Chapter 1

Introduction to international trade law

INTRODUCTION

International trade is mainly concerned with the economic exchanges or trade relations occurring
worldwide. International trade law includes the appropriate rules and customs for handling trade
between countries or between private companies across borders. It concentrates on the
challenges and prospects of global trade. International trade is basically exchange of goods,
services etc. across international borders or territories. Over the past two decades it has become
one of the fastest growing areas of international law.

The body of rules for transnational trade in the 21st century derives from medieval
commercial laws called the lex mercatoria and lex maritima — respectively, "the law for
merchants on land" and "the law for merchants on sea." Modern trade law (extending beyond
bilateral treaties) began shortly after the Second World War, with the negotiation of a
multilateral treaty to deal with trade in goods: the General Agreement on Tariffs and Trade
(GATT). International trade law is based on theories of economic liberalism developed in
Europe and later the United States from the 18th century onwards.

DEFINITIONS OF INTERNATIONAL TRADE LAW

It can be defined as the economic activity of buying and selling where the transaction crosses a
border or cross border transaction. So it is basically cross border sale of goods. Now the cross
border sale of goods is not limited to the role of commodities or manufactured goods, it also
includes services or may involve the movement of capital from one state to another through
loans or investment. Hence international trade is concerned with the movement of goods,
services, capital and in some circumstances labor across the borders.

Prof. Schwarzenberger defines it as “a branch of public international law that encompassed such
matters as the ownership and exploitation of natural resources, the production and distribution of
goods, invisible economic and financial transactions and currency and finance.”

International trade law is not about the relations of the states. Trade is not interstate activity.
Trade is about voluntary exchange between individuals that takes place across borders and the
regulations of international trade is concerned with limitations on the ability of states to
interference with these cross border exchanges. In other words the starting assumption of the
modern international regulations of trade is that the borders and other barriers to cross border
economic exchange must be limited, if not eliminated. International Trade is concerned with
removing the impediments that sovereignty places in the way of trading across borders or
international trade is about the irrelevance of the sovereignty of states. So, it can be said that
states impede trade development.

1.3. SIMILARITIES AND DISTINCTIONS BETWEEN THE INTERNATIONAL

ECONOMIC LAW, INTERNATIONAL TRADE LAW, INTERNATIONAL BUSINESS LAW,
AND INTERNATIONAL COMMERCIAL LAW
International Economic Law

A broad interpretation of international economic law could encompass both the conduct of
sovereign states in international economic relations, and the conduct of private parties involved
in cross-border economic and business transactions. This interpretation evolved as economic
interrelationships among countries continue to grow, and new challenges appear on the horizon.
When it comes to sources of International Economic Law it is not derived from a single source,
but it has its genesis in many. National, regional, and international law (public and private),
policy and customary practices are all components of international economic law. International
economic law encompasses a wide spectrum of subjects including trade in goods and services,
financial law, economic integration, development law, business regulation and intellectual
property. This expansive scope presents a challenge for identifying relevant information.

General Issues covered in International Economic Law includes: Markets, Interdependency, Role
of States Intervention & Non-Intervention, Economic Development, Trade Theories, Permanent
Sovereignty over natural resources, Nationalization and Expropriation of foreign owned
property.
Scope:
1. It covers broad subjects like the Law of Economic Transactions, Government Regulations
of Economic Matters and Related Legal Relationships including Litigation and International
Institutions for Economic Relations.
2. Int. Economic Law cannot be separated or compartmentalized from general or public Int.
Law. The activities and cases relating to IEL contain much practice, which is relevant to general
principles of Int. Law.
3. George Schwarzenberger said, “IEL as a branch of Public Int. Law that encompassed
such matters as the ownership and exploitation of natural resources, the production and
distribution of goods, invisible economic or financial transactions and currency and finance.
[**** he emphasized economic sovereignty].
4. Ignaz Seidl, Hohenveldern, says, “IEL, in its widest meaning, refers to those rules of
Public Int. Law, which directly concern economic exchange between the subjects of Int. Law.
[****he expanded the scope by saying, economic exchanges involve not only states but also
multilateral enterprises or arrangements between states and nationals of other states. He has
emphasized on relative sovereignty].

International Trade Law

International trade law focuses on how countries conduct trade in goods and services across
national borders. The international, regional and national organizations address the export and
import issues that arise in the international trade in goods and services. Institutions also provide
assistance and support through market and country reports, and economic analyses promoting
international trade.

Definitions:
1. Int. Trade is all about the economic activity of buying and selling where the
transactions crosses a border or cross-border Sale of Goods. However, cross-border
 exchanges are not only limited to Sale of Goods but also movement of services,
Capital and Labor etc.,
2.
General Issues: Tariff Regulations, Cross-border transactions including movement of services,
Capital and Labor. Subsidies, Anti-Dumping.
Institutions: International Trade law is developed and regulated by various institutions with
specific objectives of combating the aforementioned general issues. These institutions include
ITO, GATT, WTO.
International Business Law

International Business Law basically deals with Antitrust/competition concerns, the

environment, emerging issues in electronic commerce, and taxation. The resources of regulation
include national laws, government agency rules, policies, guidelines, and the status of a country
in relation to pertinent treaties or international conventions. International Business Law includes
European Commission- Competition, US Antitrust Laws— The Sherman Act, 1889, Indian
Competition Act etc.

International or Transnational Commercial Law

Central arrangements for International Sale of Goods are setting a legal context generally known
as International or transnational Commercial Law. Modern Int. Commercial law has evolved
through the principles of Lex Mercatoria-Law of Merchants. This means, a medieval body of
customary rules that were used in international commercial transactions to supplement the then
incomplete commercial law of states. Before the rise modern state system, the Lex Mercatoria
was common in all European States. This law that was applied in settling the merchants disputes
through their own courts, known as, Pepowder Courts, Which operated like modern Private
International Arbitration.
In 19th & 20th Century states developed their own commercial laws. For example, Uniform
Commercial Code in USA; The Sale of Goods Act in Britain; Code of de Commerce in France.
Codification and development of commercial law also started.

Relation between Int. Law & Int. Economic & Trade Law

1. International Trade law was not seen as state practice because it was a transaction
between individuals. Whereas principles of International law evolved or emerged from state
practice.
2. Economic and Trade law is treaty based not customary law. Whereas Int. Law is based on
customary principles.
3. Int. Trade law is based on promotion on individual economic exchange and promotion of
individual welfare. Whereas int. law is based on state centric or state oriented i.e., relations
between states--- [***State Welfare].
4. Int. law is based on the concept of state sovereignty or political sovereignty. Whereas
economic and trade law are based on economic sovereignty.
5. Territorial or State borders are important to Int. law. Whereas Int. trade law is about
getting rid of state and state borders.
6. According to Prof. Carreau, “classical IL was founded on the notion of state sovereignty.
Whereas the concept of interdependence is fundamental to economic and trade law”.
7. According to Prof. Colliard, “there were Int. economic relations, organizations and there
were int. rules about both (Int. Law & Int. Economic law) and thus reality of Int. Economic law
is beyond question.

DISTINCTION BETWEEN ITL AND DISCIPLINES

International Trade law is generally viewed as buying and selling in cross-border transaction.
Hence, it may be simply defined as cross border sale of goods. However, cross border exchanges
are not limited to sale of commodities or manufactured goods. It also includes services or in
some instances movement of capital from one country to another by means of loans or
investment. Therefore International Trade Law is concerned with the movement of goods,
services, capital and in some instances labour across national boundaries.

Now let us see how International Economic Law, International Business Law and International
Commercial Law are different from ITL.

• International Economic Law

International Economic Law includes a wide range of subjects like trade in goods and services,
financial law, economic integration, development law, business regulation and intellectual
property. It covers Law of Economic Transactions, Government regulations of economic matters
and related legal relationships including litigation and international institutions for economic
relations.

• International Financial and Development Law

International Financial Law considers the role of central banks including regional banks in
international economic relations and the development of economic and monetary policy. This is
achieved through international economic institutions like IMF, Organization for Economic
Cooperation and Development (OECD) etc. IFL covers issues like balance of payments, foreign
exchange, inflation etc. International Development Law aims to promote social and economic
development through financial assistance to developing countries. This is achieved through:-

World Bank which consists of IBRD, IDA and ICSID. They offer loans advice and other
assistance to developing countries. Regional Development Banks like Asian Development Bank,
Islamic Development Bank. UN and its Initiative on Global Development like UNCTAD and
UNIDO.

• International Business Law

It deals with Antitrust/Competition concerns, the environment concerns, emerging issues in

electronic commerce and taxation. The resources of regulation include national laws, govt.
Agencies, rules, policies and guidelines.
• International Commercial Law

It mainly evolved through the principles of Lex Mercatoria- Law of the Merchants. It
supplemented the then incomplete commercial law of the States. Now various states have
developed their own laws. Eg. Uniform Commercial Code in U.S.A., The Sale of Goods Act in
Britain, Code of de Commerce in France.

Why do we need to study International Trade Law?

Countries are endowed by nature with different elements of productive power. It is inevitable
when there are differences in the countries regarding minerals, natural vegetation, climate, soils
and other physical and geographical conditions. This necessitates trade of one country with
another. National laws drafted with state’s economic, political and social interests cannot be
applied to international transactions.

In most countries, it represents a significant share of gross domestic product (GDP). While
international trade has been present throughout much of history (see Silk Road, Amber Road),
it’s economic, social, and political importance has been on the rise in recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system. Increasing
international trade is crucial to the continuance of globalization. International trade is a major
source of economic revenue for any nation that is considered a world power. Without
international trade, nations would be limited to the goods and services produced within their own
borders. So to maintain uniformity in international system, international trade law is required.

HISTORY OF ITL

Ancient Times

Trade existed before the nation states came into being and even before international law came
into picture. People have always brought and sold to others outside their family or community or
town. Some examples can be found in the ancient Greeks and Romans and even in the Italian
city states. Douglas Irwin traced the views of ancient Greeks and Romans regarding foreign
trade. They reflected high degree of ambivalence about trading with foreigners for non-economic
reasons. Merchants were regarded as inferior social class. Commercial activity was considered as
a disruption of to domestic life exposing the citizens to bad manners and corrupt morals of
barbarians. Plato acknowledged the gains from division of labor but the writers were reluctant to
extend this view to foreign trade. The doctrine of universal economy was developed by some
philosophers according to which God has created sea, geographic separation and diversity in
endowments in order to promote foreign trade. Imposition of tolls and some agreements existed
between the city states. For ex:- In 2500 B.C. a commercial treaty existed between the King of
Egypt and Babylonia.

Medieval Times

Trade regulations were mainly governed by lex mercatoria (law of merchants). As to the origin
of lex mercatoria it is not certain as some thinkers assert that it originated in Italy while other
believe that it came from the Romans. Under Roman law there was jus gentium i.e. the law
governing the economic relations between the foreigners and Roman citizens. Lex mercatoria
originated from the international economies relations flourishing in Western Europe in the 11th
century.

Lex mercatoria has been variously described by its advocates as "a set of general principles and
customary rules spontaneously referred to or elaborated in the framework of international trade,
without reference to a particular national system of law." It is also explained as "a hybrid legal
system finding its sources both in national or international law and in the vaguely defined region
of general principles called 'Transnational law'"

Mercantile law is a cosmopolitan law based on customary rules applied to cross border disputes
by the merchant tribunals of various Europeans trade centers. Italian city commercial law is
found mainly in the statutes of merchant guilds. It was binding on all who traded within the city.
Guild councils had power to deal with the case. Fairs used to be held and this contributed to the
development of the merchant law.

Modern Times

The era of modern international trade law started in the late 17th century and gained momentum
in the beginning of the 18th century. At the start of the modern era the practice of mercantilism
still prevailed, mainly because of the colonies. Various countries like U.K., France, Portugal etc.
depended on their colonies for the growth of their trade and economies. The trade was mainly
conducted by the various trading companies established for this purpose, who in turn paid
royalty to their respective governments.

In 19th century the belief in free trade started gaining ground, especially in England. After India
came under the direct control of the British government, the monopoly of East India Company
was done away with. Likewise free trade was encouraged in other colonies of Britain. Free trade
is usually most strongly supported by the most economically powerful nations, though they often
engage in selective protectionism for those industries which are strategically important. Eg. Like
at present it is done by the U.S.A. in matters of agricultural produce.

However, the Great Depression in the United States in 1919, saw the decline in the concept of
free trade. All those countries which traded with the United States were also severely affected.
There was a growth in the policy of protectionism. Countries strived to protect their economies.
Something similar is being witnessed even today. The pangs of recession in U.S.A. have again
affected the world economy. During recessions there is often strong domestic pressure to
increase tariffs to protect domestic industries.

World War I & II wreaked havoc on the economies of almost all the countries involved in the
war whether directly or indirectly. Various industries collapsed. Cross border trade suffered
majorly. At the end of both the wars huge reparations paid by Germany severely affected its
economy. During 1917, Russian Revolution in Russia changed the way countries traded with
each other and their economic structure forever. There was rise of Socialism. U.S.S.R.
encouraged trade only among the States which formed it. It discouraged any contact whatsoever
with the capitalist powers. After World War. I League of Nations was set up to prevent future
wars (though it was not successful). It set up ILO to deal with the labour relations and mandate
system to deal with colonies of the defeated nations. Efforts were made to boost trade so as to
encourage the war-time shattered economies. However, before the West could fully recover from
the ravages of the war, it was embroiled into World War II, which caused even greater
destruction. After the [Link] many steps were taken, esp. by the Allied powers to regulate trade
to boost their economies wrecked by the consequences of the war. United Nations was
established to protect the “future generations from the scourge of war”.

Efforts were made to establish an international trade organisation. However, for some reasons it
could not be established and instead GATT was established. It was established as a temporary
arrangement. However, it continued to function for some decades before it was replaced by
WTO. Now various regional trade organizations have been established like MERCOSUR in
South America, the North American Free Trade Agreement (NAFTA) between the United States,
Canada and Mexico, and the European Union between 27 independent states to regulate trade
between them.

THEORIES OF ITL – CLASSICAL

1) Mercantilism (16th – 18th century)

According to this theory the prosperity of a nation depends upon its supply of capital and the
global volume of trade is unchangeable. Economic assets, or capital, are represented by bullion
(gold, silver and trade value) held by the state, which is best increased through a positive balance
of trade with other nations (exports minus imports). Country can grow rich and prosperous by
acquiring more and more precious metals especially gold. So a state should direct all its
economic activities towards acquiring more and more precious metals. A country should export
more than what it imports. Beggar the Neighbour principle. Mercantilists used tariffs to
discourage imports and export subsidies to encourage exports. This led to some of the first
instances of significant government intervention and control. During these times trade was
hindered by narrowistic trade policies.

2) Theory of Absolute Advantage

Adam Smith in his book ‘The Wealth of Nations’ (1776) states that a nation’s standard of living
indicates its wealth and not the governments stock of precious metals. Reaction against
mercantilist notions. According to him, a country can certainly gain by trading with other
nations. He explained the ‘Theory of Absolute Advantage’ by saying that, “trade between the
countries would be mutually beneficial, if one country, could produce one commodity, at an
absolute advantage over the other country, and the other country could, in turn, produce another
commodity, in an absolute advantage over the other.” So a country has an absolute advantage in
the production of a good relative to another country if it can produce the good at lower cost or
with higher productivity. For example :- Country A produces 1 Unit of Good ‘X’ with 10 Units
of Labour and 1 Unit of Good ‘Y’: 20 Units of Labour. Country B produces 1 Unit of Good ‘X’
with 20 Units of Labour and 1 Unit of Good ‘Y’ with 10 Units of Labour. Hence, when Country
A and B enter into a trade agreement, Country A will specialize in the production of Good ‘X’,
while Country B will specialize in the production of Good ‘Y’.
3) Theory of Comparative Advantage

Propounded by the British Economist David Ricardo (‘The Principles of Political Economy’,
1817) who modifies the absolute advantage theory. He argues that any two countries can very
well gain by trading even if one of the countries is having an absolute advantage in both the
goods over another provided that the extent of absolute advantage is different in the two
commodities in question, i.e., comparative advantage is greater in respect of one good than in
that of the other. So a country should specialize in producing and exporting goods in which its
comparative advantage is greatest or comparative disadvantage is smallest and it should export
goods on which its comparative disadvantage is greatest.

Ricardo explained his theory with the help of the following example:

England produces a given quantity of cloth with the labor of 100 men and it produces a given
quantity of wine with the labor of 120 men. Now, Portugal produces the same quantity of cloth
with the labor of 90 men and the same quantity of wine with the labor of 80 men. So, here
Portugal enjoys an absolute advantage over England in the production of both cloth and wine.
That means it can produce a given quantity of cloth or wine with fewer labor inputs than
England. According to the theory, trade will still be mutually advantageous when England
exports to Portugal the cloth produced by the labor of 100 men in exchange for wine produced
by the labor of 80 Portuguese, as England has imported wine that would require the labor of 120
Englishmen to produce. And Portugal also would gain by this transaction by exporting wine
produced by 80 men’s labor, than cloth that it would require 90 of her laborers to produce.

Similarly the law of comparative advantage can be explained with the help of another simpler
example where a lawyer is contemplating the hiring of a typist for his law office. Here, two cases
can be distinguished, first, where the lawyer’s typing is totally inadequate and second, where the
lawyer can type faster and more accurately than any other professional typist available in the
market. Now, the comparative advantage theory relates to this second case where the lawyer is
better off hiring the typist. For the lawyer the income from exporting legal services to others is
greater than the cost of importing the typing services. The lawyer makes more money by
specializing in the production of legal services, exporting these services and importing the typing
services, than he could make by doing both the tasks himself.

Free Trade

Trade in goods and services between the countries or within countries should flow unhindered by
government imposed restrictions. Restrictions include tariffs and taxes and non-tariff barriers
such as legislation and quotas. Adam Smith has defined free trade as ‘that system of commercial
policy which draws no distinction between domestic and foreign commodities and therefore
neither imposes additional burden on the latter, nor grants any special favours to the former.”
The advantage is that it creates income by reallocating and transferring jobs from lower
productivity to the higher productivity sectors of the economy. It does not equalize the standard
of living in any two countries but it makes both the countries better off in terms of real income.

Protectionism
The economic policy of restraining trade between nations, through methods such as tariffs on
imported goods, restrictive quotas, trade restriction imposed by Government to discourage
imports and anti- dumping laws. This policy is adopted to encourage home industries by the use
of bounties or by the imposition of high customs duties on foreign products. Often criticized as
harming the people it is meant to help, instead of aiding them; these critics often support free
trade. However, academic economists are generally supporters of free trade.

Fair Trade

Fair Trade is an unorganized social movement and market- based model of international trade
which promotes the payment of a fair price as well as social and environmental standards in
areas related to the production of a wide variety of goods. The movement focuses in particular on
exports from developing countries to developed countries. Most widely recognized definition of
Fair Trade created by trade four international fair trade networks (Fair trade Labeling
Organizations International, International Fair Trade Association, Network of European World
shops and European Fair Trade Association)

“Fair trade is a trading partnership, based on dialogue, transparency and respect, which seeks
greater equity in international trade. It contributes to sustainable development by offering better
trading conditions to, and securing the rights of, marginalized producers and workers. Fair trade
organizations (backed by consumers) are engaged actively in supporting producers, awareness
raising and in campaigning for changes in the rules and practice of conventional international
trade”.

Free Trade v. Fair Trade

One of the most popular recent arguments in favour of protectionism is that trade should be
“fair” rather than free. It is unfair that other countries protect their domestic producers or dump
their products on the U.S. market at low prices. Fairness should be seen as a process. A
transaction is fair if consenting adults are free to enter into it without being coerced. It is fair that
consumers are able to buy foreign products without having to pay a higher price due to some
government intervention such as a tariff or import quota.

MODERN THEORIES

1.) The Heckscher-Ohlin Theory:-

The Heckscher-Ohlin theory explains why countries trade goods and services with each other,
the emphasize being on the difference of resources between two countries. The theory presents
the issue that international and interregional differences in production costs occur because of the
differences in the supply of production factors. Factors of production include labour, capital,
land, human resources, technology etc. Factor endowments vary among countries. Products
differ according to the types of factors that they need as inputs.

A country has a comparative advantage in producing products that intensively use factors of
production (resources) it has in abundance. Countries such as Australia with relatively large
amounts of land do export land intensive products (eg. grain and cattle) whereas a country like
China would export labour intensive products. The price of a commodity is determined by the
demand for and supply of it, i.e., the preferences and incomes of consumers, on the one hand,
and production possibilities on the other. According to this theory, what needs to be reached is
‘the point of equilibrium’, at which, the demand and supply will be equal to each other and the
price of commodity equals its cost of production per unit.

The Opportunity Cost Theory:-

Gottfied Haberler propounded this theory in 1959 as a reaction to the theory of comparative
advantage. This theory specifies the cost in term of the value of the alternatives which have to be
foregone in order to fulfill a specific act. This theory builds up the foundation for international
trade in the process of exporting a specific product rather than other products. eg. If a city
decides to build a hospital on vacant land it owns, the opportunity cost is the value of the benefits
forgone of the next best thing which might have been done with the land and construction funds
instead. In building the hospital, the city has forgone the opportunity to build a sports Centre on
that land, or a parking lot.

3.) The Product Cycle Theory:-

The product life-cycle theory is an economic theory that was developed by Raymond Vernon in
response to the failure of the Heckscher-Ohlin model to explain the observed pattern of
international trade. The theory suggests that early in a product's life-cycle all the parts and labor
associated with that product come from the area in which it was invented. After the product
becomes adopted and used in the world markets, production gradually moves away from the
point of origin. In some situations, the product becomes an item that is imported by its original
country of invention. A commonly used example of this is the invention, growth and production
of the personal computer with respect to the United States. There are five stages in a product's
life cycle:

• Introduction of the product in the domestic market,

• Growth of the product in the domestic market,
• Demand for and export of the product in the foreign markets,
• Maturity of the product in the foreign markets, and
• Decline of production of the product in the original country because its production has
started in the export markets.
The theory does have its disadvantages. Perhaps the most recognizable is the assumption that
products are released initially in the domestic markets. Many globalized companies tend to
release their new product lines internationally, not domestically; hence this theory cannot be
applied to many of today’s products.

Basic principles and concepts of international trade law

INTRODUCTION
MFN is a standard of treatment which has been linked by some to the principle of the equality of
States, the prevailing view is that a MFN obligation exists only when a treaty clause creates it. In
the absence of a treaty obligation (or for that matter, an MFN obligation under national law),
nations retain the possibility of discriminating between foreign nations in their economic affairs.
Most favored nation (MFN), also called Normal trade relations in the United States, is a status
awarded by one nation to another in international trade. Somewhat contradictorily, it does not
confer particular advantages on the conferring nation, but means that the receiving nation will be
granted all trade advantages, such as low tariffs that any third nation also receives. In effect,
having MFN status means that one's nation will not be treated worse than anyone else's nation, as
reflected by the American term. The members of the World Trade Organization, which include
all developed nations, accord MFN status to each other. Exceptions exist for preferential
treatment of developing countries, regional free trade areas and customs unions. Together with
the principle of national treatment, MFN is one of the cornerstones of WTO trade law.
Most-favoured-nation (MFN): treating other people equally Under the WTO agreements,
countries cannot normally discriminate between their trading partners. Grant someone a special
favour (such as a lower customs duty rate for one of their products) and you have to do the same
for all other WTO members. This principle is known as most-favoured-nation (MFN) treatment.
It is so important that it is the first article of the General Agreement on Tariffs and Trade
(GATT), which governs trade in goods. MFN is also a priority in the General Agreement on
Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the principle is
handled slightly differently. Together, those three agreements cover all three main areas of trade
handled by the WTO.
Some exceptions are allowed. For example, countries can set up a free trade agreement that
applies only to goods traded within the group — discriminating against goods from outside. Or
they can give developing countries special access to their markets. Or a country can raise barriers
against products that are considered to be traded unfairly from specific countries. And in
services, countries are allowed, in limited circumstances, to discriminate. But the agreements
only permit these exceptions under strict conditions. In general, MFN means that every time a
country lowers a trade barrier or opens up a market, it has to do so for the same goods or services
from all its trading partners — whether rich or poor, weak or strong.
The Background of Rules: Most-Favoured-Nation Treatment (MFN)
"Most-Favoured-Nation treatment" or "MFN," which requires Members to accord the most
favourable tariff and regulatory treatment given to the product of any one Member at the time of
import or export of "like products" of all other Members, is one of the bedrock principles of the
WTO. Under the Most-Favoured-Nation rule, should WTO Member state A agree in negotiations
with state B, which needs not be a WTO Member, to reduce the tariff on the same product X to
five percent, this same "tariff rate" must also apply to all other WTO Members as well. In other
words, if a country gives favourable treatment to one country regarding a particular issue, it must
handle all Members equally regarding the same issue.
The idea of Most-Favoured-Nation treatment in and of itself has a long history. Prior to the
GATT, an MFN clause was often included in bilateral trade agreements, and as such it
contributed greatly to the liberalization of trade. However, in the 1930s, several measures that
limited the functioning of the Most-Favoured-Nation principle were taken. It is said that these
measures led to the division of the world economy into trade blocs. Having learned from this
mistake, after World War II, the unconditional Most-Favoured-Nation clause was then included
in the GATT, on a multilateral basis, and has contributed to the stability of trade around the
world. Against this background, the MFN principle in particular must be observed as a
fundamental principle for sustaining the multilateral free trade system. Regional integration and
related exceptions need to be carefully administered so as not to undermine the MFN principle as
a fundamental principle of the WTO.
History
In the early days of international trade, most favoured nation status was usually used on a dual-
party, state-to-state basis. A nation could enter into a most favoured nation treaty with another
nation. Generally bilateral, in the late 19th and early 20th century unilateral most favoured nation
clauses were imposed on Asian nations by the more powerful Western countries (see Open Door
Policy). One particular example of 'most favoured nation' status is the Treaty of Nanking as part
of the series of unequal treaties. It was implemented in the aftermath of the First Opium War
between Great Britain and China Qing Dynasty involving the Hong Kong islands.
After World War II, tariff and trade agreements were negotiated simultaneously by all interested
parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted
in the World Trade Organization. The World Trade Organization requires members to grant one
another most favoured nation status. A most favoured nation clause is also included in the
absolute majority of the numerous Bilateral Investment Treaties concluded between capital
exporting and capital importing countries after the Second World War
Benefits
Trade experts consider MFN clauses to have the following benefits:

 A country that grants MFN on imports will have its imports provided by the most
efficient supplier. This may not be the case if tariffs differ by country.
 MFN allows smaller countries, in particular, to participate in the advantages that larger
countries often grant to each other, whereas on their own, smaller countries would often
not be powerful enough to negotiate such advantages by themselves.
 Granting MFN has domestic benefits: having one set of tariffs for all countries simplifies
the rules and makes them more transparent. It also lessens the frustrating problem of
having to establish rules of origin to determine which country a product (that may contain
parts from all over the world) must be attributed to for customs purposes.
 MFN restrains domestic special interests from obtaining protectionist measures. E.g.,
butter producers in country A may not be able to lobby for high tariffs on butter to
prevent cheap imports from developing country B, because, as the higher tariffs would
apply to every country, the interests of A's principal ally C might get impaired.

As MFN clauses promote non-discrimination among countries, they also tend to promote the
objective of free trade in general. However, as MFN rules may conflict with other objectives
such as regional economic integration (e.g. in NAFTA or the EU), trade agreements usually
allow for exceptions
Exceptions
GATT members recognized in principle that the most favoured nation rule should be relaxed to
accommodate the needs of developing countries, and the UN Conference on Trade and
Development (est. 1964) has sought to extend preferential treatment to the exports of the
developing countries. Another challenge to the most favoured nation principle has been posed by
regional trading groups such as the European Union, which have lowered or eliminated tariffs
among the members while maintaining tariff walls between member nations and the rest of the
world.
In the 1990s continued most favoured nation status for the People's Republic of China sparked
U.S. controversy because of its sales of sensitive military technology and its use of prison labour,
and its most favoured nation status was only made permanent in 2000. All of the former Soviet
states, including Russia, were granted most favoured nation status in 1992. However, on a
bilateral level, the United States cannot grant NTR status to some members of the former Soviet
Union, including the Russian Federation, because the Jackson-Vanik amendment has not yet
been repealed by the US Congress (December 2007). This presents an obstacle to those
countries' accession to the WTO.
LEGAL FRAMEWORK
GATT Practice Regarding MFN Treatment

MFN treatment is stipulated in GATT Articles I, XIII, and XVII

a) GATT Article I:1 provides for WTO Members to accord Most-Favoured-Nation treatment to
like products of other WTO Members regarding tariffs, regulations on exports and imports,
internal taxes and charges, and internal regulations. In other words, "like" products from all
WTO Members must be given the same treatment as the most advantageous treatment accorded
the products of any state.
Should an importing country flagrantly accord differential treatment to "like products" of the
exporting country, i.e. by setting different tariff rates, it would be clearly a violation of GATT
Article I:1. However, Article I:1 violations can also occur even when there is no ostensible
discrimination against the product of a Most-Favoured-Nation, such as when an importing
country accords differential treatment among products that are considered to be "like products,"
which ultimately results in the de facto discrimination against products of specific contracting
parties. For instance, a country may apply a different tariff rate to a particular variety of raw
coffee bean, but if that variety and other varieties of coffee beans were considered to be "like
products," using criteria such as consumer tastes and end-use, the differential tariff may have an
effect on imports from only specific countries. This may be considered in violation of the MFN
rule.1 In contrast, the concept of like products was strictly interpreted in Japan's SPF (spruce,
pine, and fir) case. The panel in that case recognized that each WTO Member might exercise
considerable discretion as to tariff classifications and that the legality of such classifications
would be established to the extent that it did not discriminate against the same products from
different WTO Member.
b. NON-DISCRIMINATORY ADMINISTRATION OF QUANTITATIVE
RESTRICTIONS

GATT Article XIII stipulates that quantitative restrictions or tariff quotas on any product must be
administered in a non-discriminatory fashion regarding like products, and that in administering
import restrictions and tariff quotas, WTO Members shall aim to allocate shares close to that
which might be expected in their absence. Article XIII provides for most-favoured-nation
treatment in the administration of quantitative restrictions, and supplements the disciplines under
Article I.
c. STATES TRADING ENTERPRISES
"States Trading Enterprises" means state enterprises established or maintained by a WTO
Member or private enterprises granted exclusive or special privileges by WTO Members, which
make purchases or sales involving either imports or exports. By making use of their monopolistic
status, such enterprises could operate against international trade through discrimination on the
part of importing country and quantitative restrictions. GATT Article XXVII obliges WTO
Members to act in accordance with the rule of non-discrimination, including the MFN.
EXCEPTIONS TO THE MOST-FAVOURED-NATION RULE
The GATT provides for certain exceptions to the Most-Favoured-Nation rule described above.
Regional Integration (GATT Article XXIV)
Regional integration liberalizes trade among countries within the region, while allowing trade
barriers with countries outside the region. Regional integration therefore may lead to results that
are contrary to the Most-Favoured-Nation principle because countries inside and outside the
region are treated differently. This may have a negative effect on countries outside the region,
and thus lead to results contrary to the liberalization of trade. Therefore, GATT Article XXIV
provides that regional integration may be allowed as an exception to the Most-Favoured-Nation
rule only if the following conditions are met.
First, tariffs and other barriers to trade must be eliminated with respect to substantially all trade
within the region.
Second, the tariffs and other barriers to trade applied to outside countries must not be higher or
more restrictive than they were prior to establishment of regional integration.
Regional integration has a vast impact on the world economy today and is the subject of frequent
debate in a variety of forums, including the WTO Committee on Regional Trade Agreements.
b. GENERALIZED SYSTEM OF PREFERENCES
The Generalized System of Preferences or "GSP" is a system that grants products originating in
developing countries lower tariff rates than those normally enjoyed under Most-Favoured-Nation
status as a special measure granted to developing countries in order to increase their export
earnings and promote their development.
The GSP is defined in the Decision on "Generalized System of Preferences" of June 1971, and is
a measure taken based on the Decision on "Differential and More Favourable Treatment,
Reciprocity, and Fuller Participation of Developing Countries" or the "Enabling Clause."3 The
GSP has the following characteristics:
First, preferential tariffs may be applied not only to countries with special historical and political
relationships4 (i.e. the British Commonwealth), but to developing countries more generally (thus
the system is described as "generalized").
Second, the beneficiaries are limited to developing countries.
Third, it is a benefit unilaterally granted by developed countries to developing countries.
c. Non-Application of Multilateral Trade Agreements between Particular Member States (WTO
Article XIII)
The Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement")
provides that "[t]his Agreement and the Multilateral Trade Agreement in Annexes 1 and 2 shall
not apply as between any Member and any other Member," when either of the following
conditions are met: (a) at the time the WTO went into force, Article XXXV of GATT 1947 had
been invoked earlier and was effective as between original Members of the WTO which were
contracting parties to GATT 19475 or; (b) between a Member and another Member which has
acceded under Article XII only if the Member not consenting to the application has so notified
the Ministerial Conference before the approval of the agreement on the terms of accession by the
Ministerial Conference.
In the case of non-application, benefits enjoyed by other Members are not provided to the
country of non-application, which leads to results that are contrary to the most-favoured-nation
principle.
These Article XIII provisions were created to deal with problems arising from accessions.
Ideally, the most-favoured-nation rule would be applied stringently so that when country B
accedes to the Agreement, it is required to confer most-favoured-nation status on all other
Members, and they, in turn, are required to confer most-favoured-nation status on country B.
However, country A, which is already a Member of the WTO, may have reasons for not wanting
to confer the rights and obligations of the WTO on new Member B. The WTO only requires the
consent of two-thirds of the existing membership for accession, so it is conceivable that country
A might, against its will, be forced to give most-favoured-nation status to country B. WTO
Article XIII is a way to respect country A's wishes by preventing a WTO relationship from
taking effect between countries A and B. On the other hand, WTO Article XIII provides a way
for the accession of country B, even if more than a third of the membership, like country A, has
reasons for not wanting a WTO relationship with country B (in which case they will object to the
accession itself) by allowing for non-application. In January 1995, the United States notified the
General Council that it would not apply the Agreement and the Multilateral Trade Agreements in
Annexes 1 and 2 to Romania, yet, in February 1997, the United States withdrew its invocation.
In addition, the United States also notified that it would not apply the above-mentioned
agreements to two other new Members: Mongolia and Kyrgyz Republic.
OTHER EXCEPTIONS
Other exceptions peculiar to the Most-Favoured-Nation principle include Article XXIV:3
regarding frontier traffic with adjacent countries, and Article I:2 regarding historical preferences
which were in force at the signing of the GATT, such as the British Commonwealth.
General exceptions to the GATT that may be applied to the Most-Favoured-Nation principle
include Article XX regarding General Exceptions for measures necessary to protect public
morals, life and health, etc., and Article XXI regarding Security Exceptions.

It is also possible to obtain a waiver to constitute an exception to the Most-Favoured-Nation

principle. Under WTO Article IX: 3, countries may, with the agreement of other contracting
parties, waive their obligations under the agreement. New waivers, however, can only be
obtained for exceptional circumstances, and require the consent of three-quarters of the
contracting parties It is stipulated that the exceptional circumstances, the terms and conditions
governing the application of the waiver, and the date on which the waiver will be terminated
shall be clearly stated, and that waivers are subject to annual review (Article IX: 4).
Most-Favoured-Nation Provisions Outside of GATT 1994
The idea of most-favoured-nation treatment has been extended to the areas of trade in services
and intellectual property by the WTO Agreement, although with certain exemptions. Article II of
the General Agreement on Trade in Services (GATS) provides for most-favoured-nation
treatment for services and service providers; Article 4 of the Agreement on Trade-Related
Aspects of Intellectual Property Rights does the same for the protection of intellectual property
rights. The GATS allows for exceptions where Members may waive their obligation to provide
most-favoured-nation treatment for specific measures in specific fields by listing the measure in
the Annex on Article II Exemptions. The TRIPS Agreement also provides for exemptions
regarding measures based on existing treaties in the area of intellectual property. (See Chapter 11
for Trade in Services; Chapter 12 for Intellectual Property Rights.)
Economic Implications
The most-favoured-nation rule has several positive economic implications, which are discussed
below.

Increased Efficiency in the World Economy

First, most-favoured-nation treatment makes it possible for countries to import from the most
efficient supplier, in accordance with the principle of comparative advantage. For example, if
country A does not produce product X, and if country B can supply product X at a lower price
than country C, country A can increase its economic efficiency by importing it from country B.
If, however, country A applies higher tariff rates to product Xs from country B than to product
Xs from country C, country A may end up importing product Xs from country C, even though
country C is not as efficient a supplier. This distorts trade and, as a result, reduces the welfare of
country A and the economic efficiency of the entire world. If, however, the Most-Favoured-
Nation principle is applied between the three countries, then country A will apply its tariffs
equally to all exporting countries and will therefore necessarily import product X from country B
because it is cheaper to do so. The most efficient result is thus attained.
Stabilisation of the Free Trading System
Second, the most-favoured-nation rule requires that favourable treatment granted to one country
be immediately and unconditionally granted to all other countries, while trade restrictions must
also be applied equally to all. This increases the risk of the introduction of trade restrictions
becoming a political issue, raises the costs of doing so and therefore tends to support the
liberalized status quo. By stabilizing the free trade system in this manner MFN increases
predictability and therefore increases trade and investment.
Reduction of the Cost of Maintaining the Free Trade System
Third, MFN reduces the cost of maintaining the free trade system. The equal treatment
demanded by the Most-Favoured-Nation principle tends to act as a force for unifying treatment
at the most advantageous level (which in trade means the most liberal level). The establishment
and maintenance of the most-favoured-nation rule enables WTO Members to reduce their
monitoring and negotiation costs - the cost of watching and comparing treatment received with
that given to third countries - and of negotiating remedies to disadvantageous treatment. In short,
the most-favoured-nation rule has the effect of reducing the cost of maintaining the free trade
system.
Finally, as long as the most-favoured-nation rule is honored, imports from all WTO Members are
treated equally, which reduces the cost of determining an import's origin and therefore improves
economic efficiency.
Thus the most-favoured-nation rule is of fundamental importance in improving economic
efficiency. However, we must also note that the most-favoured-nation rule is often misused. The
arguments run that bilateral negotiations not under the auspices of the WTO can be justified by
the most-favoured-nation principle, because any trade benefits that result from these negotiations
will be applied equally to all other WTO members, even though they may be excluded from the
negotiations. Bilateral negotiations are thus justified as a more time-saving and effective means
to remove "unfair" trade measures. However, this does not take into account the fact that because
bilateral negotiations lack transparency, there is a possibility that MFN treatment is not extended
to countries not in the negotiation, and the fact that bilateral negotiations tend to reflect the
power relationship between the two countries. Even if the results of the negotiations are extended
through the MFN principle, it must be noted that the end "result" of improved treatment in trade
does not necessarily justify the means, that is unfairness of procedure in bilateral negotiations.
Continual vigilance is required to ensure that the most-favoured-nation rule is not abused in a
result-oriented manner to undermine the basic importance of the dispute settlement process in the
WTO.
Canada
Measures Regarding Automobiles
Canada introduced measures that allow certain companies such as the "Big Three" US
automobile manufacturers (Autopact members), to import automobiles at a zero tariff, under the
condition that they satisfy certain conditions (such as a local content requirement of 60 percent)
under the Autopact (The United States-Canada Automotive Products Trade Agreement: effective
since 1966). It is stipulated that new members will not be added to the Autopact, but preferential
treatment regarding these companies has been maintained in the NAFTA.
When automobile companies import automobiles from outside NAFTA countries, non-Autopact
Members are levied 6.1 percent tariffs (as of January 1999), while Autopact members can import
them duty-free.
By exempting only Autopact members from automobile tariffs, it is clear that there is
discrimination between foreign companies, while it is not clear that there is any discrimination
between imported products or suppliers of service in specific countries. However, taking into
account the fact that these companies are service suppliers who import and sell these products,
this measure, by providing preferential treatment to companies from specific countries, is
inconsistent with Article II of the GATS (MFN). There is also a possibility that this measure is
inconsistent with GATT Article I (MFN) in that it is possible for products from only certain
countries to be imported duty-free, thus only imports from certain countries are provided
preferential treatment de facto.
This measure also appears to be in violation of GATT Article III:4 (National Treatment), Article
2 of the TRIMs Agreement, and Article 3.1(b) of the Agreement on Subsidies and
Countervailing Measures in that the tariff exemption may be an incentive for the Autopact
Members to maintain the local content requirement.
In July 1998, Japan requested bilateral consultation under the WTO dispute settlement system
and in September it held consultations with Canada. However, a mutually satisfactory solution
was not reached. As a result, in November 1998, Japan requested the establishment of a panel.
Since the European Union filed a separate complaint regarding the same matter, a single panel to
hear complaints by both Members was established in February 1999.

The European Union maintains measures which provide preferential treatment to countries of
Africa, the Caribbean, and the Pacific (ACP) regarding tariff quotas (i.e. quota and tariff rate),
under the Rome Convention, and these measures involving bananas have been before a panel
twice under the GATT (See Chapter 15 on Regional Integration). After the conclusion of the
Uruguay Round, the European Union put in place a new tariff quota regime for bananas.
However, the United States, whose companies mainly deal in Latin American bananas, was
unsatisfied with the new regime, and argued that the licensing system still provided preferential.
In the panel report issued in May 1997, the EU's measures were found inconsistent with the
WTO agreements on the following points.
i) Allocating a portion of the quota regarding third-country and non-traditional ACP bananas to
only operators who deal in EU and traditional ACP bananas is inconsistent with Article I:1
(MFN) and Article III:4 (NT) of the GATT. The Lome waiver does not waive the EU's
obligations under Article I:1 in respect of licensing procedures applied to third-country and non-
traditional ACP imports.
ii.)The above preferential allocation of the quota to operators who deal in traditional ACP
bananas creates less favourable conditions of competition for like service suppliers from third
countries, and is therefore inconsistent with the requirements of Article XVII of GATS.
Regarding the "BFA", although it was not unreasonable for the EU to conclude at the time the
"BFA" was negotiated that Colombia and Costa Rica were the only contracting parties that had a
substantial interest in supplying the EU market, the EU's allocation of tariff quota shares by
agreement and by assignment to some Members not having a substantial interest in supplying
bananas to the EU (including Nicaragua and Venezuela) but not to other Members (such as
Guatemala) is inconsistent with Article XIII:1 (non-discriminatory administration of quantitative
restrictions). Regarding the relationship between the inclusion of the BFA tariff quota shares in
the EU's tariff schedule and GATT Article XIII, the EU's tariff schedule does not permit the EU
to act inconsistently with the requirements of Article XIII.
The European Union appealed from this panel report, but the report of the Appellate Body
basically upheld the main points of the panel report. At the Dispute Settlement Body meeting in
September 1997, both the panel report and Appellate Body report were adopted, and the EU's
measures were found inconsistent with the WTO Agreements. In accordance with this decision,
in July 1998, the European Union announced its plan to reform these measures. However, the
complaining Members argued that the plan - which may still accord unfair preferential treatment
to ACP countries - was in violation of the WTO Agreement. The EU introduced the new banana
import system in January 1999, which was the deadline for implementing the DSB's
recommendation. The United States announced that it intended to apply sanctions against the EU
pursuant to Section 301 of the US Trade Act, insisting that this new system was still inconsistent
with the DSB's recommendation.

SOME CASES ON MFN PRINCIPLE

1. AUSTRALIAN CASE

Australian subsidy on Ammonium Sulphate, the contracting parties concluded that ammonium
sulphate & sodium nitrate were not like products, basing this conclusion partly on the fact that
these products were usually classified as separate tariff item & were traded separately.
2. TREATMENT OF SARDINES BY GERMANY CASE

A GATT panel examined a 1952 complaint by Norway that Germany was treating imports of
sprats a small fish) & hemming differently with Sardines. Thereby illegally hemming Norway
which sold sprats & Heming. Panel noticed that difference of treatment was not based on origin
of goods but on assumption that preparation. These are not like products.
3. BELGIUM FAMILY ALLOWANCES CASE

Levy of tax was imposed on goods of four other countries on the bases of rules of system
allowance in these countries were similar to Belgium.
 4. FRENCH INTERNAL TAX CASE

US complaint about auto of large horse power to be taxed differently by the France. However US
did not argue this contravened MFN but instead relied on Art. 3 (National Treatment).
5. INDIA-PAKISTAN CASE

When excise rebate were given by India to some GATT contracting parties but not to Pakistan.
Art. 1 Para 1 that this type of conduct is discriminatory.

International trade and the GATT

INTRODUCTION
General Agreement on Trades and Tariffs (GATT) was formed in 1947 as part of the Bretton
Woods Agreement. GATT set up a series of negotiating rounds, which were primarily intended
to reduce and gradually eliminate quotas, duties, and tariffs in respect of trade in goods. The
basic objective of the GATT was to progressively reduce national barriers to international trade,
(a) initially through across-the-board tariff reduction, (b) later the removal of non-tariff
measures, and (c) eventually, the development of global standards for fair trade. The
fundamental promise of the GATT in pursuing its objectives was to reduce trade barriers and to
facilitate trade liberalization and expansion through multilateral consensus in a global forum
bringing together all nations, developed and developing, rich and poor.
5.1. ORIGINS OF THE GATT SYSTEM: THE ROLE OF GATT-ITO
PREPARATORY WORK
The economy of pre-World War II was dominated by US and its major trading partners. This
process took place in the form of bilateral agreements between them. The US in order to secure
more open markets offered its own tariff cuts. Subsequent to World War II, diverse measures
were adopted to liberalize trade between various nations to ensure close economic co-operation
between them.
Hence, the wartime scenario made the groundwork for the concept of liberalization of
international trade. This was by and large initiated by the United States of America. However,
the major obstacle towards achieving this objective was the existence of multifarious trade
barriers. This in turn called for a universal set of regulations, which would be applicable to all
the nations. In order to necessitate an overall international progress in the economic order, it was
necessary that a substantial improvement be achieved in three major domains i.e., investment,
trade and exchange policy.
After several rounds of discussions between the United States of America, the United Kingdom
and Canada in the Bretton Wood Conference, it was agreed that the world economy would be
organized around three institutions’:

 International Monetary Fund

 The International Bank for Reconstruction and Development or the World Bank

 International Trade Organization

International Monetary Fund was formulated to look after the short-term problems relating to
international liquidity and International Bank for Reconstruction and Development to take care
of international investments. Likewise International Trade Organization was to take care of the
‘actual’ trade relationship.
However, the International Trade Organization never came to see the light of the day. This was
due to the non-ratification of the agreement relating to International Trade Organization or ITO,
especially by United States, to which 53 states were signatories. Although the failure of
establishing the ITO was a major setback to the international trade, its contribution to the
movement on international trade regulation cannot be overlooked. The establishment of the ITO
brought into existence the ITO Charter which laid down the foundations not only for GATT but
also for the present WTO Agreement. The resultant impact of the ITO was that even after its
failure to take off as an organization, the ITO Charter was used to formulate GATT. This started
when some of the participants at the London Conference on Trade and Employment
recommended that the tariff negotiation be initiated in the Charter at Geneva. Those regulations,
which were required to protect the integrity of the trade and concessions, were included and
those relating to employment investment etc. were disregarded.
As a result of these discussions, participated by 23 nations, the General Agreement on Tariffs
and Trade (GATT) came into being in 1947. It came into force in 1948. The agreement was
intended to provide a temporary international medium that encourages free trade between
member states by regulating and reducing tariffs on traded goods and by providing a common
mechanism for resolving trade disputes. However, GATT surpassed expectations. Despite an
intention to make it a temporary Agreement, GATT 1947 became operational for almost fifty
years providing the only international forum and framework (other than regional arrangements)
for carrying forward the objectives of free and fair trade. Its popularity grew over the years and
GATT membership finally was comprised of more than 125 countries.
GATT was thus established, on a temporary basis to break down trade barriers in the form of
tariffs, quotas, preferential trade agreements between countries, etc., to make the flow of
commodities and capital, less restricted by national government influence. It is for its temporary
nature that a signatory to the agreement is known as a Contracting Party, since it is not an
organization. Hence, the origin of GATT traces back to 1947, which governed most of the
world’s trade in goods for almost, half a century. It was the foremost step towards liberalization
of global trade. Its importance may be highlighted as a multilateral agreement, which facilitated
liberalization of trade by reducing tariffs, opening markets and framing rules for free and fair
trade. The original signatories to GATT in 1947 were 23 nations. The GATT 1947 covered only
trade in goods.
It is pertinent to note that GATT 1947, unlike GATT 1994, did not cover trade in Trade in
Services, Agriculture, Textile and Apparel. This Agreement could also not justify the inclusion
of intellectual property rights regime within its ambit and neither did it regulate the foreign
investment that is incidental to the free movement of goods.
5.2. ITO AND THE HAVANA CHARTER
Four Preparatory conferences were held from 1946 – 1948 to draft the ITO-GATT Charter.
1. October – November 1946 at London the issues that were dealt in this conference were:
quantitative restrictions, issues relating to LDCs, full employment, general commercial
policies and restrictive trade practices.
2. New York (Jan-Feb 1947): Full draft of the GATT was developed. The GATT discussions at
New York Conference focused on which articles of ITO were to be included in the GATT.
3. Geneva Conference (April 1947): Issues dealt with – preparatory draft of the ITO and tariff
negotiations.
4. Havana Conference: Formally the UN Conference on Trade and Employment from
November 1947 – March 1948. Major achievements of this conference was that the ITO
Charter was considered and the first session of Contracting Parties of GATT also met at
Havana. However divergent views were expressed between developed and developing
countries. It also established an interim Commission for the ITO i.e., ICITO for preparing the
administrative groundwork for the establishment of GATT.
The ITO (Havana) Charter 1948
The Charter consisted of 106 Articles divided into 11 Chapters.
Chapter I: Objectives and purposes included stability and well-being; peaceful and friendly
relations; higher standards of living; full employment etc.
Chapter II focused on employment and economic activities which included provisions relating to
unemployment and underemployment; removal of BoP; exchange of economic information;
control of inflation and fair labour standards.
Chapter III focused on economic development and reconstruction including development of
internal resources, cooperation in economic development, international investment for economic
development, government assistance for economic development etc.
Chapter IV: Commercial policy issues which include
(A) tariffs, preferences, internal taxation and regulations, national treatment on taxation,
(B) quantitative restrictions and related matters;
(C) subsidies;
(D) State trading and related matters
(E) General commercial policy provisions
Chapter V: Restrictive business practices including general policy issues, consultation procedure
and investigation procedures and subsidies.
Chapter VI: Inter-governmental commodity agreements including primary commodities,
commodity conferences and commodity disputes.
Chapter VII: The ITO including the structure, functioning, membership and the relation with
other international financial institutions.
Chapter VII: Settlement of disputes – this dealt with

 UN Charter procedure

 Consultation and arbitration and

 ICJ
Chapter IX: General provisions which include relation with non-members, amendment procedure
(two-thirds), review of charter, withdraw and termination etc.
5.3. OBJECTIVES, STRUCTURE AND FUNCTIONS OF GATT 1947
Objectives of GATT
The GATT 1947 was an international agreement, i.e., a document setting out the rules for
conducting international trade, and an international organization created later to support the
agreement. The primary objective of GATT was to liberalize and expand trade through
negotiated reductions in trade barriers. It provided a forum in which countries could discuss and
resolve trade problems and make available contractual rights and obligations for Contracting
Parties to challenge formally other members’ trade practices.
The important objectives of GATT as stated in preamble are:

 Raising the standard of living and the progressive development of the economies of the
respective countries.

 Ensuring full employment and a large and steady growing volume of real income and
effective demand.

 Better utilization of the resources of the world.

 Expansion of production and international trade.

 Recognizing that international trade as a means of achieving economic and social

advancement.

 Equalizing and lowering trade barriers.

The GATT contains numerous Articles and Annexure. It is a cluster of various agreements,
protocols etc. Some of these relate to the general principles whereas some relate to the revision
of various tariff schedules. There are around 38 Articles dealing with commitments on tariffs.
These depict the rules and obligations to prevent nations from pursuing trade policies, which
would be self-defeating if emulated, by other nations. The unrevised text of GATT encompasses
three parts. Later on a new chapter was added.
Structure of GATT
The prime body of GATT was the Session of Contracting parties that met annually. It was in this
meeting that the major decisions were taken by way of a vote by the parties. But generally they
did not go for a vote but preferred a consensus. In case a voting took place each Contracting
Party had one vote and decisions were arrived at by simple majority. However, two-thirds
majority was essential for any major decisions.
Other than the Session of contracting parties, the GATT Council was authorized to act on any
routine and urgent matters. They had many different standing committees or councils like the
Committee on Trade and Development, Textiles Committee that looked into matters like
development of trade in developing countries. There also were ad hoc committees to look after
any specific transitory questions. GATT Secretariat was the clearing house for the working of the
Contracting Parties. It was situated at Geneva.
Functions of GATT
5.4. CONSTITUTIONAL LAW OF GATT
The GATT Agreement comprises the basic trade policy commitments of the contracting parties
(CPs). GATT 1947 consists of 38 articles divided into Preamble and four parts.
The Preamble of the GATT consisting the objectives which include Raising the standard of
living and the progressive development of the economies of the respective countries; Ensuring
full employment and a large and steady growing volume of real income and effective demand;
Better utilization of the resources of the world; Expansion of production and international trade;
Recognizing that international trade as a means of achieving economic and social advancement;
and Equalizing and lowering trade barriers.
Part I (Arts. 1 and 2): It deals with MFN and Binding Commitments.
Part II (Arts. 3 - 23): Contains substantive issues on commercial policy provisions which form
the GATT’s code of conduct for its CPs with regard to trade matters. Issues covered in this Part
include National Treatment; Freedom of Transit, Anti-Dumping and Countervailing Duties,
Valuation for Custom Procedures, Marks of Origin, Quantitative Restrictions, Balance of
Payments, security exceptions, provisions relating to developing countries, consultation and
nullification or impairment procedures etc.
Part III (Arts. 24-35): Contain miscellaneous and procedural provisions. Issues discussed in this
Part include customs unions and free trade areas, joint actions by CPs, acceptance and entry into
force, withdrawal of concessions, modifications of schedules, tariff negotiations amendments,
withdrawal etc.
Part IV (Arts. 36-38): Deals with trade and development or issues concerning the developing
countries. This Part was added in 1964 to combat trade-related problems of developing countries.
5.5. CORE PRINCIPLES OF THE GATT
The principles can be listed down as:
a. Non-discrimination (Article I)
b. Reciprocity
c. Prohibition of quantitative restrictions and Protection through tariff (Article XI)
d. Dispute Settlement (Article XXIII)
Non-discrimination
The principle of nondiscrimination is an important aspect to the system of international trade.
“Non-discrimination” denotes that the member country shall not discriminate between the
members of GATT in the conduct of international trade. Once a member reduced a tariff on
some commodity for any country, that reduction applies to all member countries. The whole
concept of multilateral trading system is based on the principle of non-discrimination. It is also
given that the nations should offer an equivalent exchange for the benefits they gain.
The principle has two components:

 Most favored nation (MFN) treatment (Article I)

 National treatment(Article III)

Most favored Nation Treatment: MFN treatment became an operational principle in the 19th
century. MFN means that every time a member State extends or improves the benefits that it
gives to one trading partner, it has to give the same “best” treatment to all other GATT
Contracting Parties, so that they remain equal. Countries are to grant equal treatment – not more
favorable or discriminatory – to goods and services from all Contracting Parties. Benefits
tendered to one country have to be given in the same manner to other country, so that literally all
of them remain ‘most favored’. All are beneficiary to any moves towards lowering of trade
barriers.
Hence, the MFN principle ensures that developing countries and others with little economic
leverage are able to benefit freely from the best trading conditions whenever and wherever they
are negotiated. Article I, II and IV of GATT says that a contracting party cannot treat a
product/service of another country more favorably than the product/service of other GATT
members.
Exceptions to MFN treatment:

 Article I paragraph 2 says that the contracting parties are permitted to continue with the
receipt of any grant or preferences under any agreement/arrangement, which was entered into
prior to the initiation of GATT.

 Article XXIV says that customs and free trade areas i.e., an association of nations with duty
free treatment for imports from members and a common level of tariff for imports from
members, are exempted from this treatment.
 Article XVII lays down provisions to the effect that if any special preferential arrangements
for the benefit of developing country are entered into, such arrangements can be continued as
such.
National Treatment: As maintained by this rule the Contracting parties/members must not accord
discriminatory treatment between imports and similar type of domestic products (with the
exception of the imposition of tariffs, which is a border measure). The vital intent behind this is
to prevent countries from taking discriminatory measures on imports on the one hand, and to
avert countries from offsetting the effects of tariffs through non-tariff measures. This also helps
to maintain the balance of rights and obligations, and is an essential constituent for the
maintenance of the multilateral trading system.
Under this principle the parties are not allowed to apply internal taxes or other internal charges,
law regulations, affecting imported or domestic products so as to provide protection to domestic
production. The standard shall not be higher than those imposed on domestic products between
imported goods and similar type of domestic goods, or between imported goods and a directly
competitive or substitutable product.
Exceptions to National treatment:

 Government Procurement allows governments to purchase domestic products preferentially.

As a result, in the context of government procurement, the national treatment rule applies
only between those who have consented to the Agreement on Government Procurement, and
for others, the traditional exception is still in force.

 Domestic Subsidies allows for the payment of subsidies exclusively to domestic producers
provided that it is not a violation of other related provisions.

 Members in the early stages of development can raise their standard of living by promoting
the establishment of infant industries by taking measures that are inconsistent with GATT
provisions after the required formality of consultation.

WTO and International trade law

World Trade Organization (WTO) is the only global international organization dealing with the
rules of trade between nations. It is guided by a cluster of agreements, negotiated and signed by
the bulk of the world’s trading nations and endorsed in their parliaments. WTO facilitates the
free flow of international trade and establishes a ground to settle the disputes impartially. The
WTO is charged with administering the World Trade Agreement (WTA), being a forum for
future liberalization negotiations and adjudicating over trade disputes among the member
countries. It has a much larger membership, with 145 participant countries.
The WTO assists in the implementation, administration and operation of the WTO Agreement
and the Multilateral Trade Agreements, and foster their objectives. It also provides the
framework, for the implementation, administration and operation of the Plurilateral Trade
Agreements. The WTO is also a forum for negotiations on multilateral trade relations in matters
covered by its various agreements. On the recommendations of its Ministerial Conference, it
provides a forum for further negotiations, and a framework for the implementation of their
results, on other issues arising in the multilateral trade relations among its Members. It
administers the integrated dispute settlement system, which is a vital element in providing
security and predictability to the multilateral trading system, serving to preserve the rights and
obligations of the Members of the WTO. The WTO administers the Trade Policy Review
Mechanism, which is designed to contribute to greater transparency and understanding of the
trade policies and practices of WTO Members. This enhances their improved adherence to the
rules, disciplines and commitments of the multilateral trading system, leading to the smoother
functioning of the system. A Ministerial Declaration adopted at the Marrakesh Ministerial
Meeting recognizes the role of trade liberalization in achieving greater coherence in global
economic policy-making.
Evolution of World Trade organization
Globalization of economy and the corrosion in the trade policy environment, clearly envisaged
that GATT was no longer as relevant to the realities of world of trade as it had been in the 1940s.
To begin with, world trade had become very complex and essential than 40 years before,
international investment was exploding and trade in services (not covered by the rules of GATT)
was of major interest to more and more countries. In other respects, the GATT had been found
inadequate. For instance, with respect to agriculture where loopholes in the multilateral system
were heavily exploited - and efforts at liberalizing agricultural trade met with little success. The
textiles and clothing sector (where an exception to the normal disciplines of GATT) was
negotiated in the form of the Multifibre Arrangement. Even the institutional structure of GATT
and its dispute settlement system were giving cause for concern. All these put together motivated
the contracting parties of GATT to the initiation of the Uruguay round, which was a land mark
trade negotiation round in the history of the world. The final agreement was signed on 15th April
1994 in Marrakesh, Morocco. One of the fundamental agreements embodied in the Uruguay
Round Marrakesh Agreement is the establishment of World Trade Organization. The
Agreements signed by the member countries at Marrakesh in 1994 include the agreement to
establish a World Trade Organization for the purpose of providing legal ground and also to
frame the common rules for international trade and commerce. Hence on January 1, 1995 the
WTO was formed to replace GATT with increasing effectiveness. World Trade Organization
members through the various agreements are bound to operate a non-discriminatory Trading
System. Furthermore through these agreements, each country receives guarantees that its exports
will be treated fairly and consistently in other countries market. World Trade Organization
provides some flexibility to the developing countries in implementing their commitments.
Principles and Objectives of WTO
The key objective of WTO is to facilitate and promote world trade among its member states.
Objectives are set out in the preamble to the Marrakesh Agreement. These include:
Raising standards of living;
Ensuring full employment
Ensuring large and steadily growing real incomes and demand; and
Expanding the production of and trade in goods and services.
These objectives are to be achieved while allowing for the most advantageous use of the world’s
resources in accordance with the objective of achieving sustainable development, and while
seeking to protect and preserve the environment. The preamble also specifically mentions the
need to assist developing countries.
The WTO aims to achieve its objectives by reducing existing barriers to trade and by preventing
new ones from developing. It seeks to ensure fair and equal competitive conditions for market
access, and predictability of access to all traded goods and services by employing certain well-
laid principles.
The basic principles of the WTO are:
Trade without Discrimination
No Most Favored Nation (MFN) Treatment - no special deals to trading partners, all members of
WTO must be treated with the same status
No National Special Treatment - locals and foreigners are treated equally
Freer Trade
Predictability through Binding - promising not to raise tariffs is called binding a tariff and
binding leads to greater certainty for businesses
Promoting Fair Competition
Encouraging Development and Economic Reform
These principles are the foundation of the multilateral trading system.
WTO-organization and functions
The structure of WTO can be represented as:
1

Ministerial
Figure 11.1 Conference

Source: [Link]
First
Generallevel of theas WTO
Council meeting structure:
General Council meeting as
General Council Trade Negotiations
Trade Policy Review Body Dispute Settlement Body Committee

The Ministerial Conference: It is composed of international trade ministers from all member
countries. This constitutes the governing
Appellate Body body of the WTO, responsible for setting the strategic
Dispute Settlement panels
direction of the organization and making all final decisions on agreements under its wings. The
Ministerial Conference meets in any case once for every two years. Although voting can take
place, decisions are generally taken by consensus, a process that can at times be difficult,
Council for
Committees on Council for Council for
particularly in a body composed of 136 very
Trade in Goods different members.
Trade-Related
Trade and Environment Aspects of Intellectual Trade in Services
After the inception of the WTO there wereProperty
four Rights
Ministerial Conferences.
Trade and Development Committees on
Committees on
First Ministerial
Subcommittee Conference
on Least- held at Singapore
Market Access
Trade in Financial Services
Developed Countries
The First WTO Ministerial
Agriculture Conference was held
Specific at Singapore between 9 and
Commitments
Regional Trade Agreements
13 December 1996. Ministers Sanitaryfor Trade, Foreign,
and Phytosanitary Measures Finance and Agriculture from more than 120
World
Balance Trade of Organization Member governments and from
Payments those in the process of acceding to
Plurilaterals
the WTO participated in Technical
Restrictions Barriers to Trade
Conference. The Conference was the first since the WTO came into
force Committee on Trade in
Budget, on Finance
1 January
and 1995. Subsidies
It included plenary
and Countervailing meetings and
Measures various multilateral, plurilateral and
Civil Aircraft
Administration
bilateral business [Link]-Dumping
These examined issues related to
Practices

– Strengthening of WTO Council for Trade in Services, Special Session

Customsas a forum for negotiation
Valuation
Working parties on
Negotiating Group on Market Access
Rules of Origin
– Continuance of liberalization of trade
Committee of Participants on the within a rule based system
Accession
Expansion of Trade in Information Negotiating Group on Rules
– Technology Products
Assessment of implementation of member’s commitments under the WTO Agreements
Committee on Trade and Environment,
and decisions Special Session
Working groups on

– Review the ongoing negotiations and Work Programme;

Council for TRIPS, Special Session

– Examine developments in world trade; and

– Address the challenges of an evolving world economy.
The Implementation of the Uruguay Round Agreements
The following important decisions were taken regarding the tribulations of Least-Developed
Countries and it was agreed to:
– A Plan of Action, including provision for taking positive measures, for example duty-free
access, on an autonomous basis, aimed at improving their overall capacity to respond to the
opportunities offered by the trading system;
– Seek to give operational content to the Plan of Action, for example, by enhancing
conditions for investment and providing predictable and favorable market access conditions for
LDCs’(less developed countries) products, to foster the expansion and diversification of their
exports to the markets of all developed countries; and in the case of relevant developing
countries in the context of the Global System of Trade Preferences; and
– Organize a meeting with UNCTAD and the International Trade Centre as soon as
possible in 1997, with the participation of aid agencies, multilateral financial institutions and
least-developed countries to foster an integrated approach to assisting these countries in
enhancing their trading opportunities.
Agreements were arrived on at a number of provisions calling for future negotiations on
Agriculture, Services and aspects of TRIPS, or reviews and other work on Anti-Dumping,
Customs Valuation, Dispute Settlement Understanding, Import Licensing, Preshipment
Inspection, Rules of Origin, Sanitary and Phyto-Sanitary Measures, Safeguards, Subsidies and
Countervailing Measures, Technical Barriers to Trade, Textiles and Clothing, Trade Policy
Review Mechanism, Trade-Related Aspects of Intellectual Property Rights and Trade-Related
Investment Measures.
Second Ministerial Conference held at Geneva
The Second WTO Ministerial Conference was held in Geneva, Switzerland between 18
and 20 May 1998. Consensus was arrived at on the basic telecommunications and financial
services and the implementation of the Information Technology Agreement. The important
decisions were arrived at on:
A mechanism to ensure full and faithful implementation of existing multilateral
agreements were to be set up
Projectionist measures are to be rejected and open and transparent rule based trading
system was to be accepted
It was agreed that The General Council’s work programme should encompass the
following:
Recommendations concerning:
– The issues, including those brought forward by Members, relating to
implementation of existing agreements and decisions;
– The negotiations already mandated at Marrakesh, to ensure that such
negotiations begin on schedule;
– Future work already provided for under other existing agreements and
decisions taken at Marrakesh
Recommendations concerning other possible future work on the basis of the work programme
initiated at Singapore;
Recommendations on the follow-up to the High-Level Meeting on Least-Developed Countries;
Recommendations arising from consideration of other matters proposed and agreed to by
Members concerning their multilateral trade relations.
Third Ministerial conference held at Seattle
The Third WTO Ministerial Conference was held in Seattle and ended on December
1999. Major new negotiations were launched to further liberalize international trade and to
review some current trade rules. Proposals regarding tariffs, anti-dumping, subsidies, safeguards,
investment measures, trade facilitation, electronic commerce, competition policy, fisheries,
transparency in government procurement, technical assistance, capacity-building and other
development issues, intellectual property protection, and many other subjects, in addition to
agriculture and services were discussed in the conference. A special deal to help least-developed
countries gain easier access to richer countries’ markets, and to develop further work on
technical assistance to least-developed countries under an integrated framework which was set
up by the WTO and a number of other organizations in 1997.
This conference turned out to be a failure since the developing nations jointly protested
against the lack of transparency and imposition of the views of the rich on the poor countries in
the negotiations. It was felt by the Asian, African and Latin American countries that their views
were not cared for in the WTO. On the lighter side, it was even claimed by the demonstrators
that WTO is no more “World Trade Organization” but “Wrong Trade Organization”
Fourth Ministerial Conference held at Doha, Qatar
The Fourth WTO Ministerial Conference was held in Doha, Qatar from
9 to 14 November 2001. This is a much talked about conference among all the WTO
conferences. It was once again confirmed that the multilateral trading system embodied in the
World Trade Organization has contributed significantly to economic growth, development and
employment throughout the past fifty years. It was decided to with the light of the global
economic slowdown as a backdrop, to maintain the process of reform and liberalization of trade
policies, thus ensuring that the system plays its full part in promoting recovery, growth and
development. This was a round especially for the developing countries.
This round successfully launched a new round of trade and investment liberalization
negotiations—the “Doha Development Agenda”. For the past half-century the countries of the
world have been able to achieve economic growth without resorting to the affluent countries as it
was in the 1930s. This was possible due to the rising accomplishments of successive negotiation
rounds. The launch of a new round with broad-based agendas and forward-looking efforts by
Japan and other countries and regions is a significant achievement.
In Doha a move towards the resolution of implementation issues was made and some of
the following concerns were addressed:
Exclusion of labor
Protection of interests in agriculture, services and industrial tariffs
Postponement of negotiations on Singapore issues
Safeguards in environmental negotiations
TRIPS and public health
Emphasis on developmental goals
The preamble of the Ministerial Declaration, speaks about the role trade plays in promoting
economic development and the mitigation of poverty. It recognizes the particular problems of
developing countries. It speaks of the need for more impartial sharing of the benefits accruing
from trade liberalization. It promises to “seek to place their (developing countries) needs and
interests at the heart of the Work Programme adopted in this Declaration.” It even goes to the
extend to state that the Ministers ought to “attach the utmost importance to the implementation-
related issues and concerns raised by Members and are determined to find appropriate solutions
to them.” The implementation issues are a set of problems within the WTO trade agreements that
many countries of the South define as unfair to their interests and development needs and are
seeking to change.
The Major Outcome Or Results Of The Doha Round Could Be Summed Up As:
The decision to launch a new three-year round of WTO trade talks (the Doha agenda) with a
joint focus on free trade and new forms of regulation, along with undertakings to substantially
increase support for capacity-building in the developing countries and help them to apply
existing WTO agreements.
The decision to interpret the agreement on trade-related intellectual property rights (TRIPS) in a
way favorable to the rights of its signatories to take public health protection measures; i.e., to
enable countries to break patent law when faced by public health emergencies such as the AIDS
endemic.
A derogation from WTO rules to allow the preferential trade agreements provided for in the
Cotonou Agreement between the EU and the ACP (African, Caribbean and Pacific) countries.
(Note: Cotonou Agreement laid down efforts to consolidate peace and prevent and settle
conflicts as part of the partnership and stressed the importance of civil society’s contribution to
development in the ACP countries, through implementation of the Agreement).
EU’s four main objectives are to a certain extend realized. They are namely:
– The vista of further trade liberalization to get off the ground, economic growth and
restore business confidence at a critical moment in the development of the global economy;
reinforcing the regulatory nature of the multilateral trade system - to be achieved by drafting
under WTO auspices agreements on investment, competition, facilitating trade and public
procurement;
– Introducing new rules to govern relations between WTO rules and international
agreements on the environment;
– Meeting the concerns of the developing countries about implementation of the Marrakesh
agreements and taking account of the development dimensions in all specific negotiations;
– Meeting the expectations of civil society about transparency, sustainable development
and the environment.
The Doha ministerial declaration includes mandates to tackle the following issues, either through
negotiations or work programs: implementation; agriculture; services; market access for non-
agricultural products; TRIPs; trade and investment; trade and competition policy; transparency in
government procurement; trade facilitation; WTO rules (including antidumping and subsidy
rules); dispute settlement; trade and environment; electronic commerce; small economies; trade,
debt, and finance; trade and transfer of technology; technical cooperation and capacity building;
least-developed countries; and special and differential treatment for the WTO’s poorer members.
Though this round was meant mainly for the developing countries, it turned out to be the
opposite. More or less the whole of the Ministerial conference was devoted to issues in the
interests of rich countries. The EU wanted to launch new free trade agreements on investment,
government procurement, and competition policy and trade facilitation which in a way was
harmful for the developing countries Though the Developing countries, bravely stood up to the
bullying and threats of the rich countries in the end though they had no choice but to sign up.
The Fifth WTO Ministerial Conference to be held at Cancun, Mexico
The Fifth WTO Ministerial Conference will be held in Cancun, Mexico from
10 to 14 September 2003. The debate on concerns about transparency and procedures of
negotiations will continue at Cancun, especially as it relates to the negotiations on agriculture
and services, which began in early 2000. Liberalization of trade in services through the WTO
General Agreement on Trade in Services (GATS) can be expected. The Cancun meeting is the
deadline for member countries to decide on modalities for launching negotiations on the
Singapore issues of investment, competition, transparency in government procurement, and trade
facilitation.
Second Level Wings of WTO
Three bodies carry out the day-to-day work of Ministerial Conference, namely:
The General Council
The General Council is composed of senior representatives (usually ambassador level) of
all members. It is responsible for overseeing the day-to-day business and management of the
WTO, and is based at the WTO headquarters in Geneva. In reality, this is the key decision-
making arm of the WTO for most issues. Several of the bodies described below report directly to
the General Council.
The Trade Policy Review Body
The Trade Policy Review Body is composed of all the WTO members, and oversees the
Trade Policy Review Mechanism, a product of the Uruguay Round. It periodically reviews the
trade policies and practices of all member states. These reviews are intended to provide a general
indication of how states are implementing their obligations, and to contribute to improved
adherence by the WTO parties to their obligations.
The Dispute Settlement Body
The Dispute Settlement Body constitutes all the WTO members. It oversees the
implementation and effectiveness of the dispute resolution process for all WTO agreements, and
the implementation of the decisions on WTO disputes. Disputes are heard and ruled on by
dispute resolution panels chosen individually for each case, and the permanent Appellate Body
that was established in 1994. Dispute resolution is mandatory and binding on all members. A
final decision of the Appellate Body can only be reversed by a full consensus of the Dispute
Settlement Body.
Third Level Wings of WTO-Councils
Third level has councils for each broad area of trade, services etc.
The Councils on Trade in Goods and Trade in Services operate under the mandate of the General
Council and are composed of all members. They provide a mechanism to oversee the details of
the general and specific agreements on trade in goods (such as those on textiles and agriculture)
and trade in services.
There is also a Council for the Agreement on Trade-Related Aspects of Intellectual Property
Rights, dealing with that agreement and that subject area.
Fourth Level Wings of WTO-Committees
Fourth level has 11 committees dealing with specific subjects (such as agriculture, market
access, subsidies, anti-dumping measures and so on).
The Committee on Trade and Development and the Committee on Trade and Environment are
two of the several committees continued or established under the Marrakesh Agreement in 1994.
They have specific mandates to focus on these relationships, which are especially relevant to
how the WTO deals with sustainable development issues. The Committee on Trade and
Development was established in 1965. The forerunner to the Committee on Trade and
Environment (the Group on Environmental Measures and International Trade) was established in
1971, but did not meet until 1992. Both Committees are now active as discussion grounds but do
not actually negotiate trade rules.
The Secretariat and Director General
The Head Quarters of WTO is Geneva, Switzerland. It has around 550 staff and is headed by a
Director-General. The Director General, who is elected by the members, heads the Secretariat Its
annual budget is roughly 143 million Swiss francs. It does not have branch offices outside
Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the
decision-making role unlike the other international bureaucracies. The Secretariat’s foremost
duties are to supply technical support for the various councils and committees and the ministerial
conferences, to provide technical assistance for developing countries, to analyze world trade, and
to explain WTO affairs to the public and media. The Secretariat also provides legal assistance in
the dispute settlement process and advises governments wishing to become members of the
WTO.
Special Policies supporting the Functions of WTO
Special focus is given to five particular policies to support the functions of WTO.
Assisting developing and transition economies
One third of the WTO member is constituted of developing countries. So a great deal of attention
is paid to the special needs and problems of these countries. A number of programmes to explain
how the system works and to help train government officials and negotiators are organized by
the WTO Secretariat .Few of them are organized jointly with other international organizations.
Some take the form of training courses. In other cases individual assistance might be offered.
Developing countries, especially the least developed among them, are helped with trade and
tariff data relating to their own exports and their participation in WTO bodies.
Specialized help for export promotion
The International Trade Centre (which was established by GATT in 1964 at the request of the
developing countries to help them promote their exports) responds to requests from developing
countries for assistance in formulating and implementing export promotion programmes as well
as import operations and techniques. It also provides information and advice on export markets
and marketing techniques. Furthermore it assists in establishing export promotion and marketing
services, and in training personnel required for these services. The Center’s help is freely
available to the least-developed countries. It is jointly operated by the WTO and the United
Nations, the latter acting through UNCTAD (the UN Conference on Trade and Development).
Cooperation in global economic policy-making
The WTO is required to cooperate with the International Monetary Fund, the World Bank and
other multilateral institutions to achieve greater consistency in global economic policy-making.
This was emphasized in a separate Ministerial Declaration that was adopted at the Marrakesh
Ministerial Meeting in April [Link] recognizes that different aspects of economic policy are
linked, and it calls on the WTO to develop its cooperation with the international organizations
responsible for monetary and financial matters - the World Bank and the International Monetary
Fund.
Notifications to introduce new trade measures
There are routine notification when members introduce new trade measures or alter old ones. In
order to monitor whether commitments are being implemented fully it is required by the
countries to notify the WTO promptly when they take relevant actions. For example, details of
any new anti-dumping or countervailing legislation, new technical standards affecting trade,
changes to regulations affecting trade in services, and laws or regulations concerning the
intellectual property agreement - they all have to be notified to the appropriate body of the WTO.
Special groups are also established to examine new free-trade arrangements and the trade
policies of countries joining as new members.
Online Public information System
Now more information about WTO activities is to be made available publicly and also that
public information, including derestricted WTO documents, would be accessible on-line. Efforts
are also made to derestrict new documents more quickly. The objective is to make more
information available to the public, including to non-governmental organizations interested in the
WTO. Some documents, such as trade policy review reports and dispute settlement panel reports,
are made public almost immediately. Others, including minutes of meetings, are considered for
derestriction after about six months, but WTO members can decide that the information should
remain confidential for longer. Many of these documents are now available in “Documents
Online”.
Benefits to Member Countries of WTO
By being members of WTO, the member countries are eligible to get the following benefits.
The system helps promote peace
Disputes are handled constructively
Rules make life easier for all
Freer trade cuts the costs of living
Provision of more choice of products and qualities
Trade free from disputes raises incomes
Trade stimulates economic growth
The basic principles make life more efficient
Governments are shielded from lobbying
The system encourages good government
The system helps to promote peace
The system contributes to international peace. Peace is partially an outcome of two of the most
fundamental principles of the trading system.
A system based on rules rather than power makes life easier for all.
The WTO can reduce some inequalities among nations by, giving smaller countries more voice,
and at the same time freeing the major powers from the complexity of having to negotiate trade
agreements with each of their numerous trading partners. Smaller countries enjoy more
bargaining power, and life is simpler for bigger countries. Rich and poor countries alike have an
equal right to challenge each other in the WTO’s dispute settlement procedures. Without a
multilateral regime such as the WTO’s system, the more powerful countries would be freer to
impose their will unilaterally on their smaller trading partners. Smaller countries would have to
deal with each of the major economic powers individually, and would be much less able to resist
unwanted pressure. In addition, smaller countries can perform more effectively if they make use
of the opportunities to form alliances and to pool resources. Several are already doing this.
Helping trade to flow smoothly, and providing countries with a constructive and fair outlet for
dealing with disputes over trade issues.
It is also an outcome of the international confidence and cooperation that the system creates and
reinforces. Down the lane of history, we can come across with examples of trade disputes turning
into war. One of the most brilliant is the trade war of the 1930s when countries competed to raise
trade barriers in order to protect domestic producers and retaliate against each others’ barriers.
This worsened the Great Depression and eventually played a part in the outbreak of World
War II. With this as a backdrop the need was felt for an International organization to look after
the matter. When governments are confident that others will not raise their trade barriers, they
will not be tempted to do the same. They will also be in a better frame of mind to cooperate with
each other. The WTO trading system plays a vital role in creating and fortify that confidence.
The system allows disputes to be handled constructively.
As trade expands in the number of products traded, and in the numbers of countries and
companies trading, there is a greater chance that disputes will arise. The WTO system helps
resolve these disputes peacefully and beneficially.
Countries in dispute always aim to conform to the agreements. More trade means more
possibilities for disputes to arise. Those disputes if unresolved could lead to serious conflict. This
could be resolved by turning to international organizations for, specifically the WTO, to
settlement of their trade disputes.
When the disputes are before WTO, the WTO’s procedure focuses its attention on the rules.
Once a ruling has been made, countries concentrate on trying to comply with the rules, and
perhaps later renegotiating the rules — not on declaring war on each other. Ever since its
inception in 1995 over 200 disputes have been brought to the WTO. Without a means of tackling
these constructively and harmoniously, some could have led to more serious political conflict.
The disputes are based on WTO agreements so there is a clear basis for judging who is right or
wrong. Once the judgment has been made, the agreements provide the focus on any further
actions that need to be taken.
The WTO’s global system lowers trade barriers through negotiation and applies the principle of
non-discrimination. The result is reduced costs of production (because imports used in
production are cheaper) and reduced prices of finished goods and services, and ultimately a
lower cost of living. But WTO members are now reducing the subsidies and the trade barriers
that are the worst offenders. Trade barriers around the world are lower than they have ever been
in modern trading history.
It gives consumers more choice, and a broader range of qualities to choose from smoother import
mechanism can improve the quality of locally produced goods because of the competition from
imports. Imports are used as materials, components and equipment for local production. This
expands the range of final products and services that are made by domestic producers, and it
increases the range of technologies they can use.
Sometimes, the success of an imported product or service on the domestic market can also
encourage new local producers to compete, increasing the choice of brands available to
consumers.
Lowering trade barriers allows trade to increase, which adds to incomes national incomes and
personal incomes. Trade poses challenges as domestic producers face competition from imports.
But the fact that there is additional income means that resources are available for governments to
redistribute the benefits from those who gain the most.
Trade stimulates economic growth, and that can be good news for employment.
Trade clearly has the potential to create jobs. In practice there is often factual evidence that lower
trade barriers have been good for employment growth. But the picture is complicated by a
number of factors. Careful policy-making harnesses the job-creation powers of freer trade.
The basic principles make the system economically more efficient, and they cut costs.
The WTO’s trading system offers to increase efficiency and to cut costs even more because of
important principles enshrined in the system. Its main principles are described hereunder:
Non-discrimination
transparency (clear information about policies, rules and regulations);
increased certainty about trading conditions (commitments to lower trade barriers and to increase
other countries’ access to one’s markets are legally binding);
simplification and standardization of customs procedure, removal of red tape, centralized
databases of information, and
other measures designed to simplify trade that come under the heading “trade facilitation”
The companies have made trading simpler by cutting their costs of operations and by increasing
the confidence for the future. This trend leads to generate more jobs and offer better goods and
services for consumers.
The system shields governments from narrow interests.
The WTO helps governments to take a more balanced view of trade policy. Governments are
better placed to defend themselves against lobbying from narrow interest groups by focusing on
trade-offs that are made in the interests of everyone in the economy. In a WTO trade negotiation
one pressure group lobbies its government to be considered as a special case in need of
protection, the government can reject the protectionist pressure by arguing that it needs a broad-
ranging agreement that will benefit all sectors of the economy.
The system encourages good government.
WTO rules, discourage a range of unwise policies. It means greater certainty and clarity about
trading conditions for business and good discipline for governments. The rules reduce
opportunities for corruption. Generally governments use the WTO as a welcome external
constraint on their policies.
Agreements of World Trade Organization in the Final Act of the 1986-1994 Uruguay
Round
The WTO’s agreements are time and again called the Final Act of the 1986–1994 Uruguay
Round of trade. A large range of trade agreements resulted from the Uruguay round, covering
not only trade in goods, but also trade in services and the protection of intellectual property
rights. These agreements are classified as below:
Agreement Establishing the World Trade Organization (WTO)
Annex 1A: The Multilateral Agreements on Trade in Goods:
– General Agreement on Tariffs and Trade
1994 (GATT 1994)
– General Agreement on Tariffs and Trade
1947 (GATT 1947)
– A number of Understandings clarifying
particular articles in GATT
– Agreements on Implementation of Articles
VI and VII of GATT
– Marakesh Protocol to GATT
– Agreement on Subsidies and Countervailing
Measures
– Agreement on Agriculture (AoA)
– Agreement on the Application of Sanitary and
Phytosanitary Measures
– Agreement on Textiles and Clothing (ATC)
– Agreement on Technical Barriers to Trade
(TBT)
– Agreement on Trade-Related Investment
Measures (TRIMS)
– Agreement on Preshipment Inspection
– Agreement on Rules of Origin
– Agreement on Import Licensing Procedures
– Agreement on Safeguards
Annex 1B: General Agreement on Trade in Services (GATS)
 Annex 1C: Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS)
Annex 2: Understanding on Rules and Procedures Governing the
Settlement of Disputes (DSU)
Annex 3: Trade Policy Review Mechanism (TPRM)
Annex 4: Plurilateral Trade Agreements:
– Agreement on Trade in Civil Aircraft
– Agreement on Government Procurement
A number of decisions and declarations, illustrated below are also
documented:
– Decision on Measures in Favor of Least
Developed Countries
– Declaration of the Relationship of the WTO
with the IMF
– Decision on Trade in Services and the
Environment
– Decision on Financial Services
Agreement establishing the WTO:
The agreement that created the WTO lays down every aspect of WTO in detail like the scope of
the WTO, explaining the “single undertaking approach” which means that all multilateral WTO
agreements are binding on all members (the plurilateral agreements, however, are only binding
on those countries that signed them).
Articles mentioned in the Agreement Establishing the World Trade Organization
Table 10.1
Salient contents of agreements

Article I Establishment of the Organization

Article II Scope of the WTO

Article III Functions of the WTO

Article IV Structure of the WTO

Article V Relations with Other Organizations

Article VI The Secretariat

Article VII Budget and Contributions

Article Status of the WTO (a legal personality)

VIII

Article IX Decision-Making (by consensus)

Article X Amendments (by laying down the proposal before

the Ministerial conference)

Article XI Original Membership

Article XII Accession

Article Non-Application of Multilateral Trade Agreements

XIII
between Particular Members

Article Acceptance, Entry into Force and Deposit

XIV

Article XV Withdrawal from the agreement

Article Miscellaneous Provisions

XVI