INTERNATIONAL ECONOMIC LAW
MEANING
The term IEL has no universal accepted meaning. Various scholars and authors have different definitions of the term IEL. There are 2 schools of thought on the meaning of the term. These are:
Broad School
Narrow School
According to the broad school of thought the term IEL means any aspects of IL that has an economic bearing. This definition implies that the entire branch of public international law, monetary law, environmental law, the law of the sea and all other laws of international character are part of international economic law.
The narrow school of thought defines International Economic Law to strictly encompass those principles and guidelines issued by sovereign states to regulate trade relationship between countries. In this narrow sense of International Economic Law is concerned with the trade relations between sovereign countries. It only relates to the policies and principles underlying the trade relations. In this narrow sense; I.E.L. does not include public International law, International Monetary Law, International Finance Law, the Law of the Sea and all those other branches of International legal regime. Due to the narrow and broad meanings of the term, this course adopts the narrow definition of international economic law.
Distinction Between International Economic Law & International Trade Law
The trade relationships between countries is conducted at two levels
By sovereign states;
By private individuals.
Sovereign States in the International Economic Arena lay down policies and principles that enable private citizens to conduct trade. They lay down the general legal framework. This framework is the narrow meaning of International Economic Law.
On the other hand private citizens or individuals engage in the importation and exportation of goods and services across national frontiers. These private individuals are engaged in the buying and selling of goods. The importer of a product is a purchaser of goods. The exporter is a seller of goods. In most cases the importer does not meet with the exporter. It is essential that there must be a contract of sale of the goods between the buyer and the seller between the importer and the exporter. This contract must be valid, the contract has an international element to the extent that the buyer and the seller reside in different countries, the contract is to be performed in different countries payment is to be made and received in different currencies, the goods must be shipped or air-freighted by a 3rd party, the financial transaction is being handled by different banks and underlying all these the importer and the exporter must have a valid contract for the sale of goods.
International Trade Law is that law for the sale of goods at the international level. At the domestic national level, the law of contract or the law of sale of goods is the one that governs the relationship between the buyer and the seller. At the international level, it is the international trade law that governs the relationship between the importer and the exporter i.e. International Trade Law is the law of sale of goods at the International Level. It purely regulates private individual transactions and not sovereign state transactions. This International Trade Law encompasses the following topics
The validity of a contract for sale of goods at the international level,
Shipping and maritime law as relates to the Bill of Lading
Insurance of Goods in Transit either FOB or C.I.F.
Letters of Credit both reversible and irreversible.
These items of international trade law give validity to the transaction between a buyer and a seller.
Distinction between International Economic Law & International Finance/Monetary Law
When goods cross national frontiers involving importers and exporters, there are two financial transactions taking place
(a) International Economic Law
The financial transaction between the individual importer and exporter; this transaction involves payment by the importer for the purchased products using local currency. To enable the importer to pay for the goods ordered he uses letters of Credit and a respondent and correspondent bank. The Respondent Bank is the bank nominated by the importer. The Correspondent Bank is the bank designated by the exporter to receive payment on his behalf. The Respondent Bank receives the purchase price from the exporter. This bank opens or issues a Letter of Credit in favour of the Correspondent Bank on one condition, the Respondent bank guarantees the correspondent bank that it shall pay the purchase price to it upon the correspondent bank confirming that it has received the Bill of Lading on instructions of the exporter. The Bill of Lading is a document issued by the Captain of a Ship confirming that he has received the goods mentioned therein and designed for export and delivery to the importer or his nominee. This transaction is a private affair. International Finance Law regulates this private financial transaction; it determines the validity of the letters of credit, the rights and obligations of the Respondent and Correspondent Bank and the Financial liabilities of the all the Parties.
(b) International Monetary Law
International Monetary Law on the other hand deals with the financial relationship between sovereign countries. When a sovereign borrows or lends money or when the balance of accounts or balance of payments is made between countries. International Monetary Law regulates that relationship. Those institutions that formulate policies and principles on monetary affairs of sovereign states are known as International Monetary Institutions. These are the World Bank and the IMF. They are concerned with the Sovereign status of countries.
SOURCES OF INTERNATIONAL ECONOMIC LAW
Treaties. International economic law governs the sovereign trade relationships between countries. Sovereign states enter into legal binding commitments through treaties. Whatever agreements the sovereign countries agree upon these will bind them in a treaty form. The Vienna Convention on the Law of Treaties regulates the procedures and determines the validity of treaties signed by states. Treaty Law is thus the most important and fundamental source of International Economic Law.
Historically countries entered into economic treaties as far back as the 13th Century during the age of exploration. At inception economic treaties were referred to as Treaties of Friendship, Commerce and Navigation (FCN).
The FCNs were treaties of friendship to the extent that the explorers were announcing to their hosts that we have come for peace and not war. They were treaties of navigation because the explorers were seeking guidance on navigation routes in the search for the sea routes to India and the Americas. They were treaties of Commerce because the explorers were interested in Trade to obtain spices and other exotic products of the new Lands.
As the FCN treaties increased in usage they ceased being purely FCNs and they started to regulate the bilateral relationship between countries. To this end the terminology changed from FCN to Bilateral Investments Treaties (BIT). The BITs with time acquired a new function. They started to regulate the whole individual foreigner not as a person per se but as an investor. For this reason the BITs acquired the following functions:
Regulating the right of entry of the foreigner;
The right of residence in the host state;
The right of establishment i.e. the right to enter the host state and do business therein;
Protection of the person of the foreigner from arbitrary arrest;
Protection of the property of the foreigner against compulsory acquisition, Nationalisation and Expropriation;
The right of foreigner to access justice and arbitral or judicial proceedings;
Issues of double taxation to determine which country has the right to tax the income of the foreigner, is it the host state or the Home country;
Incentives that can be given to the foreigner and issues of repatriation of earnings or profit.
These new functions of the BITs increased with the growing international trade amongst countries. The BITs started as bilaterals, they became regional and now they are multilateral. There are several regional and multilateral agreements that States have concluded to determine their trade relationships. Bilateral agreements are still part and parcel of todays world. There are also original and multilateral agreements.
The examples of the East African Community and COMESA and the European Union and NAFTA are regional economic agreements. The World Trade Organization is an example of a multi-lateral agreement between countries. Whether it is bilateral, regional or multi-lateral the Law of Treaties as embodied in the Vienna Convention determines the validity of those instruments.
2 Public International Law
Underlying International Economic Law is public International Law. public International Law provides fundamental concepts that form the cornerstone of International Economic Law e.g. the concept of Puncta sund Servada article 26 of the Vienna Convention on the Law of Treaties (Agreements shall be kept) is the cornerstone of the Law of Treaties and herein Public International Law lends this concept to International Economic Law. The Rules of interpretation of treaties as established by Public International Law are used to interpret the International Economic Agreements. Custom as defined by Public International law is used to modify, expand or diminish the realm of International Economic Law. These concepts borrowed from Public International Law are a source of International Economic Law.
3. Decisions of International Economic Organisations
There are certain fundamental international economic institutions whose policies, decisions and practices are a source of international economic law. To this extent the decisions of the World Trade Organization, the IMF and the World Bank are a source of International Economic Law. These Institutions are involved in the creation of customs and practices that are soft international law. Their resolutions are binding on members because they are multilateral in character.
THEORIES OF INTERNATIONAL ECONOMIC LAW
Treaty Law e.g. the treaty establishing the East African Community determines our rights and obligations
THEORIES OF INTERNATIONAL ECONOMIC LAW
There are 3 theories that underpin the international economic law. These theories seek to answer the question:
Why do countries trade with one another?
What product will countries trade with each other?
Comparative advantage;
Free Trade Theory
Foreign Policy and Strategic Trade.
Comparative advantage.
The comparative Advantage trade theory was developed by Adam Smith and Jeremy Bentham. This theory states that a country will specialize in the production and export of those goods that it can produce cheaply compared to its neighbours and trading partners. This theory compares the cost of production between the trading partners. The theory at its inception was used to compare country A and B in terms of wheat production. Under this theory assuming that country A uses 20 people to produce 2 bushels of wheat while country B used 2 people to produce 10 bushels of wheat, the theory observes that country B has a comparative advantage over country A in terms of wheat production. The argument is one person in country B can produce 5 bushels of wheat while in country A one person produces one tenth of a bushel. Under this theory of comparative advantage a country is supposed to specialise in producing and exporting only those products where it has a comparative advantage. The argument is that by engaging in comparative advantage a country can benefit from economies of scale in large-scale production and export to its trading partners.
The theory of comparative advantage has been criticized for various shortcomings.
The theory assumes that the factors of production are mobile between countries. It assumes that people can freely move from country A to country B and engage in production there. In the real world there are political boundaries and labour and other factors of production are not mobile.
The theory assumes that land and labour are the only factors of production. In the modern world there are 3 other crucial factors of production namely Capital, Technology and Entrepreneurship. These factors contribute to a large extent in determining comparative advantage.
The theory places emphasis on people or labour without examining the quality of that labour. Labour can be skilled or unskilled. The failure to draw such a distinction renders the theory inadequate in explaining the role of labour in the production process.
The theory assumes that comparative advantage is static or constant in reality a countrys comparative advantage is dynamic and comparative advantage can be created or destroyed. Using capital and technology, a country can create its own comparative advantage for example irrigation technology has been known to create comparative advantage in desert countries. Science and technology have created comparative advantage in countries which are inventive. In most developing countries social and political upheavals have destroyed comparative advantage or rendered the countries incapable of taking advantage of their comparative advantage.
The inadequacy of the theory of comparative advantage in explaining why countries trade with one another led to the development of the free trade theory.
Free Trade Theory
Under the Free Trade Theory, the theory stipulates that countries trade with one another on the basis of free trade. Free trade presupposes the absence of barriers to trade. Free trade in effect means free from trade barriers. The theory argues that when barriers to trade are eliminated the cost of production goes down. With reduced cost of production consumer prices also go down and increase in demand takes place. The theory argues that goods will move from countries of supply or production to be exported to those countries where there are free or no barriers to trade. The theory of free trade must be distinguished from the concept of freer trade. The concept of freer trade does not mean that the trade is free, it only implies that the barriers are much more reduced. Free trade presupposes absence of freedom from barriers to trade. One advantage of the theory of free trade is that it enables large scale production to take place. In practice no government practices free trade. Some form of protection is imposed by government. The arguments against free trade are normally referred to as the case for protection or the reason why trade barriers are important. In the modern days free trade theory is what is referred to as a liberalised economy or a market economy or a Keynesian economy named after John Maynard Keynes who developed the theory.
The various arguments for protection that have been advanced by the government in imposing trade barriers are
the need to protect domestic or infant industries; this argument is favoured mainly by developing countries. Developing countries have argued that their industries are young and infants. These industries cannot compete with the mature and technologically superior industries of the West. For this reason they argue that some form of protection through tariffs (tax) is necessary to cushion or protect their infant industries. This is to give these infant industries time to mature and to be able to face competition. Developed countries also use infant domestic industry argument to protect certain sectors from competition. The sectors that they deem important to their economy are normally protected using tariffs. The financial and telecommunications sector is a case in point.
Employment Creation: Countries have argued that some form of protection is necessary in order to create employment or to protect employment in the National Economy. A country that relies on imported products is in fact importing unemployment and exporting employment. Exports generate employment in the exporting country while imports generate unemployment in the importing country. Countries impose trade barriers to stop imports from creating unemployment in their countries. Similarly countries engage in export promotion as a means of generating employment in the National Economy. To this extent a liberalised economy or a free trade economy if not checked will create unemployment in the importing country.
Balance of Payment considerations: Trading countries incur a debt when they import. They incur a credit when they export. A country that imports more than it exports creates a debit balance in its national account. A country that persistently exports more than it imports creates a surplus in its national account. A persistent debit or persistent surplus is bad for trading nations. A balance must be struck out in the national account. Countries impose trade barriers in the form of tariffs or quotas so as to restore a balance in the national account. A higher tariff or quotas is used to prevent imports from entering a country and creating a debit. Lower tariffs and lower quotas have the opposite effect. They encourage imports
Food Security: Some countries pursue a policy of being self-sufficient in food production. A country that is striving for self-sufficiency is known to be pursuing a policy of autarky. There are certain countries that are determined to be self sufficient in food production. They are pursuing this policy as a matter of national food security policy these countries prohibit imports of food or specified foods. They impose trade barriers to importation of the food. For example Japan prohibits the importation of rice into the country arguing that rice is a staple food for the Japanese and they cannot allow their staple diet to be supplied by foreigners since supplies cannot be guaranteed. Today food is no longer food for the table but a weapon of war and a tool of blackmail. Countries with excessive surplus of food are using food as a tool to make food deficit countries to change their policies. Food as a weapon of war is used as a strategic military reserve. It is argued that in times of war a country should be able to feed itself and its soldiers because your enemy could be the supplier of your food. Depending on imported food at times of war makes the supplier of food to have a bargaining hand in the conduct of war. Countries pursuing self-sufficiency in food production in most cases are countries preparing for war and using food as a military strategy.
The inadequacy of the theory of comparative advantage and free trade theory led to the development of the foreign policy and strategic trade theory. The foreign policy and strategic trade theory stipulates that a country examines its own national interests and pursues a strategic foreign policy to determine which countries it will trade with and what products it will deal in. for example during the cold war between the United States and the Soviet Union, the US strategically developed a trading relationship with countries that they wanted to put under their sphere of influence. This trade relationship was dictated by the strategic interests of the United States and not the theory of comparative advantage or free trade. Similarly the Soviet Union developed a trading relationship with communist countries in order to keep these countries under the Soviet Satellite regime. A notable example is the Soviet/Cuba trade relationship and the United States Monroe doctrine. The present day relationship between United States and Israel is dictated by the United States strategic interest and not the theory of comparative advantage. The US as a super power requires to have a foothold in the Middle East and a reliable partner. In this they see Israel as fulfilling that role. The strategic interest of a country also determines which products it shall trade with that country for example the US strategic interest to remain the sole super power makes it adopt a policy that no technology in the cutting edge or superior military technology shall be sold to developing countries. The same strategic interest dictates that Israel must be provided with the latest military technology. The foreign policy and strategic trade theory thus supplements the comparative advantage trade theory and the free trade theory in explaining why countries trade with one another and which products they trade with each other.
The theory of comparative advantage must be distinguished from the concept of absolute advantage. Within a country different regions produce different products and a regional comparative advantage can be done within a country. At the International Level, there are countries that have a comparative advantage over another in almost all products and sectors. This is known as absolute advantage of country A over B. in such a scenario comparative advantage theory dictates that the countries should not trade with one another. However if the countries trade with one another, the disadvantaged countries will have unfavourable terms of trade.
International Economic Institutions:
There are several institutions at the global level that shape and influence the development of international economic law. Some of these institutions are multilateral while others are regional in character.
The International Bank for Reconstruction & Development.
(The World Bank)
The IBRD or World Bank is one of the Bretton Woods Institutions. The World Bank is established by the articles of agreement of the bank signed at Bretton Woods in 1944.
The origins of the World Bank lie in the San Francisco Conference of 1942 whereby the allied powers agreed to establish 3 Institutions to govern post world war two affairs one of these institutions was to be political and in charge of International Peace and Security. These later became the United Nations. The other institution was to be Economic to regulate the Monetary and financial aspects of the World. Three institutions were set up with this regard namely
World Bank;
IMF
ITO
The third Institution was to regulate the International trade in goods and employment. This was to be known as the International Trade Organization. (ITO)
THE WORLD BANK
The World Bank was established with the mandate of lending money to governments for the purpose of reconstructing war torn Europe. The banks mandate was restricted to financing infrastructural programs such as the reconstruction of roads, hydro-electric stations, health facilities and other social amenities that had been destroyed during the war. The Bank was to extend the loans on concessional terms which loans were repayable over a long term period.
Membership to the World Bank is open to countries that are members of the United Nations. Each member state contributes shares to the World Bank. The unit of currency at the Bank is known as a Special Drawing Right (SDR). One SDR is equivalent to $100 and this rate is reviewable.
The bank is managed by a team of executive directors and a Managing Director. There are 24 Executive Directors of the Bank and one Managing Director. The Executive Directors and the MD are appointed by the members through voting. The member states of the bank vote the directors and each director is voted by the countries that nominated him or her. The Bank has an additional group of directors who are not executives. Each member state appoints a director and an alternate director. In practice the Minister of Finance of a member state is a director of the World Bank and the Governor of the Central Bank is the alternate Director.
THE INTERNATIONAL MONETARY FUND (IMF)
The IMF was established at the same time as the World Bank in 1944 at Bretton woods. The mandate of the IMF is restricted to regulating global monetary affairs. It is charged with the responsibility of maintaining balance of payment equilibrium and stability of exchange rates. In order to achieve its purposes, the bank lends monies to governments to restore balance of payment equilibrium.
The mandate of the World Bank and the IMF are restricted to the extent that they cannot lend to private individuals. For this reason the International Finance Corporation (IFC) was established to be able to lend money to the private sector and business community in general. The necessity of establishing the IFC was also realised because the mandate of the World Bank is restricted to infrastructural development and not risk capital and joint ventures.
VOTING & DECISION MAKING IN THE IMF AND THE WORLD BANK
Ordinarily in the international level the concept of one nation one vote applies. Decisions are made based on the concept of simple majority. At the World Bank and IMF voting and decision making is not based on one nation one vote. In these institutions decision making is based on weighted voting. Each country has a vote commensurate with its shareholding. The more shares you have the more votes you have. The shares are converted into SDRs and a country uses the value of its shares to determine its votes.
In order to reflect the principle of sovereign equality of nations, each country has an initial vote of two hundred and fifty thereafter; the weight of the shares determines the votes. Using the weighted formula as of 2003 the USA had 285,000,000 votes followed by Germany with 72,000,000, Japan 55,000,000 UK 55,000,000 and France 52,000,000, Kenya has 260 votes and South Africa had 1,100 votes. In line with these weighted decision making, the practical consequence has been that the USA has reserved for itself 10 positions of Executive Director and the office of the Managing Director. The European Union has reserved five seats for itself and the rest of the positions are to be shared one for Africa, one for Asia, one for Latin America, one for Europe, one for Australia and the remaining seats they are still votes. The developing countries have objected to the weighted voting system in these Bretton Wood Institutions.
However in order to change the system, one requires the voting power to be exercised through the weighted system. This has proved impossible. The reaction of the developing countries in the early 60s was to try and shift the forum of economic issues from the Bretton Wood Institutions to the United Nations where one nation one vote system occurs. The consequence of this was that in 1964 the United Nations Conference on Trade and Development was held. This conference established (UNCTAD) as an organ of the United Nations. The mandate of UNCTAD was to address Trade and Development issues particularly as affecting developing countries. UNCTAD has tried to discharge its mandate and it depends on the UN budget for its operations. Whenever UNCTAD does something against the interests of the developed countries, particularly United States, the effect has been the US freezes its financial contribution to the UN. In the UN the US contributes 15% of the budget and the majority of the developing countries are always in arrears.
There are two particular instruments that the UNCTAD has passed that the developed countries have rejected. These are the Charter of Economic Rights and Duties of States and the Code of Conduct of Multinational Corporations. Under the Charter there is a clause that seeks to impose an obligation on developed countries that had colonies to pay compensation or reparation to the colonized people. The Charter seeks to declare colonisation as a crime against humanity. There is also a provision in the Charter that seeks to impose an obligation on developed countries to assist in the development of the developing world. Under the Code of Conduct of Trans-national corporations, there is a provision that seeks to outlaw repatriation of profits. The Trans-National Corporations are also required to transfer technology to the developing countries. Possession of arms by any nation is also deemed to be declared an act of aggression against human kind. The developed countries have objected to these provisions and have exercised their veto power to stop these instruments from becoming International Conventions with treaty obligations.
The Organization for Economic Cooperation and Development [OECD]
The OECD is a successor to the OEEC (Organization for European Economic Cooperation). The OECD is a grouping of 24 industrialized countries of the world led by the USA and Germany. The OECD is a policy making body. It conducts research and issues policy directions to its members. It issues guidelines on economic policy and advises its members on what economic instruments or policies to pursue. In practice the decisions and the policies of the OECD are binding on its members. The OECD countries control over 75% of World Trade. They also control over 98% of Global Wealth. They are the major stake holders in the global trade and monetary system. Whatever the OECD countries decide, it will be implemented by the Bretton Woods Institutions since these are the countries with the votes in these institutions.
THE G7 +1
The Group of 7 plus one countries are the most industrialised countries of the world. The group of seven is made up of the USA, Germany, Japan, Italy, United Kingdom and France, The Netherlands and the one is Russia. These industrialised countries consider themselves as the backbone of international trade and monetary system. An important aspect of the G7 is that they are the source of foreign direct investment or foreign aid flowing into the rest of the world. They are also the home to most multi-national corporations. Their private citizens and banks are the lenders to the rest of the world. The G7 came into existence largely as a reaction of the inability of governments of other countries to pay back loans that are owed to private banks in the G7 Countries. The G7 is an informal grouping not established by treaty or any instrument. These countries meet to decide on the debt issues whether they are going to forgive a debt, reschedule a loan or waive interest. They also formulate what they perceive to be an appropriate global monetary policy. When they meet to reschedule national debt they are referred to as the Paris Club. This emanates from the practice whereby they meet annually in Paris to discuss debt rescheduling . Although the group is referred to as the G7, to date it has 19 members but they have retained the name G7.
OTHER INTERNATIONAL INSTITUTIONS
In addition to UNCTAD and the Bretton Woods Institutions, there are other organizations affiliated to the United Nations which have an impact on global economic relations. The includes;
The International Labour Organization (ILO) deals with labour matters and it has come up with certain ILO conventions that have an economic impact.
The International Civil Aviation Authority,
The International Maritime Organization,
The World Meteorological Organization and a host of other institutions also formulate policies that have an economic impact.
All these institutions through their policies and practices have a bearing on creating principles of International Economic Law.
THE GENERAL AGREEMENTS ON TARIFFS & TRADE (GATT)
In 1942 at the San Francisco Conference it had been agreed that an international trade organization was to be established to regulate international trade in goods. It was agreed that a conference of experts was to be held later to draft the Charter of the Institution. In 1947 the conference was held in Havana Cuba to draw up the ITO Charter. The Charter was drafted and it was titled The Havana Charter on Trade and Employment establishing the ITO. This Charter is commonly referred to as the Havana Charter of 1947.
In consonance with the US Constitution the Havana Charter was presented before the US Congress for ratification. The Congress was controlled by the Democrats but the President was a republican. In order to teach the Republicans a lesson the US Congress rejected the Havana Charter citing two reasons
The US President had no authority to negotiate a treaty without congressional approval;
The US was not ready to surrender her economic sovereignty to an international organization.
Congress agreed that the US had already surrendered political sovereignty to the United Nations whose future was uncertain. Consequently the US could not surrender economic sovereignty and experiment with another organization. Congress declined to sanction the Charter.
Noting that the US was the strongest economy in the World, when Congress rejected the Havana Charter the idea of establishing an International Trade Organization came to an end.
Despite the US rejection of the Havana Charter 23 countries met in Geneva in 1947 and agreed to apply amongst themselves that part of the Havana Charter that was titled the General Agreement on Trade and Tariffs (GATT). In order to do this the 23 countries signed a protocol on the provisional application (PPA) of GATT. They reasoned that they were applying GATT provisionally or temporarily until the US Congress would change her mind. It took the Congress 47 more years to change its mind and to agree to the establishment of the ITO under the name WTO. In the interim in 1947 onwards GATT operated as the informal provisional media whereby the 23 countries would discuss trade and tariffs issues amongst themselves. Over the years membership to GATT increased from 23 to 140 in 1994. The practical consequence was that this informal set-up known as GATT slowly emerged as the forum controlling global trade. The 23 original countries which included the USA and UK are known as the GATT founder members. The signatories to GATT are known as Contracting Parties. Since GATT was not established by a Treaty, it did not have members or any rules on how to join it. It was an ad hoc system. When Contracting Parties met as GATT as a Corporate entity they would make binding decisions. When the contracting parties met to discuss issues, there were no binding decisions. The practice developed in GATT whereby the Contracting Parties would meet to periodically review tariff issues. These periodic meetings came to be known as Rounds of Negotiations. During these Rounds of Negotiations, the Contracting Parties would formulate principles and policies that bind them. The following rounds of negotiations have been held
Geneva 1947
Annecy 1949;
Torquay 1950-51
Geneva 1955-56;
Dillon 1961-62;
Kennedy Round 1963-67;
Tokyo Round 1973-79
Uruguay Round 1986-94 at the conclusion of the Uruguay round, one of the final instruments was the Marrakech Agreement establishing the World Trade Organization.
2001 the DOHA Round negotiations still continuing
OBJECTIVES OF GATT
At its inception GATT was established with the sole aim of addressing the tariff barriers between the contracting states. The primary goal of GATT was to identify the trade barriers between countries and come up with policies, principles and guidelines that will enable the contracting parties reduce or eliminate the trade barriers.
There were two types of barriers that were identified under GATT. These are tariff and non-tariff barriers (NTBs).
A tariff as a barrier to trade is a duty levied on imported goods. It is commonly referred as customs duty. A customs duty must be distinguished from an excise duty. An excise duty is any tariff or tax levied on goods produced or sold within a national economy.
There are three categories of tariffs, namely (a) ad valorem tariff (b) specific or fixed rate tariff or (c) a mixed rate tariff.
An ad volarem tariff is a tax imposed based on the value of the goods, for example, a 50% tariff denotes 50% of the value of the product.
A specific tariff or a flat rate tariff or a fixed tariff is a tax dependent on the quantity of the goods, for example $10 per one 1,000 pounds.
A mixed rate tariff structure is one that combines both an ad valorem rate and a specific flat rate. Each country is required to make a policy decision on what combinations of tariffs to apply.
At the market place the effects of the tariff is to raise the domestic price of the imported product. The tariff raises the price of the imported product compared to the price of a domestically produced good. The practical consequence is that consumers will purchase domestically produced goods, which are cheaper in comparison with of like imported products. This amounts to a domestic distortion whereby the laws of supply and demand cannot apply.
With respect to non-tariff barriers or NTBs the GATTs objective was to identify these barriers and formulate principles governing the same. Several non-tariff barriers were identified, and these are:
Technical barriers to trade (TBT). These are standards that must be observed by producers before their products can be sold. Some of these technical standards relate to specifications of products and safety regulations. In some cases the standards are environmental. The TBTs operate as a barrier to trade in that if a producer does not meet the standards his products will be out of the market.
Sanitary and phytosanitary standards (SPS). The SPS are standards put in place with the aim of protecting human, animal and plant life. These standards determine what products are fit for human consummation. The also regulate the type of pesticides, herbicides and germicides that can be used in agricultural and veterinary production. The SPSs have an element of environmental conservation more particularly when they relate to the protection of plant life. For agricultural economies such as Kenyas the SPSs are a major barrier to trade particularly in the horticultural sector.
Import licensing procedures. In most countries import licensing procedures there are several procedures to be followed before an important can import goods. In most countries there are several licenses or forms to be filled. The forms are in different languages all over the world and consequently the cost of interpretation and translation must be borne by the producer. In some countries the forms are non-existence yet there are required. In a majority of countries the administrative procedure of acquiring the forms and filling it out is time wasting and bureaucratic. The bureaucracy involved and the amount of licenses required and the time involved is a cost to business and a barrier to trade, for example in Kenya, before an enterprise or a business can be set up you require 48 licenses from different offices. In most cases the businessmen do not know that they require the licenses until they are arrested. This lack of transparency in licensing procedures is a barrier to trade.
Rules of origin. GATT identified the operation of rules of origin as a barrier to trade. In order to be able to administer the tariff system the rules of origin are critical. In most countries the tariff system is preferential to the extent that different countries enjoy different tariff rates. For example goods from the European Union into Kenya could enjoy a rate of 25% customs duty while goods from outside the European could have a 100% ad valarem tariff. Other countries could enjoy a duty free status. To be able to administer these different tariff structures the rules of origin become critical. The rules of origin determine the origination of a product, that is, where does the product originate from. It must be emphasized that the origin of a product is not determined by the origin or source of the ship, which carried the product. Product origin is a function of a complex formula of value adding and processing. It the value adding and the processing of a product that determines its origin. Percentage criteria are used and this percentage can operate as a trade barrier. One of the objectives of GATT was to instill discipline in countries in the use of the rules of origin as a barrier.
There are other non-tariff barriers that GATT identified such dumping, subsidies and the use of safeguard measures. In all these non-tariff barriers as identified GATT came up with principles regulating the same.
The World Trade Organization (WTO)
The World Trade Organization can aptly be described as a successor to GATT. The origin of the World Trade Organization lies in the fundamental defects of GATT as a system. GATT from 1947 to 1994 had major weaknesses. These weaknesses of GATT gave rise to the justification of the establishment of the World Trade Organization. The key weaknesses of GATT can be enumerated as follows:
Absence of a legal framework establishing GATT. GATT was created as an accident of history. The original aim in 1947 was to establish the ITO. With the failure of the ITO GATT came into being without any treaty establishing it. Historians argue that GATT had a birth defect and it was thus necessary to rectify these defects by establishing the World Trade Organization through a treaty and this treaty came to be known as the Marrakech Agreement of 1994. This is the agreement that establishes the World Trade Organization.
2. Absence of clear rights and obligations. Since GATT did not have a legal framework the rights and obligations of the contracting parties were unclear. There were no clear rules of joining GATT and even after joining the contracting parties did not know their rights. This uncertainty of rights and obligations gave rise to a system of whereby powerful and strong countries would get their will and bulldoze the weaker countries. GATT therefore become lopsided and the weaker economies felt they were in order to address this concern and to restore the concept of the sovereign equality of states it was necessary to have a treaty designation clear rights and obligations of countries.
Lack of a dispute settlement mechanism. The GATT system did not have a mechanism of resolving trade disputes between countries. This was a fertile for strong economies to have their way. It was thus necessary to establish the WTO and make provision for a centralized dispute supplement system. In GATT each GATT cord or agreement had its own procedures for resolving disputes. The practical consequences was that countries would go for forum shopping, looking for a forum that is favourable to their interests. The result was that conflicting decisions emanating from various forums and these generated uncertainty to the international economic legal order. It was thus necessary to establish the World Trade Organization with the aim of restoring certainty to international economic law and establishing a clear, mandatory and centralized dispute settlement mechanism. To achieve this goal the understanding on Dispute Settlement agreements (DSU) was signed and concluded at Marrakech.
The GATT system was made up of several disjointed codes and agreements. The various rounds of trade negotiations held under GATT from the Geneva round to the Tokyo round produced various codes and agreements. For example, the Tokyo round produced the Valuation Code, the Antidumping Code, the Subsidies Code and various understandings. Each of the GATT rounds of trade also produced their own results and agreements. These various agreements were Stand-alone Agreements with no clear relationships between themselves. It is these standalone agreements that can rise to forum shopping and added to the uncertainty of the international economic order. It thus became necessary to establish the World Trade Organization to be able to establish a clear system of hierarchy between these agreements.
Absence of a clear relationship between GATT and the national legal regimes. GATT having been established by way of accident it was not clear which took precedence, GATT or the national laws. Due to this uncertainty on precedence many countries applied their national law as superior to the GATT system. Under international law multilateral commitments should take precedence over national positions. Breach of the multilateral obligations should give rise to state responsibility. With the shaky foundation of GATT it was not possible to clearly state that GATT rules took precedence over national laws. It was thus necessary to establish the World Trade Organization by way of treaty in order to clearly give precedence to the WTO rules.
Objectives of the World Trade Organization
The objectives of the World Trade Organization are contained in the preamble to the Marrakech Agreement.
These objectives are:
To raise the standards of living of its members;
To generate employment amongst its members on this point it must be noted that full employment and unemployment are both dangerous to an economy. What is required is the optimum level of employment and the reduction of underemployment
To increase trade amongst the WTO member states
To increase productivity amongst the WTO member states
To reduce trade barriers amongst the WTO member states
In the preamble to the Marrakech Agreement and in the entire GATT and WTO documentation nowhere is stated that the objectives of GATT and WTO is to liberalise trade or to encourage Free Trade. The phrase free trade or liberalisation is not used in the WTO documents. However the practical consequence of implementing and attaining the WTO goals is to liberalise global trade.
THE WORLD TRADE ORGANISATION AS A SYSTEM
The WTO exists at two levels
As an institution with its structures and
As a trading System
As a trading system the WTO is a complex web. Within it contains all the GATT Agreements and Codes. It also embodies all the principles and rules and decisions of the GATT round of trade negotiations. It also encompasses all the GATT panel decisions. It embodies all decisions of the CONTRACTING PARTIES. From this perspective as a trading system the WTO is a system made up of over 40,000 page document. It is this system and the rules that create it that make up the body of law known as international economic law.
As an institution the WTO is made up of one single treaty namely the Marrakech Agreement. The Marrakech Agreement as other WTO Agreements was signed 30th April 1994 at Marrakech in Morocco. Under the terms of the Marrakech Agreement the WTO as an institution was to come into force or into being on 1st January 1995. Consequently the WTO was established in 1995.
The institution known as the WTO has its own governing structure as follows:
The Ministerial Conference: This is the highest decision making organ of the WTO. Under the terms of the Marrakech Agreement the Ministerial Conference meets at least once every two years. The first Ministerial Conference was held in 1996 at Singapore, the next one was in 1998 in Geneva, the next one was in Seattle Washington in 1999, Doha Qatar in 2001 and Cancun Mexico in 2003 and the next one will be in 2005 in Hong Kong December 17. The Ministerial Conference has the mandate to make several important decisions affecting the WTO for example admission to the WTO can only be done by the Ministerial Conference. Amendment to any of the WTO agreements requires a decision of the Ministerial Conference. Imposition of sanctions and withdrawal of concessions to a member is by decision of the Ministerial Conference. Introducing any new issue for negotiation at the WTO requires a decision of the Ministerial Conference. The commencement and termination of any round of trade negotiations requires the decision of the Ministerial Conference.
The Ministerial Conference is made up of the Ministers for the time being of Trade of the member countries.
THE GENERAL COUNCIL: The General Council is the second highest organ of the WTO. Its membership is made up of the Ambassadors or representatives of the member states at Geneva. It sits in a continuous session in Geneva. It is charged with the responsibility of carrying out the decision of the Ministerial conference. The General Council can sit as a court to hear and determine dispute between member states. When the General Council sits as a court it is known as the Dispute Settlement Body (DSB)
THE COUNCILS: In addition to the General Council there are four other councils established under the Marrakech Agreement. These are
Council for Trade in Goods: this council oversees the implementation of the GATT 1947 and GATT 1994 Agreements;
Council for Trade in Services: This council oversees the implementation of the general agreement for trade in services (GATS)
Council for Trade Related Aspects of Intellectual Property (The TRIPS Council) This Council is charged with the responsibility of implementing the TRIPS Agreement.
Council for Dispute Settlement otherwise known as The Dispute Settlement Body(DSB). The DSB is established to implement and supervise the dispute settlement procedure of the WTO. The General Council is authorised to perform the functions of the DSB. The DSB is established under the DSU. The DSU likewise establishes the TPRM (Trade Policy Review Mechanism). The function of the TPRM is to review the trade policy of the WTO member states to determine if such trade policies are in conflict with the WTO.
The Secretariat: The Secretariat of the WTO is made up of international civil servants. They provide secretariat services to the organization. The Secretariat is headed by a Director General appointed by the Ministerial Conference. The DG is assisted by two deputy Director Generals. There are other divisions within the WTO headed by various international civil servants. The Secretariat implements the decisions of the Ministerial Conference and the General Council. The Secretariat is not the WTO and it does not make decisions. Decisions are made by WTO members and the Secretariat is purely a civil service system.
Agreements Making up the WTO
The WTO as a trading system is made up of the following agreements
The Marrakech Agreement of 1994 establishing the WTO;
Annex 1 Agreement made up of GATT 1994: The Annex 1 Agreement contains all the multilateral agreements that concluded the Uruguay Round of Trade negotiations. In these Agreements one of the most important is GATT 1994. At the end of the Uruguay Round Agreement one of the issues of concern was how do you deal with the GATT of 1947 and all the Agreements of the various rounds of negotiations. It was decided that all these GATT 1947 and the various rounds of negotiations were to become part of WTO. For this reason GATT 1994 Agreement was signed. GATT 1994 is made up of
GATT 1947, and
All the GATT decisions and rounds of negotiations agreements; this is a 22,000 page document making up the goods regime.
The Agreement on Agriculture:
Agreement on Sanitary and Phytosanitary Measures;
Textiles and Clothing Agreement
TBT Agreement
Trade Related Investment Measures Agreement (TRIMS)
Agreements on the implementation of Article VI of GATT 1994 (the Dumping Code)
Agreement on implementation of Article VII of GATT 1994 (The valuation Code)
Pre-Shipment Inspection Agreement;
Rules of Origin Agreement;
Import licensing Agreement;
Subsidies and Counter veiling measures Agreements
Safeguards Agreements;
Annex 1 B containing the general agreement on Trade in Services (GATS) and its schedules of concessions.
Annex 1 C the TRIPS Agreement.
Annex 2 the understanding on Dispute Settlement which establishes the DSB
Annex 3 The Trade Policy Review Mechanism (TPRM)
Annex M the Plurilateral Agreements (Optional Agreements)
Annex IV contains four optional agreements which member countries may sign. These are
a. The agreement of Government procurement
b. Trade in civil aircraft;
c. The Bovine Meet Agreement
d. The Daily Products Agreement
PRINCIPLES OF GATT/WTO
The GATT/WTO operates on two fundamental principles namely:
The most favoured nation principle (MFN) and
The National Treatment Principle (NT)
These two principles are the cornerstone of the GATT and WTO trading system. They are principles of non-discrimination. The assumption is that if all countries apply the MFN and National Treatment principles all will benefit from the resulting efficient use of resources.
THE MOST FAVOURED NATION PRINCIPLE
The MFN Principle is divided into two namely
The conditional MFN principle; and
Unconditional MFN Principle.
The term MFN Most Favoured Nation is an undertaking by a country to extend the best or the most favoured treatment to its trading partner that it has signed the MFN Agreement with. If a country signs an MFN Agreement, it undertakes to give the best treatment to that country that it has signed the agreement with.
Under conditional MFN, when country A grants a privilege to country C while owing MFN to country B, then Country A must grant the equivalent privilege to country B but only after B has given A some reciprocal privilege {to pay for it
Under unconditional MFN, in the above case A must grant the equivalent privilege to B, without receiving anything in return from B.
The GATT/WTO system is based on the unconditional MFN. Article I of GATT 1947 and GATT 1994 requires all the WTO member states to extend the unconditional MFN Treatment to all WTO Member States. The unconditional MFN Principle is a principle of geographical non-discrimination. Under Article I of GATT all member countries are supposed to extend unconditionally any privilege, right or benefit to all WTO counties without discrimination. The provisions of Article I is referred to as the principle of Geographical non-discrimination because it prevents the importing country from discriminating products on the basis of the geographical origin of the product.
The unconditional MFN treatment has several advantages to trading nations:
First from an economic viewpoint, the MFN principle ensures that each country will satisfy its total import needs from the most efficient sources of supply thereby allowing the operation of comparative advantage.
Secondly from the trade policy viewpoint the MFN commitment protects the value of bilateral concessions and spreads security around by making these bilateral commitments the basis of a multilateral system.
Thirdly, from an international viewpoint, the MFN clause mobilises the power of large countries behind the interest and aspirations of small ones which are to be treated equally. This MFN Principle restores equality of treatment of Nations.
From the domestic political viewpoint the MFN commitment makes for a straight- forward and transparent policies which are simple to administer. If all countries observe the MFN there will be no need for special rules of origin.
The unconditional MFN has a constitutional significance. It serves as the safe constraint on the delegated discretionary powers of the executive branch in trade matters. The MFN Principle that is embodied in GATT other than being the cornerstone of the system, it is the one that guarantees international trade security.
There are two crucial questions that arise from the operational of the MFN Principle:
When does it apply? (Breath of MFN)
To what does it apply? (Scope of MFN)
Scope of the MFN Obligation:
The MFN principle applies to all products imported into a country. The scope of MFN seeks to answer the question to what does the MFN Principle apply? The answer is the MFN applies to like products. Scope of MFN is determined by the concept of like products. MFN thus states that like products must be treated alike. The practical question is what is a like product? Is shoes the same thing as slippers? Are sandals slippers? Is an open shoe a shoe or is it slippers? Is a bed sheet the same thing as a leso and is a coat the same thing as a blazer? Is a shirt the same thing as a blouse so that they should be treated alike.
The MFN principle clearly requires that like products must be treated alike. In practical terms the difficulty has been how to determine like products. The GATT/WTO system to answer this question has come up with a system of product classification. Products are classified and given different tariff lines and headings. For this reason there must be product differentiation. Different products must be classified and differentiated. It is only after differentiation and classification that the MFN principle can be applied.
Concept of like products. MFN says no discrimination where tariffs are concerned,, if you treat like products differently, you must come up with a criteria, is slippers same as sandals? Tariffs are fixed high where the states want to discourage import. If Mitumba tariffs go up by 200% the nation is trying to discourage mitumba and encourage the textile industry. This concept can be complex when you manufacture goods cause when goods are manufactured they become different. What is coffee bee? Is it coffee or is it a beer. The tariffs change.
MFN applies to like products, if it is maize from Uganda, it must be treated the same with Maize from USA and Maize from Mozambique.
The real impact is that MFN is discriminatory as it tends to treat unequals equally
THE BREADTH OF MFN
The breadth of MFN seeks to answer the question, when does the MFN apply? Article I of the GATT Agreement states that the unconditional MFN principle applies in all cases relating to any privilege, concession or benefit of every kind given by a country more particularly the MFN applies in the following instances
It applies to
Customs Duties and other subsidiary charges or levies of every kind;
The method of levying such duties and charges;
To all rules, formalities and charges imposed in connection with clearing the goods through customs;
To all laws, regulations affecting the sale, taxation, distribution or use of imported goods within the country.
Interpretation of the MFN Breadth implies that the MFN principle applies at all times at all places to all products.
THE NATIONAL TREATMENT PRINCPLE
The second principle of GATT/WTO is the national treatment principle. This principle like its counterpart the MFN is a principle of non-discrimination. Whereas the MFN prohibits discrimination at the point of entry, the National treatment principle prohibits discrimination once the imported products have entered into the national territory of the importing country. The MFN prohibits Geographical discrimination between countries at the point of entry. The National Treatment principle prohibits discrimination within the National boundaries. The National Treatment Principle basically states that once imported products have entered into the national territory, they should not be discriminated with like domestic products. The NT principle thus requires that like imported products must be treated in the same way that you treat like domestically produced goods. This principle prohibits discrimination between domestically produced goods and like imported products.
The National Treatment principle is contained in GATT Article III. Article III of GATT stipulates that no charges or levies of equivalent effect shall be imposed on imported products in preference to domestic goods. The provisions of Article III on National Treatment read together with Article I of MFN completes the liberalisation process. These two principles are the cornerstone to the GATT/WTO Regime.
Paragraph I of Article III establishes the General principle that internal taxes and regulations should not be applied so as to afford protection to domestic production.
Many countries have raised concern that when governments give a subsidy they are in effect violating the National Treatment Principle. Rural Development Programmes have also been construed to be violating the National Treatment Principle. Education Scholarships and Grants are also being construed to be violating the National Treatment Principle. Just as its counterpart the MFN the Breadth of the National Treatment Principle is that it applies to all internal taxes, laws and regulations.
EXCEPTIONS TO THE MFN & NATIONAL TREATMENT PRINCIPLE
There are several exceptions to the MFN and the National Treatment Principle
The most important exception are:
Article XXIV exception on Customs Union and Free Trade Areas or Agreements leading to the formation of Free trade areas or customs union.
Article XX security exception;
Article XIX Escape Clause
Articles IX and XVIII on balance of payments;
Article III paragraph 8 on government purchases;
The exception on Customs Union and free trade agreements is the widely used exception to the MFN and the National Treatment Principle. It is this article that justifies the existence of Free Trade Areas and Customs Union.
Article XXIV stipulates that countries can form a free trade area or a customs union as an exception to the obligations in Article I and III of GATT. Article xxiv paragraph 8 (b) defines a Free Trade Area as an association of Nations with duty free treatment for imports from members. In a free trade area the members have a Common Internal Tariff (CIT) and each member is free to have its own common external tariff applicable to non-members.
Article XXIV paragraph 8 (a) defines a Customs Union as an Association of Nations with duty free treatment for imports from members and a common external tariff (CET) for imports from non-members.
An interim Agreement leading to the formation of a free trade area or a customs union is also an exception to the MFN and National Treatment Principle.
For a free trade area or a Customs Union to operate as an exception the agreement must cover substantially all trade between the parties. There is no consensus as to the meaning of the term substantially all trade. Does it mean trade in all goods and services between the countries or does it refer to the volume or value of trade. A rule of practice has been developed whereby substantially all trade means 90% of the trade between the countries.
The operation of the provisions of article XXIV provides the legal basis for the existence of all regional economic groupings such as the European Union, COMESA, SADC, NAFTA and the ASEAN, MERCUSOR (Economic Association for Latin America).
Most regional economic groupings have not complied with the provisions of Article XXIV as relates to substantially all trade. The other requirement under Article XXIV is that the integrating countries must be at the same levels of economic development. This provision has been interpreted to mean that only a developed country can enter into a Free Trade Agreement with another developing country. Likewise a developing country can only integrate with a developing country. Recent practice at the global level demonstrate that developed countries are entering into free trade agreements with developing countries for example the NAFTA is an arrangement between United States and Canada being developed countries with Mexico which is developing. The European Union has concluded a free trade agreement with Egypt and other Arab Countries which are developing. Presently the European Union is negotiating a free trade agreement with Kenya and other COMESA countries which agreement will come into force on 1st January 2008.
The rationale for the Article XXIV exception stems from the fact that GATT and WTO seek to liberalise Trade and reduce trade barriers between countries. These objectives of GATT and WTO are global in nature. Free trade agreements and Customs Union also share similar objectives at a regional level. It is thus considered that Article XXIV exception enhances the Objectives of GATT and WTO at a regional level.
Article XX of GATT is the security exception. Whenever the security of a country is threatened by increased imports Article XX allows the country to impose Tariffs and Quotas to prevent imports that can threaten its national security. Anything that threatens public order, health and morals is deemed to be a security threat. Article XX has also been used to justify import restrictions that threaten key economic sectors. This exception has been used frequently by the United States to restrict imports and exports of steel.
Article XIX is regarded as the GATT escape clause. It is also known as the safeguard clause. It is an escape clause because it allows a country to escape from its MFN and its National Treatment obligations. This article can only be utilised when 3 conditions are fulfilled. These are
There must be increased imports due to Trade Concessions;
The increased imports must threaten to cause injury or cause injury to a like domestic producer;
There must be causation whereby the injury or threat thereof is actually caused by the increased imports.
Upon fulfilment of these conditions a country can impose tariffs or quota restrictions to restrict importation of a given product. The Clause is also known as a Safeguard Clause since it is the Clause that allows government to impose Tariffs to protect or Safeguard Domestic Infant Industries.
Articles IX and XVIII of GATT make provisions for balance of payment exceptions. Whenever a countrys balance of payment is not in equilibrium, Article IX and XVIII allows the country to impose Tariffs or Quotas to restore the equilibrium. Imports are a debit on the balance of payment accounts of a country. Conversely exports are a credit on these accounts. Whenever imports exceed exports the balance of payment of a country remains in debit. Persistent debit year in year out implies that a country is in debt and cannot meet its financial obligations. In order to restore this account to equilibrium, Articles IX and XVIII permits a country to use tariffs or quotas to restrict imports and encourage exports. The wordings of Article XVIII implies that its only developing countries that can use the Article. Developed Countries use Article IX for balance of payment purposes.
GATT Article III makes provision for the National Treatment Principle (NTP). Paragraph VIII of Article III stipulates that the National Treatment Principle does not apply for government purchases. The implication is that govt procurement is not subject to National Treatment Principle. By extension scholars have interpreted the provisions of Article III paragraph VIII liberally to imply that the MFN does not apply to government purchases.
WAIVER AND THE ENABLING CLAUSE
The GATT Contracting Parties and WTO Ministerial Conference are empowered to waive any obligation of the WTO Agreement on any member state. This power to waive is usually referred to as the waiver clause of Article XX. The implication of the Waiver Clause is that a member may apply to the WTO Ministerial Conference seeking a waiver from any obligation. Using the waiver clause in the year 2001 the WTO Ministerial Conference at Doha waived the application of the MFN and National Treatment Principle to the European Union ACP (Africa Caribbean Pacific Agreement) to the Partnership Agreement otherwise known as the COTONOU from the MFN and National Treatment Obligations. This waiver is to last to 30 years expiring on 31st December 2007. Under the EU ACP Partnership Agreement goods emanating from the ACP countries would enter the EU duty free. The EU ACP partnership agreement was started in 1975 under the name the LOME Convention. This convention provides that African Caribbean Pacific Countries products will enter the European Union duty free. Kenya is a member of the ACP group of countries and it is by virtue of the provisions of the LOME convention and the COTONOU partnership Agreement that Kenyan Tea and Coffee enter the EU Duty free. Recognising that the waiver was to last up to 2007 the implication is that from 2008 Kenyan Tea and Coffee and other products will be subjected to import duty into the European Union.
In 1967 most of the developing countries began raising concerns that the MFN and were the National Treatment Principles discriminatory. The basic agreement was that the MFN and National Treatment Principles were treating unequals equally. It was argued that this amounted to substantive and real discrimination. Developing countries further argued that the MFN Principle did not address the developing concerns of these Nations. In order to address these accusations Part IV of GATT was introduced containing Articles XXXVI, XXXVII and XXXVIII. these articles normally referred to as the development dimensions of GATT allowed developing countries to impose tariff and quotas as a means of enhancing their development.
To enable developed countries to give market to developing countries products the GATT Contracting Parties passed a resolution in 1975 known as the Enabling Clause. The Enabling Clause permits developed countries to grant Preferential Market Access to developing countries. The Enabling Clause enables a developed country to have two sets of tariffs, one applicable to developed countries and a low tariff applicable to developing countries. The Enabling Clause permits individual developed countries to or set up its own scheme of preferential treatment to developing countries. By virtue of the operation of the Enabling Clause, developed countries have established a Generalised Scheme of Preference (GSP) which operates as an exception to the MFN and National Treatment Principle. It is an exception because the GSP allows discrimination between developed and developing countries. Presently there exists the EU-GSP, the Japanese GSP, the USA GSP, Canadian GSP and the Australian GSP.
In the year 1999 India filed a suit before the WTO alleging inter alia that the EU GSP was a violation of the MFN Clause. The argument by India was that whereas the Enabling Clause permitted the EU to set up a GSP it did not authorise the EU to discriminate between developing countries. Under the then EU- GSP the EU would discriminate between different developing countries in delivering its panel decision in 2002 the WTO Panel upheld Indias claims and stated that the Enabling Clause is an exception to the MFN as regards developed countries but as between Developing Countries the MFN applies and the EU could not discriminate between Developing countries.
This interpretation of the Indian EU GSP case implied that the USA AGOA regime was illegal. The United States has been implementing AGOA under the provisions of the Enabling Clause. However, AGOA is discriminatory to the extent that it only applies to sub-Sahara Africa and not other developing countries and also that within Sub-Sahara Africa, it also discriminates. To prevent the possibility of AGOA being declared illegal, the US sought a waiver from the WTO Ministerial Conference and this waiver was granted.
DISGUISED DISCRIMINATION
Notwithstanding the operations of the MFN and National Treatment Principles multinational corporations have been able to find ways of going round these principles. They have adopted measures which on the face of it appear innocent, neutral and non-discriminatory but which in practice are discriminatory. There are four main practices which fall under Disguised Discrimination: these are
Advertisement;
Labelling;
Technical Regulations;
Product Standards.
The use of these restrictions effectively discriminate between countries and producers.
TARIFFS & QUOTAS
The most important policy instruments that countries use in their Trade Relations are Tariffs and Quotas. A tariff is a tax on imported goods. The GATT/WTO regime has specific country obligations with respect to Tariffs.
A quota is a quantitative restriction on imports or exports of products. GATT and WTO have specific rules on the use of quotas. The general obligation with respect to quotas is that the use of Quantitative Restrictions is prohibited. A country under Article XI is prohibited from using quotas. Article XI provides that no prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures shall be instituted or maintained by any contracting party on the importation of any product of the territory of any contracting party.
These wordings in Article XI are a sweeping prohibition on the use of quotas. Article XI (2) allows the use of export restrictions necessary to prevent shortages or to apply marketing standards and also the use of import restrictions necessary to implement Agricultural Programs. Article XII and XVIII B allows the use of import restrictions in order to safeguard a countrys external financial position (Balance of Payments)
Quotas can either be specific or original or at the extreme a complete ban. A country specific quota is a quantitative prohibition of imports from a specified country. For example during the Apartheid days, many countries had countrys specific prohibitions of imports from South Africa. Today the United States maintains a countrys specific quota with respect to Cuba. A regional quota is a quota that applies to a specific geographical region, for example Kenya maintains a regional sugar quota whereby the country can only import a maximum of 200,000 tonnes of sugar from COMESA countries. The EU under the LOME Agreement has country specific quotas on various products. Whenever a country does not impose a specific or regional quota, it can opt to have a total ban of the import. This complete prohibition can only be justified under the provisions of Article XX exception. Article XI of GATT outlaws import and quota restrictions.
With respect to tariffs the mainstay of the GATT/WTO regime is the Tariff System. GATT Article II contains the general obligations with respect to tariffs. The Tariffs can either be specific, ad valorem or a mixture of the two. GATT Article II imposes 3 main obligations with respect to tariffs
Each WTO Member country is required to prepare a tariff schedule;
Each country is required to have a tariff binding or bindings;
Each member country is required to observe its bindings and to renegotiate the bindings only under the provisions of the WTO agreements.
It must be noted that there is no obligation to reduce tariffs. Each country is sovereign and it reserves the right to impose whatever tariff it wishes. However during the rounds of negotiations as countries negotiate the tariffs the agreed rates shall be the MFN Tariff Rate.
A binding is a commitment by a country to bind itself to a given percentage of tariff for example country A can bind itself that the import duty for Coffee shall be 50%. This 50% is known as the bound rate or the binding. The bound rate is the maximum tariff that a country shall impose. A country is not under an obligation to apply the bound rate. The applied rate can be lower than the bound rate so long as the applied rate does not exceed the bound rate. The bound rate is the MFN rate for the country. The difference between the applied rate and the bound rate is the margin of preference. That margin is the most important market instrument. It determines the competitive age of a product.
A concession is a benefit, right or privilege given by one country to its trading partners. Each of the WTO Member States is sovereign. No third country has a right to enter and sell its products in another country. The privilege or rights or benefits to enter another country is a concession. This concession can also extend in form of a customs duty or tariff. In most cases country A gives a concession to country B to enter its territory and sell a product having paid an import duty of 10% or 20%. This Tariff is a concession.
Customs & Excise Act Cap Annex 1
Concession
Every country is sovereign. The privilege or right to sell is a concession, the concession is subject to conditions.
Reciprocity
When you give concessions to one another you are supposed to give equivalent concessions. Tit for tat. Reciprocity is not conditional MFN all we are saying is that if I give you a concession you give me an equivalent concession. The only problem is how to calculate the value of reciprocity of concessions. This is one of the cornerstones of MFN. The waiver clause and the enabling clause are not reciprocal this is because it is one way as goods from developing countries are allowed to enter developed countries preferentially and there is no reciprocity.
TARIFF NEGOTIATION TECHNIQUES
In the multilateral system there are various modalities of tariff negotiations. Basically to be able to get the MFN Tariff rates countries must negotiate together. There are 5 main modalities of tariff negotiation techniques. These are
Request List;
Offer List;
Bilateral;
Linear Approach;
Formula Approach
Under the Request List approach country A makes a request to country B and any other country requesting tariff reduction in given products or tariff lines. The countries receiving the request make counter proposals and the various countries negotiate. These counter proposals are referred to as the offered lists. The Request and Offer Lists therefore go together. When only two countries are involved in the Request and Offer, the negotiations are bilateral. When several countries are involved in the request and offer, the negotiations are multilateral and the agreed rates shall be the MFN rates.
In 1947 when GATT came into being the request and offer list was the mode of tariff negotiations. This modality was appropriate taking into account the small number of countries that were involved and the few products that were covered. With the increasing number of countries in the GATT system the request and offer list became inappropriate. With more countries in GATT and increasing product range or coverage the offer and request approach had to be done away with. During the Tokyo Round of Trade Negotiations the Linear Approach was adopted as the modality of trade negotiation.
Under the Linear Approach countries agree on a percentage that shall be used as a mode of tariff reduction for example it can be agreed that all countries are to reduce their tariffs by 10% or 20%. The Linear Approach is a straight Line Tariff Reduction for all products and all countries. At the beginning the Linear technique proved useful in that it was easy to bring higher tariffs down. However at the market place the linear technique had a disadvantage. It did not address the question of the gap between low tariffs and high tariffs and the issue of tariff peaks and tariffs escalations. Due to the inadequacies of the linear technique a Formula Approach was designed. The Formula Technique was developed by the Swiss whereby the Swiss formula is that Z = A x X divided by A + X whereby Z represents the new tariff (MFN Rate) X is the initial tariff rate and A is a co-efficient any number between (1-10). This formula brings down the tariff peak. The value of A is what countries negotiate, it is any number between1-10.
A tariff Peak is a tariff that is three times above the national average. You take the average tariff in the country for all products to arrive at a national average.
Tariff escalation in many countries when one imports a raw material the tariff is zero, when one imports manufactured products the tariffs go up, the more you process the product the higher the tariff to encourage importation of raw materials. Tariff escalation is a term referring to the increase in tariff rates with increase in processing of a product. The linear approach does not address tariff peaks or tariff escalations. In developing countries one of our problems is tariff escalations.
NEGOTIATING PARTIES
At the multilateral level, there are 3 primary parties that take part in tariff negotiations. These are
Principle Supplier;
Principle Consumer;
The country holding the Initial Negotiating Right (INR)
The Principle Supplier is that country or group of countries that are the principle suppliers of the product in question. These countries are deemed to be principles both from the volume and value of the products in question. The Principle Consumer is that country that purchases the bulk of the product. When renegotiations of tariffs take place during rounds of negotiations, the country that last participated in the negotiation is also invited to the negotiating fora. This country is referred to as the country holding the initial negotiating right.
The tariff rates agreed by these participating countries become applicable to everybody else and is then known as the MFN Tariff Rate. The negotiations at the initial stages starts off as bilateral negotiations. The result of these bilateral negotiations is multilateralised by the MFN principle to become the MFN Tariff Rate.
Renegotiations, Modifications and Rectification of the MFN Tariff Rate
There are seven provisions or articles in GATT that allow a country to renegotiate its tariff bindings and commitments.
Under Article 28 paragraph 1 after every 3 years countries are allowed to reopen and renegotiate their tariff bindings. This is referred to as the Triennial Renegotiations;
Under Article 28(4) any country experiencing special difficulties and circumstances may apply to be allowed to renegotiate its tariff bindings. The special circumstances need to be proved with empirical data for example a country experiencing balance of payment difficulties or a surge in imports can invoke this clause and renegotiate its bindings;
Article 28(5) allows a country to make a reservation in its national schedule and reserve for itself the right to renegotiate or amend its bindings;
Article 24(6) permits other countries to change their tariff bindings whenever a group of countries form a customs union or a free trade area. It is argued that the formation of a customs union or free trade area affects the tariff bindings of the member states. Consequently other countries who are not members are given an opportunity to renegotiate their bindings with members of the Customs Union or free trade area. This renegotiation is referred to as Compensatory Renegotiation in order to compensate non-members for any concession loss that they suffer due to the creation of the customs union or free trade area;
Article 18(7) permits developing countries to renegotiate their commitments in the even of balance of payment difficulties.
Article 27 allows the GATT/WTO member states to withdraw their concessions and tariff bindings with respect to a country that ceases to be a GATT or WTO member;
Rectification of minor mistakes and minor changes to a countrys schedule is permissible without affecting the substantive commitments of a country.
CUSTOMS LAW
Customs Law is a detailed and specialised area of international economic law. it has 3 main dimensions that Customs Officials must know and take in order to administer tariffs and quotas. Before a Customs Officer can impose any tariff he must do 3 things:
He must classify the goods namely is it a shoe or a sandal or is it a handkerchief or a scarf;
He must value the goods: Most of the tariffs are ad valorem, they depend on the value of the imported product. The Customs Officer must give a value to this imported goods;
The Officer must determine the origin of a product. In order to administer a preferential tariff rate or a quota the origin of the product is crucial;
Customs Law as a body of law is thus made up of 3 main branches:
Product classification;
Product valuation
Rules of Origin
Product Classification
Product Classification is a system of categorization of every conceivable tradeable goods. All products must be classified and categorized. The system of classification must be simple enough to be applied consistently and uniformly by hundreds of customs officers throughout the world and in thousands of transactions daily.
GATT and WTO have developed 3 systems of product classifications. These are
The Brussels Tariff Nomenclature (BTN)
Customs cooperation Council Nomenclature (CCCN)
The Standard International Tariff Classification (SITC) otherwise known as the Harmonised Tariff Nomenclature (HS system)
Kenya under the Customs & Excise Act uses the four digit Brussels Tariff Nomenclature for product classification. The WTO is presently using the 6 digits harmonised system. All countries are required to move to the 6 digit system. The United States and European Union is using the 8 10 and 12 digit system with Bar Coding.
The BTN system of product classification was developed by the European Economic Community. When the EEC was formed in 1957 each of the individual countries had its own product classification system. To enable the EEC to operate and function there was need to have a uniform classification system applicable to all the countries. A European Customs Union study group was established in Brussels to develop a classification system. This system came to be known as the BTN. The BTN was applicable mainly to the EEC countries. With time the BTN became small since it was a four digit system. As trade between the EEC and the outside world increased, there was need to expand the product coverage of the BTN. Due to this a Customs Cooperation Council (CCC) was established in 1967 to formulate a new nomenclature system. The CCC established a 6 digit Customs Cooperation Council Nomenclature (CCCN). In 1970 the US joined the CCC but it did not adopt the Nomenclature. The US argument was that the nomenclature was outdated and a modern classification system was needed. Subsequently the CCC developed with US participation, the harmonized commodity description and coding system (The Harmonised System) which entered into force on first January 1988. On its part the United Nations through its statistical commission also developed a commodity classification system. The UN system is known as the Standard International Trade Classification (SITC). The HS system is based partly on the SITC.
The GATT Agreement contains no specific provision on customs classification, except under Article 2(5) which provides for negotiation with a view to compensatory adjustment when a tariff classification ruling prevents the implementation of a negotiated concession. Today under the WTO countries are required to adopt the HS Harmonised System of the 6 digits. Technical assistance is available to enable developing countries adjust and implement the 6 digit HS.
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