrangement (STA) on cotton textiles introduced in the Dillon Round (1961). This
rapidly evolved into the long-term arrangement (LTA) which led into four successful
multi-fibre arrangements which were successive from 1974 to 1994. The discriminatory
character of the MFN was progressively intensified and entry and product coverage
considerably extended. Initially, it was limited to cotton fabrics, but over time, wool,
man-made fabrics, vegetable fibres and silk blends were added. As is the case with
agriculture, it was only in the Uruguay Round that textiles and clothing were first
discussed in Multilateral Trade Negotiations. The main common element was the
pressure from importers, in particular those countries who perceived they would do
better under a liberalized competitive trade regime. Negotiations were difficult and the
following were the areas of disagreement:
The application of general GATT rules
Modalities of phasing out MFAs
Duration of transitional period
Poor GATT coverage
The need for special safeguards
The WTO agreement on textile and clothing sets out the rules for the transitional
period/process which expected to result in 1 January 2005 in the full integration of the
textile and clothing sector to the GATT system. ATC was to terminate on 1 Jan 2006. The
review of the implementation of the ATC was put in the hands of the Textile Monitoring
Body (TMB). Full implementation of the ATC would result not only in the abolition of
quotas but also in the demise of special bilateral safeguard measures allowed under the
ATC.
Trade in Services
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Services which include activities as different as transport of goods and people, financial
intermediation, communication distribution, hotels, education, healthcare, construction,
accounting, legal services etc are vital to the function of that economy. As in the GATT,
the first principles of GATS is MFN (article 2) although many countries are not really
ready to commit themselves to MFN across the board. Article 2(2) has a clawback
clause:
a member may maintain a measure inconsistent with paragraph 1 provided that such
a measure is listed in and it meets the conditions of the Annex of Article 2 exemptions.
The right to a derogation from MFN treatment is unilateral and requires no approval
from any committee. Article 3 in GATS requires prompt publication of all relevant
measures of general application which pertain to or affect trade in services. Whether or
not they pertain to sectors for which commitments have been made under part 3.
Barriers to the supply of services in many instances are not border controls as in respect
to trade in goods. The main barriers are regulations e.g. what it takes for a foreigner to
practice law in Kenya, licensing requirements, red-tape (bureaucracy). For
administrative decisions to trade in services, GATS requires states to provide for prompt
and impartial review of administrative decisions by judicial or administrative tribunals
- Article 6(2).
On market access with regard to services, access by service providers of one state to the
markets of the other state is a central focus of GATS although access is not granted
automatically. The GATS adopts a positive list approach whereby members are bound
to only specific commitments i.e. what you have accepted positively is what you will be
committed to.
In a sector for which a country has made market access commitment, a state is required
to refrain from imposing any limitation on the number of service suppliers whether in
form of numerical quotas, monopolies, exclusive service supplies or the requirement of
an economic needs test. Further, member states may not impose restrictions/limitations
on the total value, total number or total output of service operations.
The state may not restrict the number of persons that may be employed by a service
supplier or by a particular service sector who are necessarily for and directly related to
the supply of a specific service. A state may not restrict or require specific type of legal
entity, joint venture through which a service is applied or limit participation of foreign
capital by a maximum percentage of shareholding or total value of that investment.
TRIPS
1. Each member state of WTO is regarded not only to be a party but must also give
effect to the principal provisions of the Paris and Berne Conventions and others
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2.

3.

4.

5.

6.

7.

now included in the WIPO system, whether or not the state is a party to those
conventions articles 2-9 TRIPS
Members are obligated with a few exceptions to accord both National Treatment
article 3 and MFN treatment Art 4 of TRIPS to the nationals of all other states
with regard to protection of Intellectual Property rights.
The agreement covers virtually all aspects of IP i.e. copyright related rights (9-14),
Trademarks (15-21), Geographical Indications (Art 22- 24), Industrial Designs (2526), Patents (27-34) Layout designs of integrated circuits (35-38) Trade secrets
(39). For each of these categories, member states are supposed to provide
protection i.e. to prevent unauthorized persons from using the property.
Each member state shall ensure that there is an enforcement procedure of IP
rights. Procedures depend on a countrys judicial and administrative system but
they have to be fair and equitable, not unnecessarily complicated and costly and
they shall not entail unreasonable time limits or unwarranted delays. Decisions
should be made in writing and they should be subject to judicial review.
Although TRIPS agreement to the Preamble makes it clear that IP rights are
private rights, it seems clear that failure by a member state to comply with this
procedure could be a subject of state-to-state dispute settlement.
States must provide adequate remedies to right holders by giving injunctions
including injunctions against the sale or use of infringing products, monitoring
damages and forfeiture of infringing goods (article 44 46, 50)
In several parts, TRIPS goes beyond the traditional GATT approach to avoid
discrimination and avoid trade e.g. with regard to patents, protection is available
article 27 (1):
For any inventions whether products or processes in all fields of technology
provided that they are new; involve an inventive step; and are capable of
industrial application
This is subject to exceptions on various grounds and grace periods for developing
countries patents shall be available and patent rights enjoyable without
discrimination as to place of invention, field of technology or locally or imported
products.

Further the agreement spells out the rights that member states are to confer in
connection with a patent both with respect to product and process art 28 TRIPS also
prescribes the minimum period of validity of patent i.e. 20 years counted from the date
of filing art 33

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With regard to processing patents TRIPS provides that the judicial authorities of
member states may require an alleged infringer to prove that its products was made
with a process different from the patented process and that in the absence of such proof
the challenged product shall be deemed to have been made by the patented process art
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With regard to copyrights, TRIPS recites the basic principle that protection extends to
expression but not ideas, procedures, methods of operations or mathematical concepts
art 9 (2) Also under copyright, computer programmes whether in source or in object
code shall be protected as literary works under the Berne Convention Art 10 (5). This
provision prevents wholesale copying of computer software but not to prevent
independent achievement by second comers of functionally equivalent software.
Copyright protection is to be available for compilation of data or other material which
by reason of the selection or arrangement of their contents constitute intellectual
creation. There are detailed protection for performers, producers of sound recordings
and broadcast organisations. When a copyright other than a photographic work or a
work of applied art is not linked to the life of a natural person i.e. if the creator is a
corporation or a comparable entity, then the applicable term shall be a minimum of 50
years from publication art 12
Trademarks are any sign or combination of signs capable of distinguishing goods and
services of one undertaking from those of other undertakings and are eligible for
registration. TRIPS also incorporates and elaborates on the provisions of art 6 et al of
the Paris Convention which calls for the refusal of members to recognize or permit the
refusal of well known marks such as Coca Cola, Mercedes Benz etc by persons other
than the owner or licensee of the mark even if the mark was not previously registered.
Registration of a trademark is for at least 7 years and it shall be renewable indefinitely.
Contrary to provisions relating to patents, compulsory licensing of trademarks is
precluded in all cases art 21 Cancellation for non-use of trademarks is permitted after an
uninterrupted period of three years provided that the owner is given an opportunity to
explain the reasons for non-use were beyond his control such as import restrictions or
government requirements.
Geographical indications identify a product as originating in a state or region within
that state. They are to be protected including by legal means for interested parties to
prevent any misleading discrimination or presentation of competing products. Member
states are required to refuse or invalidate registration of any trademark that contains a
misleading indication of the geographical origin of the product in question.
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Counterfeiting is the entry point by which IP was brought into the GATT/WTO system.
It is dealt with in the enforcement sections 41 50. States are to provide several remedies
including civil remedies. The agreement authorizes measures by customs officials to bar
entry of counterfeited or pirated goods art 51
Member states are obliged to provide for criminal procedures and penalties to be
applied at least in cases of willful trademark counterfeiting, of copyright piracy on
commercial scale including imprisonment and/or monetary fines sufficient to provide
for a deterrence art 61
If a member state fails or is alleged to fail to carry one of its obligations under the TRIPS
another member state presumably the state of nationality of the holder of the IP whose
rights have been impaired can make a claim under the WTO dispute settlement
understanding.
TRIPS is a contentious issue in international trade
What are the issues of contention between developed and developing countries?

Developing countries are anti-IP protection as they argue protection of IP hinders

development e.g. Japan was built on stolen knowledge. Europe and America also
developed through reverse engineering, bio-piracy, stolen labour etc. After
developing they then want to protect IP in a bid to lock out Africa from the third
industrial revolution (of information, after steam engine and electricity).
Other arguments include developing countries not having technology (TOT)
debate, lacking capacity to protect (finances), public health policy (HIV AIDS
drugs debate) why allow people to die yet drugs can be duplicated.
Food security is also an issue, ethical issues and morality questions such as
patenting of life forms and stem cell researches.
The environment and IP is also an issue i.e. bio-piracy and bio-diversity.
The protection of folklore is also an issue.
Issues of justice like human rights are also contentious.

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