Professional Documents
Culture Documents
global trade.
Mr. Pradeep Narwal
Syllabus
Course Objective:
The primary objective of this course is to provide the students with a thorough understanding of the global,
economic, political and legal environment prevalent in international trade. The major focus of this course is to
highlight the international norms and regulatory bodies for enhancing global trade. Finally the students will be able
to analyze the various nuances associated with international trade.
Learning Outcomes:
On the successful completion of this module the student will be able to:
Understand the concept of global and national regulatory environment in business management
Appreciate the role of various bodies in the international regulatory environment
Evaluate the various measures taken by different nations to regulate their business environments
Course Contents:
Module I: Business and its Environment
Meaning of Business.
Nature of Modern Business
Internal and External Environment
P.E.S.T.E.L Analysis
Text:
Debroy Bibek, 2005, Economic and Social Environment, Oscar Publications
References:
Exports of Indias Major Products: Problems and Products, Oxford University Press, 2001, Pawan Kr Graga
Chauhan Sandeep-GATT to WTO Deep & Deep Publication Pvt. Ltd., 2001 Edition
Verma M.L -Foreign Trade Management in India, Vikas Publishing House, 2002
Prasad, H Ashok, ed.,Exim dynamic of service and WTO,Common Wealth Publishers, New Delhi,1996
Mathur, Vibha, WTO and India, New Century, New Delhi, 2005
Garg, Hema, W T O and regionalism in world trade, New Century, New Delhi, 2004
Mattoo, Aditya, Ed., India and the WTO, Rawat Publications, Jaipur, 2004
Das, Bhagirath Lal, WTO and the multinatinal trading system, Book Well, New Delhi, 2003
Hoekman, Bernard, Development trade & the WTO: a handbook, The World press, Washington, 2002
Index
S.
No.
1
2
3
4
5
6
7
Module
Page
6
20
43
52
112
136
158
Module I
Business and its
Environment
and grow the business itself. The owners and operators of a business have as one of their main
objectives the receipt or generation of a financial return in exchange for work and acceptance of
risk. Notable exceptions include cooperative enterprises and state-owned enterprises. Businesses
can also be formed not-for-profit or be state-owned.
Basic forms of ownership
Although forms of business ownership vary by jurisdiction, there are several common forms:
Sole proprietorship: A sole proprietorship is a business owned by one person. The owner
may operate on his or her own or may employ others. The owner of the business has
personal liability of the debts incurred by the business.
Partnership: is a form of business in which two or more people operate for the common
goal which is often making profit. In most forms of partnerships, each partner has
personal liability of the debts incurred by the business. There are three typical
classifications of partnerships: general partnerships, limited partnerships, and limited
liability partnerships.
Corporation: is either a [limited liability limited] or unlimited liability entity that has a
separate [legal personality] from its members. A corporation can be organized for-profit
or not-for-profit. A corporation is owned by multiple shareholders and is overseen by a
board of directors, which hires the business's managerial staff. In addition to privately
owned corporate models, there are state-owned corporate models.
Cooperative: Often referred to as a "co-op", a cooperative is a limited liability entity that
can organize for-profit or not-for-profit. A cooperative differs from a corporation in that
it has members, as opposed to shareholders, who share decision-making authority.
Cooperatives are typically classified as either consumer cooperatives or worker
cooperatives. Cooperatives are fundamental to the ideology of economic democracy.
"Nature of Business" means what type of business your are doing? like Wholesale, Retail or
Service, Manufacturing, Marketing, etc. If you want more specific, then HBA wholesale, Car
Service, Furniture manufacturing, health Drinks Marketing
what exactly your business doing,
What is the service / product you are offering
For example nature of "Walmart" business is "Retail business"
Nature of "Microsoft" is Software Business
Business Environment Defined
Business environment is a set of political, economic, social and technological (PEST) forces that
are largely outside the control and influence of a business, and that can potentially have both a
positive and a negative impact on the business
Business Environment is individual and organization that exist outside the business and have
influence direct and indirect to the business.
Meaning of Business Environment
Environment of a business means the external forces influencing the business decisions. They
can be forces of economic, social, political and technological factors. These factors are outside
the control of the business. The business can do little to change them.
Following features:
1. Totality of external forces: Business environment is the sum total of all things external to
business firms and, as such, is aggregative in nature.
2. (Specific and general forces: Business environment includes both specific and general forces.
Specific forces (such as investors, customers, competitors and suppliers) affect individual
enterprises directly and immediately in their day-to-day working. General forces (such as
social, political, legal and technological conditions) have impact on all business enterprises
and thus may affect an individual firm only indirectly.
3. Dynamic nature: Business environment is dynamic in that it keeps on changing whether in
terms of technological improvement, shifts in consumer preferences or entry of new
competition in the market.
4. Uncertainty: Business environment is largely uncertain as it is very difficult to predict future
happenings, especially when environment changes are taking place too frequently as in the
case of information technology or fashion industries.
5. Relativity: Business environment is a relative concept since it differs from country to country
and even region to region. Political conditions in the USA, for instance, differ from those in
China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may
be almost non-existent in France.
1. firm to identify opportunities and getting the first mover advantage: Early identification of
opportunities helps an enterprise to be the first to exploit them instead of losing them to
competitors. For example, Maruti Udyog became the leader in the small car market because
it was the first to recognize the need for small cars in India.
2. firm to identify threats and early warning signals: If an Indian firm finds that a foreign
multinational is entering the Indian market it should gives a warning signal and Indian firms
can meet the threat by adopting by improving the quality of the product, reducing cost of the
production, engaging in aggressive advertising, and so on.
3. Coping with rapid changes: All sizes and all types of enterprises are facing increasingly
dynamic environment. In order to effectively cope with these significant changes, managers
must understand and examine the environment and develop suitable courses of action.
4. Improving performance: the enterprises that continuously monitor their environment and
adopt suitable business practices are the ones which not only improve their present
performance but also continue to succeed in the market for a longer period.
1. Initiate rapid economic growth to raise the standard of living, reduce unemployment and
poverty;
2. Become self-reliant and set up a strong industrial base with emphasis on heavy and basic
industries;
3. Reduce inequalities of income and wealth;
4. Adopt a socialist pattern of development based on equality and prevent exploitation of
man by man.
As a part of economic reforms, the Government of India announced a new industrial policy in
July 1991.
The broad features of this policy were as follows:
1. The Government reduced the number of industries under compulsory licensing to six.
2. Disinvestment was carried out in case of many public sector industrial enterprises.
3. Policy towards foreign capital was liberalized. The share of foreign equity participation was
increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.
4. Automatic permission was now granted for technology agreements with foreign companies.
5. Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign
investment in India.
PEST analysis is also known as: STEP, PESTEL, PESTLE, PESTE, PESTLIED, SLEPT,
STEEPLE, STEEPLED, LE PEST C and LEPEST analysis.
Introduction
In analyzing the macro-environment, it is important to identify the factors that might in turn
affect a number of vital variables that are likely to influence the organizations supply and
demand levels and its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The
"radical and ongoing changes occurring in society create an uncertain environment and have an
impact on the function of the whole organization" (Tsiakkiros, 2002). A number of checklists
have been developed as ways of cataloguing the vast number of possible issues that might affect
an industry. A PEST analysis is one of them that is merely a framework that categorizes
environmental influences as political, economic, social and technological forces. Sometimes two
additional factors, environmental and legal, will be added to make a PESTEL analysis, but these
themes can easily be subsumed in the others. The analysis examines the impact of each of these
factors (and their interplay with each other) on the business. The results can then be used to take
advantage of opportunities and to make contingency plans for threats when preparing business
and strategic plans (Byars, 1991; Cooper, 2000).
Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market
growth or decline, business position, potential and direction for operations. The headings of
PEST are a framework for reviewing a situation, and can in addition to SWOT and Porters Five
Forces models, be applied by companies to review a strategic directions, including marketing
proposition. The use of PEST analysis can be seen effective for business and strategic planning,
marketing planning, business and product development and research reports. PEST also ensures
that companys performance is aligned positively with the powerful forces of change that are
affecting business environment (Porter, 1985). PEST is useful when a company decides to enter
its business operations into new markets and new countries. The use of PEST, in this case, helps
to break free of unconscious assumptions, and help to effectively adapt to the realities of the new
environment.
Economic conditions affect how easy or how difficult it is to be successful and profitable at any
time because they affect both capital availability and cost, and demand (Thompson, 2002). If
demand is buyout, for example, and the cost of capital is low, it will be attractive for firms to
invest and grow with expectations of being profitable. In opposite circumstances firms might
find that profitability throughout the industry is low. The timing and relative success of particular
strategies can be influences by economic conditions. When the economy, as a whole or certain
sectors of the economy, are growing, demand may exist for a product or service which would not
be in demand in more depressed circumstances. Similarity, the opportunity to exploit a particular
strategy successfully may depend on demand which exists in growth conditions and does not in
recession. Although a depressed economy will generally be a treat which results in a number of
organizations going out of business, it can provide opportunities for some (Robinson and et al.,
1978; Thompson, 2002).
Economic conditions are influenced by political and government policy, being a major influence
affecting government decisions. The issue of whether European countries join, or remain outside,
the single European currency is a case in point. At any one time either exported or imported
goods can seem expensive or inexpensive, dependent upon currency exchange rates. There are
many other ways, however, in which government decisions will affect organizations both
directly and indirectly, as they provide both opportunities and threats.
While economic conditions and government policy are closely related, they both influence a
number of other environmental forces that can affect organizations. Capital markets determine
the conditions for alternative types of funding for organizations. They tend to be a subject to
government controls, and they will be guided by the prevailing economic conditions. The rate of
interest charged for loans will be affected by inflation and by international economics and,
although the determining rate may be fixed by a central bank, as it is the case with the Bank of
England, that will also be influenced by stated government priorities. According to Thompson
(2002), government spending can increase the money supply and make capital markets more
buoyant. The expectations of shareholders with regard to company performance, their
willingness to provide more equity funding or their willingness to sell their shares will also be
affected.
The labour market reflects the availability of particular skills at national and regional levels; this
is affected by training, which is influenced by government and other regional agencies. Labour
costs will be influenced by inflation and by general trends in other industries, and by the role ad
power of trade unions.
The sociocultural environment encapsulates demand and tastes, which vary with fashion,
disposable income, and general changes, can again provide both opportunities and threats for
particular companies (Thompson, 2002; Pearce and Robinson, 2005). Over-time most products
change from being a novelty to a situation of market saturation, and as this happens pricing and
promotion strategies have to change. Similarly, some products and services will sell around the
world with little variation, but these are relatively unusual. Organizations should be aware of
demographics changes as the structure of the population by ages, affluence, regions, numbers
working and so on can have an important bearing on demand as a whole and on demand for
particular products and services. Threats to existing products might be increasing: opportunities
for differentiation and market segmentation might be emerging.
Technology is widely recognised by various literature on strategic management (Capron and
Glazer, 1987; Johnson and Scholes, 1993; Jan, 2002), as part of the organization and the industry
part of the model as it is used for the creation of competitive advantage. However, technology
external to the industry can also be captured and used, and this again can be influenced by
government support and encouragement. Technological breakthroughs can create new industries
which might prove a threat to existing organizations whose products or services might be
rendered redundant, and those firms which might be affected in this way should be alert to the
possibility. Equally, new technology could provide a useful input, in both manufacturing and
service industries, but in turn its purchase will require funding and possibly employee training
before it can be used.
How to Write a Good PEST Analysis
As it was discussed above, PEST analysis incorporates four perspectives, which give a logical
structure, providing clear presentation for further discussions and proactive decision-makings. In
writing a good PEST, subject should be a clear definition of the market being addressed, which
might include the following issues of:
a company looking at its market
a product looking at its market
Technological:
inventions,
new
discoveries,
research,
energy
uses/sources/fuels,
businesses concerns the management of cash flow, being able to pay bills when they are due for
payment and being strong enough to persuade customers to pay their invoices on time.
Finding Information for PEST Analysis
To understand what kind of environment the company may compete in the near future, it requires
understanding of the forces that will shape the change. For a PEST analysis, that means
conducting a scan of the external events outside of the company, such as potential regulatory
issues, demographic trends, political upheaval, and cutting-edge technology that could move
mainstream. In conducting the analysis it may be essential to look at periodicals, analyst reports,
demographics, and anything that will give the exposure to new trends and possibilities. Any
reliable secondary data source of current events and projected future trends will provide
information for the PEST analysis, including:
Newspapers, periodicals, current books
Trade organizations
Government agencies
Industry analysts
Financial analysts
One of the potential disadvantages collecting from the secondary sources is derived from issues
of validity, reliability and relevance. The limitation could be apparent in the nature of market
forces that reduce the applicability of the information sources to present situations. The problem
could arise based on the past data and past events being collected within past environmental
conditions. Therefore, the data has to be checked and applied to the current business conditions.
Conclusion
PEST analysis looks at the external business environment and is an appropriate strategic tool for
understanding the "big picture" of the environment in which business operates, enabling the
company to take advantage of the opportunities and minimize the threats faced by thier business
activities. When strategic planning is done correctly, it provides a solid plan for a company to
grow into the future.
With a PEST analysis, the company can see a longer horizon of time, and be able to clarify
strategic opportunities and threats that the organisation faces. By looking to the outside
environment to see the potential forces of change looming on the horizon, firms can take the
strategic planning process out of the arena of today and into the horizon of tomorrow.
PEST is not a set of rigid compartments into which ideas need to be sorted. It is better thought of
as a set of hooks that can be used to fish for important facts. Once the factors have been "fished
out", it does not matter which hook they were attached to. When it comes to writing up the
analysis, there is no need to mention the PEST labels at all
Module II
Contemporary Global and
National Business Environment
Digital Cameras
Vacuum Cleaners
UK
600
600
United States
2400
1000
Total
3000
1600
Vacuum Cleaners
UK
0 (-600)
1200 (+600)
United States
3360 (+960)
600 (-400)
Total
3000
1600
3360
1800
The UK specializes totally in producing vacuum cleaners doubling its output to 1200
The United States partly specializes in digital cameras increasing output by 960 having
given up 400 units of vacuum cleaners
For mutually beneficial trade to take place, the two nations have to agree an acceptable rate of
exchange of one product for another.
There are gains from trade between the two countries. If the two countries trade at a rate of
exchange of 2 digital cameras for one vacuum cleaner, the post-trade position will be as follows:
o
The UK exports 420 vacuum cleaners to the USA and receives 840 digital cameras
The USA exports 840 digital cameras and imports 420 vacuum cleaners
Vacuum Cleaners
UK
840
780
United States
2520
1020
Total
3360
1800
Compared with the pre-specialisation output levels, consumers in both countries now have an
increased supply of both goods to choose from.
Assumptions behind trade theory
This theory of the potential benefits from trade and exchange using the law of comparative
advantage is based on a number of underlying assumptions:
1. Perfect occupational mobility of each of the factors of production (land, labour, capital
etc.) -this means that switching factor resources from one industry to another involves no
loss of relative efficiency and productivity. In reality of course we know that factors of
production are not perfectly mobile labour immobility for example is a root cause of
structural unemployment
2. Constant returns to scale (i.e. doubling the inputs used in the production process leads to
a doubling of output) this is merely a simplifying assumption. Specialisation might lead
to diminishing returns in which case the economic benefits from trade are reduced.
Conversely, increasing the scale of production can generate increasing returns to scale in which case the benefits from trade are even stronger than the numerical example we
have considered
3. No externalities arising from production and/or consumption meaning that there is no
divergence between private and social costs and benefits. Again this is a simplifying
assumption. No discussion about the overall costs and benefits of specialisation and trade
should ignore many of the environmental considerations arising from increased
production and trade between countries.
A country's place in the global economy seems neither predestined nor predictable. Comparative
advantage is almost impossible to spot in advance.
Comparative advantage is best viewed as a dynamic concept meaning that it can and does change
over time. Some businesses find they have enjoyed a comparative advantage within their own
market in one product for several years only to face increasing competition as rival producers
from other countries enter their markets and under cut them on price or take market share
through non-price competition. For a country, the following factors are often seen as important in
determining the relative costs of production:
1. The quantity and quality of factors of production available (e.g. the size and efficiency of
the available labour force and the productivity of the existing stock of capital inputs)
2. Investment in research & development (this is important in industries where patents give
some firms a significant market advantage) there is quite strong evidence that an
emerging comparative advantage often comes from entrepreneurial trial and error the
never ending process of engaging in research and innovation to find more efficient
process and new products
3. Fluctuations in the real exchange rate which then affect the relative prices of exports and
imports and cause changes in demand from domestic and overseas customers
4. Import controls such as tariffs, export subsidies and quotas can be used to create an
artificial comparative advantage for a country's domestic producers
5. The non-price competitiveness of producers (e.g. covering factors such as the standard of
product design and innovation, product reliability, quality of after-sales support)
the production of many goods relative to their trading partners. Some have an absolute
disadvantage. They are inefficient in producing anything, relative to their trading partners. The
theory of comparative costs argues that, put simply, it is better for a country that is inefficient at
producing a good or service to specialise in the production of that good it is least inefficient at,
compared with producing other goods.
The Production Possibility Curve can be used to illustrate the principles of absolute and
comparative advantage.
Country A has an absolute advantage in the production of both maize and wheat. At all points its
production possibility curve lies to the right of that of Country B. Country B has an absolute
disadvantage. Due to abundance of raw materials or more productively efficient production
techniques, Country A is able to produce more wheat and more maize that Country B. Perhaps
common sense tells us that Country A should produce both goods and export surpluses and
Country B neither. However, when comparative advantage is considered a different story
emerges.
Consider the opportunity cost of Country A producing one more unit of maize. Half a unit of
wheat has been foregone. When country B produces one more unit of maize two units of wheat
are foregone. Economics is concerned with the allocation of scarce resources. Fewer resources
are foregone if Country A concentrates its resources in the production of maize.
Now consider the opportunity cost of Country B producing one more unit of wheat. Two units of
maize have been foregone. When Country B produces one more unit of wheat only half a unit of
maize is foregone. Fewer resources are foregone if Country B specialises in the production of
wheat.
In the above case Country A should produce maize and Country B wheat. The surpluses produce
should then be traded.
Basically, strategy is about two things: deciding where you want your business to go, and
deciding how to get there. A more complete definition is based on competitive advantage, the
object of most corporate strategy:
Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the
firm's cost of creating it. Value is what buyers are willing to pay, and superior value stems from
offering lower prices than competitors for equivalent benefits or providing unique benefits that
more than offset a higher price. There are two basic types of competitive advantage: cost
leadership and differentiation.
-- Michael Porter, Competitive Advantage, 1985, p.3
The figure below defines the choices of "generic strategy" a firm can follow. A firm's relative
position within an industry is given by its choice of competitive advantage (cost leadership vs.
differentiation) and its choice of competitive scope. Competitive scope distinguishes between
firms targeting broad industry segments and firms focusing on a narrow segment. Generic
strategies are useful because they characterize strategic positions at the simplest and broadest
level. Porter maintains that achieving competitive advantage requires a firm to make a choice
about the type and scope of its competitive advantage. There are different risks inherent in each
generic strategy, but being "all things to all people" is a sure recipe for mediocrity - getting
"stuck in the middle".
Treacy and Wiersema (1995) offer another popular generic framework for gaining competitive
advantage. In their framework, a firm typically will choose to emphasize one of three value
disciplines: product leadership, operational excellence, and customer intimacy.
COMPETITIVE ADVANTAGE
Lower Cost
Differentiation
Broad
Target
1. Cost Leadership
2. Differentiation
Narrow
Target
3B. Differentiation
Focus
COMPETITIVE
SCOPE
models are difficult to apply to specific company situations. Instead, qualitative frameworks
have been developed with the specific goal of better informing business practice. In another
sense, we may also talk about frameworks in this class as referring to the guiding analytical
approach you take to your project (i.e. decision analysis, economics, finance, etc.).
Some Perspective on Strategy Frameworks: Internal and External Framing for Strategic
Decisions
It may be helpful to think of strategy frameworks as having two components: internal and
external analysis.
structure, and how a firm can make the most of competing in that structure. It emphasizes where
a company should compete, and what's important when it does compete there. Porter's 5 Forces
and Value Chain concepts comprise the main externally-based framework. The external view
helps inform strategic investments and decisions.
example, is less based on industry structure and more in specific business operations and
decisions.
appropriate for strategic organization and goal setting for the firm.
Porters theory of competitive advantage. The Five Forces define the rules of competition in any
industry. Competitive strategy must grow out of a sophisticated understanding of the rules of
competition that determine an industry's attractiveness. Porter claims, "The ultimate aim of
competitive strategy is to cope with and, ideally, to change those rules in the firm's behavior."
(1985, p. 4) The five forces determine industry profitability, and some industries may be more
attractive than others. The crucial question in determining profitability is how much value firms
can create for their buyers, and how much of this value will be captured or competed away.
Industry structure determines who will capture the value. But a firm is not a complete prisoner of
industry structure - firms can influence the five forces through their own strategies. The fiveforces framework highlights what is important, and directs manager's towards those aspects most
important to long-term advantage. Be careful in using this tool: just composing a long list of
forces in the competitive environment will not get you very far its up to you to do the analysis
and identify the few driving factors that really define the industry. Think of the Five Forces
framework as sort of a checklist for getting started, and as a reminder of the many possible
sources for what those few driving forces could be.
New Entrants
Threat of
New Entrants
Industry
Competitors
Bargaining Power
of Suppliers
Rivalry Determinants
Industry growth
Fixed (or storage) costs / value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Bargaining Power
of Buyers
Suppliers
Buyers
Intensity
of Rivalry
Threat of
Substitutes
Substitutes
Price Sensitivity
Price/total purchases
Product differences
Brand identity
Impact on quality/
performance
Buyer profits
Decision makers
incentives
implementation, competitive advantage grows out of the way firms perform discrete activities conceiving new ways to conduct activities, employing new procedures, new technologies, or
different inputs. The "fit" of different strategic activities is also vital to lock out imitators.
Porters "Value Chain" and "Activity Mapping" concepts help us think about how activities build
competitive advantage.
The value chain is a systematic way of examining all the activities a firm performs and how they
interact. It scrutinizes each of the activities of the firm (e.g. development, marketing, sales,
operations, etc.) as a potential source of advantage. The value chain maps a firm into its
strategically relevant activities in order to understand the behavior of costs and the existing and
potential sources of differentiation. Differentiation results, fundamentally, from the way a firm's
product, associated services, and other activities affect its buyer's activities. All the activities in
the value chain contribute to buyer value, and the cumulative costs in the chain will determine
the difference between the buyer value and producer cost.
A firm gains competitive advantage by performing these strategically important activities more
cheaply or better than its competitors. One of the reasons the value chain framework is helpful is
because it emphasizes that competitive advantage can come not just from great products or
services, but from anywhere along the value chain. It's also important to understand how a firm
fits into the overall value system, which includes the value chains of its suppliers, channels, and
buyers.
With the idea of activity mapping, Porter (1996) builds on his ideas of generic strategy and the
value chain to describe strategy implementation in more detail. Competitive advantage requires
that the firm's value chain be managed as a system rather than a collection of separate parts.
Positioning choices determine not only which activities a company will perform and how it will
configure individual activities, but also how they relate to one another. This is crucial, since the
essence of implementing strategy is in the activities - choosing to perform activities differently or
to perform different activities than rivals. A firm is more than the sum of its activities. A firm's
value chain is an interdependent system or network of activities, connected by linkages.
Linkages occur when the way in which one activity is performed affects the cost or effectiveness
of other activities. Linkages create tradeoffs requiring optimization and coordination.
Porter describes three choices of strategic position that influence the configuration of a firm's
activities:
variety-based positioning - based on producing a subset of an industry's products or services;
involves choice of product or service varieties rather than customer segments.
Makes
economic sense when a company can produce particular products or services using
distinctive sets of activities. (i.e. Jiffy Lube for auto lubricants only)
needs-based positioning - similar to traditional targeting of customer segments. Arises when
there are groups of customers with differing needs, and when a tailored set of activities can
serve those needs best. (i.e. Ikea to meet all the home furnishing needs of a certain segment
of customers)
access-based positioning - segmenting by customers who have the same needs, but the best
configuration of activities to reach them is different. (i.e. Carmike Cinemas for theaters in
small towns)
Porter's major contribution with "activity mapping" is to help explain how different strategies, or
positions, can be implemented in practice. The key to successful implementation of strategy, he
says, is in combining activities into a consistent fit with each other. A company's strategic
position, then, is contained within a set of tailored activities designed to deliver it. The activities
are tightly linked to each other, as shown by a relevance diagram of sorts. Fit locks out
competitors by creating a "chain that is as strong as its strongest link." If competitive advantage
grows out of the entire system of activities, then competitors must match each activity to get the
benefit of the whole system.
Import substitution
long-distance transportation of goods (and concomitant fuel consumption and greenhouse gas
and other emissions).
The disadvantages claimed for ISI is that the industries that it creates are inefficient and obsolete
as they aren't exposed to internationally competitive industries which constitute their rivals and
that the focus on industrial development impoverishes local commodity producers who are
primarily rural. Other disadvantages include unemployment increasing internationally as World
GDP decreases through the promotion of inefficiency
Major points of Import Substitution
In the 30 years after ww2 developing countries were under the assumption that the key to
development was the creation of strong manufacturing sector through protecting domestic
markets from foreign imports through protection.
Main concern in developing countries is the low level of overall income also the case
that many developing countries are characterised by large differentials in income between
regions and sectors.
Until the 70s developing countries tried to limit imported manufactured goods in order to
help the development of local firms who were able to support the domestic markets.
Most important argument for such policy was:
They need support for the initial start up existing industries in developed countries are
too well established to compete with. This produces the argument for protection via
tariffs, quotas etc.
Examples of success of the policy US, Germany (tariffs in 18th century on manufactures) and
Japan (import controls until the 70s)
Problems with the argument not always good to move into a potential advantage industry
No good to protect unless the protection itself eventually makes the industry competitive
If financial institutions are inefficient e.g. savings are not efficiently used in investment,
the ability to earn current profits decreases. This creates disincentives to invest. This
case the solution would be to repair the institutions, and if not possible, protection is the
alternative measure.
Appropriability argument
Pioneer firms create intangible benefits such as knowledge and new markets and are
unable to establish property rights follower firms will not be subjected to these costs.
Solution compensate firms for initial costs if not possible then protection via quotas and
other policies
Problem with above 2 arguments - hard to assess industries which fall into the categories
Most developing countries have tried to promote industry through orientation towards
supplying the domestic market using quotas, tariffs.. Therefore replacing imports with
domestically produced goods called import substituting industrialisation
Problems with such policies trading partner countries may decide to retaliate with
similar quotas and tariffs.
Such policies employed due to belief that this is the way for growth to occur as opposed
to export promoting and also political biases exist
Others believed that the system was rigged to ensure developing countries remain poor
Method of protection protection of final stages of industry e.g. food processing. The larger
countries tried to completely replace imported goods with domestically produced consumer
goods but most of this production was undertaken by multinationals. The next step was to
protect intermediate goods such as steel and petrochemicals
Conclusions of the policy import sub has encouraged growth of manufactures but as
some countries e.g. India tend to spend high proportions of income on food, the idea that
it has promoted development is doubtful.
Problems with import substitution industrialisation countries have pursued the policy but show
no sign of catching up. Also stagnation of per capita incomes was evident can be seen in India
between 1950 70s as there was a very minute increase
Mexico achieved growth but not narrowed the gap between themselves and other
countries.
Protection would allow inefficient manufacturing to exist and does not necessarily mean
efficiency will ensue.
Often there is not enough scope for more than one producer as the domestic market is unable to
handle it. Therefore the creation of a monopoly is imminent which leads to inefficiency and
higher profits
Export promotion
Incentive programs designed to attract more firms into exporting by offering help in product and
market identification and development, pre-shipment and post-shipment financing, training,
payment guaranty schemes, trade fairs, trade visits, foreign representation, etc.
Export Promotion
Export promotion activities are to encourage increased sales of products that are currently
available for export. All promotional efforts are based on existing production and aim at
increasing the value of foreign sales by a given target. In recent years, some governments have
focused on programmes of export development. Governments were responding to greater
liberalization of foreign trade regulations and increased competition from abroad. Export
development is different from export promotion, because export development aims at producing
new export products and/or penetrating new markets that were not accessible before. The aim of
export development activities is to identify existing opportunities and encourage new industries
or production facilities to be set up in order to meet newly identified demands in the international
market
The keys to successful national export promotion and development programmes are government
policy decisions that affect export trade. A country's export development policy established in
terms of appropriate economic instruments and export promotion measures is critical to national
foreign trade performance. Two sets of policies affect foreign trade management in general, and
export promotion and development in particular:
(a) foreign trade policies and other policies with direct influence on foreign trade,
(b) Policies that regulate other economic activities, but at the same time influence the general
performance of foreign trade.
Tariff
A duty levied on goods transported from one customs area to another either for protective or
revenue purposes
A comprehensive list or "schedule" of merchandise with applicable duty rates to be paid or
charged for each listed article; together with governing rules and regulations.(A "customs"
Tariff.)
A schedule of rates and charges applied by a business, especially a common carrier, together
with a description of the services offered and the rules and regulations applicable.
Historic definition...
Tariff -- A schedule or list of prices or rates. For instance, the tariff of a hotel is the schedule or
list of prices at which it provides accommodations. Again, the tariff of a railroad is the schedule
or list of rates at which it carries freight and passengers ; likewise, the tariff of a telegraph
company is the schedule or list of rates at which it transmits messages. Also, the tariff is the
schedule or list of merchandise and other articles with the rates of duty to be paid on them to the
government when imported (and in some instances when exported).
Tariff Barriers
Non-tariff Barriers
Cost of Trade Barriers
Despite
all
the
obvious
benefits
of
international
trade,
governments
have
Module III
Protectionism and International
Trade
Tariff Barriers
Tariff is a tax levied on goods traded internationally. When imposed on goods being brought into
the country, it is referred to as an import duty. Import duty is levied to increase the effective cost
of imported goods to increase the demand for domestically produced goods. Another type of
tariff, less frequently imposed, is the export duty, which is levied on goods being taken out of the
country, to discourage their export. This may be done if the country is facing a shortage of that
particular commodity or if the government wants to promote the export of that good in some
other form, for example, a processed form rather than in raw material form. It may also be done
to discourage exporting of natural resources. When imposed on goods passing through the
country, the tariff is called transit duty.
Tariff can be imposed on three different bases.
A specific duty is a flat duty based on the number of units regardless of the value of the goods.
For example,
There may be a duty of Rs.5,000 per computer imported into India. In this case, a person
importing, say, 20 computers would have to pay a duty of (5,000 x 20 =) Rs.1,00,000.
An ad valorem duty is expressed as a percentage of the value of the good. So a person importing
a walkman worth Rs.2,000 carrying an import duty of 10% would have to pay Rs.200 towards
duty charges.
A compound duty is a combination of a specific and an ad valorem duty. For example, a book
worth Rs.500 carrying a specific duty of Rs.25 and an ad valorem duty of 2% would in effect be
carrying
compound
duty
of
Rs.35.
Over
the
last
few
decades,
tariffs
have been losing their importance as barriers to trade, their place being taken by non-tariff
barriers.
Non-tariff Barriers
Non-tariff barriers (NTBs) include all the rules, regulations and bureaucratic delays that help in
keeping foreign goods out of the domestic markets. The following are the different types of
NTBs:
Quotas
A quota is a limit on the number of units that can be imported or the market share that can be
held by foreign producers. For example, the US has imposed a quota on textiles imported from
India and other countries. Deliberate slow processing of import permits under a quota system
acts as a further barrier to trade.
Embargo
When imports from a particular country are totally banned, it is called an embargo. It is mostly
put in place due to political reasons. For example, the United Nations imposed an embargo on
trade with Iraq as a part of economic sanctions in 1990.
Voluntary Export Restraint (VER)
A country facing a persistent, huge trade deficit against another country may pressurize it to
adhere to a self-imposed limit on the exports. This act of limiting exports is referred to as
voluntary export restraint. After facing consistent trade deficits over a number of years with
Japan,
the
US
persuaded
it
to
impose
such
limits
on
itself.
Governments may directly or indirectly subsidize local production in an effort to make it more
competitive in the domestic and foreign markets. For example, tax benefits may be extended to a
firm producing in a certain part of the country to reduce regional imbalances, or duty drawbacks
may be allowed for exported goods, or, as an extreme case, local firms may be given direct
subsidies to enable them to sell their goods at a lower price than foreign firms.
A foreign company may find it more cost effective or otherwise attractive to assemble its goods
in the market in which it expects to sell its product, rather than exporting the assembled product
itself. In such a case, the company may be forced to produce a minimum percentage of the value
added locally. This benefits the importing country in two ways it reduces its imports and
increases the employment opportunities in the local market.
Technical Barriers
Countries generally specify some quality standards to be met by imported goods for various
health, welfare and safety reasons. This facility can be misused for blocking the import of certain
goods from specific countries by setting up of such standards, which deliberately exclude these
products. The process is further complicated by the requirement that testing and certification of
the products regarding their meeting the set standards be done only in the importing country.
These testing procedures being expensive, time consuming and cumbersome to the exporters, act
as a trade barrier. Under the new system of international trade, trading partners are required to
consult each other before fixing such standards. It also requires that the domestic and imported
goods be treated equally as far as testing and certification procedures are concerned and that
there should be no disparity between the quality standards required to be fulfilled by these two.
The importing country is now expected to accept testing done in the exporting country.
Procurement Policies Governments quite often follow the policy of procuring their requirements
(including that of government-owned companies) only from local producers, or at least extend
some price advantage to them. This closes a big prospective market to the foreign producers.
International Price Fixing
Some commodities are produced by a limited number of producers scattered around the world. In
such cases, these producers may come together to form a cartel and limit the production or price
of the commodity so as to protect their profits. OPEC (Organization of Petroleum Exporting
Countries) is an example of such cartel formation. This artificial limitation on the production and
price of the commodity makes international trade less efficient than it could have been.
Exchange Controls
Controlling the amount of foreign exchange available to residents for purchasing foreign goods
domestically
or
while
travelling
abroad
is
another
way
of
restricting
imports.
A country may directly restrict foreign investment to some specific sectors or up to a certain
percentage of equity. Indirect restrictions may come in the form of limits on profits that can be
repatriated or prohibition of payment of royalty to a foreign parent company. These restrictions
discourage foreign producers from setting up domestic operations. Foreign companies are
generally interested in setting up local operations when they foresee increased sales or reduced
costs as a consequence. Thus, restrictions against foreign investments add impediments to
international trade by giving rise to inefficiencies.
Customs Valuation
There is a widely held view that the invoice values of goods traded internationally do not reflect
their real cost. This gave rise to a very subjective system of valuation of imports and exports for
levy of duty. If the value attributed to a particular product would turn out to be substantially
higher than its real cost, it could result in affecting its competitiveness by increasing the total
cost to the importer due to the excess duty. This would again act as a barrier to international
trade. This problem has now been considerably reduced due to an agreement between various
countries regarding the valuation of goods involved in a cross-border trade.
The effective rate of protection is a commonly used measure of net effect of trade policies on
The incentives facing domestic producers. The measurement of effective protection is clearly a
two stage process first determining the nominal protection of the policies in question, and
second, analyzing the implications for effective protection of different firms, sectors or activities.
Just as increases in nominal protection reduce overall economic welfare by distorting the
information provided by domestic prices about relative scarcities of different goods, increases
in effective protection cause economic waste by inducing producers to supply goods domestically even
when their domestic costs are higher than their opportunity costs through trade. At the same time,
producers of goods with relatively low levels of effective protection are induced to refrain from
producing goods domestically even when this could be done at a lower cost than in international
markets
Tariffs also have an effect on industries that sell material inputs to the protected industry, and
firms in the protected industry are affected by tariffs on their inputs. This complicates looking at
who is being protected by a set of tariffs.
The effective rate of protection is the percentage by which the entire set of a nation's trade
barriers raises the industry's value added per unit of output.
Suppose that under free trade, the input costs of a bicycle are $220 and the world price is $300.
Value added equals $80.
Suppose a 10% tariff is imposed on bicycle imports so the domestic bicycle price rises to $330
and a 5% tariff is placed on its inputs so that input costs rise to $231. Value added now equals
$99.
The effective rate of protection for the bicycle industry equals (99-80)/80 or 23.8%, not the 10%
nominal tariff. This tells us that income rises by 23.8% in the bicycle industry.
The effective rate of protection is the percentage by which a country's trade barriers increase
the value added per unit of output (considering the fact that tariffs on inputs matter as well as
tariffs on outputs).
One-Input Model
First we consider the case where there is only one input i into the production of a good j.
Consider these parameters:
Pj Price of a unit of j
Cj Cost of a unit of j
aij Share of input i in cost of j
ti Tariff rate on i
tj Tariff rate on j
In the absence of a tariff, Vj, which is the value added per unit of output j, is:
Vj = Pj - Cj
= Pj(1 - aij)
Suppose tariffs are imposed on the output (tj) and input (ti). Then the new value added V'j is:
V'j = Pj[(1 + tj) - aij(1 + ti)]
Condition Result
tj = ti
ti > tj
ti < tj
Explanation
gj = tj = If the input and output tariffs are the same, the ERP is the same as the
ti
tariffs.
gj < tj <
ti
gj > tj >
ti
If the input tariff is higher, the ERP is lower than the output tariff.
If the input tariff is lower, the ERP is higher than the output tariff.
Example
Consider a simplified example where steel is considered to be the only input to produce
automobiles. Under free trade, assume that the price of a car is $10000 and the price of steel
required to produce a car is $8000.
Then the value added (under free trade) is $10000 - 8000 = $2000.
1. How much is the value added if a 10% tariff is imposed on cars? How much is the ERP?
2.
3.
As we can see, although the tariff is only 10%, the effective rate of protection is 50%.
4. How much are the value added and ERP if a 10% tariff is imposed on steel (only)?
5.
6.
In this case, the 10% tariff on steel (which is a cost to producers) is effectively a 40%
tariff.
7. How much are the value added and ERP if a 10% tariff is imposed on cars and steel both?
8.
9.
12.
Module IV
Regulatory Function of
Foreign Trade Policy
Exim Policy or Foreign Trade Policy is a set of guidelines and instructions established by the
DGFT in matters related to the import and export of goods in India.
The Foreign Trade Policy of India is guided by the Export Import in known as in short EXIM
Policy of the Indian Government and is regulated by the Foreign Trade Development and
Regulation Act, 1992. DGFT (Directorate General of Foreign Trade) is the main governing
body in matters related to Exim Policy. The main objective of the Foreign Trade (Development
and Regulation) Act is to provide the development and regulation of foreign trade by acilitating
imports into, and augmenting exports from India. Foreign Trade Act has replaced the earlier law
known as the imports and Exports (Control) Act 1947.
EXIM Policy
Indian EXIM Policy contains various policy related decisions taken by the government in the
sphere of Foreign Trade, i.e., with respect to imports and exports from the country and more
especially export promotion measures, policies and procedures related thereto. Trade Policy is
prepared and announced by the Central Government (Ministry of Commerce). India's Export
Import Policy also know as Foreign Trade Policy, in general, aims at developing export
potential, improving export performance, encouraging foreign trade and creating favorable
balance of payments position.
History of Exim Policy of India
In
the
year
1962,
the
Government
of
India
appointed
special
Exim policy Committee to review the government previous export import policies. The
committee was later on approved by the Government of India. Mr. V. P. Singh, the then
Commerce Minister and announced the Exim Policy on the 12th of April, 1985. Initially the
EXIM Policy was introduced for the period of three years with main objective to boost the
export business in India
Objectives Of The Exim Policy : Government control import of non-essential items through the EXIM policy. At the same time,
all-out efforts are made to promote exports. Thus, there are two aspects of Exim Policy; the
import policy which is concerned with regulation and management of imports and the export
policy which is concerned with exports not only promotion but also regulation. The main
objective of the Government's EXIM Policy is to promote exports to the maximum extent.
Exports should be promoted in such a manner that the economy of the country is not affected by
unregulated exportable items specially needed within the country. Export control is, therefore,
exercised in respect of a limited number of items whose supply position demands that their
exports should be regulated in the larger interests of the country. In other words, the main
objective of the Exim Policy is:
To accelerate the economy from low level of economic activities to high level of
economic activities by making it a globally oriented vibrant economy and to derive
maximum benefits from expanding global market opportunities.
To stimulate sustained economic growth by providing access to essential raw materials,
intermediates, components,' consumables and capital goods required for augmenting
production.
To enhance the techno local strength and efficiency of Indian agriculture, industry and
services, thereby, improving their competitiveness.
To generate new employment.
Opportunities and encourage the attainment of internationally accepted standards of
quality.
To provide quality consumer products at reasonable prices.
Governing Body of Exim Policy
The Government of India notifies the Exim Policy for a period of five years (1997-2002) under
Section 5 of the Foreign Trade (Development and Regulation Act), 1992. The current
Export Import Policy covers the period 2002-2007. The Exim Policy is updated every year on
the 31st of March and the modifications, improvements and new schemes became effective from
1st April of every year.
All types of changes or modifications related to the EXIM Policy is normally announced by the
Union Minister of Commerce and Industry who co-ordinates with the Ministry of Finance, the
Directorate General of Foreign Trade and network of Dgft Regional Offices.
Exim Policy 1992 -1997
In order to liberalize imports and boost exports, the Government of India for the first time
introduced the Indian Exim Policy on April I, 1992. In order to bring stability and continuity, the
Export Import Policy was made for the duration of 5 years. However, the Central Government
reserves the right in public interest to make any amendments to the trade Policy in exercise of the
powers conferred by Section-5 of the Act. Such amendment shall be made by means of a
Notification published in the Gazette of India.
Export Import Policy is believed to be an important step towards the economic reforms of
India.
Exim Policy 1997 -2002
With time the Exim Policy 1992-1997 became old, and a New Export Import Policy was need
for the smooth functioning of the Indian export import trade. Hence, the Government of India
introduced a new Exim Policy for the year 1997-2002. This policy has further simplified the
procedures and educed the interface between exporters and the Director General of Foreign
Trade (DGFT) by reducing the number of documents required for export by half. Import has
been further liberalized and better efforts have been made to promote Indian exports in
international trade.
Objectives of the Exim Policy 1997 -2002
The principal objectives of the Export Import Policy 1997 -2002 are as under:
To accelerate the economy from low level of economic activities to high level of
economic activities by making it a globally oriented vibrant economy and to derive
maximum benefits from expanding global market opportunities.
To motivate sustained economic growth by providing access to essential raw materials,
intermediates, components,' consumables and capital goods required for augmenting
production.
To improve the technological strength and efficiency of Indian agriculture, industry and
services, thereby, improving their competitiveness.
To create new employment. Opportunities and encourage the attainment of
internationally accepted standards of quality.
To give quality consumer products at practical prices.
Highlights of the Exim Policy 1997-2002
1. Period of the Exim Policy
This policy is valid for five years instead of three years as in the case of earlier policies. It is
effective from 1st April 1997 to 31st March 2002.
2. Liberalization
A
very
important
feature
of
the
policy
is
liberalization.
It has substantially eliminated licensing, quantitative restrictions and other regulatory and
discretionary controls. All goods, except those coming under negative list, may be freely
imported or exported.
3. Imports Liberalization
Of 542 items from the restricted list 150 items have been transferred to Special Import Licence
(SIL) list and remaining 392 items have been transferred to Open General Licence (OGL) List.
4. Export Promotion Capital Goods (EPCG) Scheme
The duty on imported capital goods under EPCG scheme has been reduced from 15% to 10%.
Under the zero duty EPCG Scheme, the threshold limit has been reduced from Rs. 20 crore to
Rs. 5 crore for agricultural and allied Sectors
5. Advance Licence Scheme
Under Advance License Scheme, the period for export obligation has been extended from 12
months to 18 months.
A further extension for six months can be given on payment of 1 % of the value of unfulfilled
exports.
6. Duty Entitlement Pass Book (DEPB) Scheme
Under the DEPB Scheme an exporter may apply for credit, as a specified percentage of FOB
value of exports, made in freely convertible currency.
Such credit can be can be utilized for import of raw materials, intermediates, components,
parts, packaging materials, etc. for export purpose.
In order to encourage foreign investment in India, the Exim Policy 1997-02 has permitted 100%
foreign equity participation in the case of 100% EOUs, and units set up in EPZs.
development
programmers
and
upgrade
the
quality
of
their
products.
The Exim Policy 1997-2002 successfully fulfills one of the Indias long terms objective of Selfreliance. The Exim Policy has achieved this by encouraging domestic sourcing of raw materials,
in order to build up a strong domestic production base. New incentives added in the Exim Policy
have also added benefits to the exporters.
Exim Policy 2002 2007
The Exim Policy 2002 - 2007 deals with both the export and import of merchandise and services.
It is worth mentioning here that the Exim Policy: 1997 - 2002 had accorded a status of exporter
to the business firm exporting services with effect from1.4.1999. Such business firms are known
as Service Providers.
Objectives of the Exim Policy: 2002 - 2007
The main objectives of the Export Import Policy 2002-2007 are as follows:
1. To encourage economic growth of India by providing supply of essential raw materials,
intermediates, components, consumables and capital goods required for augmenting
production and providing services.
2. To improve the technological strength and efficiency of Indian agriculture, industry and
services, thereby improving their competitive strength while generating new employment
opportunities and encourage the attainment of internationally accepted standards of
quality; and
3. To provide consumers with good quality products and services at internationally
competitive prices while at the same time creating a level playing field for the domestic
producers.
Main Elements of Exim Policy 2004-2009
The new Exim Policy 2004-2009 has the following main elements:
Preamble
Legal Framework
Special Focus Initiatives
Board Of Trade
Permeable of Exim Policy 2004-2009: It is a speech given by the Ministry of Commerce and
Industries. The speech for the Exim Policy 2004-2009 was given by Kamal Nath, on 31ST
AUGUST, 2004.
Legal Framework of Exim Policy 2004-2009
1.1 Preamble
The Preamble spells out the broad framework and is an integral part of the Foreign Trade Policy.
1.2 Duration
In exercise of the powers conferred under Section 5 of The Foreign Trade (Development and
Regulation Act), 1992 (No. 22 of 1992), the Central Government hereby notifies the Exim Policy
for the period 2004-2009 incorporating the Export Import Policy for the period 2002-2007, as
modified. This Policy shall come into force with effect from 1st September, 2004 and shall
remain
in
force
up
to
31st
March,
2009,
unless
as
otherwise
specified.
1.3 Amendments
The Central Government reserves the right in public interest to make any amendments to this
Policy in exercise of the powers conferred by Section-5 of the Act. Such amendment shall be
made
by
means
of
Notification
published
in
the
Gazette
of
India.
Licenses, certificates and permissions issued before the commencement of this Policy shall
continue to be valid for the purpose and duration for which such licence; certificate or
permission was issued unless otherwise stipulated.
With a view to doubling our percentage share of global trade within 5 years and expanding
employment opportunities, especially in semi urban and rural areas, certain special focus
initiatives have been identified for agriculture, handlooms, handicraft, gems & jewellery, leather
and Marine sectors.
Government of India shall make concerted efforts to promote exports in these sectors by specific
sectoral strategies that shall be notified from time to time.
Board of Trade of Exim Policy 2004-2009
BOT has a clear and dynamic role in advising government on relevant issues connected with
foreign trade.
To advise Government on Policy measures for preparation and implementation of both
short and long term plans for increasing exports in the light of emerging national and
international economic scenarios;
To review export performance of various sectors, identify constraints and suggest
industry specific measures to optimize export earnings;
To examine existing institutional framework for imports and exports and suggest
practical measures for further streamlining to achieve desired objectives;
To review policy instruments and procedures for imports and exports and suggest steps to
rationalize and channelize such schemes for optimum use;
To examine issues which are considered relevant for promotion of Indias foreign trade,
and to strengthen international competitiveness of Indian goods and services; and
To commission studies for furtherance of above objectives.
General Provisions Regarding Exports and Imports of Exim Policy 2004-2009
The Export Import Policy relating to the general provisions regarding exports and Imports is
Countries of Imports/Exports - Unless otherwise specifically provided, import/ export will be
valid from/to any country. However, import/exports of arms and related material from/to Iraq
shall be prohibited.
The above provisions shall, however, be subject to all conditionality, or requirement of licence,
or permission, as may be required under Schedule II of ITC (HS).
Promotional Measures of Exim Policy 2004-2009
The Government of India has set up several institutions whose main functions are to help an
exporter in his work. It would be advisable for an exporter to acquaint him with these institutions
and the nature of help that they can provide so that he can initially contact them and have a clear
picture of what help he can expect of the organized sources in his export effort. Some of these
institution are as follows.
Exemption
Remission
Schemes
of
Exim
Policy
2004-2009
The Duty Exemption Scheme enables import of inputs required for export production. It includes
the following exemptions-
premises.
Export
goods
are
totally
exempted
from
central
excise
duty.
Octroi Exemption: - Octroi is a duty paid on manufactured goods, when they enter the
municipal limits of a city or a town. However, export goods are exempted from Octroi.
The Duty Remission Scheme enables post export replenishment/ remission of duty on inputs
used in the export product.
DEPB:
Duty
Entitlement
Pass
Book
in
short
DEPB
Rate is basically an export incentive scheme. The objective of DEPB Scheme is to neutralize the
incidence of basic custom duty on the import content of the exported products.
DFRC
Under the Duty Free Replenishment Certificate (DFRC) schemes, import incentives are given to
the exporter for the import of inputs used in the manufacture of goods without payment of basic
customs duty. Duty Free Replenishment Certificate (DFRC) shall be available for exports only
up to 30.04.2006 and from 01.05.2006 this scheme is being replaced by the
(BTPs) Scheme is given in Chapter 6 of the Foreign Trade Policy. Software Technology
Park(STP)/Electronics Hardware Technology Park (EHTP) complexes can be set up by the
Central Government, State Government, Public or Private Sector Undertakings.
Export Promotion Capital Goods Scheme (EPCG) of Exim Policy 2004-2009
Introduced in the EXIM policy of 1992-97,
Export Promotion Capital Goods Scheme (EPCG) enable exporters to import machinery and
other capital goods for export production at concessional or no customs duties at all. This facility
is subject to export obligation, i.e., the exporter is required to guarantee exports of certain
minimum value, which is in multiple of total value of capital goods imported.
Capital goods imported under EPCG Scheme are subject to actual user condition and the same
cannot be transferred /sold till the fulfillment of export obligation specified in the licence. In
order to ensure that the capital goods imported under EPCG Scheme, the licence holder is
required
to
produce
certificate
from
the
jurisdictional
Central Excise Authority (CEA) or Chartered Engineer (CE) confirming installation of such
capital goods in the declared premises.
The area under 'SEZ' covers a broad range of zone types, including Export Processing Zones
(EPZ), Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ), Free Ports, Urban
Enterprise Zones and others.
In Indian, at present there are eight functional Special Economic Zones located at Santa Cruz
(Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu),
Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (Uttar Pradesh) in India.
Further a Special Economic Zone at Indore ( Madhya Pradesh ) is also ready for operation.
Free
Trade
&
Warehousing
Zones
of
Exim
Policy
2004-2009
Free Trade & Warehousing Zones (FTWZ) shall be a special category of Special Economic
Zones with a focus on trading and warehousing. The concept of FTWZ is new and has been
recently introduced in the five-year foreign trade policy 2004-09. Its main objective is to provide
infrastructure for growth of the economy and foreign trade. Free Trade & Warehousing Zones
(FTWZ) plays an important role in achieving global standard warehousing facilities as free trade
zones. Free Trade & Warehousing Zones is a widely accepted model with a history of providing
Substantial encouragement to foreign trade and warehousing activity.
Deemed
Exports
under
the
Exim
Policy
2004-2009
Deemed Export is a special type of transaction in the Indian Exim policy in which the payment
is received before the goods are delivered. The payment can be done in Indian Rupees or in
Foreign Exchange. As the deemed export is also a source of foreign exchange, so the
Government of India has given the benefit duty free import of inputs
HIGHLIGHTS OF
FOREIGN TRADE POLICY 2009-2014
3. The incentive available under Focus Market Scheme (FMS) has been raised from 2.5% to 3%.
4. The incentive available under Focus Product Scheme (FPS) has been raised from 1.25% to
2%.
5. A large number of products from various sectors have been included for benefits under FPS.
These include, Engineering products (agricultural machinery, parts of trailers, sewing machines,
hand tools, garden tools, musical instruments, clocks and watches, railway locomotives etc.),
Plastic (value added products), Jute and Sisal products, Technical Textiles, Green Technology
products (wind mills, wind turbines, electric operated vehicles etc.), Project goods, vegetable
textiles and certain Electronic items.
6. Market Linked Focus Product Scheme (MLFPS) has been greatly expanded by inclusion of
products classified under as many as 153 ITC(HS) Codes at 4 digit level. Some major products
include; Pharmaceuticals, Synthetic textile fabrics, value added rubber products, value added
plastic goods, textile madeups, knitted and crocheted fabrics, glass products, certain iron and
steel products and certain articles of aluminium among others. Benefits to these products will be
provided, if exports are made to 13 identified markets (Algeria, Egypt, Kenya, Nigeria, South
Africa, Tanzania, Brazil, Mexico, Ukraine, Vietnam, Cambodia, Australia and New Zealand).
7. MLFPS benefits also extended for export to additional new markets for certain products.
These products include auto components, motor cars, bicycle and its parts, and apparels among
others.
8. A common simplified application form has been introduced for taking benefits under FPS,
FMS, MLFPS and VKGUY.
9. Higher allocation for Market Development Assistance (MDA) and Market Access Initiative
(MAI) schemes is being provided.
Technological Upgradation
10. To aid technological upgradation of our export sector, EPCG Scheme at Zero Duty has been
introduced. This Scheme will be available for engineering & electronic products, basic chemicals
& pharmaceuticals, apparels & textiles, plastics, handicrafts, chemicals & allied products and
leather & leather products (subject to exclusions of current beneficiaries under Technological
Upgradation 10 Fund Schemes (TUFS), administered by Ministry of Textiles and beneficiaries
of Status Holder Incentive Scheme in that particular year). The scheme shall be in operation till
31.3.2011.
11. Jaipur, Srinagar and Anantnag have been recognised as Towns of Export Excellence for
handicrafts; Kanpur, Dewas and Ambur have been recognised as Towns of Export Excellence
for leather products; and Malihabad for horticultural products.
14. Focus Product Scheme benefit extended for export of green products; and for exports of
some products originating from the North East.
Status Holders
15. To accelerate exports and encourage technological upgradation, additional Duty Credit
Scrips shall be given to Status Holders @ 1% of the FOB value of past exports.
The duty credit scrips can be used for procurement of capital goods with Actual User condition.
This facility shall be available for sectors of leather (excluding finished leather), textiles and jute,
handicrafts, engineering (excluding Iron & steel & non-ferrous metals in primary and
intermediate form, automobiles & two wheelers, nuclear reactors & parts, and ships, boats and
floating structures), plastics and basic chemicals (excluding pharma products) [subject to
exclusions of current beneficiaries under Technological Upgradation Fund Schemes (TUFS)].
This facility shall be available upto 31.3.2011.
16. Transferability for the Duty Credit scrips being issued to Status Holders under paragraph
3.8.6 of FTP under VKGUY Scheme has been permitted. This is subject to
the condition that transfer would be only to Status Holders and Scrips would be utilized for the
procurement of Cold Chain equipment(s) only.
18. Interest subvention of 2% for pre-shipment credit for 7 specified sectors has been extended
till 31.3.2010 in the Budget 2009-10.
19. Income Tax exemption to 100% EOUs and to STPI units under Section 10B and 10A of
Income Tax Act, has been extended for the financial year 2010-11 in the Budget 2009-10.
20 The adjustment assistance scheme initiated in December, 2008 to provide enhanced ECGC
cover at 95%, to the adversely affected sectors, is continued till March, 2010.
Marine sector
21. Fisheries have been included in the sectors which are exempted from maintenance of
average EO under EPCG Scheme, subject to the condition that Fishing Trawlers, boats,
ships and other similar items shall not be allowed to be imported under this provision.
This would provide a fillip to the marine sector which has been affected by the present
downturn in exports.
22. Additional flexibility under Target Plus Scheme (TPS) / Duty Free Certificate of
Entitlement (DFCE) Scheme for Status Holders has been given to Marine sector.
25. A new facility to allow import on consignment basis of cut & polished diamonds for
the purpose of grading/ certification purposes has been introduced.
26. To promote export of Gems & Jewellery products, the value limits of personal
carriage have been increased from US$ 2 million to US$ 5 million in case of participation
in overseas exhibitions. The limit in case of personal carriage, as samples, for export
promotion tours, has also been increased from US$ 0.1 million to US$ 1 million.
Agriculture Sector
27. To reduce transaction and handling costs, a single window system to facilitate export
of perishable agricultural produce has been introduced. The system will involve creation
of multi-functional nodal agencies to be accredited by APEDA.
Leather Sector
28. Leather sector shall be allowed re-export of unsold imported raw hides and skins and
semi finished leather from public bonded ware houses, subject to payment of 50% of the
applicable export duty.
29. Enhancement of FPS rate to 2%, would also significantly benefit the leather sector.
Tea
30. Minimum value addition under advance authorization scheme for export of tea has
been reduced from the existing 100% to 50%.
31. DTA sale limit of instant tea by EOU units has been increased from the existing 30%
to 50%.
32. Export of tea has been covered under VKGUY Scheme benefits.
Pharmaceutical Sector
33. Export Obligation Period for advance authorizations issued with 6-APA as input has
been increased from the existing 6 months to 36 months, as is available for other
products.
34. Pharma sector extensively covered under MLFPS for countries in Africa and Latin
America; some countries in Oceania and Far East.
Handloom Sector
35. To simplify claims under FPS, requirement of Handloom Mark for availing benefits
under FPS has been removed.
EOUs
36. EOUs have been allowed to sell products manufactured by them in DTA upto a limit
of 90% instead of existing 75%, without changing the criteria of similar goods, within
the overall entitlement of 50% for DTA sale.
37. To provide clarity to the customs field formations, DOR shall issue a clarification to
enable procurement of spares beyond 5% by granite sector EOUs.
38. EOUs will now be allowed to procure finished goods for consolidation along with
their manufactured goods, subject to certain safeguards.
39. During this period of downturn, Board of Approvals (BOA) to consider, extension of
block period by one year for calculation of Net Foreign Exchange earning of EOUs.
40. EOUs will now be allowed CENVAT Credit facility for the component of SAD and
Education Cess on DTA sale.
42. Coverage of Project Exports and a large number of manufactured goods under FPS
and MLFPS.
DEPB
43. DEPB rate shall also include factoring of custom duty component on fuel where fuel
is allowed as a consumable in Standard Input-Output Norms.
45. Import of restricted items, as replenishment, shall now be allowed against transferred
DFIAs, in line with the erstwhile DFRC scheme.
46. Time limit of 60 days for re-import of exported gems and jewellery items, for
participation in exhibitions has been extended to 90 days in case of USA.
47. Transit loss claims received from private approved insurance companies in India will
now be allowed for the purpose of EO fulfillment under Export Promotion schemes. At
present, the facility has been limited to public sector general insurance companies only.
Simplification of Procedures
49. To facilitate duty free import of samples by exporters, number of samples/pieces has
been increased from the existing 15 to 50. Customs clearance of such samples shall be
based on declarations given by the importers with regard to the limit of value and
quantity of samples.
50. To allow exemption for up to two stages from payment of excise duty in lieu of
refund, in case of supply to an advance authorisation holder (against invalidation letter)
by the domestic intermediate manufacturer. It would allow exemption for supplies made
to a manufacturer, if such manufacturer in turn supplies the products to an ultimate
exporter. At present, exemption is allowed upto one stage only.
51. Greater flexibility has been permitted to allow conversion of Shipping Bills from one
Export Promotion scheme to other scheme. Customs shall now permit this conversion
within three months, instead of the present limited period of only one month. 17
52. To reduce transaction costs, dispatch of imported goods directly from the Port to the
site has been allowed under Advance Authorisation scheme for deemed supplies. At
present, the duty free imported goods could be taken only to the manufacturing unit of the
authorisation holder or its supporting manufacturer.
53. Disposal of manufacturing wastes / scrap will now be allowed after payment of
applicable excise duty, even before fulfillment of export obligation under Advance
Authorisation and EPCG Scheme.
54. Regional Authorities have now been authorised to issue licences for import of sports
weapons by renowned shooters, on the basis of NOC from the Ministry of Sports &
Youth Affairs. Now there will be no need to approach DGFT(Hqrs.) in such cases.
55. The procedure for issue of Free Sale Certificate has been simplified and the validity
of the Certificate has been increased from 1 year to 2 years. This will solve the problems
faced by the medical devices industry.
56. Automobile industry, having their own R&D establishment, would be allowed free
import of reference fuels (petrol and diesel), upto a maximum of 5 KL per annum, which
are not manufactured in India.
57. Acceding to the demand of trade & industry, the application and redemption forms
under EPCG scheme have been simplified.
59. To further EDI initiatives, Export Promotion Councils/ Commodity Boards have been
advised to issue RCMC through a web based online system. It is expected that issuance
of RCMC would become EDI enabled before the end of 2009.
60. Electronic Message Exchange between Customs and DGFT in respect of incentive
schemes under Chapter 3 will become operational by 31.12.2009. This will obviate the
need for verification of scrips by Customs facilitating faster clearances.
61. For EDI ports, with effect from December 09, double verification of shipping bills
by customs for any of the DGFT schemes shall be dispensed with.
62. In cases, where the earlier authorization has been cancelled and a new authorization
has been issued in lieu of the earlier authorization, application fee paid already for the
cancelled authorisation will now be adjusted against the application fee for the new
authorisation subject to payment of minimum fee of Rs. 200.
64. An updated compilation of Standard Input Output Norms (SION) and ITC (HS)
Classification of Export and Import Items has been published.
Exemption from State sales tax and other levies as extended by the respective State
Governments.
The major incentives and facilities available to SEZ developers include:Exemption from customs/excise duties for development of SEZs for authorized
operations approved by the BOA.
Income Tax exemption on income derived from the business of development of the SEZ
in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.
Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.
Exemption from dividend distribution tax under Section 115O of the Income Tax Act.
Exemption from Central Sales Tax (CST).
Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act
Export Performances Exports from the functioning SEZs during the last three years are as
under:
Year
2003-2004
13,854
39%
2004-2005
18,314
32%
2005-2006
22 840
25%
2006-20007
34,615
52%
2007-2008
66,638
93%
2008-2009
99,689
50%
2009-2010
2,20,711.39
121.40%
in the world. By some definitions, Indias middle class consists of 300 million people and its
expansion will raise consumption and make economic growth faster and more sustainable. As is
well-known, India has developed a world-class information technology and business process
outsourcing (BPO) sector that exports its services globally. Yet for all of Indias achievements,
the country is still wrestling with high poverty and unemployment rates. India may have excelled
in BPO, but when it comes to export manufacturing, India is the poorer cousin of China. Hence,
there is great interest within India to promote the export-oriented manufacturing sector through
Special Economic Zones or SEZs
SEZs IN INDIA
SEZs are regarded as foreign territory for the purpose of duties and taxes, and operate outside the
domain of the custom authorities. SEZ units are allowed to retain 100 percent of their foreign
exchange earnings in special Export earners Foreign Currency Exchange accounts. They are free
to sell goods in the domestic tariff area (DTA) on payment of applicable duties. Sales from DTA
firms to SEZ units are on par with regular trade transactions and hence eligible to benefit from
all export incentive and foreign currency exemption schemes. In addition, many state
governments have granted a sales-tax exemption for DTA-SEZ sales. SEZ units are also exempt
from the central government's service and excise tax regimes. SEZ businesses are expected to be
a positive foreign exchange earner within five years from the commencement of production.
None of the FDI equity caps are applicable to units in SEZs, including those sectors reserved for
small-scale industries. SEZs are exempted from the requirements of industrial licensing. The new
law increased the tax holiday period (phased out over time) from 10 years to 15-years for both
SEZ developers and SEZ production units. The SEZ legislation also provides for the
establishment of an International financial Services Centre to facilitate financial services for SEZ
units. Offshore banking units (OBUs) will be permitted to operate in SEZs, virtually like a
foreign branch of a bank, to make available financing at international rates. The OBUs will enjoy
exemption from certain Reserve bank of India requirements.
The set up of large scale SEZs in India is designed to serve both domestic and export markets.
They are envisaged to have world-class infrastructure with integrated real estate, power and
transportation facilities, single window clearance approval and administrative processes,
flexibility, internationally-competitive labor laws and transparency/clarity of governance.
However, a perusal of the supporting customs and central excise duty exemption notifications
and procedures reveals a confusing scenario. This is since there are an unduly large number of
notifications (over 50) and circulars and instructions (over 300) in existence. It can well be
contemplated that both the tax administrators and the units themselves would have a lot of
doubts in view of the sheer volume of relevant material. It is also quite possible that cases of
misuse of the scheme, which are on the rise in recent years, are on account of the absence of
codification of the law and procedures in respect of the said schemes.
As far as trade and commerce are concerned, SEZs are regarded as international territory.
Local raw materials bought by producers within SEZs are regarded as exports whereas those
goods that are produced in SEZs and sold in the DTA (Domestic Tariff Area) are regarded as
imports.
Objectives of SEZs
The objective behind an SEZ is to enhance foreign investment, increase exports, create jobs and
promote regional development. To put in the governments own words, the main objectives of
the SEZs are:
(a) Generation of additional economic activity;
(b) Promotion of exports of goods and services;
(c) Promotion of investment from domestic and foreign sources;
(d) Creation of employment opportunities;
(e) Development of infrastructure facilities.
SEZs in India were announced by the government in March 2000. To provide a stable economic
environment for the promotion of Export-import of goods in a quick, efficient and hassle-free
manner, Government of India enacted the SEZ Act, which received the assent of the President of
India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 (SEZ Rules) were notified on
February 10, 2006. Since then 15 SEZs including 8 EPZs (Export Processing Zones) have been
set up at Kandla, Surat, Mumbai, Kochi, Noida, Chennai (3 SEZs), Visakhapatnam, Indore,
Jaipur and Jodhpur, Falta, Manikanchan, and Salt Lake.
The SEZ Rules provides the simplification of procedures for development, operation, and
maintenance of the Special Economic Zones and for setting up and conducting business in SEZs.
This includes simplified compliance procedures and documentation with an emphasis on
selfcertification; single window clearance for setting up of an SEZ, setting up a unit in SEZs and
clearance on matters relating to Central as well as State Governments; no requirement for
providing bank guarantees; contract manufacturing for foreign principals with option to obtain
sub-contracting permission at the initial approval stage; and Import-Export of all items through
personal baggage.
The salient features of the Indian SEZ initiative further include the following points:
1. Unlike most of the international instances where zones are primarily developed
by governments, the Indian SEZ policy provides for development of these zones
in the government, private or joint sector. This is meant to offer equal
opportunities to both Indian and international private developers.
2. 100 per cent FDI is permitted for all investments in SEZs, except for activities
included in the negative list.
3. SEZ units are required to be positive net foreign-exchange earners and are not
subject to any minimum value addition norms or export obligations.
4. Goods flowing into the SEZ area from a domestic tariff area (DTA) are treated as
exports, while goods coming from the SEZ into a DTA are treated as imports. In
addition to the duty exemptions, the units in the Indian SEZs do not have to pay
any income tax for the first five years and only pay half their tax liability for the
next two. SEZ developers also enjoy a 10-year tax holiday. The size of an SEZ
varies depending on the nature of the SEZ. At least 50 per cent of the area of
multi-product or sector-specific SEZs must be used for export purposes. The rest
can include malls, hotels, educational institutions, etc. Besides providing state-of
the- art infrastructure and access to a large, well-trained and skilled workforce, the
SEZ policy also provides enterprises and developers with a favorable and
attractive range of incentives.
5. Facilities in the SEZ may retain 100 per cent foreign-exchange receipts in
Exchange Earners Foreign Currency Accounts.
6. 100 per cent FDI is permitted for SEZ franchisees in providing basic telephone
services in SEZs.
7. No cap on foreign investment for small-scale-sector reserved items which are
otherwise restricted.
8. Exemption from industrial licensing requirements for items reserved for the
small-scale-industries sector.
9. No import licence requirements.
10. Exemption from customs duties on the import of capital goods, raw materials,
consumables, spares, etc.
11. Exemption from Central Excise duties on procurement of capital goods, raw
materials, consumable spares, etc. from the domestic market.
12. No routine examinations by Customs for export and import cargo.
13. Facility to realize and repatriate export proceeds within 12 months.
14. Profits allowed to be repatriated without any dividend-balancing requirement.
15. Exemption from Central Sales Tax and Service Tax.
16.
The incentives for developers of SEZs include
1. Exemption from duties on import/procurement of goods for the development, operation
and maintenance of SEZs.
2. Income tax exemption for a block of 10 years in 15 years.
3. Exemption from Service Tax
4. FDI to develop townships within SEZs with residential, educational, health-care and
recreational facilities permitted on a case-by-case basis.
specific requirements for sector-specific operations can be seen from sec. 5 para. 2 lit. b) and c)
SEZ Rules. If the developer proposing to set up an SEZ is not in possession of the minimum
contiguous area, the Central Government may approve more than one developer. In such cases,
each developer shall be considered as a developer in respect of the land under its possession.
Whereas, at first, there was no ceiling regarding the maximum size of an SEZ, a meeting of the
so called Empowered Group of Ministers (EGoM) held on April 5, 2007 brought about a capping
at 5,000 hectares, which can still be undercut by states as land matters are state matters according
to Indian constitutional law (see table 1 and 2). Table 2 illustrates some sector specific SEZs
restrictions on foreign-owned equity and other requirements.
Table 3
Area-wise SEZs Distribution
Area (ha) Number Total Area (ha)
Up to 49 279 5352.8
50-100 39 3159.9
101-200 74 9021.2
201-500 26 7313.1
501-1000 2 1228.0
1000+ 19 28432.6
Total 439 54507.6
Source: SEZ India, NIC
The distribution of SEZs which have area more than 50 hectares shows that out of 160 SEZs
nearly 113 or 70 per cent accounts for the SEZs having area less than 200 hectares. More than 85
per cent of SEZs having area of more than 1000 hectares are developed in multi product sector
while nearly 63 per cent of total approved SEZs are developed in IT/ITeS sector.
PROBLEMS OF SEZs
And these concerns are not unfounded. Some of the prime concerns being raised by farmers
groups, fisher folk communities, marginalized communities and other movements on the
governments SEZ policy are:
1. Large scale and unjustified acquisition of land
2. Inadequate resettlement and rehabilitation policies and plans
3. Inadequate employment opportunities for local people through SEZs leading to loss of
livelihood
4. Increasing burden on natural resources and the environment and alienation of local
communities from these resources
5. SEZs contributing to real estate boom and creating real estate zones
6. Potential revenue loss from heavy subsidizing in SEZs
7. Concerns over the process of approving and implementing SEZs where is local government
consultation and sanction?
8. No wider public consultation
9. Threat to water security
10. Bypassing local governments and ignoring local communities
11. Increases regional disparities
The main question that voices and agitations across the country are raising is if SEZs are truly
meant to boost growth, what is the intended growth and for whose benefit? Going by the SEZ
policy, private profit seems to be the barometer of growth and the preference by policy is for
private players to lead the nations growth. The issue of development and the links between
growth and development are however missing. In a country with 65 percent of the population
depending on agriculture as a means of livelihood, industry ought to be complementary to
agriculture. Through SEZs however, industry is being promoted at the cost of agriculture.
Valuable resources spent to create SEZs will be at the cost of building better infrastructure for
the rest of the country, something that will affect both the domestic industry as well as
agriculture.
Investor services: It co-ordinates with EPZ units and helps in processing import/export
documents, custom clearance, helps in issuance of visas.
Finance: It receives payments towards, ground rent, water bills, import, export and other
charges, taxes including stamp duty.
Advantage India
Indias stability beneath the surface arises from:
An English-speaking workforce.
CONCLUSION
The SEZ policy in India underwent gradual relaxation of procedural and operational rigidities.
The changes effected in this policy since 1991 have been far reaching and significant. It is
believed that the overall and EPZ investment climate has an overwhelming bearing on the SEZ
performance. In India, however, a conducive policy framework has had only a limited impact on
the zone performance. Though the gross exports, foreign exchange earning and employment
increased phenomenally in absolute terms, their growth rates declined substantially. Growth in
exports per unit of employment also slowed down indicating deterioration in the export
performance. Net value addition performance compares favourably with other Asian countries
but it has not been consistent and the trend growth rate in value addition had not been
statistically different from zero. Furthermore, zones also failed to promote non-traditional
exports. Traditional sectors namely electronics and gems and jewellery dominate the zones. This
could be due to the piecemeal nature of the policy changes. Various committees were set up to
examine the performance of the zones. These committees made far reaching recommendations
regarding incentive package, development of infrastructure and improvement in governance
Initially, EOUs were mainly concentrated in Textiles and Yarn, Food Processing, Electronics,
Chemicals, Plastics, Granites and Minerals/Ores. But now a day, EOU has extended it area of
work which includes functions like manufacturing, servicing, development of software, trading,
repair, remaking, reconditioning, re-engineering including making of gold/silver/platinum
jewellery and articles thereof, agriculture including agro-processing, aquaculture, animal
husbandry, bio-technology, floriculture, horticulture, pisiculture, viticulture, poultry, sericulture
and granites.
Need for Special License
To set up an EOU for the following sectors, an EOU owner needs a special license.
Arms and ammunition,
Explosives and allied items of defense equipment,
Defense aircraft and warships,
Atomic substances,
Narcotics and psychotropic substances and hazardous chemicals,
Distillation and brewing of alcoholic drinks,
Cigarettes/cigars and manufactured tobacco substitutes.
In the above mention cases, EOU owner are required to submit the application form to the
Development Commissioner who will then put them up to the Board of Approvals (BOA).
Choosing the Location for EOU
EOUs can be set up anywhere in the country and may be engaged in the manufacture and
production of software, floriculture, horticulture, agriculture, aquaculture, animal husbandry,
pisciculture, poultry and sericulture or other similar activities
.However, it should be noted that in case of large cities where the population is more than one
million, such as Bangalore and Cochin, the proposed location should be at least 25 km away
from the Standard Urban Area limits of that city unless, it is to be located in an area designated
as an "industrial area" before the 25th July, 1991. Non-polluting EOUs such as electronics,
computer software and printing are exempt from such restriction while choosing the area.
Apart from local zonal office and state government, setting up of an EOU is also strictly guided
by the environmental rules and regulations. Therefore, an even if the EOU unit has fulfilled all
locational policy but not suitable from environmental point of view then the Ministry of
Environment, Government of India has right to cancel the proposal. In such situation industrialist
would be required to abide by that decision.
EOU Unit Obligations
The EOUs are required to achieve the minimum NFEP (Net Foreign Exchange Earning as a
Percentage of Exports) and the minimum EP (Export Performance) as per the provisions of
EXIM Policy which vary from sector to sector. As for instance, the units with investment in plant
and machinery of Rs.5 crore and above are required to achieve positive NFEP and export US$
3.5 million or 3 times the CIF value of imported capital goods, whichever is higher, for 5 years.
For electronics hardware sector, minimum NFEP has to be positive and minimum EP for 5
years is US$ 1 million or 3 times the CIF value of imported capital goods, whichever is higher.
NFEP is calculated cumulatively for a period of 5 years from the commencement of commercial
production according to a prescribed formula.
Bonding Period of EOU
The EOUs are licensed to manufacture goods within the bonded time period for the purpose of
export. As per the Exim Policy, the period of bonding is initially for five years, which is
extendable to another five years by the Development Commissioner. However on a request of
EOU Unit, time period can also be extended for another five year by the Commissioner / Chief
Commissioner of Customs.
EOU in Exim Policy
Currently EOU scheme is mentioned in the Chapter 9 of the Foreign Trade Policy (1997-2002)
and Chapter 9 of the Handbook of Procedures, Volume-I (HOP). The EOUs can export all
products except prohibited items of exports in ITC (HS).
Recent Policy Changes in the EOUs Scheme (w.e.f. 7th April, 2006)
The export of goods up to one and half percent of the FOB value.
In order to facilitate the smooth functioning of the EOU units, the Development
Commissioners will fix time limits for finalizing the disposal of matters relating to EOUs.
New units engaged in export of Agriculture/Horticulture/Aqua-Culture products have
been now allowed to remove capital goods inputs to the DTA on producing bank
guarantee equivalent to the duty foregone on the capital goods/input proposed to be taken
out.
The EOU units in Textile Sector are allowed to dispose off the left over material/fabrics
up to 2 per cent of Cost Insurance Freight (CIF) value of imports, on consignment basis.
Recognizing that settling the accounts for every consignment is complex and time
consuming it has been decided to allow disposal of left over material on the basis of
previous year's imports.
Software Technology Park (STP) is a 100% export oriented scheme for the development
and export of computer software using communication links or physical media and
including export of professional services. The scheme integrates the concept of 100%
Export Oriented Units (EOUs) and Export Processing Zones (EPZs) of the Government
of India and the concept of Science Parks / Technology Parks as operating elsewhere in
the World.
Software Technology Parks of India (STPI) was established under the Department of
Information Technology, Ministry of Communications and Information Technology,
Government of India on 5th June 1991 with an objective to implement STP scheme, setup and manage infrastructural facilities and provide other services like technology
assessment and professional training.
Software Technology Park (STP) is a 100% export oriented scheme for the development
and export of computer software using data communication links or in the form of
physical exports including export of professional services. This scheme is unique in its
nature as it focuses on one product/sector i.e. computer software. The scheme integrates
the concept of 100% Export Oriented Units (EOUs) and Export Processing Zones (EPZs)
of the Government of India and the concept of Science Parks/Technology Parks as
operating elsewhere in the World.
2. SALIENT FEATURES OF THE SCHEME
Approval under single window clearance mechanism.
EXPORTS
Member units of STPI have exported software of over Rs.20,051 Crore during the
year 2000-2001. The export figure of Rs.20,051 Crore from STP units represents
more than 70% of the national software exports.
STPI has established the Business Support Centre (named as India Infotech
Centre) at San Jose, Silicon Valley, and USA. It serves as a main nodal point to
facilitate with North American Companies that are interested in doing business
with India.
4. GOVERNING PROVISIONS OF THE SCHEME
The scheme is governed by policy provisions contained in para 9.1 to 9.29 under
Chapter 9 of Exim Policy 1992-1997 and 1997-2002 and exemption is allowed
under customs Notifications No.13/81 dated 9.2.1981, 53/97-cus date 3.6.97
138/91, 140/91 both dated 22.10.1991, 95/93-cus and 96/93-cus as amended.
5. SCOPE OF AUDIT
that the importer has fulfilled all the pre and post importation conditions laid
down in the notifications either before or after availing the benefits of exemption
from duty.
ii.
that the imported goods are not disproportionate to the reasonable requirements.
iii.
whether the input-output ratio prescribed has been followed in the manufacture of
exported product.
iv.
that the importer has fulfilled the annual export targets which might have been set
for him by the Interministerial Standing Committee or specified in the Letter of
Permission (LOP) Letter of Intent (LOI) and achieved the net foreign exchange
earning.
v.
that duties at appropriate rates have been paid by the importer on the
manufactured goods cleared in domestic tariff area (DTA) in terms of relevant
Central Excise Notification in force.
vi.
vii.
whether the scheme as a whole in its policy planning and implementation at the
field level had achieved its overall objective of promoting the export of Software
and Hardware.
6. IMPORTABILITY OF GOODS
Software Technology Park is a duty free customs bonded area in which a unit may
import free of duty all types of goods, including capital goods required by it for
manufacture, production or processing of articles for export out of India or for
being used in connection with the production or packaging of goods for export as
specified in the table appended to the Notification concerned except prohibited
items in the negative list of imports. The software technology park of India which
is a nodal agency for administering the scheme may also import free of duty all
types of goods for creating a central facility for use by software development
units in the STP complex.
Objective of audit is to seek assurance that :(a) prohibited items in the negative list of imports have not been
allowed in terms of the restrictions contained in Chapter 15 of the
Exim Policy 1992-97 and 1997-2002, similarly adherence to
conditions prescribed in para 25 and 5.4 of the policy for import of
second hand goods should be verified in audit.
a. the goods have been imported into STP premises in accordance with the detailed
list attested by the Director/Development Commissioner and shall be subjected to
satisfaction of all terms & conditions of the LOP/LOI.
b. the procedure for customs bonding has been followed besides transit bond from
port of importation to the premises.
c. the goods has been utilised for exports within a period of two years.
d. the importer maintained proper account of imports consumption, utilisation &
exports etc.
7. EXECUTION OF THE BOND
In terms of the above notifications each unit shall execute a bond with the
Assistant Commissioner of Customs binding himself to fulfil the export
obligations and other conditions stipulated in the Notification/Exim policy and to
pay on demand an amount equal to duty leviable on the goods and interest at the
rate of 20 percent or as amended from time to time if the said goods are not
proved to the satisfaction of the Assistant Commissioner of Customs to have been
used within the stipulated period in the development of software for exports.
The unit shall execute a legal undertaking with the Director/Development
Commissioner concerned and in the event of failure to fulfil the performance as
in case bank guarantees had been obtained in support of the bond it should be
ensured that the guarantees had not expired and timely renewals of such
guarantees had been effected.
ii.
bond/LUTs had been cancelled after fulfilment of export obligations and the
conditions stipulated in the customs notification.
iii.
the cases involving delay in renewal of bonds/LUTs and time barred bank
guarantees should be incorporated in the review.
iv.
the failure to invoke the penalty clause in terms of bonds/LUTs or to recover the
duties payable on the imported goods in case of non fulfilment of export
obligations/non achievement of the prescribed net foreign exchange earnings
should be carefully scrutinised and such cases should be incorporated in the
report.
v.
EXPORT
OBLIGATION/NET
FOREIGN
EXCHANGE
PERFORMANCE (NFEP)
The export obligation of STP unit is net foreign exchange earnings as percentage
of exports (NFEP) and minimum export performance (EP) shall be achieved by
the units as stipulated under para 9.5 of the Exim Policy read with para 9.29 and
Appendix 1 of the policy.
Whenever software exports take place in physical form they have to be duly
accompanied by GR/PP form, as the case may be. However, when software is
exported
in
non-physical
form
i.e.,
through
data
communication
or
ii.
iii.
i.
ii.
the value of imported capital goods financed through leasing companies have
been taken into account for calculating NFEP.
iii.
iv.
v.
In the case of bringing back, for repairs/replacement of the goods sold in DTA but
found defective or transfer of goods to DTA for repairs, testing or calibration, etc.
the permission of customs authorities has been taken for such clearances and such
goods fully accounted for.
We must detect and comment upon :(a) Irregular/clandestine clearances effected without the permission
of customs authorities should be commented upon with money
value of goods and duty payable thereon.
a. Incorrect method of calculation of net Foreign Exchange Earning as percentage of
export in violation of terms of Para 9.5 and 9.29 of the Exim Policy 1997-2002 or
incorrect computation of export obligation will call for comments in audit.
9. DTA SALE ENTITLEMENT
STP units are permitted to sell in DTA upto 25 per cent of their production in
value terms in any mode including on line data communication. They are also
permitted to sell finished products, which are either freely importable under the
exim policy or against other import licences , in the DTA over and above the
levels permissible under the policy against payment of full duties provided they
have achieved stipulated export obligations/NFEP as per Appendix I of the policy.
In the case of electronic hardware products, the permissible sale in the D.T.A. is
dependent on the value addition achieved, as follows :Net foreign Exchange earnings Permissible sale in D.T.A.
as a percentage of exports
a) Less than 15%
Nil
b) 15-25%
Electronic Hardware units in shall have an alternative facility to sell one half of
the value of their production on an annual basis in the domestic market and export
the other half of the Production in value terms without minimum foreign
exchange earning stipulation, on payment of applicable duties as specifically
notified for this facility. Units desirous of availing this facility shall exercise one
time option in this regard. Such units shall not be eligible for the other D.T.A. sale
facility as given in para 9.9 (d) of the policy.
As per para 9.12 of Chapter 9 EHTP/STP units may with the permission of the
concerned Customs authorities, supply or sale in the D.T.A. samples of goods
produced by them for display/market promotion, upto 1% of the value of previous
years export or maximum of Rs.5 lakh in case of new units going into production
on payment of applicable duties. Such samples may also be allowed to be
removed from the unit without payment of duty on furnishing a suitable
undertaking to the Customs authorities for return of such goods. This does not
effect the eligibility under para 9.9.
In the case of software items, D.T.A. sale facility will be 25 percent only.
Where both hardware and software electronic items are manufactured net foreign
exchange and D.T.A. sales entitlement shall be reckoned separately for hardware
and software as explained above.
In case of D.T.A. clearances the duties are chargeable as per the provisions of
notification No.97/91-CE dated 7.10.91, 101/93 CE dated 27.12.93, 2/95 CE
dated 4.1.95 or the relevant notification as amended from time to time.
ii.
iii.
wherever sales have exceeded the prescribed percentage, the duties have been
charged at full rates on such excess sales.
iv.
DTA sale entitlement has been correctly worked out and is confined only to those
goods that are approved for manufacture and export in the LOP/LOI.
v.
units opts for DTA sales on a quarterly, half yearly or annual basis by intimation
to the Director/Development Commissioner of the STP/EHTP concerned.
vi.
the DTA sales entitlement shall be availed of within one year of the accrual of
entitlement. The period can be extended upto six months by DC and upto 3 years
by the Board of Approvals/Inter ministerial standing committee in exceptional
cases.
vii.
advance DTA sale permission in respect of trial production has not exceeded the
entitlement accruable on the exports envisaged in the first year and such sale has
been adjusted against the subsequent entitlements. The unit had executed a bond
with the DC of the STP/EHTP concerned to cover the difference between the
amount of duties paid on the advance DTA sales and the full duties applicable on
such goods.
viii.
ix.
the benefits for supplies from DTA to STP/EHTP has been claimed by the
supplier after proper utilisation and in case disclaimer from the DTA supplier had
been given to STP/EHTP units, such unit had claimed only those benefits
admissible under para 10.3(b) and (c) of the Exim Policy 1997-2002.
ii.
ii.
iii.
that the duties in such cases have been collected in terms of relevant notification.
ii.
It should also be ensured that guidelines issued by the CBEC regarding valuation
of second hand machinery have been followed and the goods have been properly
accounted for.
ii.
i.
that the duty has been charged correctly in terms of prevalent industrial policy at the time
of debonding alongwith penalty if any leviable thereon.
ii.
Interministerial Standing Committee had initiated steps in time for immediate debonding
of units on completion of bonding period or where such units had failed to discharge
export obligations.
13. TEMPORARY REMOVAL OF GOODS FOR JOB WORK OUTSIDE THE UNIT.
a. The EHTP/STP units may be permitted to sub-contract part of their production process,
which may also involve change of form or nature of the goods through job work by units
in the DTA or other EOU/EPZ/EHTP/STP units. Requests in this regard will be permitted
by the Customs Authorities on the basis of factors such as fixation of input/output norms,
and on furnishing of undertaking by the concerned unit. EOU/EPZ/EHTP/STP units
using predominantly indigenous raw materials (i.e. 90% or more) may be permitted to
whether the procedure prescribed by the CBEC in their instructions dated 30.12.1993
(copy enclosed) for removal of goods from the STP/EHTP unit under Bond/BG to the
premises of the job work has been followed.
ii.
iii.
that a correlation existed between the raw material sent to DTA and goods received back
in STP/EHTP unit.
iv.
third year subject to commencement of production as indicated above during the fourth
and fifth years also.
It may be checked in audit:i.
ii.
iii.
loss of rent caused to the Government either due to mortality of the unit or due to failure
of the unit to discharge the export obligations in lieu of facilities availed may be
quantified and highlighted in the review.
ii.
whether the NFEP is achieved and foreign exchange realised with reference to bank
realisation certificates/other bank documents.
iii.
whether the DTA entitlements have been covered by proper sanction and within the limit
prescribed.
iv.
whenever capital goods etc., are shifted from bonded premises, whether appropriate duty
has been demanded and paid and
v.
proper monitoring is done by the agency with reference to the periodical returns
submitted by the STP units
Module V
International Trading
Environment
The World Trade Organization (WTO) is an organization that intends to supervise and liberalize
international trade. The organization officially commenced on January 1, 1995 under the
Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which
commenced in 1948. The organization deals with regulation of trade between participating
countries; it provides a framework for negotiating and formalizing trade agreements, and a
dispute resolution process aimed at enforcing participants' adherence to WTO agreements which
are signed by representatives of member governments and ratified by their parliaments. Most of
the issues that the WTO focuses on derive from previous trade negotiations, especially from the
Uruguay Round (1986-1994).
The organization is currently endeavoring to persist with a trade negotiation called the Doha
Development Agenda (or Doha Round), which was launched in 2001 to enhance equitable
participation of poorer countries which represent a majority of the world's population. However,
the negotiation has been dogged by "disagreement between exporters of agricultural bulk
commodities and countries with large numbers of subsistence farmers on the precise terms of a
'special safeguard measure' to protect farmers from surges in imports. At this time, the future of
the Doha Round is uncertain."
The WTO has 153 members, representing more than 97% of total world trade[8] and 30
observers, most seeking membership. The WTO is governed by a ministerial conference,
meeting every two years; a general council, which implements the conference's policy decisions
and is responsible for day-to-day administration; and a director-general, who is appointed by the
ministerial conference. The WTO's headquarters is at the Centre William Rappard, Geneva,
Switzerland
ITO and GATT 1947
The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established
after World War II in the wake of other new multilateral institutions dedicated to international
economic cooperation notably the Bretton Woods institutions known as the World Bank and
the International Monetary Fund. A comparable international institution for trade, named the
International Trade Organization was successfully negotiated. The ITO was to be a United
Nations specialized agency and would address not only trade barriers but other issues indirectly
related to trade, including employment, investment, restrictive business practices, and
commodity agreements. But the ITO treaty was not approved by the U.S. and a few other
signatories and never went into effect
attention. The fourth ministerial conference was held in Doha In Persian Gulf nation of Qatar.
The Doha Development Round was launched at the conference. The conference also approved
the joining of China, which became the 143rd member to join. The fifth ministerial conference
was held in Cancn, Mexico, aiming at forging agreement on the Doha round. An alliance of 22
southern states, the G20 developing nations (led by India, China and Brazil), resisted demands
from the North for agreements on the so-called "Singapore issues" and called for an end to
agricultural subsidies within the EU and the US. The talks broke down without progress.
The sixth WTO ministerial conference was held in Hong Kong from 13-18 December 2005. It
was considered vital if the four-year-old Doha Development Agenda negotiations were to move
forward sufficiently to conclude the round in 2006. In this meeting, countries agreed to phase out
all their agricultural export subsidies by the end of 2013, and terminate any cotton export
subsidies by the end of 2006. Further concessions to developing countries included an agreement
to introduce duty free, tariff free access for goods from the Least Developed Countries, following
the Everything But Arms initiative of the European Union but with up to 3% of tariff lines
exempted. Other major issues were left for further negotiation to be completed by the end of
2010. The WTO General Council, on 26 May 2009, agreed to hold a seventh WTO ministerial
conference session in Geneva from 30 November-3 December 2009. A statement by chairman
Amb. Mario Matus acknowledged that the prime purpose was to remedy a breach of protocol
requiring two-yearly "regular" meetings, which had lapsed with the Doha Round failure in 2005,
and that the "scaled-down" meeting would not be a negotiating session, but "emphasis will be on
transparency and open discussion rather than on small group processes and informal negotiating
structures". The general theme for discussion is "The WTO, the Multilateral Trading System and
the Current Global Economic Environment
Functions
Among the various functions of the WTO, these are regarded by analysts as the most important:
It oversees the implementation, administration and operation of the covered agreements.
It provides a forum for negotiations and for settling disputes.
Additionally, it is the WTO's duty to review and propagate the national trade policies, and to
ensure the coherence and transparency of trade policies through surveillance in global economic
policy-making. Another priority of the WTO is the assistance of developing, least-developed and
low-income countries in transition to adjust to WTO rules and disciplines through technical
cooperation and training.
The WTO is also a center of economic research and analysis: regular assessments of the global
trade picture in its annual publications and research reports on specific topics are produced by
the organization. Finally, the WTO cooperates closely with the two other components of the
Bretton Woods system, the IMF and the World Bank
Principles of the trading system
The WTO establishes a framework for trade policies; it does not define or specify outcomes.
That is, it is concerned with setting the rules of the trade policy games.
Five principles are of particular importance in understanding both the pre-1994 GATT and the
WTO:
1. Non-Discrimination. It has two major components: the most favoured nation (MFN) rule,
and the national treatment policy. Both are embedded in the main WTO rules on goods,
services, and intellectual property, but their precise scope and nature differ across these
areas. The MFN rule requires that a WTO member must apply the same conditions on all
trade with other WTO members, i.e. a WTO member has to grant the most favorable
conditions under which it allows trade in a certain product type to all other WTO
members. "Grant someone a special favour and you have to do the same for all other
WTO members." National treatment means that imported goods should be treated no less
favorably than domestically produced goods (at least after the foreign goods have entered
the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical
standards, security standards et al. discriminating against imported goods).
2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise
because of the MFN rule, and a desire to obtain better access to foreign markets. A
related point is that for a nation to negotiate, it is necessary that the gain from doing so be
greater than the gain available from unilateral liberalization; reciprocal concessions
intend to ensure that such gains will materialise.
3. Binding and enforceable commitments. The tariff commitments made by WTO members
in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of
concessions. These schedules establish "ceiling bindings": a country can change its
bindings, but only after negotiating with its trading partners, which could mean
compensating them for loss of trade. If satisfaction is not obtained, the complaining
country may invoke the WTO dispute settlement procedures.
4. Transparency. The WTO members are required to publish their trade regulations, to
maintain institutions allowing for the review of administrative decisions affecting trade,
to respond to requests for information by other members, and to notify changes in trade
policies to the WTO. These internal transparency requirements are supplemented and
facilitated by periodic country-specific reports (trade policy reviews) through the Trade
Policy Review Mechanism (TPRM). The WTO system tries also to improve
predictability and stability, discouraging the use of quotas and other measures used to set
limits on quantities of imports.
5. Safety valves. In specific circumstances, governments are able to restrict trade. There are
three types of provisions in this direction: articles allowing for the use of trade measures
to attain noneconomic objectives; articles aimed at ensuring "fair competition"; and
provisions permitting intervention in trade for economic reasons. Exceptions to the MFN
principle also allow for preferential treatment of developing countries, regional free trade
areas and customs unions.
Organizational structure
The General Council has multiple bodies which oversee committees in different areas, and they
are the following:
Council for Trade in Goods
There are 11 committees under the jurisdiction of the Goods Council each with a specific
task. All members of the WTO participate in the committees. The Textiles Monitoring
Body is separate from the other committees but still under the jurisdiction of Goods
Council. The body has its own chairman and only 10 members. The body also has several
groups relating to textiles.
Council for Trade-Related Aspects of Intellectual Property Rights
Information on intellectual property in the WTO, news and official records of the
activities of the TRIPS Council, and details of the WTOs work with other international
organizations in the field.
Council for Trade in Services
The Council for Trade in Services operates under the guidance of the General Council
and is responsible for overseeing the functioning of the General Agreement on Trade in
Services (GATS). It is open to all WTO members, and can create subsidiary bodies as
required.
Trade Negotiations Committee
The Trade Negotiations Committee (TNC) is the committee that deals with the current
trade talks round. The chair is WTOs director-general. The committee is currently tasked
with the Doha Development Round.
The Service Council has three subsidiary bodies: financial services, domestic regulations, GATS
rules and specific commitments. The General council has several different committees, working
groups, and working parties. There are committees on the following: Trade and Environment;
Trade and Development (Subcommittee on Least-Developed Countries); Regional Trade
Agreements; Balance of Payments Restrictions; and Budget, Finance and Administration. There
are working parties on the following: Accession. There are working groups on the following:
Trade, debt and finance; and Trade and technology transfer.
Voting system
The WTO operates on a one country, one vote system, but actual votes have never been taken.
Decision making is generally by consensus, and relative market size is the primary source of
bargaining power. The advantage of consensus decision-making is that it encourages efforts to
find the most widely acceptable decision. Main disadvantages include large time requirements
and many rounds of negotiation to develop a consensus decision, and the tendency for final
agreements to use ambiguous language on contentious points that makes future interpretation of
treaties difficult.
In reality, WTO negotiations proceed not by consensus of all members, but by a process of
informal negotiations between small groups of countries. Such negotiations are often called
"Green Room" negotiations (after the colour of the WTO Director-General's Office in Geneva),
or "Mini-Ministerials", when they occur in other countries. These processes have been regularly
criticised by many of the WTO's developing country members which are often totally excluded
from the negotiations..
Richard Harold Steinberg (2002) argues that although the WTO's consensus governance model
provides law-based initial bargaining, trading rounds close through power-based bargaining
favouring Europe and the U.S., and may not lead to Pareto improvement.
Dispute settlement
In 1994, the WTO members agreed on the Understanding on Rules and Procedures Governing
the Settlement of Disputes (DSU) annexed to the "Final Act" signed in Marrakesh in 1994.
Dispute settlement is regarded by the WTO as the central pillar of the multilateral trading
system, and as a "unique contribution to the stability of the global economy". WTO members
have agreed that, if they believe fellow-members are violating trade rules, they will use the
multilateral system of settling disputes instead of taking action unilaterally.
The operation of the WTO dispute settlement process involves the DSB panels, the Appellate
Body, the WTO Secretariat, arbitrators, independent experts and several specialized institutions.
Accession and membership
The process of becoming a WTO member is unique to each applicant country, and the terms of
accession are dependent upon the country's stage of economic development and current trade
regime. The process takes about five years, on average, but it can last more if the country is less
than fully committed to the process or if political issues interfere. As is typical of WTO
procedures, an offer of accession is only given once consensus is reached among interested
parties.
Accession process
offers submitted
observer,
frozen procedures or no
A country wishing to accede to the WTO submits an application to the General Council, and has
to describe all aspects of its trade and economic policies that have a bearing on WTO
agreements. The application is submitted to the WTO in a memorandum which is examined by a
working party open to all interested WTO Members.
After all necessary background information has been acquired; the working party focuses on
issues of discrepancy between the WTO rules and the applicant's international and domestic
trade policies and laws. The working party determines the terms and conditions of entry into the
WTO for the applicant nation, and may consider transitional periods to allow countries some
leeway in complying with the WTO rules.
The final phase of accession involves bilateral negotiations between the applicant nation and
other working party members regarding the concessions and commitments on tariff levels and
market access for goods and services. The new member's commitments are to apply equally to
all WTO members under normal non-discrimination rules, even though they are negotiated
bilaterally.
When the bilateral talks conclude, the working party sends to the general council or ministerial
conference an accession package, which includes a summary of all the working party meetings,
the Protocol of Accession (a draft membership treaty), and lists ("schedules") of the member-tobe's commitments. Once the general council or ministerial conference approves of the terms of
accession, the applicant's parliament must ratify the Protocol of Accession before it can become
a member.
Members and observers
The WTO has 153 members (almost all of the 123 nations participating in the Uruguay Round
signed on at its foundation, and the rest had to get membership). The 27 states of the European
Union are represented also as the European Communities. WTO members do not have to be full
sovereign nation-members. Instead, they must be a customs territory with full autonomy in the
conduct of their external commercial relations. Thus Hong Kong (as "Hong Kong, China" since
1997) became a GATT contracting party, and the Republic of China (ROC) (commonly known
as Taiwan, whose sovereignty has been disputed by the People's Republic of China or PRC)
acceded to the WTO in 2002 under the name of "Separate Customs Territory of Taiwan, Penghu,
Kinmen and Matsu" (Chinese Taipei).
A number of non-members (30) are observers at WTO proceedings and are currently negotiating
their membership. As observers, Iran, Iraq and Russia are not yet members. Russia is the biggest
economy outside WTO and after the completion of Russia's accession, Iran would be the biggest
economy outside the WTO. With the exception of the Holy See, observers must start accession
negotiations within five years of becoming observers. Some international intergovernmental
organizations are also granted observer status to WTO bodies. 14 states and 2 territories so far
have no official interaction with the WTO.
Agreements
The WTO oversees about 60 different agreements which have the status of international legal
texts. Member countries must sign and ratify all WTO agreements on accession. A discussion of
some of the most important agreements follows. The Agreement on Agriculture came into effect
with the establishment of the WTO at the beginning of 1995. The AoA has three central
concepts, or "pillars": domestic support, market access and export subsidies. The General
Agreement on Trade in Services was created to extend the multilateral trading system to service
sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a
system for merchandise trade. The Agreement entered into force in January 1995. The
Agreement on Trade-Related Aspects of Intellectual Property Rights sets down minimum
standards for many forms of intellectual property (IP) regulation. It was negotiated at the end of
the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994.
The Agreement on the Application of Sanitary and Phytosanitary Measures also known as the
SPS Agreement was negotiated during the Uruguay Round of the General Agreement on Tariffs
and Trade, and entered into force with the establishment of the WTO at the beginning of 1995.
Under the SPS agreement, the WTO sets constraints on members' policies relating to food safety
(bacterial contaminants, pesticides, inspection and labelling) as well as animal and plant health
(imported pests and diseases). The Agreement on Technical Barriers to Trade is an international
treaty of the World Trade Organization. It was negotiated during the Uruguay Round of the
General Agreement on Tariffs and Trade, and entered into force with the establishment of the
WTO at the end of 1994. The object ensures that technical negotiations and standards, as well as
testing and certification procedures, do not create unnecessary obstacles to trade". The
Agreement on Customs Valuation, formally known as the Agreement on Implementation of
Article VII of GATT, prescribes methods of customs valuation that Members are to follow.
Chiefly, it adopts the "transaction value" approach
Protectionism is the economic policy of restraining trade between states, through methods such
as tariffs on imported goods, restrictive quotas, and a variety of other government regulations
designed to discourage imports, and prevent foreign take-over of domestic markets and
companies. This policy is closely aligned with anti-globalization, and contrasts with free trade,
where government barriers to trade and movement of capital are kept to a minimum. The term is
mostly used in the context of economics, where protectionism refers to policies or doctrines
which protect businesses and workers within a country by restricting or regulating trade with
foreign nations
Protectionist policies
A variety of policies can be used to achieve protectionist goals. These include:
1. Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually
vary according to the type of goods imported. Import tariffs will increase the cost to
importers, and increase the price of imported goods in the local markets, thus lowering
the quantity of goods imported. Tariffs may also be imposed on exports, and in an
economy with floating exchange rates, export tariffs have similar effects as import tariffs.
However, since export tariffs are often perceived as 'hurting' local industries, while
import tariffs are perceived as 'helping' local industries, export tariffs are seldom
implemented.
2. Import quotas: To reduce the quantity and therefore increase the market price of imported
goods. The economic effects of an import quota is similar to that of a tariff, except that
the tax revenue gain from a tariff will instead be distributed to those who receive import
licenses. Economists often suggest that import licenses be auctioned to the highest bidder,
or that import quotas be replaced by an equivalent tariff.
3. Administrative Barriers: Countries are sometimes accused of using their various
administrative rules (eg. regarding food safety, environmental standards, electrical safety,
etc.) as a way to introduce barriers to imports.
4. Anti-dumping legislation Supporters of anti-dumping laws argue that they prevent
"dumping" of cheaper foreign goods that would cause local firms to close down.
However, in practice, anti-dumping laws are usually used to impose trade tariffs on
foreign exporters.
5. Direct Subsidies: Government subsidies (in the form of lump-sum payments or cheap
loans) are sometimes given to local firms that cannot compete well against foreign
imports. These subsidies are purported to "protect" local jobs, and to help local firms
adjust to the world markets.
6. Export Subsidies: Export subsidies are often used by governments to increase exports.
Export subsidies are the opposite of export tariffs, exporters are paid a percentage of the
value of their exports. Export subsidies increase the amount of trade, and in a country
with floating exchange rates, have effects similar to import subsidies.
7. Exchange Rate manipulation: A government may intervene in the foreign exchange
market to lower the value of its currency by selling its currency in the foreign exchange
market. Doing so will raise the cost of imports and lower the cost of exports, leading to
an improvement in its trade balance. However, such a policy is only effective in the short
run, as it will most likely lead to inflation in the country, which will in turn raise the cost
of exports, and reduce the relative price of imports
De facto protectionism
In the modern trade arena many other initiatives besides tariffs have been called protectionist.
For example, some commentators, such as Jagdish Bhagwati, see developed countries efforts in
imposing their own labor or environmental standards as protectionism. Also, the imposition of
restrictive certification procedures on imports are seen in this light.
Further, others point out that free trade agreements often have protectionist provisions such as
intellectual property, copyright, and patent restrictions that benefit large corporations. These
provisions restrict trade in music, movies, drugs, software, and other manufactured items to high
cost producers with quotas from low cost producers set to zero.
Arguments for protectionism
Protectionists believe that there is a legitimate need for government restrictions on free trade in
order to protect their countrys economy and its peoples standard of living.
burden on US producers of goods and services regardless of whether they are sold within the US
or exported to other countries."
Protectionists argue that this reverse protectionism is most clearly seen and most detrimental to
those countries (such as the US) that do not participate in the Value Added Tax (VAT) system.
This is a system which generates revenues from taxation on the sale goods and services whether
foreign or domestic. Protectionists argue that a country that does not participate is at a distinct
disadvantage when trading with a country that does. That the final selling price of a product from
a non-participating country sold in a country with a VAT tax must bear not only the tax burden
of the country of origin, but also a portion of the tax burden of the country were it is being sold.
Conversely, the selling price of a product made in a participating country and sold in a country
that does not participate, bears no part of the tax burden of the country in which it is sold (as do
the domestic products it is competing with). Moreover, the participating country rebates VAT
taxes collected in the manufacture of a product if that product is sold in a non-participating
country. This allows exporters of goods from participating countries to reduce the price of
products sold in non-participating countries.
Protectionists believe that governments should address this inequity, if not by adopting a VAT
tax, then by at least imposing compensating taxes (tariffs) on imports.
Infant industry argument
Main article: Infant industry argument
Protectionists believe that infant industries must be protected in order to allow them to grow to a
point where they can fairly compete with the larger mature industries established in foreign
countries. They believe that without this protection, infant industries will die before they reach a
size and age where economies of scale, industrial infrastructure, and skill in manufacturing have
progressed sufficiently allow the industry to compete in the global market.
For example, say that investors in Ethiopia would like to start a car company. Assuming the
investors were smart, educated people with knowledge of how to produce cars, an Ethiopian firm
would still face practically insurmountable barriers to entering the global auto industry. Ethiopia
lacks the infrastructure of parts suppliers. It lacks workers skilled in the specifics of building
cars. And, an infant auto industry would have to compete for steel, glass, and other raw materials
with established firms such as Toyota and Mercedes who purchase materials in quantities that
allow established companies to receive a better price and therefore allow them to produce cars at
a lower cost than the infant company.
Some might argue that trying to start an auto industry in Ethiopia is simply a bad business
decision and that is certainly true, but what is true for the auto industry is true for every other
industrial segment. Ethiopia would face the same barriers in trying to enter the appliance
industry, the textile industry, the pharmaceutical industry, or any other established manufacturing
segment. Protectionists believe that such barriers to entry are anti-competitive in the same way as
monopolies and trusts are anti-competitive. Protectionists believe that Ethiopia has a right to
become an industrialized nation and that its government has a right to pass protectionist
legislation to insure that its infant industries have a chance to mature.
Unrestricted Trade undercuts domestic policies for social good
Most industrialized governments have long held that laissez-faire capitalism creates social evils
that harm its citizens. To protect those citizens, these governments have enacted laws that restrict
what companies can and can not do in pursuit of profit. Examples are laws regarding:
child labor
environmental protection
competition (antitrust)
occupational safety and health
equal opportunity
collective bargaining
minimum wage
intellectual property
Protectionists argue that these laws place an economic burden on domestic companies bound by
them that put those companies at a disadvantage when they compete, both domestically and
abroad, with goods and services produced by companies unfettered by such restrictions. They
argue that governments have a responsibility to protect their corporations as well as their citizens
when putting its companies at a competitive disadvantage by enacting laws for social good.
Otherwise, they believe that these laws end up destroying domestic companies and ultimately
hurting the citizens these laws were designed to protect.
Arguments against protectionism
Protectionism is frequently criticized as harming the people it is meant to help. Many
mainstream economists instead support free trade.[1][4] Economic theory, under the principle of
comparative advantage, shows that the gains from free trade outweigh any losses as free trade
creates more jobs than it destroys because it allows countries to specialize in the production of
goods and services in which they have a comparative advantage. Protectionism results in
deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a free market,
where there is no such total loss. According to economist Stephen P. Magee, the benefits of free
trade outweigh the losses by as much as 100 to 1.
Most economists, including Nobel prize winners Milton Friedman and Paul Krugman, believe
that free trade helps workers in developing countries, even though they are not subject to the
stringent health and labour standards of developed countries. This is because "the growth of
manufacturing and of the myriad of other jobs that the new export sector creates has a
ripple effect throughout the economy" that creates competition among producers, lifting wages
and living conditions. Economists have suggested that those who support protectionism
ostensibly to further the interests of workers in least developed countries are in fact being
disingenuous, seeking only to protect jobs in developed countries. Additionally, workers in the
least developed countries only accept jobs if they are the best on offer, as all mutually consensual
exchanges must be of benefit to both sides, else they wouldn't be entered into freely. That they
accept low-paying jobs from companies in developed countries shows that their other
employment prospects are worse.
Alan Greenspan, former chair of the American Federal Reserve, has criticized protectionist
proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is
followed, newer, more efficient industries will have less scope to expand, and overall output and
economic welfare will suffer."
Protectionism has also been accused of being one of the major causes of war. Proponents of this
theory point to the constant warfare in the 17th and 18th centuries among European countries
whose governments were predominantly mercantilist and protectionist, the American
Revolution, which came about primarily due to British tariffs and taxes, as well as the protective
policies preceding both World War I and World War II. According to Frederic Bastiat, "When
goods cannot cross borders, armies will."
Free trade promotes equal access to domestic resources (human, natural, capital, etc.) for
domestic participants and foreign participants alike. Some thinkers extend that under free trade,
citizens of participating countries deserve equal access to resources and social welfare (labor
laws, education, etc.). Visa entrance policies tend to discourage free reallocation between many
countries, and encourage it with others. High freedom and mobility has been shown to lead to far
greater development than aid programs in many cases, for example eastern European countries in
the European Union. In other words visa entrance requirements are a form of local protectionism.
Current world trends
Since the end of World War II, it has been the stated policy of most First World countries to
eliminate protectionism through free trade policies enforced by international treaties and
organizations such as the World Trade Organization. Certain policies of First World
governments have been criticized as protectionist, however, such as the Common Agricultural
Policy in the European Union and proposed "Buy American" provisions in economic recovery
packages in the United States.
The current round of trade talks by the World Trade Organization is the Doha Development
Round and the last session of talks in Geneva, Switzerland led to an impass. The leaders'
statement in the G20 meeting in London in early 2009 included a promise to continue the Doha
Round.
Protectionism after the 2008 financial crisis
Heads of the G20 at their recent London summit pledged to abstain from imposing any trade
protectionist measures. Although they were reiterating what they had already committed to, last
November in Washington, 17 of these 20 countries were reported by the World Bank as having
imposed trade restrictive measures since then. In its report, the World Bank says most of the
world's major economies are resorting to protectionist measures as the global economic
slowdown begins to bite
De facto protectionism
In the modern trade arena many other initiatives besides tariffs have been called protectionist.
For example, some commentators, such as Jagdish Bhagwati, see developed countries efforts in
imposing their own labor or environmental standards as protectionism. Also, the imposition of
restrictive certification procedures on imports are seen in this light.
Further, others point out that free trade agreements often have protectionist provisions such as
intellectual property, copyright, and patent restrictions that benefit large corporations. These
provisions restrict trade in music, movies, drugs, software, and other manufactured items to high
cost producers with quotas from low cost producers set to zero.
Arguments for protectionism
Protectionists believe that there is a legitimate need for government restrictions on free trade in
order to protect their countrys economy and its peoples standard of living.
The "Comparative Advantage" argument has lost its legitimacy
The Comparative Advantage argument is used by most economists as a basis for their support of
free trade policies. Opponents of these policies argue that the Comparative Advantage argument
has lost its legitimacy in a globally integrated worldin which capital is free to move
internationally. Herman Daly, a leading voice in the discipline of ecological economics,
emphasizes that although Ricardo's theory of comparative advantage is one of the most elegant
theories in economics, its application to the present day is illogical: "Free capital mobility totally
undercuts Ricardo's comparative advantage argument for free trade in goods, because that
argument is explicitly and essentially premised on capital (and other factors) being immobile
between nations. Under the new global economy, capital tends simply to flow to wherever costs
are lowestthat is, to pursue absolute advantage."
Protectionists would point to the building of plants and shifting of production to Mexico by
American companies such as GE, GM, and even Hershey Chocolate as proof of this argument.
The Comparative Advantage argument is also premised on full employment. According to the
Wikipedia entry on Comparative Advantage, if one or other of the economies has less than full
employment of factors of production, then this excess capacity must usually be used up before
the comparative advantage reasoning can be applied. Protectionists believe that it is therefore
erroneous to base trade policy on the principle of Comparative Advantage in those countries that
suffer from significant unemployment or underemployment.
Domestic tax policies can favor foreign goods
Protectionists believe that allowing foreign goods to enter domestic markets without being
subject to tariffs or other forms of taxation, leads to a situation where domestic goods are at a
disadvantage, a kind of reverse protectionism. By ruling out revenue tariffs on foreign products,
governments must rely solely on domestic taxation to provide its revenue, which falls
disproportionately on domestic manufacturing. As Paul Craig Roberts notes: "[Foreign
discrimination of US products] is reinforced by the US tax system, which imposes no
appreciable tax burden on foreign goods and services sold in the US but imposes a heavy tax
burden on US producers of goods and services regardless of whether they are sold within the US
or exported to other countries."
Protectionists argue that this reverse protectionism is most clearly seen and most detrimental to
those countries (such as the US) that do not participate in the Value Added Tax (VAT) system.
This is a system which generates revenues from taxation on the sale goods and services whether
foreign or domestic. Protectionists argue that a country that does not participate is at a distinct
disadvantage when trading with a country that does. That the final selling price of a product from
a non-participating country sold in a country with a VAT tax must bear not only the tax burden
of the country of origin, but also a portion of the tax burden of the country were it is being sold.
Conversely, the selling price of a product made in a participating country and sold in a country
that does not participate, bears no part of the tax burden of the country in which it is sold (as do
the domestic products it is competing with). Moreover, the participating country rebates VAT
taxes collected in the manufacture of a product if that product is sold in a non-participating
country. This allows exporters of goods from participating countries to reduce the price of
products sold in non-participating countries.
Protectionists believe that governments should address this inequity, if not by adopting a VAT
tax, then by at least imposing compensating taxes (tariffs) on imports.
Infant industry argument
Main article: Infant industry argument
Protectionists believe that infant industries must be protected in order to allow them to grow to a
point where they can fairly compete with the larger mature industries established in foreign
countries. They believe that without this protection, infant industries will die before they reach a
size and age where economies of scale, industrial infrastructure, and skill in manufacturing have
progressed sufficiently allow the industry to compete in the global market.
For example, say that investors in Ethiopia would like to start a car company. Assuming the
investors were smart, educated people with knowledge of how to produce cars, an Ethiopian firm
would still face practically insurmountable barriers to entering the global auto industry. Ethiopia
lacks the infrastructure of parts suppliers. It lacks workers skilled in the specifics of building
cars. And, an infant auto industry would have to compete for steel, glass, and other raw materials
with established firms such as Toyota and Mercedes who purchase materials in quantities that
allow established companies to receive a better price and therefore allow them to produce cars at
a lower cost than the infant company.
Some might argue that trying to start an auto industry in Ethiopia is simply a bad business
decision and that is certainly true, but what is true for the auto industry is true for every other
industrial segment. Ethiopia would face the same barriers in trying to enter the appliance
industry, the textile industry, the pharmaceutical industry, or any other established manufacturing
segment. Protectionists believe that such barriers to entry are anti-competitive in the same way as
monopolies and trusts are anti-competitive. Protectionists believe that Ethiopia has a right to
become an industrialized nation and that its government has a right to pass protectionist
legislation to insure that its infant industries have a chance to mature.
Unrestricted Trade undercuts domestic policies for social good
Most industrialized governments have long held that laissez-faire capitalism creates social evils
that harm its citizens. To protect those citizens, these governments have enacted laws that restrict
what companies can and can not do in pursuit of profit. Examples are laws regarding:
child labor
environmental protection
competition (antitrust)
occupational safety and health
equal opportunity
collective bargaining
minimum wage
intellectual property
Protectionists argue that these laws place an economic burden on domestic companies bound by
them that put those companies at a disadvantage when they compete, both domestically and
abroad, with goods and services produced by companies unfettered by such restrictions. They
argue that governments have a responsibility to protect their corporations as well as their citizens
when putting its companies at a competitive disadvantage by enacting laws for social good.
Otherwise, they believe that these laws end up destroying domestic companies and ultimately
hurting the citizens these laws were designed to protect.
policies preceding both World War I and World War II. According to Frederic Bastiat, "When
goods cannot cross borders, armies will."
Free trade promotes equal access to domestic resources (human, natural, capital, etc.) for
domestic participants and foreign participants alike. Some thinkers extend that under free trade,
citizens of participating countries deserve equal access to resources and social welfare (labor
laws, education, etc.). Visa entrance policies tend to discourage free reallocation between many
countries, and encourage it with others. High freedom and mobility has been shown to lead to far
greater development than aid programs in many cases, for example eastern European countries in
the European Union. In other words visa entrance requirements are a form of local protectionism.
Current world trends
Since the end of World War II, it has been the stated policy of most First World countries to
eliminate protectionism through free trade policies enforced by international treaties and
organizations such as the World Trade Organization. Certain policies of First World
governments have been criticized as protectionist, however, such as the Common Agricultural
Policy in the European Union and proposed "Buy American" provisions in economic recovery
packages in the United States.
The current round of trade talks by the World Trade Organization is the Doha Development
Round and the last session of talks in Geneva, Switzerland led to an impass. The leaders'
statement in the G20 meeting in London in early 2009 included a promise to continue the Doha
Round.
Protectionism after the 2008 financial crisis
Heads of the G20 at their recent London summit pledged to abstain from imposing any trade
protectionist measures. Although they were reiterating what they had already committed to, last
November in Washington, 17 of these 20 countries were reported by the World Bank as having
imposed trade restrictive measures since then. In its report, the World Bank says most of the
world's major economies are resorting to protectionist measures as the global economic
slowdown begins to bite
Module VI
Rules Governing International Trade
under WTO
Determination of Dumping
Dumping occurs when a product is sold at less than its normal value. The
normal value will usually be the comparable price of the product in the
domestic market of the exporting country. Actual domestic prices do not have
to be used when a) sales are not made in the ordinary course of trade (e.g.
below cost) b) there is a particular market situation that does not permit a
proper comparison c) there is a low volume of domestic sales.
When actual domestic prices are not available, or cannot be used, normal value
can be based on the export price to a third country or cost of production in the
country of origin (plus reasonable amount for selling costs and profit).
Export prices may be constructed from the first independent price where the
importer is related to the exporter.
A fair comparison must be made between export price and normal value. Allowances should be
made for all differences that affect price comparability
Determination of Injury
An injury determination must examine a) volume of dumped imports and effect
of those import on prices in the domestic (importing) market; imports can be
cumulated if several countries are involved in the same investigation. b) the
consequent impact of these imports on the domestic industry must include
an evaluation of all relevant economic factors and indices having a bearing on
the state of the industry.
It must be demonstrated that dumped imports are causing injury and that
injury caused by other factors is not attributed to the dumped imports.
Threat of injury must be clearly foreseen and imminent. Application of AD measures in such
situations should be decided with care.
Definition of Domestic Industry
The domestic industry is all domestic producers of the product concerned, or
those whose collective output constitutes a major proportion of total domestic
production of those products. Companies can be excluded from domestic
Provisional Measures
Provisional measures (in the form of a duty or, preferably a security by cash
deposit or bond) can be applied no sooner than 60 days after initiation of the
investigation. Provisional measures can be applied for a maximum of 4 months,
extendable to 6 months. These deadlines are 6 and 9 months respectively when
an authority applies a duty lower than the dumping margin where that is
sufficient to remove the injury (i.e. lesser duty rule).
Price Undertakings
Proceedings can be terminated with voluntary price undertakings. Undertakings offered by
exporters need not be accepted by the authority concerned nor shall exporters be required to
enter into such undertakings
Imposition and Collection of Anti-Dumping Duties
Whether a duty should be imposed, or the amount of such a duty, are
decisions to be made by the authority concerned. It is desirable the duty be
less than the dumping margin if sufficient to remove the injury to the domestic
industry. The amount of dumping duty must not exceed the margin of
dumping. An accelerated review should be provided for new exporters that a)
are not related to existing exporters b) did not export during the period of
investigation
Retroactivity
Measures and duties should only apply to products imported after the measure
is adopted.Provisional duties can be retained if there is a final determination of
injury. Definitive duties can be levied retroactively for up to 90 days prior to
provisional measures in certain circumstances.
Duration and Review of Anti-Dumping Duties and Price Undertakings
AD duties should only last for five years, unless an expiry review determines that the duty
should be continued
By beneficiary, there are two primary categories: 1) subsidies that are not limited to specific
businesses or industries (non-specific subsidies), and 2) subsidies that are limited to specific
businesses and industries (specific subsidies).
Although governments articulate ostensibly legitimate goals for their subsidy programmes, it is
widely perceived that government subsidies may give excessive protection to domestic
industries. In such cases, subsidies act as a barrier to trade, by distorting the competitive
relationships that develop naturally in a free trading system. Exports of subsidized products may
injure the domestic industry producing the same product in the importing country. Similarly,
subsidized products may gain artificial advantages in third country markets and impede other
countries exports to those markets.
Because of this potential the WTO Agreements prohibit with respect to industrial goods any
export subsidies and subsidies contingent upon the use of domestic over imported goods, as
having a particularly high trade-distorting effect. Furthermore, even for subsidies that are not
prohibited, it allows Member countries importing subsidized goods to enact countermeasures,
such as countervailing duties if such goods injure the domestic industry and certain procedural
requirements are met . For agricultural products, the WTO Agreements requires obligations such
as reducing export subsidies and domestic supports
Legal Framework
Concerning the legal framework for subsidies, the basic principles are provided in Articles VI
and XVI of the GATT. Furthermore, there is the Agreement on Subsidies and Countervailing
Measures (hereinafter the Subsidies Agreement) as the implementation agreement for
subsidies in general. The Subsidies Agreement was negotiated during the Uruguay Round to
provide new disciplines in place of the Agreement on the Interpretation and Application of
Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade (hereinafter the
Subsidies Code) adopted during the Tokyo Round. Compared to the Subsidies Code, the
Subsidies Agreement provides more explicit definitions of subsidies and stronger, clearer
disciplines on countervailing duty
Definition of Subsidies
In the Subsidies Agreement, a subsidy shall be deemed to exist if: there is a financial
contribution (i.e., a fiscal burden) by a government or any public body within the territory of a
Member or there is any form of income or price support in the sense of Article XVI of GATT
1994, and a benefit is thereby conferred. Actions constituting financial contributions
include:
(a) Direct transfers of funds (for example, grants, loans and equity infusions) and potential direct
transfers of funds or liabilities (for example, government guarantees).
(b) Foregoing or non-collection of government revenue that is otherwise due (for example, fiscal
incentives such as tax credits).
(c) Government provision of goods or services (other than infrastructure) or government
purchases of goods.
(d) Government making payments to a funding mechanism or entrusting or directing a private
body to carry out one or more of the type of functions above which would normally be vested in
the government and which in practice does not differ from practices normally followed by
governments.
Categories of Subsidies
Red- light Subsidies
Red-light subsidies mean prohibited subsidies. With certain exceptions, such as preferential
treatment for developing countries and transitional economies, all red-light subsidies must be
eliminated .If a red-light subsidy is granted, it may be subject to the remedies for red-light
subsidies .Furthermore, the remedies for red-light subsidies may be invoked in parallel with
countervailing measures; however, with regard to the effects of a particular subsidy in the
domestic market of the importing member, only one form of relief (either a countervailing duty
or the defined remedies) shall be available. There are two categories of red subsidies: export
subsidies and subsidies contingent upon the use of domestic over imported goods. The Subsidies
Agreement illustrates the following measures as export subsidies.
1. Measures which provide direct subsidies contingent upon export performance.
2. Measures which involve a bonus on exports, such as currency retention schemes.
3. Measures which treat internal transport and freight charges on export shipments on terms more
favourable than for domestic shipments.
4. Measures which provide products or services for use in the production of exported goods on
terms or conditions more favourable than for domestic consumption.
5.Measures which allow the full or partial exemption, remission or deferral specifically related to
exports, of direct taxes or social welfare charges.
6. Measures which allow the exemption or remission, in respect of exported products, of indirect
taxes in excess of those levied in respect of like products when sold for domestic consumption.
7. Measures which provided export credit guarantees or insurance programmes at premium rates
which are inadequate to cover the long-term operating costs and losses of the programmes.
8.With some exceptions, government export credits granted at rates below those which the
government actually has to pay for the funds so employed, or the payment by them of all or part
of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they
are used to secure a material advantage in the field of export credit terms.
Institutional Framework
The Subsidies Agreement calls for the establishment of a Committee on Subsidies and
Countervailing Measures ("the Committee" hereinafter) and a Permanent Group of Experts. The
Permanent Group of Experts is an institution that reviews the nature of subsidies in line with the
disciplines in the Agreement. If requested by a panel, it may render a verdict on whether a
subsidy is prohibited. It may also issue advisory opinions on the existence and nature of a
subsidy if requested by a panel or by any member.
subsidies. For countervailing measures, the Agreement also contains disciplines on reporting
measures, furnishing semi-annual reports, and notifications of domestic procedures.
Agreement on Agriculture
In the area of agriculture, treatment of subsidies on agricultural products will follow the
disciplines laid out in the Agreement on Agriculture, even though such subsidies may appear to
come under the provisions of the Subsidies Agreement
Domestic supports
(a) Domestic supports are divided into yellow (subject to elimination) and green (not subject
to elimination) categories.
(b) The following policies are deemed green as long as certain conditions are met:
- Research, promotion, education, inspection, and other general services.
- Infrastructure services for agricultural areas and rural communities; creation of markets for
agricultural products.
- Public stockholding for food security purposes.
- Domestic food aid.
- Decoupled income support.(i.e. that directly linked to production)
- Income insurance and safety-net programmes.
- Relief from natural disasters.
- Structural adjustment assistance provided through producer retirement, resource retirement, and
investment aid programmes.
- Payments under environmental programmes.
- Payments under regional assistance programmes.
Blue categories include direct payments under production restriction plans as long as the
following conditions are met.
- Payments are based on fixed area and yield (subsidy payments for idle fields under the EU
Common Agriculture Program).
- Payments are made on 85% or less of base level of production (the deficient payment system
under the US Agriculture Act of 1990(abolished by the US Agriculture Act of 1996.
Export Competition
(a) Over a period of 6 years, direct export subsidies are to be reduced by 36 percent and the
volume of subsidized exports by 21 percent.
(b) Measurements are based on the period 1986-1990.
(c) Each Member undertakes not to provide export subsidies other than in conformity with this
Agreement and with the commitments as specified in that Member's Schedule. The uniform
dispute settlement procedures of the WTO apply to consultations and dispute settlements under
this Agreement.
Recent Trends
The frequency of subsidy complaints under the GATT was the ambiguity of the GATT's rules on
subsidies. Countries interpreted differently the procedural rules for invoking countervailing
duties. Underlying this disagreement was a basic conflict between the various contracting parties
as to how to view government assistance designed to protect and nurture domestic industry.
Exporting countries frequently initiated GATT disputes involving subsidies. The exporting
countries generally claimed that countervailing duties had been imposed unfairly on the basis of
arbitrary determinations of subsidies, injury or causation. Other disputes concerned domestic
subsidies which nullify the benefits gained through tariff reductions by effectively excluding
exports from the domestic market. While there has been a decline in the number of cases brought
before panels since the WTO Agreement went into force, it is notable that prohibited subsidy
disputes that have reached a panel have recently increased
Economic Implications
Government subsidization may have far-reaching implications. When a government subsidizes
projects, such as research projects in advanced technology, the benefits may extend well beyond
the industry directly concerned. This is true because the results of projects spill over into a wide
range of fields. Government assistance for research activities can contribute not only to domestic
economic development, but to the development of the world economy as a whole. Subsidies may
also be used to encourage less competitive industries to reduce excess capacity or to withdraw
from unprofitable fields. They may, therefore, smooth the way for structural adjustment and
shifts in employment. Such subsidies therefore promote the appropriate allocation of resources
and encourage imports of competitive goods.
On the other hand, subsidies can also distort trade when they are used to protect a domestic
industry regardless of its competitiveness. Governments have often used subsidies to needlessly
prolong the natural adjustment process in certain industries. Over the short term, such subsidies
may place a domestic product in a better competitive position. They may maintain or increase the
profitability of the products and keep employment in that industry stable. Over the longer term,
however, the disadvantages of the subsidies become clear. They impede the productivity gains
that come from intensely competitive environments and undermine companies efforts to
rationalize. Thus from a medium- and long-term perspective, subsidies may obstruct an
industry's development or impede the rational allocation of domestic resources. For example,
subsidies tend to impede the efforts of companies struggling to improve productivity and
rationalize operations in an extremely competitive environment. Over time, therefore, subsidies
actually obstruct the development of domestic industry and the appropriate allocation of
domestic resources. On a global economic level, distortions in the allocation of resources and the
international division of labour become serious problems as well. And even when subsidies are
used to make up for short-term market failures, there is still potential for their purposes and
terms to be subverted.
Since the mid-1960s, the governments of some developing countries have also been using the
services of preshipment inspection (PSI) companies to inspect goods to be imported and to verify
their prices, prior to shipment and in the exporting countries. Their basic purpose in doing so is
to bring under control the under- or over-invoicing of imported goods and other unfair or
improper practices. Today, over 30 countries in Africa, Asia and Latin America use these
services:
1. To carry out physical inspection of the goods to be imported in order to ensure that they
conform to the terms of the contract;
2. To verify their prices; and
3. To ensure that they are classified by the exporter under the correct tariff classification of
the importing country.
The physical inspection of goods is an integral part of the procedures adopted by PSI companies
to ensure that the prices indicated by the exporter in the invoice reflect the true value of the
goods and that there is no under- or over-invoicing. Such inspections assure importers that the
goods they have ordered meet contractual specifications and quality standards, thereby reducing
possibilities for dispute after the goods arrive at destination. These inspections also prevent the
import of products that are considered harmful to health and therefore cannot be sold (e.g.
banned chemicals and pharmaceutical products, substandard food products) in the exporting
countries.
In most PSI-using countries, physical inspection and price verification of almost all goods prior
to exportation is obligatory for imports to be permitted. In one country, the system is voluntary
and importers using PSI services are entitled to have their goods cleared through Customs
without further scrutiny of the value recommended by the companies concerned
While PSI services are mainly used for the preshipment inspection of imports, a few
governments also utilize them to control the flight of capital through the undervaluation of
exports.
principles and rules which countries using PSI services and exporting countries have to follow in
order to ensure that their activities do not cause barriers to trade.
Nigeria Customs/Forex
Paraguay Customs
Peru Customs
Philippines Customs
Rwanda Customs/Forex
Senegal Customs/Forex
Sierra Leone Customs/Forex
Togo Customs
Uganda Customs
United Republic of Tanzania Customs/Forex
Uzbekistan Forex
Zanzibar Forex
Differing rules on the verification of prices in the Agreement on PSI and on the valuation of
goods in the Agreement on Customs Valuation
recommended by a PSI company. An examination has to be carried out in each case. If on the
basis of the the verification of transportation charges shall relate only to the agreed price of
the mode of transport in the country of exportation as indicated in the sales contract; the
following shall not be used for price verification purposes:
(i) the selling price in the country of importation of goods produced in such country;
(ii) the price of goods for export from a country other than the country of exportation;
(iii) the cost of production;
(iv) arbitrary or fictitious prices or values.
_
examination and a comparison of the price declared by the importer and the one recommended
by the PSI company, it finds that the latter reflects the correct price and the importer does not
contest it, the value can be determined on the basis of that price. In all such cases, it will be
necessary to ensure that in arriving at the recommended price, the PSI company has followed the
rules on adjustments for various elements (e.g. buying commissions and sole agency
commissions) laid down by the Agreement on Customs Valuation. There will always be a few
importers who will contest the PSI-recommended prices that are acceptable to Customs, and
maintain that the prices they have declared reflect the true value of goods. Such importers have a
right to expect Customs to give them the opportunity to produce documentary and other evidence
to justify their declared price. If, after examining the evidence, Customs still maintains that the
price declared by the importer involves either under- or over-valuation, it cannot under the
provisions of the Agreement on Customs Valuation determine value on the basis of the PSIrecommended price.8 It will have to determine it by using the methods laid down in the
Agreement for the determination of value when the transaction value declared by the importer is
not acceptable. These methods, inter alia, provide for the determination of the value of imported
goods on the basis of the value determined in earlier transactions involving identical or similar
goods. When the value cannot be determined under these methods, it has to be determined on the
basis of price of the imported goods in the domestic market of the importing country (deductive
value) or on the basis of cost of production (computed value)
First, the Agreement calls on PSI entities to designate officials to whom exporters can appeal
against the decisions of PSI entities.
Second, it establishes an independent review entity (IE) to which both exporters and PSI entities
can submit grievances. The IE is constituted jointly by WTO, the International Chamber of
Commerce (ICC, which represents the interests of exporters), and the International Federation of
Inspection Agencies (IFIA, which represents the interests of PSI companies).WTOis responsible
for the administration of the IE.
Third, the Agreement recognizes the right of the governments of countries using PSI services
and of the exporting countries to invoke WTO dispute settlement procedures, if they consider
that the rules of the Agreement are not being adhered to. A complaint can be submitted to the IE
by an exporting enterprise or by a PSI company. Once a complaint is filed, the IE is expected to
appoint, with the agreement of the parties to the complaint, either a single trade expert or a threemember panel. Where a panel is constituted, one member is nominated by ICC, the second by
IFIA and the third, who should be a trade expert and who will act as chairman, by the IE itself.
The panel is required to make a decision, by a majority vote, within eight working days from the
filing of the dispute. Both parties to the dispute are required to make financial deposits to cover
expenditures incurred by the panel. These procedures have, however, not been so far invoked
either by exporters or by PSI companies
Module VII
Measures to Regulate Trade
Environment
Quantitative restrictions on import and export goods refers to a government of a period of time or
the amount of import and export volume of goods in advance or in random places, either
generally or individually, be limited, for example, limit the import of 1000 cars this year only.
Quantitative restriction measures and tariffs on the import and export of goods may hinder
effect, but both the nature and role of the extent of not the same. If the tariffs compared to the
threshold, then the number of restrictive measures can be compared to the wall: tariff can
increase the cost of import and export commodities, thereby increasing the resistance of the
import and export of goods in order to achieve the purpose of reducing the number of commodity
imports and exports; and quotas, licensing Permit number of restrictive measures, you can
completely block the goods in the customs territory and outside. From the school perspective, the
tariff is only distort the market mechanism, while the number of restrictive measures, you can
simply cut off the domestic market and international market. For example, in car import tariff
rate defined circumstances, the domestic market, increasing demand for cars will not
immediately cause an increase in domestic car production or prices change, but will cause an
increase in the number of cars imported; in the measures taken to limit the number of Under the
growth in domestic demand does not allow foreign cars to enter their markets, but only caused
by the growth in domestic car prices.
In practice, the most commonly used measure is the number of restrictions on import quotas
and import permit system.
The so-called import quota system, is a government in a certain period of time, the import of
goods or the amount of the provisions of a number of restrictions on the goods exceed the limit
are not allowed to import, or to impose very high tariffs. Import quotas, quotas can be divided
into unilateral and bilateral quotas. Unilateral quota is the importing countries without prior
consultation with relevant countries to unilaterally determine the limit; agreement quota refers to
the importing and exporting countries or exporters of the exporting country to determine through
consultation and sharing limit. Unilateral quotas of other countries often lead to dissatisfaction
and lead to retaliation; In contrast, the agreement means the quota is more moderate.
wide free trade plays a more serious obstacle than tariffs role, so the original GATT and now the
World Trade Organization have adopted a general prohibition of their position. GATT Article XI
of the title that is 'the general abolition of quantitative restrictions'. Paragraph 1 reads: 'Any State
Party have imposed other taxes or other charges shall not establish or maintain the quota system,
import and export licenses or other measures to restrict or prohibit the territory of other States
Parties to the product input or output to the territory of other States Parties or sale of export
products.
'
Although the issue of the 1947 GATT i.e. 'no walls' notice, but the Parties 'wall' is often
according to assemble worth while. This is because: First, the original 'grandfather clause' can
ignore the GATT Parties 'should not walls' notice. Many of the provisions of the General
Agreement to prohibit the form of quotas and licensing, and other products from other parties to
impose restrictions, but because of these provisions are provisions of the second part of the
General Agreement, and according to the protocol of accession to the General Agreement on the
'grandfather provision ', the Parties to the second part of the General Agreement undertake only
with the internal legislation in the fullest extent not inconsistent with the obligation to be applied,
so the General Agreement on elimination of quantitative restrictions on the practical application
of the provisions of the process have been very major constraint.
Second, the GATT's general prohibition on quantitative restrictions have been exceptions.
GATT Article XI provides for the general elimination of quantitative restrictions at the same
time, that provides for three important exceptions: In order to prevent or alleviate food or other
necessities of a serious lack of implementation of the temporary export bans or restrictions on
exports; for the implementation of International Trade Classification and grading standards
necessary to prohibit or restrict; right to any form of agricultural and fishing products are
necessary to the implementation of import restrictions.
In addition to these three exceptions, the General Agreement also provides for a number of
other exceptions, for example, to protect its balance of payments and the implementation of
quantitative restrictions exception. Article XII of the General Agreement provides that any of the
Parties in order to safeguard their external position and the international balance of payments,
may limit the quantity of goods to permit the import or value, but must comply with the
following conditions: First, Parties in accordance with the provisions of this section to establish,
maintain or strengthen The import restrictions shall not exceed in order to prevent a serious
decline in monetary reserves, or to stop an imminent threat to a serious decline in monetary
reserves the extent necessary; Second, the Parties in accordance with the provisions of the
preceding paragraph the implementation of quantitative restrictions, serious decline in monetary
reserves, or of very low With the improvements, should gradually be relaxed, and even canceled;
Third, all Parties in accordance with provisions of this section the implementation of quantitative
restrictions, you must also undertake a number of other obligations, including the following: for
any trade or the interests of other contracting parties to avoid unnecessary damage; the
implementation of the restriction does not unreasonably obstruct any complete ban on the
importation of which would undermine the kind of normal trade channels, the minimum trade
volume of input and so on. In addition, the General Agreement also provides for the 'home
exception' (18th of section III), 'exception to the implementation of safeguard measures' (19th)
and 'to protect domestic health and national security exceptions' (Article XX, the second 11),
etc..
It should be noted, even though the GATT / WTO members to restrict the number of
measures have never been completely abolished, but the number of restrictive measures, after all,
has become a focus of surveillance and, through continuous multilateral negotiations and
bilateral consultations, the number of restrictions on international trade continued to reduce the
obstacles.
Secondly, in the WTO under the pressure of other members of the party, a Member may
gradually give up the number of restrictive measures. For example, the Indian government
announced in March this year, with effect from April 1 last 715 kinds of abolition of quantitative
restrictions on imports of goods, the Indian market will be from food to cars and opening all
foreign consumer goods. But the Indian government has also made it clear that the abolition of
quantitative import restrictions does not mean that the Indian market will be door open to foreign
goods, the Government will take appropriate measures to prevent foreign goods flooded the
Indian market. These measures include: the establishment of a Secretary of the participation of
relevant government ministries, the permanent group to oversee the 300 species of 'sensitive
products' import conditions, at any time warning; wheat, rice, corn and other grains, coconut oil,
agricultural products and petrol, diesel , urea and other important goods imported only through
government-designated state trading agencies.
Third, the GATT under the 'exceptional' in the WTO is still preserved within the system,
launched under the name in a variety of products, quantitative restrictions on imports will
continue to emerge. In the first half, the Japanese government on the name of 'security measures'
under the banner of China's exports to Japan, green onions, fresh mushrooms and other
agricultural products of quantitative restrictions. Based on Japan's new import regulations, within
a specified share of imports of these products, Japan will be the same as for its collection and the
previous tariff rate, but the import of agricultural products more than the prescribed share, will
be in excess of the amount of levy is high tariffs. From the April 23, within 200 days from the
date, if imports from China, the number of these three kinds of products does not exceed the past
200 days respectively, the average import volume, that is, 5383 tons green onions, fresh
mushrooms and straw mats and 8003 tons and 7949 tons, according to The current 3-6% tax,
more than the highest part of the lesson with 266% of the tariff.
It can be said that in the foreseeable future period of time, the number of restrictions on
such walls can not be completely removed or cut-assemble. My Government will also carry out
the gradual elimination of quantitative restrictions measures, through the development and
implementation of the 'safeguard measures Ordinance,' and so on, remain in the specific
circumstances the use of quantitative restrictions on their rights.
Of course, no matter what the number under the name of the implementation of restrictive
measures, should comply with WTO rules. For example, as defined in Article XIII of GATT
1994 of quantitative restrictions shall not be discriminatory implementation of the principle that:
'Unless the same product to all third-country inputs or the same product to all third countries, the
output of the same be prohibited or restrictions, to any State Party shall not restrict or prohibit the
territory of another State Party the input products, nor shall prohibit or restrict the output
products to the territory of another State Party. 'Article XIII of the General Agreement also
provides for the implementation of quantitative restrictions on the quota of the State party to
provide materials and consultation obligations. In accordance with these provisions, the
implementation of import restrictions for the import license issued by the case, if a product's
trade with any interested parties request the restriction of the States parties should provide
information on the restrictions on the management of import permits issued during the recent
permit and in the distribution among the various suppliers of all relevant material, but the name
of the importer or supplier should not assume the obligation to provide information; fixed quota
restrictions on the importation of cases, the restriction of the States Parties shall publish in the
future a specific period of time will be allowed to import the total quantity or value of the
product and the possible changes; when the quota system in all allocated among supplying
countries the situation, the State Party shall impose restrictions on the quantity or value recently
assigned according to the Suppliers quota share, and supply products promptly notify all other
interested parties and should be more widely known.
The WTO 'Agreement on import licensing procedures' also on the number of restrictive
measures taken by a binding effect. The legislative purpose of the Agreement is to regulate the
import permits States parties to the management of behavior, the State party to the licensing
procedures to avoid improper usage so as to impede the development of international trade, but
also provide a quickly and effectively and fairly address the licensing procedures for all disputes
arising
Definition of an SPS Measure: In the context of the SPS Agreement, SPS measures refer to any
measure, procedure, requirement, or regulation, taken by governments to protect human, animal,
or plant life or health from the risks arising from the spread of pests, diseases, disease-causing
organisms, or from additives, toxins, or contaminants found in food, beverages, or feedstuffs.
History of the Agreement: Virtually all countries, including the United States, supported the
development of new and strengthened SPS rules in the Uruguay Round. Before the Uruguay
Round, trade rules for SPS measures were so vague that countries could protect domestic
producers from international competition by establishing import restrictions justified only by the
country's assertion that the measure existed for "health reasons." These restrictions were of
particular significance for U.S. agriculture, as countries could cite unfounded risks of a pest or
disease as reason to keep out U.S. exports. With the Uruguay Rounds removal of other
agricultural market access barriers, rules for disciplining the use of SPS measures became even
more important.
The SPS Agreement contains 14 articles and three annexes covering basic rights and obligations;
harmonization; equivalency; risk assessments; pest- or disease-free areas; transparency; control,
inspection, and approval procedures; technical assistance; special and differential treatment;
consultations and dispute settlement; administration; and implementation.
Since the inception of the Agreement in 1995, the WTO Committee for SPS Measures (formed
in accordance with Article 12 of the Uruguay Round Agreement on SPS Measures) has met at
least three times each year and addressed more than 204 trade issues from 1995 to 2004.
Core Disciplines: To eliminate disguised trade restrictions, the Agreement allows countries to
set their own standards. SPS measures must be based on science. They should be applied only to
the extent necessary to protect human, animal or plant life, or health. The regulations should not
arbitrarily or unjustifiably discriminate between countries where identical or similar conditions
prevail. The nature and magnitude of the perceived risk must be clearly established so that the
SPS measure is commensurate with the risk. The Agreement also contains procedures for
managing risk to limit unnecessary restrictions on international trade. Countries are encouraged
to establish a consistent approach to the concept of appropriate levels of protection and to allow
imports when the exporting country objectively demonstrates that it has controlled possible risks.
Finally, countries must notify their trading partners when they intend to establish SPS measures
and seek their comments on proposed laws. Important principles incorporated into the SPS text
include the following.
Basic SPS Rights: Article 2 of the SPS Agreement recognizes the sovereign right of each
country to set its own food safety, and animal and plant health standards. While encouraging
countries to use international standards, the SPS text clearly recognizes that, under certain
circumstances, countries have the right to maintain standards that are stricter than international
standards to protect human, animal, and plant health, as long as the more stringent standard is
justified by science. In addition, while all SPS measures must be based on a risk assessment, a
country has the right to decide the appropriate level of risk, subject to the condition that any
arbitrary or unjustified distinction does not result in discrimination or a disguised restriction on
trade.
Harmonization: Article 3 of the SPS Agreement recognizes the Codex Alimentarius
Commission (CODEX), the International Office of Epizootics (OIE), and the International Plant
Protection Convention (IPPC) for their expertise in setting standards. The Agreement states that
harmonization between nations will be promoted by following the standards set by these three
international scientific organizations.
Equivalency: Article 4 recognizes that different methods may be used to achieve the same level
of health protection. If an exporting countrys measures achieve the importing members
appropriate level of sanitary and phytosanitary protection, then those measures may be
acceptable, even if they differ from those used by the importing country.
Risk Assessment: Article 5 of the Agreement covers assessment of risk and determination of the
appropriate level of SPS protection. A risk assessment is the technical assessment of the nature
and magnitude of risk. It involves an effort to quantify the specific level of risk posed by a
substance or situation. Countries are obligated to ensure that SPS measures are based on risk
assessment, taking into account techniques developed by the relevant international organizations.
on beef hormones, Canada vs. Australia on salmon, the United States vs. Japan on fruit varietals,
and the United States vs. Japan Measures Affecting the Importation of Apples.
The United States vs. the EU on Beef Hormones
In 1985, the EU banned the sale of U.S. beef from cattle treated with certain growth hormones.
The United States contested the prohibition first under the General Agreement on Tariffs and
Trade and then under the new WTO dispute resolution mechanism. In 1997, a dispute settlement
panel ruled that the EU ban violated the SPS Agreement. The EU appealed this finding.
In 1998, the WTO Appellate Body upheld most of the panels findings against the EU, making
three points:
1. All the available scientific evidence, including that presented by the EU, as well as by
experts
consulted
by
the
panel,
indicated
that
the
hormones
were
safe.
2. The Appellate Body upheld the determination that the EU had failed to conduct a risk
analysis to meet its obligations under Article 5 of the SPS Agreement.
3. The concept of precaution, although represented in Article 5.7 of the SPS Agreement,
does not override any stated obligations, especially not those in Articles 5.1 and 5.2.
Canada vs. Australia on Salmon
In 1975, Australia imposed an import restriction requiring that fresh, chilled, and frozen salmon
could enter Australia only after first having been heat treated. In 1995, arguing that the import
restrictions violated the SPS Agreement, Canada requested Article 4.4 consultations.
In March 1997, Canada called for creation of a dispute settlement panel, and the United States
reserved the right to participate as a third party. The panel decided that Australia, by conducting
a risk assessment limited to certain types of salmon, had maintained a measure not based on a
correct risk assessment and had not met its obligations under Articles 5.1 and 2.2 of the SPS
Agreement.
The Appellate Body upheld most of the panel's findings against Australia, making two points:
1. Australia limited its import ban to salmon, while tolerating imports of herring used as bait
and live ornamental fish. Both posed an equal or greater risk of spreading disease to the
very
domestic
stocks
that
the
salmon
ban
ostensibly
protected.
2. Australia had no controls on the internal movement of salmon products when compared
with the import prohibition on ocean-caught Pacific salmon.
United States vs. Japan on Fruit Varietals
In October 1997, the United States brought a formal WTO complaint against Japan for
prohibiting imports of fresh apricots, cherries, plums, pears, quince, peaches, apples, and walnuts
from the continental United States because the fruits were potential hosts for the coddling moth.
Though common in the United States, this moth is a quarantined pest in Japan. The Japanese rule
contained a general exception permitting entry of the products on a variety-by-variety basis, a
costly and slow process. The United States urged the dispute settlement panel to find that these
measures were not based on science or international standards.
In October 1998, the panel agreed with the U.S. interpretation, making the following points:
1.
Japan had violated Article 2.2 by maintaining the same quarantine provisions for
all these fruit varieties and not identifying the risks specifically enough.
2.
Japan had violated Article 5.6 by using more trade-restrictive varietal testing
requirements than were necessary. The panel noted that Japan could have protected itself
from the coddling moth by setting a certain fumigant concentration level when treating
affected
3.
produce.
b.
If the United States only exports mature, symptomless apples, the alternative
measure proposed by the United States meets the requirement of Article 5.6 of the SPS
Agreement.
Technical barriers to trade (TBT) refer to technical regulations and voluntary standards that set
out specific characteristics of a product, such as its size, shape, design, functions and
performance, or the way a product is labelled or packaged before it enters the marketplace.
Included in this set of measures are also the technical procedures which confirm that products
fulfil the requirements laid down in regulations and standards.
All these measures usually serve legitimate goals of public policy e.g. protecting human health
and safety, or the environment. At the same time, product standards and other TBT have an
important influence on market access and the export performance of businesses. They can be
costly and burdensome by design or effect and restrict international trade
The phrase technical barriers to trade refers to the use of the domestic
regulatory process as a means of protecting domestic producers.
The TBT Agreement seeks to assure that:
(1) mandatory product regulations,
(2) voluntary product standards, and
(3) conformity assessment procedures (procedures designed to test a products conformity with
mandatory regulations or voluntary standards) do not become unnecessary obstacles to
international trade and are not employed to obstruct trade.
Objectives
Technical regulations, standards and conformity assessment procedures are all potential nontariff measures that are sometimes used for protectionist purposes. As such, they can be potential
barriers to international trade. The TBT Agreement establishes rules and disciplines designed to
prevent mandatory technical regulations, voluntary standards, and conformity assessment
procedures from becoming unnecessary barriers to international trade. However the TBT
Agreement seeks to leave Members with sufficient domestic policy autonomy to pursue
legitimate regulatory objectives
Rules of origin are used to determine the country of origin of a product for purposes of
international trade. There are two common types of rules of origin depending upon application,
the preferential and non-preferential rules of origin (19 CFR 102). The exact rules vary from
country to country
Non-preferential
Non-preferential rules of origin are used to determine the country of origin for certain purposes.
These purposes may be for quotas, anti-dumping, anti-circumvention, statistics or origin labeling.
The basis for the non-preferential rules originates from the Kyoto convention[1] which states that
if a product is wholly obtained or produced completely within one country the product shall be
deemed having origin in that country. For a product which has been produced in more than one
country the product shall be determined to have origin in the country where the last substantial
transformation took place.
To determine exactly what was the last substantial transformation, three general rules are
applied:
1. Change of tariff classification (on any level, though 4-digit level is the most common)
2. Value added-rule (ad-valorem)
3. Special processing rule, the minimum transformation is described. For instance, in the
EU non-preferential rules of origin for T-shirts (HS6109), the origin is supposed to be in
the country where the complete making-up was done.
According to the non-preferential rules a product always has exactly one country of origin.
However, the non-preferential rules may differ from country to country; the same product may
have different origins depending on which country's scheme is applied. Usually it is the rules of
the country into which a product is being imported that apply
Preferential
Preferential RoO are part of a free trade area or preferential trade arrangement which includes
tariff concessions. These trade arrangements might be unilateral, bilateral or regional (also
sometimes called multilateral) trade arrangements. The rules of origin determine what products
can benefit from the tariff concession or preference, in order to avoid transshipment
Where are rules of origin used?
Rules of origin are used:
to implement measures and instruments of commercial policy such as anti-dumping duties
and safeguard measures;
to determine whether imported products shall receive most-favoured-nation (MFN) treatment
or preferential treatment;
for the purpose of trade statistics;
for the application of labelling and marking requirements; and
for government procurement.
GATT has no specific rules governing the determination of the country of origin of goods in
international commerce. Each contracting party was free to determine its own origin rules, and
could even maintain several different rules of origin depending on the purpose of the particular
regulation. The draftsmen of the General Agreement stated that the rules of origin should be left:
...within the province of each importing country to determine, in accordance with the provisions
of its law, for the purpose of applying the most-favoured-nation provisions (and for other GATT
purposes),
whether
goods
do
in
fact
originate
in
particular
country.
Article VIII:1(c) of the General Agreement, dealing with fees and formalities connected with
importation and exportation, states that the contracting parties also recognize the need for
minimizing the incidence and complexity of import and export formalities and for decreasing
and simplifying import and export documentation requirements and the Interpretative Note 2 to
this Article states that it would be consistent if, on the importation of products from the territory
of a contracting party into the territory of another contracting party, the production of certificates
of origin should only be required to the extent that is strictly indispensable.
In 1981, the GATT Secretariat prepared a note on rules of origin and, in November 1982,
Ministers agreed to study the rules of origin used by GATT Contracting Parties. Not much more
work was done on rules of origin until well into the Uruguay Round negotiations. In the
late 1980s developments in three important areas served to focus more attention on the problems
posed by rules of origin:
Arrangement
and
the
voluntary
steel
export
restraints;
and
The UR Agreement
Introduction
The increased number and importance of rules of origin led the Uruguay Round negotiators to
tackle the issue during the negotiations.
General principles
Until the completion of the three-year harmonization work programme, Members are expected to
ensure that their rules or origin are transparent; that they are administered in a consistent,
uniform, impartial and reasonable manner; and that they are based on a positive standard.
all non-preferential rules of origin
Article 1 of the Agreement defines rules of origin as those laws, regulations and administrative
determinations of general application applied to determine the country of origin of goods except
those related to the granting of tariff preferences. Thus, the Agreement covers only rules of
origin used in non-preferential commercial policy instruments, such as MFN treatment, antidumping and countervailing duties, safeguard measures, origin marking requirements and any
discriminatory quantitative restrictions or tariff quotas, as well as those used for trade statistics
and government procurement. It is, however, provided that the determinations made for purposes
of defining domestic industry or like products of domestic industry shall not be affected by the
Agreement.
rules of origin. It is to meet at least once a year. Membership is open to all WTO Members; other
WCO members and the WTO Secretariat may attend as observers (Article 4:2 and Annex I).
to
complete
the
Programme
by a
new
target
date,
November 1999.
The work is being conducted both in the WTO Committee on Rules of Origin (CRO) in Geneva
and in the WCO Technical Committee (TCRO) in Brussels. The TCRO is to work, on a productsector basis of the HS nomenclature, on the following matters:
Supplementary criteria
To elaborate supplementary criteria, on the basis of the criterion of substantial transformation, in
a manner supplementary or exclusive of other requirements, such as ad valorem percentages
(with the indication of its method of calculation) or processing operations (with the precise
specification of the operation).
The CRO considers the input of the TCRO with the aim of endorsing the TCRO's interpretations
and opinions, and, if necessary, refining or elaborating on the work of the TCRO and/or
developing new approaches. Upon completion of all the work in the TCRO, the CRO is to
consider the results in terms of their overall coherence
Overall architectural design
The CRO and the TCRO have established an overall architectural design within which the
harmonization
work
programme
is
to
be
finalized.
This
encompasses
general rules, laid down in eight Articles provisionally entitled: Scope of Application; the
Harmonized System; Definitions; Determination of Origin; Residual Rules of Origin; Minimal
Operations or Processes; Special Provisions; and De Minimis;
back to top
During the transition period (i.e. until the entry into force of the new harmonized rules) Members
are required to ensure that:
(a) rules of origin, including the specifications related to the substantial transformation test,
are clearly defined;
(b) rules of origin are not used as a trade policy instrument;
(c) rules of origin do not themselves create restrictive, distorting or disruptive effects on
international trade and do not require the fulfilment of conditions not related to manufacturing or
processing
of
the
product
in
question;
(d) rules of origin applied to trade are not more stringent than those applied to determine
whether a good is domestic, and do not discriminate between Members (the GATT MFN
principle). However, with respect to rules of origin applied for government procurement,
Members are not be obliged to assume additional obligations other than those already assumed
under the GATT 1994 (the national treatment exception for government procurement contained
in GATT
(e) rules of origin are administered in a consistent, uniform, impartial and reasonable
manner;
(f) rules of origin are based on a positive standard. Negative standards are permissible either
as part of a clarification of a positive standard or in individual cases where a positive
determination or origin is not necessary;
(g) rules of origin are published promptly;
(h) upon request, assessments of origin are issued as soon as possible but no later than
150 days after such request, they are to be made publicly available; confidential information is
not to be disclosed except if required in the context of judicial proceedings. Assessments of
origin remain valid for three years provided the facts and conditions remain comparable, unless a
decision contrary to such assessment is made in a review referred to in (j). This advance
information
on
origin
is
considered
as
great
innovation
of
the
Agreement;
(j) any administrative action in relation to the determination of origin is reviewable promptly
by judicial, arbitral or administrative tribunals or procedures independent of the authority issuing
the determination; such findings
(k) confidential information is not disclosed without the specific permission of the person
providing such information, except to the extent that this may be required in the context of
judicial proceedings.
At its meeting of 4 April 1995, the Committee agreed that any notifications made in a language
other than a WTO working language should be accompanied by a summary in a WTO working
language (G/RO/1).
Preferential rules of origin
Paragraph 4 of Annex II of the Agreement on Rules of Origin provides that Members shall
provide to the Secretariat promptly their preferential rules of origin, including a listing of the
preferential arrangements to which they apply, judicial decisions, and administrative rulings of
general application relating to their preferential rules of origin as soon as possible to the
Secretariat. The Secretariat circulates lists of the information received and available to Members.
At its meeting of 4 April 1995, the Committee agreed that any notification made in a language
other than a WTO working language, should be accompanied by a summary in a WTO working
language
After over 7 years of negotiations the Uruguay Round multilateral trade negotiations were
concluded
on
December
15,1993
and
were
formally ratified
in
April
1994
at
Marrakesh,Morrocco. The WTO Agreement on Agriculture was one of the many agreements
which were negotiated during the Uruguay Round.
The implementation of the Agreement on Agriculture started with effect from January 1, 1995.
As per the provisions of the Agreement, the developed countries would complete their reduction
commitments within 6 years, i.e., by the year 2000, whereas the commitments of the developing
countries would be completed within 10 years, i.e., by the year 2004. The least developed
countries are not required to make any reductions.
The products, which are included within the purview of this agreement are what are normally
considered as part of agriculture except that it excludes fishery and forestry products as well as
rubber, jute, sisal, abaca and coir. The exact product coverage can be accessed in the legal text of
the agreement from the web site http://www.wto.org
SAILENT FEATURES
The WTO Agreement on Agriculture contains provisions in 3 broad areas of agriculture and
trade policy: market access, domestic support and export subsidies.
Market Access
This includes tariffication, tariff reduction and access opportunities. Tariffication means that all
non-tariff barriers such as quotas, variable levies, minimum import prices, discretionary
licensing, state trading measures, voluntary restraint agreements etc. need to be abolished and
converted into an equivalent tariff. Ordinary tariffs including those resulting from their
tariffication are to be reduced by an average of 36% with minimum rate of reduction of 15% for
each tariff item over a 6 year period. Developing countries are required to reduce tariffs by 24%
in 10 years. Developing countries as were maintaining Quantitative Restrictions due to balance
of payment problems, were allowed to offer ceiling bindings instead of tariffication.
Special safeguard provision allows the imposition of additional duties when there are either
import surges above a particular level or particularly low import prices as compared to 1986-88
levels.
It has also been stipulated that minimum access equal to 3% of domestic consumption in 198688 will have to be established for the year 1995 rising to 5% at end of the implementation period.
Domestic support
For domestic support policies, subject to reduction commitments, the total support given in
1986-88,measured by the total Aggregate Measurement of Support (AMS) should be reduced by
20% in developed countries (13.3% in developing countries). Reduction commitments refer to
total levels of support and not to individual commodities. Policies which amount to domestic
support both under the product specific and non-product specific categories at less than 5% of
the value of production for developed countries and less than 10% for developing countries are
also excluded from any reduction commitments. Polices which have no or at most minimal trade
distorting effects on production are excluded from any reduction commitments (Green BoxAnnex 2 of the Agreement on Agriculture - http://www.wto.org). The list of exempted green box
policies includes such policies which provide services or benefits to agriculture or the rural
community, public stock holding for food security purposes, domestic food aid and certain decoupled payments to producers including direct payments to production limiting programmes,
provided certain conditions are met.
Special and Differential Treatment provisions are also available for developing country
members. These include purchases for and sales from food security stocks at administered prices
provided that the subsidy to producers is included in calculation of AMS. Developing countries
are permitted untargeted subsidised food distribution to meet requirements of the urban and rural
poor. Also excluded for developing countries are investment subsidies that are generally
available to agriculture and agricultural input subsidies generally available to low income and
resource poor farmers in these countries.
Export Subsidies
The Agreement contains provisions regarding member's commitment to reduce Export Subsidies.
Developed countries are required to reduce their export subsidy expenditure by 36% and volume
by 21% in 6 years, in equal instalment (from 1986-1990 levels). For developing countries the
percentage cuts are 24% and 14% respectively in equal annual installment over 10 years. The
Agreement also specifies that for products not subject to export subsidy reduction commitments,
no such subsidies can be granted in the future.
INDIAS COMMITMENTS
Market Access
As India was maintaining Quarantine Restrictions due to balance of payments reasons (which is
a GATT consistent measure), it did not have to undertake any commitments in regard to market
access. The only commitment India has undertaken is to bind its primary agricultural products at
100%; processed foods at 150% and edible oil at 300%. Of course, for some agricultural
products like skimmed milk powder, maize, rice, spelt wheat, millets etc. which had been bound
at zero or at low bound rates, negotiations under Article XXVIII of GATT were successfully
completed in December, 1999 and the bound rates have been raised substantially.
Domestic Support
India does not provide any product specific support other than market price support. During the
reference period (1986-88), India had market price support programmes for 22 products, out of
which 19 are included in our list of commitments filed under GATT. The products are: rice,
wheat, bajra, jawar, maize, barley, gram, groundnut, rapeseed, toria, cotton, soyabean, (yellow),
soyabean (black), urad, moong, tur, tobacco, jute and sugarcane. The total product specific AMS
was (-) Rs. 24,442 crores during the base period. The negative figure arises from the fact that
during the base period, except for tobacco and sugarcane, international prices of all products was
higher than domestic prices, and the product specific AMS is to be calculated by subtracting the
domestic price from the international price and then multiplying the resultant figure by the
quantity of production.
Non-product specific subsidy is calculated by taking into account subsidies given for fertilisers,
water,seeds, credit and electricity. During the reference period the total non- product specific
AMS wasRs. 4581 crores. Taking both product specific andnon-product specific AMS into
account, the total AMS was (-) Rs.19,869 crores i.e., about (-) 18% of the value of total
agricultural output.
Since our total AMS is negative and that too by a huge magnitude, the question of our
undertaking reduction commitment did not arise. As such, we have not undertaken any
commitment in our schedule filed under GATT. The calculations for the marketing year 1995-96
show the product specific AMS figure as (-) 38.47% and non-product specific AMS as 7.52% of
the total value of production. We can further deduct from these calculations the domestic support
extended to low income and resource poor farmers provided under Article 6 of the Agreement on
Agriculture. This still keeps our aggregate AMS below the de minimis level of 10%.
India's notifications on AMS are available at website address: www.wto.org/wto/online/ddf.htm.
Export Subsidies
In India, exporters of agricultural commodities do not get any direct subsidy. The only subsidies
available to them are in the form of (a) exemption of export profit from income tax under section
80-HHC of the Income Tax Act and this is also not one of the listed subsidies as the entire
income from Agriculture is exempt from Income Tax per se. (b) subsidies on cost of freight on
export shipments of certain products like fruits, vegetables and floricultural products. We have,
in fact, indicated in our schedule of commitments that India reserves the right to take recourse to
subsidies (such as, cash compensatory support) during the implementation period.
MANDATED NEGOTIATIONS
Article 20 of the Agreement on Agriculture (http://www.wto.org) mandates that negotiations for
continuing the reform process in agriculture will be initiated one year before the end of the
implementation period. As the implementation period for developed countries culminates at the
end of the year 2000, the negotiations on the Agreement on Agriculture have begun this year.
STATE OF PLAY
Through formal and informal discussions in the Committee on Agriculture, the WTO
membership has been debating on various issues of concern to them. The demarcation in various
groups of countries has now become clearer. The EU, certain Nordic countries like Norway and
Japan are on the one side, wanting to continue their subsidy regimes in agriculture, whereas the
Cairns group of countries who are naturally endowed agriculture producers, are totally opposed
to the trade distorting subsidies and the protectionist regime being practiced by EU and Japan.
The United States, though opposing EU and not completely with the Cairns group either, forms
the third dimension. The developing countries are somewhere in the middle, not having decided
whether or not to form a 4th dimension.
The Cairns group of countries, votaries of unrestricted trade, comprises a group of 18 major
agricultural exporting countries. They have listed the elimination of export subsidies and
domestic subsidies as goals of the ongoing agricultural negotiations at the World Trade
Organisation. They have also called for better information and analysis of tariff rates, quota
administration, export subsidies, domestic support programmes and market access as well as
members position on bio-technology and Genetically Modified Organisms.
The U.S agenda for negotiations would be driven by further trade liberalisation in the
agricultural sector, which would benefit US interests. There is likely to be an emphasis on global
tariff reduction on agricultural products, greater transparency and improved disciplines on state
trading enterprises, proper implementation of tariff rate quotas and greater disciplines on biotechnology, as well as, further strengthening of the sanitary and phytosanitary agreement.
The European Union is more vulnerable to attack in the WTO on the issue of its distortion of
markets through domestic subsidisation of agriculture. In the context of further liberalisation, EU
would strongly defend its "Blue Box" policies. They feel that in case Blue Box is to be
abolished, the WTO contracting parties will have to agree to change of the present rules in the
Agreement on Agriculture. The EU would be pressing at the international level for
improvements in food safety and food quality standards as well as in supporting environmental
and social sustainability. It is, thus, apparent that EU intends to maintain protection of its
agricultural industry at the highest possible level while maximising concessions to be gained in
other country markets.
Japan highlights the importance of the multifunctional role of agriculture, food security and a
fair balance between rights and duties of importing and exporting countries from the standpoint
of a net importer of farm products.
India's position has been articulated in WT/GC/W/152 available at the web site
http//www.wto.org. Briefly, it has been emphasised that Article 20 of the Agreement adequately
reflects both the emphasis and context in which these negotiations should be entered upon. The
most important aspect of the negotiations would be to address implementation problems up front,
in the areas of market access, domestic support, export subsidy, notification requirements &
technical assistance. The inadequate implementation of special & differential provisions in the
above mentioned areas is a cause of particular concern to us.
India has suggested that an in-depth analysis and assessment of the effect of the Uruguay Round
on the trade of developing countries should be an essential pre-requisite of any negotiations.
We have also drawn attention to the peculiar agricultural scenario obtaining in large agrarian
economies like India, where rural employment and production of sufficient food to meet the
domestic requirements are of paramount importance. Thus, for addressing food security issues, a
certain degree of autonomy and flexibility is required by developing countries in their domestic
policies. These concerns have been articulated not with the intention of creatinga negotiating
base but with the hope that the forthcoming negotiations would provide us adequate opportunity
to pursue our legitimate trade and non- trade concerns.
LIKELY ISSUES FOR NEGOTIATIONS AND POSSIBLE INDIAN STAND
Market Access:
i) High agricultural tariffs and tariff peaks being applied by some WTO members are significant
barriers to meaningful market access opportunities. We would have to very carefully articulate it
as India will need to have a reasonable level of tariff protection for taking care of its food
security and rural employment concerns.
ii) Tariff escalation is another factor, which discourages developing countries from diversifying
from primary commodity production to processed value added agricultural products for export
purposes.
iii) The operation of tariff rate quotas in a non-transparent and complex manner limits trade
opportunities of new suppliers, particularly from developing countries. In this context, thus,
guidelines on TRQ allocation and administration would be sought so as to enhance market access
opportunities. It may be desirable to press for the elimination of tariff rate quota system itself.
iv) Certain aspects of sanitary and phytosanitary measures which limit market access particularly
for exports of developing countries would also figure prominently in the forthcoming
negotiations.
v) The special safeguard provisions, which are available to only a few Member countries, would
also be coming up for review and India would press for its availability to all developing
countries.
Domestic Support:
i) During the course of implementation of obligations/commitments, a number of member
countries particularly from the developing world have experienced difficulty in calculating and
notifying their aggregate measurement of support (AMS) on account of the following factors:a) Financial/resource constraints limit the capacity of most developing countries to provide
support to their agricultural sector even upto the de minimis level.
b) Lack of clarity in the agreement with regard to the treatment of negative AMS and "excessive
inflation", reduces the flexibility provided to developing countries during the Uruguay Round to
address their domestic policy concerns.
Such implementation issues would require clarification during the current negotiations.
ii) The 'Green Box' should be revisited for a further tightening of criteria as it currently
incorporates various provisions for support, many of which are not non-trade distorting.
Moreover, as it is currently designed, it is not of much assistance to developing countries as it
does not reflect their support programmes.
iii) The Blue Box measures which refer to direct payments to farmers under production limiting
programmes which are currently exempt from AMS reduction commitments, should either be
totally dispensed with or alternatively should be subject to reduction commitments.
iv) Ways and means to incorporate increased flexibility in the level and use of de minimis
support would also be discussed.
Export Subsidies:
i) Export subsidies are universally acknowledged to be the single most trade distortive impact in
agriculture because of their potential of displacing developing country exports. There would be a
strong demand for a complete outlawing of export subsidies. India would also press for it.
However, as long as the export subsidies are permitted to be given by any country above the de
minimis limit provided under the WTO's Subsidies and Countervailing Measures agreement,
India should also have right to give export subsidies upto an appropriate level.
ii) Establishment of disciplines in the field of export credits, guarantees and deferred payments
which have a negative effect on prices and competition in the world agricultural market, would
be insisted and India would like it to be also included under the disciplines of Export Subsidies.
iii) On account of ambiguity in the existing language of the Agreement on Agriculture, certain
countries are resorting to 'rolling over of export subsidies. This practice would need to be
suitably addressed as it amounts to negation of reduction commitments.
Non Trade Concerns:
The Non Trade Concerns (NTCs) including food security and the need to protect the
environment, alluded to in Article 20 of the Agreement on Agriculture would be taken into
account during negotiations.
Food Security for India is not only availability of sufficient food but also adequate means to
procure the same. Eminent agricultural economists and scientists like Dr. Swaminathan also
believe that food security is economic access to food. Accordingly this has ramifications for
employment and livelihood. For developing countries like India which are still grappling with
the twin problems of poverty and unemployment, the production of food and economic access to
it are primary objectives. As opposed to this certain developed countries are advocating
multifunctional character of agriculture which essentially signifies that agriculture has functions
other then providing food and fibre and also includes the protection of evironment and
maintaining the economic viability or rural areas. Viewed against the needs of developing
countries concerns about the maintenance of rural landscape appear to be hollow. Any attempts
to try and equate the two different scenarios and continue heavy subsidisation of agriculture
would be resisted. The concept of multificationality needs to the examined from the perspective
of developing countries. Here, we would like to highlight the fact that the non-trade concerns of
devloped countries and those of developing countries differ not only in content but in priority
also.
For countries like India, multifunctionality of agriculture is best mainfested in its ramifications in
areas such as food security, employment and the elimination of poverty in rural areas. Moreover,
these issues are neither emotive nor undefined but are practical and harsh realities which decision
makers have to confront when addressing issues of agricultural policies. The need to provide
employment opportunities in pre-dominantly rural agrarian areas is one of the main NTCs which
India would like to see addressed.
Biotechnology:
Biotechnological inventions are increasingly affecting agricultural production and trade. New
genetically engineered varieties of crops have increased productivity and are more pest resistant.
This has important ramification for increasing productivity which is of central concern to almost
all developing countries. To this extent, we would support carefully controlled use of
biotechnology in agriculture. At the same time, there are environmental concerns relating to
biotechnology. It is feared that Genetically Modified Organisms (GMOs), not having been fully
tested for their effect on human health or the environment, should be treated as a class apart.
There are also fears that new technologies like the so called 'terminator gene' could imbalance
the ecosystem if it spreads beyond controlled production areas.
A concrete country position needs to be evolved in this regard.
The TRIPS agreement is based on the basic principles of the other WTO Agreements, like nondiscrimination clauses - National Treatment and Most Favoured Nation Treatment, and are
intended to promote technological innovation and transfer and dissemination of technology.
It also recognizes the special needs of the least-developed country Members in respect of
providing maximum flexibility in the domestic implementation of laws and regulations.
Part V of the TRIPS Agreement provides an institutionalized, multilateral means for the
prevention of disputes relating to IPRs and settlement thereof. It is aimed at preventing unilateral
actions
Copyrights and related rights Part II Section 1 (Article 9 to Article 14) of the TRIPS
agreement deals with the minimum standard in respect of copyrights.
Copyright is a right given by the law to creators of literary, dramatic, musical and artistic works
and producers of cinematograph films and sound recordings. It is a bundle of rights including,
inter alia, rights of reproduction, communication to the public, adaptation and translation of the
work. There could be slight variations in the composition of the rights depending on the work.
The Copyright Act, 1957 protects original literary, dramatic, musical and artistic works and
cinematograph films and sound recordings from unauthorized use. Unlike the case with patents,
copyright protects the expressions and not the ideas. There is no copyright in an idea. The
general rule is that a copyright lasts for 60 years. In the case of original literary, dramatic,
musical and artistic works the 60-year period is counted from the year following the death of the
author. In the case of cinematograph films, sound recordings, photographs, posthumous
publications, anonymous and pseudonymous publications, works of government and works of
international organizations, the 60-year period is counted from the date of publication.
The Copyright Act, 1957 came into effect from January 1958. This Act has been amended five
times since then, i.e., in 1983, 1984, 1992, 1994 and 1999, with the amendment of 1994 being
the most substantial. The Copyright Act, 1957 continues with the common law traditions.
Developments elsewhere have brought about a certain degree of convergence in copyright
regimes in the developed world.
The Copyright Act is compliant with most international conventions and treaties in the field of
copyrights. India is a member of the Berne Convention for the Protection of Literary and Artistic
Works of 1886 (as modified at Paris in 1971), and the Universal Copyright Convention of 1951.
Though India is not a member of the Rome Convention of 1961, the Copyright Act, 1957 is fully
compliant with the Rome Convention provisions.
Two new treaties, collectively termed as Internet Treaties, were negotiated in 1996 under the
auspices of the World Intellectual Property Organization (WIPO). These treaties are called the
WIPO Copyrights Treaty (WCT) and the WIPO Performances and Phonograms Treaty
(WPPT). These treaties were negotiated essentially to provide for the protection of the rights of
copyright holders, performers and producers of phonograms in the Internet and digital era. India
is not a member of these treaties as yet
Trademarks
Part II Section 2 (Article 15 to Article 21) of the TRIPS agreement contains the
provisions for minimum standards in respect of Trademarks.
A trademark is a distinctive sign which identifies certain goods or services as those produced or
provided by a specific person or enterprise. Its origin dates back to ancient times, when
craftsmen reproduced their signatures, or "marks" on their artistic or utilitarian products. Over
the years these marks evolved into today's system of trademark registration and protection. The
system helps consumers identify and purchase a product or service because its nature and
quality, indicated by its unique trademark, meets their needs.
A trademark provides protection to the owner of the mark by ensuring the exclusive right to use
it to identify goods or services, or to authorize another to use it in return for a payment. The
period of protection varies, but a trademark can be renewed indefinitely beyond the time limit on
payment of additional fees. Trademark protection is enforced by the courts, which in most
systems have the authority to block trademark infringement.
There are two international treaties governing Trademarks - the Madrid Agreement
Concerning the International Registration of Marks and the Madrid Protocol.
th
In India, the Trade Marks Act, 1999 was passed on 30 December 1999 and came into force on
th
15 September 2003. Before commencement of this Act, the Trade & Merchandise Marks Act
governed the protection of trademarks in India, which has now been replaced by the Trade Marks
Act. The Trade Marks Act, 1999 is in coherence with the provisions of the TRIPS Agreement.
The new Act provides for registration of trademarks for services in addition to goods, and has
increased the period of registration and renewal from 7 yrs to 10 yrs.
into force with effect from 15 September 2003. This Act seeks to provide for the registration
and protection of Geographical Indications relating to goods in India. The Controller General of
Patents, Designs and Trade Marks is also the registrar for the Geographical Indications, and the
Geographical Indications Registry is located at Chennai
industrial production. It is also intended to promote innovative activity in the field of industries.
The present legislation is aligned with the changed technical and commercial scenario and
conforms to the international trends in design administration.
Under the Designs Act, the designs would not include any trade mark, as defines in the Trade
Marks Act or property mark or artistic works as defined in the Copyright Act.
The duration of the registration of a design is initially ten years from the date of registration, but
in cases where claim to priority has been allowed the duration is ten years from the priority date.
This initial period of registration may be extended by further period of 5 years on an application
before the expiry of the said initial period of Copyright. The proprietor of a design may make an
application for such an extension as soon as the design is registered
(e) Patents
Section 5 Part II of the TRIPS Agreement (Article 27 to Article 34) contains the
provisions for standards in respect of the Patents.
A Patent is an exclusive right granted by a country to the inventor to make, use,
manufacture and market the invention that satisfies the conditions of novelty, innovativeness and
usefulness Members are required to comply with the Paris Convention for the Protection of
Industrial Property.
Introduction of Patent Law in India took place in 1856 whereby certain exclusive
privileges to the inventors of new inventions were granted for a period of 14 years. Presently, the
patent provisions in India are governed by the Patents Act, 1970. The Indian Patents Act is fully
compatible with the TRIPS Agreement, following amendments to it; the last amendment being in
2005 by the Patents (Amendment) Act, 2005.
Product patents in the field of pharmaceuticals and agro-chemicals have been introduced
by deleting Section 5 of the Patents Act. Those inventions which are considered a mere
discovery of a new form of a known substance or mere discovery of a new property or new use
will not be considered patentable. A provision for patenting of software that is embedded in
hardware has also been introduced in the Patents Act.
The term of every patent is now for 20 years from the date of filing. Provisions for the
pre-grant opposition to the grant of patents have also been incorporated in the Act. Earlier such
provisions were available only for post-grant opposition. The filing date of a patent application
and its complete specification will now be the international date of filing for the patent as per the
provisions of the Patent Cooperation Treaty.
A provision has also been introduced in the Patents Act to enable the grant of compulsory
licenses for the export of medicines to countries with limited or no manufacturing capacities to
meet emergent public health situations. The law effectively balances and calibrates intellectual
property protection with public health concerns and national security. This provision is in line
with the Decision of the WTO of 30 August 2003 on the Implementation of Paragraph 6 of the
Doha Declaration on the TRIPS Agreement and Public Health.
B. Additional protection to geographical indications (GIs) to products other than wines and
spirits.
processed any further till necessary declaration and evidence are furnished. There could be
penalties and time limits to submit the declaration and evidence, otherwise the application could
be deemed withdrawn. At the post-grant stage, the legal effect could be revocation of patent and
/or criminal and /or civil sanctions including the possibility of punitive damages.
General Council on 31 May 2006. This proposal is in line with the mandate of the Hong Kong
Ministerial Conference. The text for the proposed Article 29bis takes into account the objectives
of the requirement as well as the questions, comments and concerns raised by various Members
in the negotiations so far.
The Agreement on Trade Related Investment Measures (TRIMs) are rules that apply to the
domestic regulations a country applies to foreign investors, often as part of an industrial policy.
The agreement was agreed upon by all members of the World Trade Organization.
Policies such as local content requirements and trade balancing rules that have traditionally been
used to both promote the interests of domestic industries and combat restrictive business
practices are now banned.
Trade Related Investment Measures is the name of one of the four principal legal agreements of
the WTO trade treaty.
TRIMs are rules that restrict preference of domestic firms and thereby enable international firms
to operate more easily within foreign markets
The Agreement on Trade Related Investment Measures (TRIMs) is one of Agreements covered
under Annex IA to the Marrakech Agreement, signed at the end of the Uruguay Round (UR)
negotiations. The Agreement addresses investment measures that are trade related and that also
violate Article III (National treatment) or Article XI (general elimination of quantitative
restrictions) of the General Agreement on Tariffs and Trade. An illustrative list of the measures
that are violative of the provisions of the Agreement is annexed to the text of the Agreement.
These pertain broadly to local content requirements, trade balancing requirements and export
restrictions, attached to investment decision making.
Provisions on elimination of notified TRIMs by WTO Members, and transition periods
The Agreement requires all WTO Members to notify the TRIMs that are inconsistent with the
provisions of the Agreement, and to eliminate them after the expiry of the transition period
provided in the Agreement. Transition periods of two years in the case of developed countries,
five years in the case of developing countries and seven years in the case of LDCs, from the date
of entry into force of the Agreement (i.e. 1st January 1995) are provided in the Agreement.
Temporary deviation on BOP grounds
The Agreement allows developing countries to deviate temporarily from its provisions on
balance of payments (BOP) grounds (as per the provisions of Article XVIII.B of GATT, 1994).
The Seattle Ministerial Conference was inconclusive and no decision could be taken on the
proposals.
However, during the General Council meeting of 8th May, 2000, the following decisions, interalia, were taken :
" ..members agree to direct the Council for Trade in Goods to give positive consideration to
individual requests presented in accordance with Article 5.3 by developing countries for
extension of transition periods for implementation of the TRIMs Agreement".
"Members have noted the concerns of those Members who have not notified TRIMs or have not
yet requested an extension. Consultations on the means to address these cases should also be
pursued as a matter of priority, under the aegis of the General Council, by the Chairman of the
Council for Trade in Goods".
multilateral disciplines in these areas will take place only after explicit consensus decision by the
Members. The Working Group process is still on.
Likely issues during the review
The review of the Agreement is likely to address the following issues:
A.
Issues related to the operation of the Agreement during the last five years, and
B.
A.
Art. 4 provides that a developing country Member shall be free to deviate temporarily from the
obligations arising out of this agreement to the extent and in such a manner as Art. XVIII of
GATT 1994, the Understanding on the Balance of Payments Provisions of GATT 1994, and the
Declaration on Trade Measures Taken for Balance of Payments Purpose adopted on 28th
November, 1979. Issues related to operationalization of this provision would be raised by
developing countries;
The question of transition period of five years for developing countries has ended before the
review of the operation of the Agreement. The issue of transition periods and the need for
general exemption, rather than based on individual request, is a matter of concern for developing
countries;
Art. 5.3 which provides for request for extension of transition period on individual basis,
stipulates that such Members should demonstrate particular difficulties in implementing the
provisions of the Agreement. This leaves the decision to the discretion of WTO Members. There
is likely to be demand for objective criteria;
The role of the Committee on TradeRelated Investment Measures has so far been confined to
monitoring the notification requirements. A changed role could be considered.
B.
The present agreement prohibits trade related investment measures that are violative of Art. III
and Art. XI of the General Agreement on Tariffs and Trade. Local content requirements, trade
balancing requirements, and export restrictions are prohibited. The efforts of developing
countries would be to reduce the prohibitions in view of the experience of these countries based
on the operation of the agreement. Developing countries (the Like Minded Group) have
submitted certain proposals in this regard in the context of review of implementation of the
Uruguay Round Agreements.
The TRIMs Agreement has been found by the developing countries to be standing in the way of
sustained industrialization of developing countries, without exposing them to balance of payment
shocks, by reducing substantially the policy space available to these countries.
Trade-related investment measures have been used mainly, if not exclusively, by developing
countries to promote development objectives. For instance, the growth of domestic ancillary
industries has been fought through the imposition of local content requirements and export
expansion through export
performance requirements. In many cases, TRIMs are designed to deal with the restrictive
business practices of transnational corporations and their anti-competition behavior
The TRIMs Agreement, which was negotiated in the Uruguay Round, prohibits countries from
using five TRIMs. These are considered inconsistent with GATT rules on national treatment and
the rules against the use of quantitative restrictions.
TRIMs prohibited on the grounds that they extend more favourable treatment to domestic
products in comparison to imports and thus infringe the national treatment principle include
those that require:
1. Purchase or use by an enterprise of products of domestic origin or from any
domestic source (local content requirements), or Agreement on TRIMs,
Business implications
For the business person, it is important to note that the Agreement is limited in scope. It
identifies only five TRIMs that are inconsistent with GATT and gives countries transition
periods within which to remove them. It does not prevent countries from using at least some of
the other TRIMs l. For instance, countries are not prevented from imposing export performance
requirements as a condition for investment. They are not prohibited from insisting that a certain
percentage of equity should be held by local investors or
that a foreign investor must bring in the most up-to-date technology or must conduct a specific
level or type of R & D locally. A number of developing countries today impose local content
requirements.
The abolition of these requirements may have an impact on ancillary industries that are
benefiting from the protection they provide. However, most of these countries are reviewing the
need for the continued maintenance of such measures in the light of the open trade policies they
are now pursuing and the
steps they are taking to attract foreign investment. For instance, Argentina, Brazil, India and
Mexico had taken decisions to abolish local content requirements even before the conclusion of
the Uruguay Round. The Agreement therefore only reinforces the trend towards the removal of
TRIMs that are considered inconsistent with GATT.
The Agreements limited coverage of TRIMs has led countries to provide that its operation
should be reviewed within a period of five years of its coming into force (i.e. before 1 January
2000) and that the review should consider the desirability of complementing the Agreement with
provisions on investment
and competition policy
TRIMs Review
There will be a joint WTO/UNCTAD study on TRIMs. This will be an examination of how
governments have used TRIMs as policy tools for industrial development and their effect on
international trade, investment flows, economic growth etc.
The General Agreement on Trade in Services (GATS) is a treaty of the World Trade
Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Round
negotiations. The treaty was created to extend the multilateral trading system to service sector, in
the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for
merchandise trade.
All members of the WTO are signatories to the GATS. The basic WTO principle of most
favoured nation (MFN) applies to GATS as well. However, upon accession, Members may
introduce temporary exemptions to this rule
Historical background
Before the WTO's Uruguay Round negotiations began in 1986, public services such as
healthcare, postal services, education, etc. were not included in international trade agreements.
Most such services have traditionally been classed as domestic activities, difficult to trade across
borders, notwithstanding the fact that for example educational services have been "exported" for
as long as universities have been open to international students. Nevertheless, foreign
participation has existed in many countries prior to the GATS.
Nonetheless, most service sectorsin particular, international finance and maritime transport
have been largely open for centuries, as necessary components of merchandise trade. Other large
sectors have undergone fundamental technical and regulatory changes in recent decades, opening
them to private commercial participation and reducing barriers to entry. The development of
information technologies and the internet have expanded the range of internationally tradeable
service products to include a range of commercial activities such as medicine, distance learning,
engineering, architecture, advertising and freight forwarding.
While the overall goal of the GATS is to remove barriers to trade, members are free to choose
which sectors are to be progressively liberalised, under which mode of supply a particular sector
would be covered under, and to what extent to which liberalisation will occur over a given period
of time. Members' commitments are governed by a "ratchet effect", meaning that commitments
are one-way and should not be wound back once entered into. This reason for this is the creation
of a stable trading climate. Article XXI allows Members to withdraw commitments and so far
two members have used this option (USA and EU). In November 2008, Bolivia notified that it
will withdraw its health services commitments.
Some activist groups consider that the GATS risks undermining the ability and authority of
governments to regulate commercial activities within their boundaries, with the effect of ceding
power to business interests over the interests of citizens. In 2003 'GATSwatch' network
published a critical statement which was supported in 2003 by over 500 organisations in 60
countries
WTOs General Agreement on Trade in Services (GATS) was first established in 1994 as one
of the Uruguay Round agreements to be enforced by the WTO. Rules about actual trade in
services across borders (via the phone or internet) is only a small element of GATS. The WTO
called the GATS the worlds first multilateral investment agreement because its rules cover
everyconceivable way a service might be delivered, including granting foreign corporations the
right to buy or establish new companies within the territory of another country. GATS is known
as a bottom-up agreement because most of its requirements only cover service sectors
countries agree to open up for competition by foreign corporations. GATS negotiators like to
portray GATS as a very flexible agreement from which countries may completely exclude
certain sectors. In reality, the GATS text is very ambiguous about what aspects of our lives its
rules cover
services abroad.3 These specific objectives are included in a participating country's schedule of
offer lists, after the conclusion of negotiations and commitments.
(4) National Treatment - specific sets of rules in which a country grants to other service
suppliers, conditions which are no less favorable than which it grants its own national suppliers
(5) Transparency in national regulations, which includes incentive arrangements. Participating
members are obliged to establish points of inquiry for actual and potential trading partners. The
transparency rules also require that individual countries notify the WTO of any changes
implemented in regulations for specific services, where commitments for market access and
national treatment are made.
(6) Reciprocity: no nation should benefit at the expense of another, except in conditions of
varying economic development.
(7) Continuous liberalization through additional negotiation. Domestic regulations and associated
changes are to be objective and consistent with a continuous process of liberalization.
(8) Other GATS principles focus on normally unrestrictive methods of international payments,
increased participation of less developed countries, recognition of the criteria used for the
licensing of service providers and monitoring and disciplining monopolies
A. Four Important GATS Exemptions
The GATS does not impact all policy interventions affecting the financial sector. The following
are four important exceptions
Macroeconomic policy action involves both fiscal and monetary procedures. Monetary policy
falls under the umbrella of Central Banks, and can powerfully affect aggregate demand.
Monetary policy remains outside of GATS rules.
Governments continue to maintain prudential regulatory control in order to protect their financial
sectors. Some of the more common prudential measures include capital adequacy ratios and
solvency margin requirements, limitations on the extent of credit concentration and portfolio
allocation (WTO 1997)4. It merits emphasis that the obligations of any member under GATS do
not in any way infringe on the rights of member states to impose prudential regulations. As
specifically stated in paragraph 2 (a) of the Annex of Financial Services,
"Notwithstanding any other provision of the Agreement, a member shall not be prevented from
taking measures for prudential reasons, including for the protection of investors, deposits, policy
holders or persons to when a fiduciary duty is owned by a financial service supplier or to ensure
the integrity and stability of the financial system."
A developing country government also has the option of maintaining other regulations that may
impinge on the extent of competition allowed, and the general operation of its financial sector.
For example the manufacturing sector, within such a country, may be offered a lower rate of
interest than other sectors, given the need to develop backward and forward linkages, and the
opportunities for learning by doing.
These policies, even if there are considered to be technically deficient, are not debarred by the
GATS, unless they limit the application of national treatment to foreign firms.
B. The Benefits of Financial Liberalization
There are a number of benefits, which can be expected for reforming economies, when trade in
financial services is liberalized. Liberalization can lead to greater specialization by financial
institutions, within those areas where they have comparative and competitive advantages.
Specialization, with the benefits of economies of scale, engenders lower unit costs. Competition
amongst financial institutions also promotes the emergence of new types of saving instruments.
This is likely to increase investment returns, stimulate aggregate savings and investment, and
promote economic growth
With financial liberalization, economies of scale in technology acquisition can also be expected.
As the presence of foreign banks, insurance companies and brokers expands, so does the spread
of knowledge regarding best practices. With the increasing transfer of financial services
technology and innovative ideas, there is an increasing potential for future economic growth.5
Liberalization can also lead to a reduction of systemic risk. Foreign financial institutions are
typically branches or subsidiaries of transnational companies, and so can rely on the parent or
affiliates of the parent, in the event that they find themselves in liquidity or other crises.
Furthermore, the deepening of the financial system and the expanding volume and range of
transactions resulting from the liberalization process tends to reduce the degree of host economy
exposure to volatility and vulnerability to shocks.
Financial liberalization can also improve risk management, by allowing large projects to be
undertaken more easily, with related uncertainty compensated by a reasonable rate of return. In
particular, transnational financial institutions can transfer funds to seize attractive opportunities
in individual countries and loan recipients can take advantage of lower interest rates, currency
risk, and better insurance coverage. Funds from capital surplus countries are therefore able to
flow to countries with capital deficits 6
Increased financial sector competition associated with financial liberalization can result in
financial institutions that are more responsive to the needs of consumers, by providing better
advice, enhanced financial packages, more timely and expeditious attention, and a more even
flow of financial services over time. The overall effect, temporal and intertemporal, can
constitute a definite improvement in the financial services provision (Sargeant, 2002).
Indeed, the absence of liberalization can encourage greater prudential risk, moral hazard and
ownership concentration in the financial sector. Financial liberalization is one way to circumvent
some of these problems
C. Financial Intermediation and Economic Growth
The high cost of acquiring information within the financial sector provides a niche opening for
financial sector institutions. In practice, shareholders find it difficult to monitor the performance
of firms and managers, and it is hardly likely that individual savers have the time or capacity to
make such judgments. One consequence may be to inhibit the flow of scarce financial resources
into those opportunities, which offer the highest returns. At the same time, high information
costs create new entrepreneurial opportunities for financial institutions (Diamond, 1984;). The
activities of such intermediaries can reduce costs related to the allocation of scarce resources
(Levine, 1997).
Apart from reducing the fixed cost of pooling information, financial institutions can also play an
important role in ensuring that corporate managers operate efficiently, even after they receive
financing for a particular business venture. If a corporation defaults on one of its payments to a
financial intermediary, an immediate chain of events is put in place
D. The Structure and Performance of Trinidad and Tobago's Financial Sector
In 2002 the level of real GDP in T&T was TT$23,374.7m, an increase of 47.1% above that
attained in 1989. The real GDP growth performance for Trinidad and Tobago was estimated to
be around 2.7% for 2002, whilst inflation remained under control, hovering at 3.9% in the same
year. The unemployment rate in 2002 was 10.1%, 0.7 percentage points lower than the year
before. In 2002, the average price of a barrel of oil was US$23.4, as compared to US$30.1 per
barrel in 2000. For Trinidad and Tobago, the real effective exchange rate in 2002 was 127.1;
clearly indicating that the country is becoming increasingly uncompetitive externally.8 The
external debt of Trinidad and Tobago was projected to stand at 17% of GDP in 2002. The level
of the external debt itself was US$1,528.1mn in 2002, as compared to US$1,579.7mn in 2001.
Preliminary data indicated a trade surplus of US$115m in 2002.
E. Interview Assessment
Ten interviews were conducted with leading commercial bankers, corporate managers, central
bankers, and economists, during the month of March 2003. The standardized questions asked
concerned the respondent's level of familiarity with GATS; the prototypical impact, as well as
the potential benefits and dangers, of financial market liberalization; and the distribution of gains
from such liberalization.
The WTO's strengthened dispute resolution mechanism was designed to have the authority to
sort out this "fine line between national prerogatives and unacceptable trade restrictions" Several
of the supplemental agreements to the GATT created during the Uruguay Round, such as the
SPS Agreement, sought to specify the conditions under which national regulations were
permissible even if they had the effect of restraining trade. The United States, perhaps more than
any other country, has found itself on both sides of this delicate balance. In 1988, it was the
United States who pushed for strengthening the Dispute Settlement provisions of the GATT
during the Uruguay Round, in part because Congress was not convinced that, "the GATT, as it
stood, could offer the United States an equitable balance of advantage." The concern was that
formal concessions granted to U.S. exports going into other countries would be eroded by hidden
barriers to trade. On the other hand, the United States harbors reservations in regards to its
sovereignty, with much of the negative reaction to the WTO itself centered around the concern
that U.S. laws and regulations may be reversed by the DSU panels or the Appellate Body.
Critics argued that the WTO would "compel Congress and our states to abandon many health and
environmental standards" if they were at odds with international trade rules. Particularly, these
critics noted that the United States would not have a veto in the WTO and that each nation would
have an equal say in the DSB, which ultimately votes to adopt or reject panel reports. They
further noted that the Appellate Body and the dispute settlement panels vote in secret, and that
they could authorize nations to retaliate against violations of the trade agreements with unilateral
sanctions. It was argued by some that the cumulative effect of WTO dispute panel decisions
would be to erode the sovereignty of the United States. One of the purposes of this review is to
assess the validity of this claim in light of the actual functioning of the WTO system over the last
three years.
OVERVIEW OF THE DISPUTE SETTLEMENT UNDERSTANDING
The Dispute Settlement Understanding (DSU), formally known as the Understanding on Rules
and Procedures Governing the Settlement of Disputes, establishes rules and procedures that
manage various disputes arising under the Covered Agreements of the Final Act of the Uruguay
Round. All WTO member nation-states are subject to it and are the only legal entities that may
bring and file cases to the WTO. The DSU created the Dispute Settlement Body (DSB),
consisting of all WTO members, which administers dispute settlement procedures. It provides
strict time frames for the dispute settlement process and establishes an appeals system to
standardize the interpretation of specific clauses of the agreements. It also provides for the
automatic establishment of a panel and automatic adoption of a panel report to prevent nations
from stopping action by simply ignoring complaints. Strengthened rules and procedures with
strict time limits for the dispute settlement process aim at providing "security and predictability
to the multilateral trading system" and achieving "[a] solution mutually acceptable to the parties
to a dispute and consistent with the covered agreements." The basic stages of dispute resolution
covered in the understanding include consultation, good offices, conciliation and mediation, a
panel phase, Appellate Body review, and remedies.
Consultation
A member-country may request consultations when it considers another member- country to
have "infringed upon the obligations assumed under a Covered Agreement." If the respondent
fails to respond within ten days or enter into consultations within thirty days, the complaint "may
proceed directly to request the establishment of a panel."
Good Offices, Conciliation and Mediation
Unlike consultation in which "a complainant has the power to force a respondent to reply and
consult or face a panel," good offices, conciliation and mediation "are undertaken voluntarily if
the parties to the dispute so agree." No requirements on form, time, or procedure for them exist.
Any party may initiate or terminate them at any time. The complaining party may request the
formation of panel, "if the parties to the dispute jointly consider that the good offices,
conciliation or mediation process has failed to settle the dispute." Thus the DSU recognized that
what was important was that the nations involved in a dispute come to a workable understanding
on how to proceed, and that sometimes the formal WTO dispute resolution process would not be
the best way to find such an accord. Still, no nation could simply ignore its obligations under
international trade agreements without taking the risk that a WTO panel would take note of its
behavior.
Panel Phase
If consultation, good offices, conciliation or mediation fails to settle the dispute, the complaining
party may request the formation of panel. The DSB shall form a panel, "unless at that meeting
the DSB decides by consensus not to establish a panel." "Panels shall be composed of wellqualified governmental and/or non-governmental individuals" "with a view to ensuring the
independence of the members," and whose governments are not the parties to the dispute, "unless
the parties to the dispute agree otherwise." Three panelists compose a panel unless the parties
agree to have five panelists.
The Secretariat proposes nominations for panels that the parties shall not oppose "except for
compelling reasons." If the parties disagree on the panelists, upon the request of either party, "the
director-general in consultation with the chairman of the DSB and the chairman of the relevant
council or committees" shall appoint the panelists.
When multiple parties request the establishment of a panel with regard to the same matter, the
DSU suggests a strong preference for a single panel to be established "to examine these
complaints taking into account the rights of all members concerned." The DSU gives any
member that has "a substantial interest in a matter before a panel" (and notifies "its interest to the
DSB") an opportunity "to be heard by the panel and to make written submissions to the panel."
"The panel shall submit its findings in the form of written report to the DSB." As a general rule,
it shall not exceed six months from the formation of the panel to submission of the report to the
DSB. In interim review stage, the panel submits an interim report to the parties. The panel "shall
hold a further meeting with the parties" if the parties present written comments. If no comments
are provided by the parties within the comment period, the "report shall be the final report and
circulated promptly to the members." Within sixty days after the report is circulated to the
members, "the report shall be adopted at a DSB meeting unless a party to the dispute formally
notifies the DSB of its decision to appeal or the DSB decides by consensus not to adapt the
report."
level of suspension proposed. "The original panel, if members are available, or an arbitrator
appointed by the director-general" may conduct arbitration.
Arbitration
Members may seek arbitration within the WTO as an alternative means of dispute settlement "to
facilitate the solution of certain disputes that concern issues that are clearly defined by both
parties." Those parties must reach mutual agreement to arbitration and the procedures to be
followed. Agreed arbitration must be notified to all members prior to the beginning of the
arbitration process. Third parties may become party to the arbitration "only upon the agreement
of the parties that have agreed to have recourse to arbitration." The parties to the proceeding
must agree to abide by the arbitration award. "Arbitration awards shall be notified to the DSB
and the Council or Committee of any relevant agreement where any member may raise any point
relating thereto."
THE WTO'S DISPUTE SETTLEMENT SYSTEM IN OPERATION
Now that the WTO Dispute Settlement procedures have been in use for three years, it is possible
to make a tentative analysis of the impact of this institutional evolution of the international
trading system. A rich variety of cases have been addressed by the WTO dispute settlement
procedures. (See Figure 1) These include complaints against countries with economies as small
as Guatemala, and as large as the European Union. They have also targeted countries at vastly
different stages of development, including countries like India at one end of the spectrum and the
United States and Japan on the other.(58)
Figure 1
WTO DISPUTE CASES BY INDUSTRY
Industry
Number of cases
Agricultural Products
32
10
Electronics
Telecommunications
Automobiles
Aircraft
Satellite Systems
Cement Products
Chemical Products
Pharmaceutical Products
Note: Among eighty-three distinct matters, including settled and inactive cases; above statistics
include five cases of disputes involving more than two industries.
In the entire forty-seven years of the GATT, only some 200 cases were disputed. In the first three
years of the WTO, 118 complaints have been brought, dealing with eighty-three distinct matters.
Nine of these cases have gone through the entire process, resulting in the adoption of appellate
reports by the DSB.(59) The increased use of the dispute settlement procedures under the WTO
suggests that nations see value in the reforms that were implemented, and that they have
increased confidence that other nations will abide by their trade obligations if the DSB finds
them to be in violation of specific provisions.
Due to the wide range of topics addressed by the dispute settlement panels, it is difficult to make
generalizations about the overall impact of the DSU. Nevertheless, a few early trends are
evident. The majority of complaints have been brought by developed countries against other
developed countries, with the next largest category being complaints by developed countries
against developing nations. However, at least twenty-five complaints have been initiated by
developing countries. (See Figure 2)
Figure 2
CASE CHARACTERISTICS BY COUNTRY
Complainants
Frequencies by matter
27
36
16
Note: Four matters were more than doubly counted because the suits were brought by multiple
complainants.
These complaints have dealt with traditional sectors such as trade in goods, manufactures, and
agricultural products, but they have also dealt with newer trade issues such as intellectual
property rights. (See Figure 3)
Figure 3
NEW AREAS BEGIN TO EMERGE
Sector
By Request
Manufacturing
48
Agricultural
42
General Goods
Intellectual Property
10
Others
Note: Statistics are from data provided through the WTO website and USTR press releases.
the European Parliament, since the hormone restrictions were initially adopted under intense
public pressure. The panel sided with the United States by finding that the provisions were
arbitrary and had the effect of restricting trade, but left options for the EU as well by suggesting
that more complete scientific evidence would justify the ban. Alternatively, the panel indicated
that technical changes in the way the policy is implemented could reduce the policy's negative
impact on trade. Still, the panel was firm in ruling that the current policy is inconsistent with the
SPS Agreement, and the EU will have to make substantive changes to come into compliance. If
it does not, the EU will be required to offer other trading concessions to compensate for losses,
some $200 million per year according to the United States. The EU has until 1999 to comply.
Kodak-Fuji Case
The Kodak-Fuji film dispute centers on the distribution system in Japan. In May 1995, Eastman
Kodak, Co. asked the U.S. Trade Representative (USTR) to investigate the Japanese
photographic film and paper market. Kodak charged that Fuji Photo Film, Co., Japan's biggest
photographic film and paper producer, was involved in "anti-competitive trade practices" in
Japan. Kodak asserted that Fuji, with the support of the Japanese government, tacitly dominated
the consumer film market in Japan using unfair practices. According to Kodak, Japanese
regulations implicitly favored Fuji by making it difficult for imported consumer photographic
film and paper to be marketed in Japanese shops. Kodak also said that some shops in Japan were
not allowed to carry Kodak's products because of back room deals with Fuji. According to
Kodak, this explained why Fuji had a 75 percent market share in Japan while Kodak had only a 7
percent share in 1996. Kodak estimated its losses since the 1970s due to the unfair practices at
$5.6 billion. Accordingly, Kodak requested that Japanese regulations be changed in order to
break up Fuji's exclusive distribution system.
In the Kodak-Fuji case, the panel ruled that Japanese regulations predated the reductions in
tariffs that had been negotiated on photographic film. Consequently, those regulations could not
have negated the benefits accruing to the United States in the trade agreement. This technical
ruling allowed the WTO to avoid a far-reaching decision that could have found Japanese vertical
integration of business in conflict with the intent of the WTO regime. Currently, there is no
international standard for anti-trust regulation. If the WTO dispute settlement panel had found in
favor of the United States, it would have been involved in creating new international obligations,
an act not sanctioned by the WTO Agreement. The ruling suggests that the United States and
other nations need not be overly concerned that the WTO's dispute settlement mechanism will
overtly threaten national sovereignty.
In June of 1995, the United States began to investigate Japanese market barriers for photographic
films and papers, and found that three "liberalization countermeasures" discriminated against
imported goods. The first measure was exclusive wholesaling arrangements currently dominated
by Fuji; the second was the large-stores law enacted in 1974. According to the United States, this
law discouraged large stores from carrying film other than Fuji's. The third discriminatory
measure cited involved controls on price competition and promotion as supervised by the
Japanese Fair Trade Commission. After eleven months of investigation, the United States filed a
complaint in the WTO on June 13, 1996, requesting consultations with Japan. The United States
argued that the import-resistant market structure created by the Japanese government violated the
national treatment principle of the GATT Article III. The United States also asserted that Japan's
restrictions on retail operations and promotional activities ran counter to the transparency
standard set out in the GATT Article X, even if Japan appears to offer neutral treatment of
imported goods. The United States also made a "non-violation" claim that these measures nullify
or impair benefits accruing to the United States. A "non-violation" claim is specifically
authorized in the GATT Agreements if the actions of another nation reduce the value of
negotiated trade concessions, even if the specific measure taken by the other country does not
directly violate any of the Articles of the trade agreements. The types of redress available under
such complaints, however, are limited.
Fuji denied Kodak's assertion. Fuji asserted that it had never conspired with the Japanese
government to discriminate against imported goods. Furthermore, Fuji claimed that Kodak's loss
of market share in Japan could be attributed to Kodak for a number of reasons. First, Kodak
failed to introduce innovative products to compete with Fuji's new products. Second, Kodak's
marketing strategy was not superior to that of Fuji's. Third, there was no bottleneck to block
Kodak from the market since it had the same access to consumers as Fuji. These market channels
included selling directly to retailers, selling to secondary dealers, and selling to smaller retailers
through photo finishing labs. Fourth, Fuji stated that its market share in the United States is only
11 percent while Kodak dominates the market with a 75 percent share. Thus, the proportion is
exactly the reverse of the situation in Japan suggesting that both Kodak and Fuji have difficulty
penetrating the domestic market of its rival. Therefore, consumers' loyalty to the domestic brand,
and not formal restrictions on trade, can explain low market penetration by foreign competition.
There is also a claim that, although Kodak is cheaper in Japan, customers buy Fuji because of its
investment in innovative products and its creative marketing skills and services.
The United States, failing to reach an agreement with Japan, requested a dispute settlement panel
on September 20, 1996. The panel was tasked to investigate Kodak's allegations that Japanese
regulations had the effect of supporting anti-competitive practices by Fuji film. After more than a
year's investigation, the WTO interim report was submitted on December 5, 1997. The report
rejected the U.S. complaint against Fuji. The tribunal arbitration panelists were from Brazil,
Switzerland, and New Zealand. They determined that the United States had not demonstrated
that its WTO rights had been impaired.
Even though the panel did not rule as Kodak would have liked, there is evidence that Fuji's
market share in Japan has diminished from 74 percent in the early 1990s to 67 percent at the end
of 1997, though Fuji denies this. The profit margin of the color film industry in Japan used to be
close to 12 percent, compared to 6 percent on overseas sales, but this has also fallen. Current
retail prices for photographic film and paper in Japan reflect this, with prices about 30 to 40
percent below comparable prices in the United States. Kodak's market share in Japan now
accounts for about 11 percent since it won the Nagano Olympic Games sponsorship by paying
$44 million in 1996. In the Nagano area where the Games were held, Kodak has doubled its
market share to 20 percent. In the U.S. market, however, Kodak's profits decreased by 25 percent
in 1997 from the year before. Fuji's business in the U.S. market is also improving. Fuji increased
its market share to 14 percent while Kodak had 76 percent of the market. Kodak announced
plans to cut costs by a billion dollars and lay off 10,000 jobs over next two years in order to
remain competitive. (See Figure 4)
Figure 4
Kodak's Layoffs
Month/Year
Jobs Cut
January 1993
2,000
August 1993
10,000
November 1994
800
February 1995
4,000
November 1997
10,000
Total
26,800
Increased market share for Fuji in the United States, and for Kodak in Japan, suggests that
consumers are increasingly trying the imported brand. In the end, it is consumers who benefit
from increased global competition through lower prices.
Figure 5
WTO Complainants by Country
Figure 6
COMPLETED CASES (Appellate Reports Adopted)
Total Completed Cases
US involved as Complainant
US as Respondent
Figure 7
Respondents to WTO Complaints by Country
Of the five complaints by the United States where final appellate reports have been adopted, all
five decisions found that there were barriers to exports from the United States that violated the
trade agreements and should be rectified. The result has been significant moves on the part of
U.S. trading partners towards allowing greater access in their market places for U.S. goods and
services.
France, Spain, Portugal, pushing for more protection of the ACP economies and the northern
states preferring more liberalization of banana importation.
On May 22, 1997, the DSB found that the EU banana regime's practices were inconsistent with
the GATT and GATS Articles. The EU filed an appeal on June 11 stating, among other things,
that the United States did not have standing in this case. The Appellate Body issued its report on
September 9, 1997, upholding most of the previous panel's rulings, with the exception of certain
violation of the GATS with regard to Mexico, Honduras, and Ecuador.
Since the ruling against the EU banana regime, the EU has issued proposals to reform its banana
importation rules in hopes of bringing them in line with the WTO. The measures include a tenyear modernization plan to make traditional suppliers more efficient as well as an end to the
contentious import licensing system. If the reforms are approved by a qualified majority of the
EU, the European Commission will likely propose funding of up to $412.8 million. As of
February 1998, the U.S. and Latin American banana producers had rejected the EU proposal,
which continues to let ACP bananas enter duty-free. Now the EU must find a solution acceptable
to its members, the ACP countries, and American producers. If the final EU reform plan is
unsatisfactory to the United States and the four Latin American countries, they can ask the WTO
panel to reconvene on the dispute. The EU will have to pay compensation or face WTOauthorized retaliation if a satisfactory settlement is not reached before January 1999.
CASE WHERE THE UNITED STATES SETTLED A COMPLAINT
As of April 17, 1997, Renato Ruggiero, director-general of the WTO, noted that nineteen out of
the seventy-one cases brought before the WTO's dispute settlement mechanism were settled 'out
of court', before a final decision was reached. He said, "The system is working as intended - as a
means above all for conciliation and for encouraging resolution of disputes, rather than just for
making judgements." The United States has been a beneficiary of such settlements that occurred
in part because nations were motivated to settle in order to avoid a definitive panel ruling. One
such case is the U.S. dispute with Japan in regards to the auto parts industry.
was also content with the dispute solution, saying that it "will result in significantly increased
market access and structural change in the Japanese automobile sector."
Although the dispute was settled bilaterally, this case raised a question about the propriety of
unilateral sanctions. Another significant point raised by this case regards the fact that, "the WTO
acted as a deterrent against conflict and promoter of agreement." The fact that "the resolution of
the Japan-US trade dispute before the sanctions went into effect illustrates many of the
improvements that the new WTO has brought to the dispute settlement process."
U.S. SOVEREIGNTY AND THE DISPUTE SETTLEMENT MECHANISM
Two different concerns have been raised about how the WTO's DSU may erode U.S.
sovereignty. The first is the concern noted above that if the WTO panel finds that specific U.S.
laws or regulations are inconsistent with what the United States has agreed to in international
trade agreements, it can pressure the United States to change its practices. The second concern is
that the DSU may constrain U.S. legal authority in imposing unilateral economic sanctions under
Section 301 of the U.S. Trade Act, designed to retaliate against foreign trade practices
determined to be unfair.
As with the panel decisions under the GATT, the reports by panels or the Appellate Body under
the WTO do not compel executive or legislative action under U.S. law. If a report by a panel or
the Appellate Body requires the United States to amend federal law to be consistent with an
Uruguay Round Agreement, the Congress is the only body with the authority to decide whether
such amendments will be made. Reports do not grant federal agencies or state governments legal
authority to modify their regulations or procedures or to cease to enforce any specific laws or
regulations.
Two early dispute panel cases illustrate the ways in which the WTO panels have dealt with
conflicts between U.S. laws and regulations and U.S. obligations under international trade
agreements. They include a complaint by Costa Rica regarding restrictions on imports of cotton
underwear, and a complaint by Venezuela and Brazil regarding U.S. restrictions on gasoline
imports.
This first WTO decision was a poignant one since many opponents of the WTO were concerned
that democratically created environmental, health, and consumer safety laws could be
undermined by trade bureaucrats in Geneva. WTO supporters, in the United States and
elsewhere, touted the stricter enforcement mechanism as a tool that free-trading countries, the
United States in particular, could use to break down protectionist trade barriers in other
countries. Perhaps an example was made of the United States to show that Technical Barriers to
Trade will be contested in all WTO member-states, and that all members must relinquish some
sovereignty in order to benefit from the free-trading regime established by the WTO. Ultimately,
though, WTO panels cannot change U.S. laws or regulations. Although the United States chose
to change its regulation in response to the Gasoline Case, it had other options. The U.S.
government and its agencies retain the authority and the responsibility to take measures to
protect the environment, public health, and safety. If these measures conflict with U.S. trade
obligations, the United States can always choose to compensate its trading partners in other
ways.
The Helms-Burton Case: the National Security Exception
The outcome of another complaint brought before the WTO, by the European Union and other
nations against the U.S. Helms-Burton Act, suggests that if national security issues are at stake,
the United States has the political power to convince other nations to choose a different venue for
settling disputes.
The Cuban Liberty and Democratic Solidarity Act, also known as the Helms-Burton Act, was
signed into law by President Clinton on March 12, 1996 and has been at the center of serious
controversy ever since. The Act gives the right to U.S. nationals whose property was confiscated
by the Cuban government decades ago, to sue, in U.S. courts, foreign investors who profit from
the use of those properties. Another provision bars senior executives of U.S. firms from doing
extensive business in Cuba. Canada and the EU adamantly oppose this law, asserting that it
extends past U.S. territory and thus falls outside U.S. jurisdiction, and have enacted their own
counter legislation.
In order to soften the law, the U.S. Republican Congress would have to amend it. The EU
formally requested a WTO dispute settlement panel to investigate the Helms-Burton Act, and
such a panel was established in November 1996. The establishment of the panel was not meant
to preclude negotiations, however, and the United States and European Union agreed in April
1997 to work cooperatively on a resolution before October 1997. The EU suspended the panel
but reserved the right to reinstate it, while the Clinton Administration has so far refrained from
filing any claims under the Act.
This case could have been a breaking point for the WTO, as the United States has threatened to
relinquish jurisdiction in this matter. The United States has argued that the Act involves national
security and is not strictly an economic concern. Therefore, the United States could ignore any
WTO panel ruling. If a dominant country such as the United States were to deny a dispute
settlement panel ruling in a politically sensitive case such as this one, it would seriously
undermine the authority of the organization. While a short-sighted politician might see a weaker
WTO as an increase in U.S. national sovereignty, future generations would not benefit from the
powerful, and so far very respected, settlement mechanism for resolving trade disputes. This
reality explains why the EU agreed to halt the WTO dispute panel. By reaching a negotiated
settlement with the United States, the EU avoided jeopardizing the WTO.
Section 301: Unilateral Sanctions and the Japan Auto Dispute
The second argument that raised vis a vis the WTO dispute settlement mechanism and U.S.
sovereignty regards the question of whether or not the United States can employ unilateral
sanctions to punish trading partners who do not cooperate with U.S. wishes. In the Japan auto
parts dispute, the United States insisted that the WTO does not cover the anti-competitive policy
issue, therefore unilateral action was permissible. However, the language of the DSU implies that
unilateral sanctions without authorization by the WTO violate WTO rules. For example, Article
III and Article XXII of the DSU, which emphasize multilateral dispute settlement; and Article I
of the GATT, which addresses MFN status, as well as Article II of the GATT, which deals with
excessive tariffs, can all be interpreted as prohibiting unilateral punitive sanctions. Other WTO
member-states also opposed the United States' unilateral action, with the European Union and
Canada going so far as to reserve their third party rights in the dispute because of this issue.
The DSU does not affect application of Section 301 if it is used against non-WTO members,
however. The DSU does not demand any significant modification in Section 301 investigations if
those investigations include alleged breaches of Uruguay Round Agreements or the impairment
of U.S. benefits under the Agreements. The United States could always decide to use Section 301
trade sanctions without WTO authorization against a fellow member-state. In this case, the
member-country subjected to the use of Section 301 may seek counter-retaliation against the
United States by arguing that the United States has violated its obligations under the DSU. While
the United States clearly retains the practical ability to apply Section 301, doing so would
probably undo the delicate world trade regime that the United States has sought to promote.
Since the United States and Japan settled the auto-parts dispute before a WTO panel was formed,
the issue of the legality of unilateral sanctions was not formally decided by the WTO. Both the
threat of sanctions by the United States and the existence of the possibility of a binding
settlement by the DSU panel brought pressure on the parties to come to a negotiated settlement.
Since the issue was not formerly resolved, the United States has quietly maintained the legal
position that it could use unilateral sanctions in the future, even before a panel found that a U.S.
complaint was justified. The Clinton Administration has not chosen to force the issue.
On balance, the record of the first three years suggests that the WTO's dispute settlement
provisions are not a significant threat to the sovereignty of the United States. Instead, the United
States maintains enough practical power to move issues out of the venue of the WTO when it
sees fit, as illustrated by Helms Burton case and the Japan auto parts conflict. Since dispute
settlement panels are only authorized to consider whether laws and regulations are consistent
with trade agreements, there is a tendency for their decisions to place a preponderance of
importance on trade issues. Ultimately, the United States may face the need to exercise its
sovereignty by violating a WTO recommendation on environmental, health and safety, and/or
national security grounds. The United States, or any other member-country, should carefully
consider the consequences of such an action for long-term trade stability before doing so. The
option to maintain the controversial regulation always remains, while compensating trading
partners in another realm.
The existence of the WTO regime offers the United States a valuable opportunity to extend its
global influence. Through minor adjustments in policy, the United States has demonstrated its
willingness to abide by the dispute settlement process. By setting an example of compliance, the
United States further promotes its vision of a stable, law-based international trading system.