INTERNATIONAL
ECONOMIC LAW
Semester 1
1. Introduction
International economic law is an increasingly seminal field of international law that involves the regulation
and conduct of states, international organizations, and private firms operating in the international
economic arena.
The theory of international trade is customarily divided into two major branches:
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The Theory of International Values which is the Pure or Real Theory of International Trade
Equilibrium
o Concerned with the determination of relative prices and real incomes in international trade,
abstracting from the intervention of money. The implicit assumption that whatever
adjustments of money wage and price levels or exchange rates required to preserve
international monetary equilibrium do actually take place is a potent source of difficulty and
confusion in applying the theory to actual problems.
The theory of the mechanism of adjustment which is the Monetary Theory of Balance-ofPayments Adjustment
o in its classical formulation, was concerned with the automatic mechanism by which
international monetary equilibrium was attained or preserved under the gold standard and,
subsequently, with the automatic mechanisms of adjustment under fixed and floating
exchange rate systems.
1.1 Trade Theories
1.1.1 The Pure Theory of International Trade
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The central concern of the pure theory of international trade is to explain the causes of international
trade and the determination of the equilibrium prices and quantities of traded goods and to analyse
the effects of trade on economic welfare; that is, the theory is concerned with both positive and
normative questions.
The normative concern is particularly dominant in the theory on the effects of tariffs and other
governmental interventions in international trade a perennial problem that has acquired new interest
in the modern world of planned economic development based on protected industrialization and
deliberate import-substitution.
1.1.2 The Classical Theory
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The classical economists developed the basic concepts of the theory in two steps:
o Ricardo contributed the theory of comparative costs, which explained both the cause and the
mutual beneficiality of international trade by international differences in relative costs of
production; and
o John Stuart Mill added the principle that the relative prices of the goods exchanged must be
such that the quantities demanded in international trade are equal to the quantities supplied.
The fundamental point that the beneficiality of international trade depends in no way on the absolute
levels of economic efficiency or “stages of economic development” of the trading partners but only on
differences in their relative costs of production in the absence of trade.
The theory is reformulated here to bring out the essential point that what matters is differences in the
alternative opportunity costs of commodities in the absence of trade.
Ricardo’s own formulation, with its assumption of a single factor of production producing goods at
constant costs and its concept of a fundamental unit of real cost (hours of work), unnecessarily tied
trade theory to the labour theory of value.
The modern approach can incorporate theories of production of any desired degree of complexity
and specifically allows alternative opportunity cost to vary with changes in the production pattern.
However, as soon as more than one factor of production is introduced, the analysis of the effect FDs
of trade on economic welfare becomes more complex than in the classical system, and the
demonstration of gain from trade requires considerably more conceptual sophistication
1.1.3 The Modern Theory
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The modern approach to the question of the gains from trade recognizes that the inauguration of trade
or a change in the conditions of trade, such as that involved in the erection or removal of tariff barriers,
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will have differential effects on the welfare of individuals either by changing the relative prices facing
them as consumers or by changing the relative prices paid for the factors of production.
In their absence, welfare conclusions can only be derived either on the assumption that a social
judgment of the desirable distribution of real income exists and is implemented consistently or in terms
of potential welfare, that is, in the sense that in one situation everyone could be made no worse off
and some be made better off than they would be in the alternative situation, by means of appropriate
compensations through transfers of income.
Ethical neutrality requires that this result should be true for all possible distributions of economic
welfare among individuals, not merely for the distribution that happens to prevail before or after a
change of situation. This requirement is satisfied by any change that makes more of all commodities
available to the economy or, in the limit, no less of any commodity, regardless of how the community
allocates its consumption among commodities.
1.1.3.1 Gains in International Trade
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The gains from international trade are obviously dependent on the difference between the prices for
exports in terms of imports established in international trade and the prices that would rule in a closed
economy.
The classical economists attempted to relate the distribution of the gains from trade to the precise
point between the closed-economy comparative cost ratios at which the equilibrium international price
ratio fell.
In practice, while this approach has been applied in specialist studies of the welfare cost of protection,
economists have generally been content to analyse changes in countries’ gains from trade by
reference to changes in an index expressing one or another concept of the terms of trade.
1.1.4 The Heckscher-Ohlin
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The classical theory of international trade explained trade by differences in the comparative
productivity of labour.
The existence of the differences in comparative costs underlying international trade, however, was
merely assumed and not explained by the theory.
Contemporary international trade theory attempts the more fundamental task of explaining these
differences by differences in the ratios in which countries are endowed with factors of production.
As commonly expounded and applied, the theory employs a simple but elegant model of production
and distribution in the national economy.
Example:
o The Heckscher–Ohlin model assumes a perfectly competitive economy in which two
commodities (call them X and Y) are produced by two factors of production (call them K and
L), utilizing production functions characterized by constant returns to scale and diminishing
marginal rate of substitution between the factors.
o The quantities of the factors available are assumed fixed, and the production functions are
assumed to be such that at any given ratio of the price of K to the price of L, the production of
X is K-intensive and the production of Y is L-intensive, in the sense that X employs a higher
ratio of K to L than does Y.
o For the analysis of international trade the world is assumed to be composed of two such
national economies, the production functions and factors are assumed to be identical in
the two countries, and the tastes of consumers in the two countries are assumed to be
similar, in the sense that, at the same commodity price ratio, they will consume the two goods
in roughly the same ratios.
o The production side of this model has two fundamental properties, from which an extensive
and elegant set of theorems can be derived.
 These result from the assumption of constant returns to scale, which makes the ratios
in which factors are employed in the two industries depend only on their relative prices.
 The assumption of the invariance of relative factor intensity, which links relative factor
prices uniquely to relative commodity prices; and the assumption of fixed factor
endowments, which links the production pattern uniquely to commodity or factor prices.
1.1.4.1 Stolper–Samuelson Relationship
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It describes the relationship between relative prices of output and relative factor rewards; specifically,
real wages and real returns to capital.
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Stolper-Samuelson theorem emphasizes that the increase in the price of one good, along with other
conditions unchanged, increases the real income of production factor, which is intensively used in the
production of good whose price has increased.
The theorem states that under specific economic assumptions (constant returns to scale, perfect
competition, equality of the number of factors to the number of products) a rise in the relative price of
a good will lead to a rise in the real return to that factor which is used most intensively in the production
of the good, and conversely, to a fall in the real return to the other factor.
In the normal case, in which the two trading countries’ demands for each other’s exports are elastic,
a tariff will improve a country’ terms of trade and raise the internal price of imports, thus shifting
production toward import-substitutes and raising the real income of the factor used intensively in
producing them.
There are two “exceptional” cases:
o If the country’s own demand for imports is inelastic and if those who spend the tariff proceeds
have a stronger marginal preference for imports than the average consumer, the demand for
imports may increase and the terms of trade turn against the country.
o If the foreign country’s demand for imports is inelastic and if domestic consumers have a
stronger marginal preference for the export good than do foreigners, the terms of trade may
improve so much that the internal price of imports falls and the income-distribution effects are
opposite to those normally expected.
1.1.5 The Theory Second Best
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Protection has been a perennial policy issue since long before the origins of international trade theory,
and international trade theorists in the main tradition of the subject have consistently been concerned
with advocating freedom of trade and exposing the innumerable fallacies of protectionist thinking.
Two arguments for tariffs have, traditionally been acknowledged as valid
The terms of trade (“optimum tariff”) argument, and
The infant industry argument, favouring temporary protection of industries capable eventually of
establishing themselves in international competition.
A customs union is, from the free trade point of view, a second-best arrangement; and the problems
dealt with in Meade’s analysis all involve choices among alternatives when the first-best, or welfaremaximizing, solution is ruled out by assumption. This is the nature of most policy problems in
economics, in other areas as well as international trade, so that Meade’s theoretical construction is
of great general applicability.
1.1.6 Customs unions
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Interest in the theory of tariffs has also been generated by the movement toward economic integration
in Europe and by the associated problem of the economic effects of customs unions and free trade
areas.
Such arrangements entail a simultaneous movement toward free trade and protection. The problem
is whether the net result is a gain or a loss of economic welfare for individual members, the union as
a whole, outsiders, and the world as a whole.
A customs union increases welfare to the extent that it creates trade by diverting demand from highercost domestic to lower-cost partner products and decreases welfare to the extent that it diverts trade
from lower-cost, foreign to higher-cost, partner products.
1.1.7 The monetary theory of balance-of-payments adjustment
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The pure theory of international trade assumes that money prices and costs will adjust passively to
the real equilibrium of the international economy.
According to the theory, the stock of international money (which was initially identified with gold and
silver, whose total quantity was assumed fixed, although the theory was subsequently extended to
incorporate deposit money and the intervention of central banks) would tend automatically to be so
distributed among nations that each would have the quantity it demanded, consistent with
international equilibrium.
An increase in the quantity of money in a particular country would raise prices there, decreasing
exports and increasing imports, bringing the exchange rate to the gold-export point and inducing an
outflow of gold, which would cause domestic prices to fall and foreign prices to rise until equilibrium
was restored with a generally higher level of world prices.
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2. Brief Historical remarks on GATT, and associated Institutions
2.1 Brief History of GATT
GATT is a legal agreement between many countries, whose overall purpose was to promote international
trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its preamble, its purpose
was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a
reciprocal and mutually advantageous basis."
The GATT was first discussed during the United Nations Conference on Trade and Employment and was the
outcome of the failure of negotiating governments to create the International Trade Organization (ITO).
It remained in effect until the signature by 123 nations in Marrakesh on 14 April 1994, of the Uruguay Round
Agreements, which established the World Trade Organization (WTO) on 1 January 1995. The WTO is the
successor to the GATT, and the original GATT text (GATT 1947) is still in effect under the WTO framework,
subject to the modifications of GATT 1994. The GATT, and its successor the WTO, have successfully
reduced tariffs.
The Bretton Woods Conference produced two of the most important international economic institutions of the
postwar period: The International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development, commonly known as the World Bank.
The beggar-thy-neighbor tariff policies of the 1930s had contributed to the environment that led to war,
ministers discussed the need for a third post war institution, the International Trade Organization (ITO), but
left the problem of designing it to their colleagues in government ministries with responsibility for trade.
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Beggar thy neighbour: In economics, a beggar-thy-neighbor policy is an economic policy through
which one country attempts to remedy its economic problems by means that tend to worsen the
economic problems of other countries.
It assumes that economics is a zero-sum game. In other words, if you want more income, you have
to take it from other countries.
The goal was to create an agreement that would ensure postwar stability and avoid a repeat of the mistakes
of the recent past, including the Smoot-Hawley tariffs and retaliatory responses, which had been a contributor
to the devastating economic climate that culminated in the death and destruction of the Second World War.
The 1947 GATT created a new basic template of rules and exceptions to regulate international trade between
members (referred to as contracting parties) and locked in initial tariff reductions that these countries
committed to establish.
2.2 Advantages and Disadvantages of GATT
2.2.1 Advantages
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Initially reduced tariffs
By increasing trade, the GATT promoted world peace
By showing how free trade works, GATT inspired other trade agreements.
It set the stage for the European Union.
GATT also improved communication between countries.
It provided incentives for countries to learn, among others, English, one of the languages of the world's
largest consumer markets. This adoption of a common language reduced misunderstanding. It also
gave less developed countries a competitive advantage. English gave them insight into the developed
country's culture, marketing, and product needs.
2.2.2 Disadvantages
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Low tariffs destroy some domestic industries, contributing to high unemployment in those sectors.
Governments subsidized many industries to make them more competitive on a global scale.
Like other free trade agreements, GATT reduced the rights of a nation to rule its own people. The
agreement required them to change domestic laws to gain the trade benefits.
Trade agreements like GATT often destabilize small, traditional economies. Countries like the United
States that subsidize agricultural exports can put local family farmers out of business. Unable to
compete with low-cost grains, the farmers migrate to cities looking for work, often in factories set up
by multi-national corporations. Often these factories can move to other countries with lower cost
labour, leaving the farmers unemployed.
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2.3 Main provisions of GATT
GATT 1947 had three main provisions:
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The First and the most important requirement was that each member must confer most favoured
nation status to every other member. All members must be treated equally when it comes to tariffs. It
excluded the special tariffs among members of the British Commonwealth and customs unions. It
permitted tariffs if their removal would cause serious injury to domestic producers.
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The Second, GATT prohibited restriction on the number of imports and exports. The exceptions
were:
o When a government had a surplus of agricultural products.
o If a country needed to protect its balance of payments because its foreign exchange reserves
were low.
o Emerging market countries that needed to protect fledgling industries.
o In addition, countries could restrict trade for reasons of national security. These
included protecting patents, copyrights, and public morals.
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The Third provision was added in 1965. That was because more developing countries joined GATT,
and it wished to promote them. Developed countries agreed to eliminate tariffs on imports of
developing countries to boost their economies. It was also in the stronger countries' best interests in
the long run. It would increase the number of middle-class consumers throughout the world.
2.4 GATT and Beggar thy Neighbour Policies
2.4.1 Corporation Tax
In a globalised world, there is a temptation for a country to cut corporation tax rates below the global average
to attract more inward investment. The country cutting corporation tax benefits from more investment, and
although tax rates are lower, they hope to make up tax revenue by attracting more firms.
However, if one country cuts corporation tax, you effectively are attracting firms away from other countries,
who lose out. Cutting corporation tax in many countries does not increase global economic welfare – it tries
to increase the specific economy of the country cutting welfare at the expense of other countries.
This can create a situation of tax competition – where countries keep cutting tax rates to attract investment.
However, the total level of investment does not increase; it is just competition for a certain level of investment.
In theory, strong tax competition could lead to very low corporation tax rates – and a situation where no one
has gained any more investment. The only real winners are companies who benefit from lower global
corporation tax rates.
2.4.2 Currency Manipulation
For example, in a depression, a country may seek to devalue their currency to increase exports and domestic
demand. However, if one country artificially keeps a currency undervalued – it means other countries suffer
from being relatively over-valued and lower domestic demand. This currency manipulation is a charge often
raised against China – claiming currency manipulation give Chinese exports a benefit over other countries.
2.4.2.1 Currency Devaluation
Currency wars are said to occur when countries seek to devalue their currency to gain a competitive
advantage. However, if one country seeks to become more competitive through devaluation, it means other
countries become less competitive. Therefore, they may respond by weakening their currency too. Thus, we
may get a situation of competitive devaluation where each country seeks to reduce the value of a currency.
This can lead to instability.
Often countries want to maintain a strong currency. A strong currency increases living standards and enables
cheaper imports. In addition, a devaluation may cause inflation because imports are more expensive and
Aggregate Demand rises. However, in a recession and liquidity trap, inflation is not seen as a problem and
therefore, countries seek to boost demand by the exchange rate.
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2.4.2.2 Why do countries want a weaker currency?
If you devalue your currency, it means your exports are relatively more competitive (cheaper to foreigners).
Therefore, you will export more. In addition, imports become more expensive so there should be a rise in
Aggregate Demand. This should help boost economic growth and reduce unemployment.
2.4.2.3 Problems with Currency Wars
Instability, which discourages investment and trade. Policies to weaken currency like printing money can
cause instability such as potential future inflation.
However, others argue the dangers of currency wars are overstated. They argue that in a deep recession,
countries facing deflation do the right thing to try to boost the money supply.
2.4.3 Quantitative Easing
Also known as large-scale asset purchases, is a monetary policy whereby a central bank buys predetermined
amounts of government bonds or other financial assets in order to inject liquidity directly into the economy.
In other words, Quantitative easing is an unconventional monetary policy in which a central bank purchases
government securities or other securities from the market in order to increase the money supply and
encourage lending and investment.
In essence, quantitative easing is a monetary policy instituted by central banks in an effort to stimulate the
local economy. By flooding the economy with a greater money supply, governments hope to maintain
artificially low interest rates while providing consumers with extra money to spend more freely, which can
sometimes lead to inflation.
The important thing to remember is that quantitative easing generally leads to short-term benefits with the
risk of exacerbating long-term problems. As a result, it is often used as a last resort when the economy faces
a great risk of a recession or depression.
2.4.4 Intervention Buying
By purchasing the assets of other countries, you increase the value of their currency. For example, if China
uses its foreign currency to buy US Treasuries, it increases demand for the dollar and therefore the dollar
becomes *stronger* compared to the Yuan.
2.4.5 Problems with a strong Currency.
In essence, if we consider a country like an individual, having a strong currency means the country can
accumulate more assets and resources for its people, thereby increasing the value of its country.
As for the reasoning that it decreases competitiveness that means that actual demand has reduced. This will
naturally cause people to diversify into some other business, overall, leading to much-improved productivity
and diversity.
It is true that a strong currency can have various advantages. Some of which are as follows:
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The price of imports falls. Therefore, living standards can increase as consumers and firms can benefit
from lower prices of imported goods. Some firms who rely on imported raw materials will see a fall in
costs. Consumers who buy expensive imports will see improved living standards and greater
purchasing power.
Incentives to cut costs. A strong currency makes exports less competitive. This creates an incentive
for exporters to:
o Look for efficiency savings / increase productivity.
o Diversify into less price sensitive exports. This is often exports with greater value added. This
can lead to long-term benefits for the economy and is arguably better than always trying to
compete through relying on the weak currency, which may encourage fewer incentives to be
efficient.
Can help reduce inflationary pressures. An appreciation in the currency can help prevent domestic
inflation and prevent the economy overheating. This is because imports are cheaper, and we get
relatively lower aggregate demand.
If a currency appreciates, then it can lead to a fall in domestic demand. Exports are less competitive, imports
are cheaper. For an economy which is already growing slowly, a strong currency will worsen this economic
slowdown.
A strong currency can also cause a deterioration in the current account.
For example, from 2002 to 2012, some members of the Euro found that they became very uncompetitive in
the Euro. The currency was too strong for the relative price of their exports. Because they couldn’t allow the
currency to depreciate, it led to a serious deterioration in their current account. With Portugal, Spain and
Greece all experiencing record levels of a current account deficit.
It depends on why a currency is strong
If it is strong because of strong economic fundamentals (e.g. rising productivity, strong growth) the economy
will be able to absorb the relative loss in competitiveness from a strong currency.
It also depends on when a currency is strong
If you have an economic boom (high growth, inflation) an appreciation can be beneficial. The appreciation in
the currency leads to a reduction in inflationary pressure, but high growth is maintained.
If you have a recession, a strong currency can make the recession deeper. In a recession, a strong currency
will lead to a further fall in domestic demand. This is particularly a problem for a country in the Eurozone. For
example, the value of the Euro is far too high for a country like Greece. Greece is fundamentally
uncompetitive; this is reflected in a current account deficit of over 10% of GDP. However, in the Euro, Greece
cannot pursue expansionary fiscal or monetary policy. Therefore, the strong currency contributes to a fall in
economic growth and deflation.
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2.5 The Principles of GATT 1994
The GATT 1994 consists principally of the provisions of GATT 1947, as ‘rectified, amended or modified by
the terms of the instruments which have entered into force before the entry into force of the WTO
Agreements’.
The Preamble to the GATT 1947 reveals that the main objective of GATT is the conduct of relations in the
field of trade and economic endeavour “with a view to raising standard of living, ensuring full employment
and a large and steadily growing volume of real income and effective demand, developing the full use of the
resources of the world and expanding the production and exchange of goods’.
2.5.1 General Provisions of GATT
The basic principle of GATT 1947 is the principle of non-discrimination from which the following other three
principles are derived:
1. The Most-favoured-nation principle (MFN)
2. The National Treatment Principle
3. The Reciprocity principle.
2.5.1.1 The Most Favoured Nation Principle
The most-favoured-nation principle is found in Article 1 of GATT 1947.
Article 1(1) provides:
“With respect to customs duties and charges of any kind imposed on or in connection with
importation or exportation or imposed on the international transfer of payments for imports
or exports, and with respect to the method of levying such duties and charges, and with
respect to all rules and formalities in connection with importation and exportation, and with
respect to all matters referred to in paragraphs 2 and 4 of Article III,* any advantage, favour,
privilege or immunity granted by any contracting party to any product originating in or
destined for any other country shall be accorded immediately and unconditionally to the
like product originating in or destined for the territories of all other contracting parties.”
This Article 1 specified four categories of exchange concession agreements:
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Those relating to an obligation to pay customs duties and charges of any kind imposed on the export
and import of goods on the international transfer of payment for import and export purposes.
Those relating to the methods of levying such duties and charges.
Those relating to the rules and formalities in connection with import and export of.
Those relating to all matters to in paragraphs 2 and 4 of Article III regarding internal taxation.
Trade negotiations involve the exchange of concessions among the principal supplying States and result in
the grant of advantages, favours, privileges and immunities. These concessions may be given to a product
originating in or destined for a particular country.
According to the MFN principle, all other contracting parties (which are known under the WTO Agreement
as “members”, may automatically take advantage of any concession exchange. The MFN principle set out in
the GATT is unconditional. It applies automatically and immediately to Third States without any need for the
grant of any compensation to the member states involved in the granting of these concessions.
Tariffs which have been negotiated based on the MFN principle are included in the Tariffs Schedules of the
GATT. As a result, all contracting parties may benefit from such negotiations. Even developing countries not
involved in the tariff negotiations may benefit from these, although the GATT rounds seem to have been more
beneficial to the developed countries than the developing countries.
2.5.1.2 The National Treatment Principle
The National Treatment principle is contained in Article III of the GATT.
Article III (2) reads as follows:
“The products of the territory of any contracting party imported into the territory of any other
contracting party shall not be subject, directly or indirectly, to internal taxes or other internal
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charges of any kind in excess of those applied, directly or indirectly, to like domestic
products. Moreover, no contracting party shall otherwise apply internal taxes or other
internal charges to imported or domestic products in a manner contrary to the principles
set forth in paragraph 1”.
The ‘National treatment’ is a liberal economic concept, which is difficult to implement because it potentially
impedes the fulfilment of national development policy. The national treatment principle prohibits
discrimination between imported and like domestic products. GATT does not define “like products”. In
addition, it is left to the GATT panels to decide what constitutes a “like product”. The overall purpose of Article
III is to ensure that the determination of “like product’ is not made in such way that it infringes the regulatory
authority and domestic policy options of contracting parties. In so doing, the WTO panels usually consider
tariff classifications, nature of the product, internal use, commercial value, and price and substitutability.
In the legal framework of the GATT, the national-treatment-principle supplements the MFN principle, which
gives third parties the opportunity to benefit from concessions already negotiated. However, there are certain
exceptions. In Article XX(g) of the GATT, among others, exempts measures ‘relating to the conservation of
exhaustible natural resources if such measures are made effective in conjunction with restrictions on
domestic production or consumption’.
In addition, Article XX (i) excludes measures:
“involving restrictions on exports of domestic materials necessary to ensure essential quantities of such
materials to a domestic processing industry during periods when the domestic price of such materials is held
below the world price as part of a governmental stabilization plan; Provided that such restrictions shall not
operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart
from the provisions of this Agreement relating to non-discrimination”.
2.5.1.3 The Reciprocity Principle
One of the objectives of GATT is to give a mutual advantage to all contracting parties. The Preamble to the
GATT describes the contracting parties as:
“Being desirous of contributing to these objectives by entering into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade
and to the elimination of discriminatory treatment in international commerce”.
GATT encourages negotiations based on the reciprocity principle. Article XXVIII (1) provides:
“The contracting parties recognize that customs duties often constitute serious obstacles to trade;
thus negotiations on a reciprocal and mutually advantageous basis, directed to the substantial
reduction of the general level of tariffs and other charges on imports and exports and in particular to
the reduction of such high tariffs as discourage the importation even of minimum quantities, and
conducted with due regard to the objectives of this Agreement and the varying needs of individual
contracting parties, are of great importance to the expansion of international trade. The
CONTRACTING PARTIES may therefore sponsor such negotiations from time to time”.
The reciprocity principle and its implementation may be found in the following Articles:
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Article III(1) prohibits the use of internal tax for the purpose of affording protection to domestic
production.
Article VI condemns dumping if it causes or threatens material injury. This Article permits levying of
anti-dumping duties to offset dumping.
Article VII establishes general principles of valuation and Article VIII provides that fees and charges
must not constitute an indirect protection.
The reciprocity principle has these consequences:
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A concession which is given to another country must be carried out on an equitable basis
All contracting parties will gain an advantage from every negotiated concession by the negotiator and
the advantage would be given reciprocally through the application of the MFN principle
All imported goods must be treated equally to, and promptly and adequately as, domestic products.
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Infant Industries
The strict application of the reciprocity principle in relations between developed and developing countries
could be to the latter’s disadvantage because developing countries may want to develop ‘infant industries.
Developing countries frequently promote their infant industries with the purpose of raising the general
standard of living of their people. Hence, the protection of infant industries may make it difficult for some
developing countries to implement direct reciprocity between developed countries and developing countries.
Breach of GATT obligations violates the legitimate expectations that a member country has in regard to the
reciprocal performance of obligations by other member countries. If a member country acts in a manner
inconsistent with its obligations, it will potentially be subject to retaliatory action by other member countries,
provided his relevant dispute resolution procedures have been followed. The GATT imposes an obligation
on member countries seeking to impose trade sanctions in response to an alleged breach of GATT
Obligations, to use the WTO dispute resolution process. There are, however, many exceptions within the
GATT that may provide a defence to a claim for breach of a country’s obligations.
The obligations of GATT members (which result in corresponding rights of other members) include MFN
treatment, national treatment and the granting of tariff concessions. GATT members must also seek to
eliminate or reduce non-tariff barriers such as subsidies, dumping and quantitative restrictions.
In particular, GATT members must grant other contracting parties equal tariff treatment or MFN trading status
automatically, and domestic policy must be non-discriminatory. This requires that internal taxes and other
charges, laws, regulations and other requirements affecting business transactions be applied to domestic
entities and foreign concerns on an equal basis.
The GATT also requires transparency of the laws and regulations in respect of trade. Under Article X, the
contracting parties must publish, among other things, their trade policies, and laws, import and export
systems and domestic regulations in respect to trade. In addition, on becoming a member, a country may not
raise its tariffs for a period of three years. After this period, any move to modify o raise tariffs must be
discussed with other contracting parties. Should a country increase its tariff rates in one category of products,
it may be required to reduce the rates in another category or categories.
2.5.1.4 The Escape Clause
Article XIX(1)(a) of GATT provides that, where
“as a result of unforeseen developments and of the effect of obligations incurred by a contracting
party under this Agreement… any product is being imported into the territory of that contracting party
in such increased quantities and under such conditions cause or threatens serious injury to domestic
producers in that territory of like or directly competitive products, members may impose increased
tariffs on imported products or suspend its obligations or withdraw or modify any concessions
granted.”
This Article justify the taking of temporary action to adjust imports. Article XIX is implemented by the WTO’s
Agreements on Safeguard.
The escape clause has already been implemented by some countries (For example, the United States
implemented it in Section 201 of the Trade Act of 1974 (as amended): This USA section of their legislations
reads: “import relief may be granted if increased imports are a substantial cause of serious injury or threat to
the domestic industry producing a like or competitive product”. Hence, for example, the ‘unforeseen
development’ part of Article XIX (1) (a) is not part of the American law on International Trade.
2.5.2 Legal Framework for Dispute Resolution
The procedure for dispute resolution under GATT is found in
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Article XXII and XXIII; and
Annexure 2 to the Agreement Establishing the World Trade Organization (WTO), namely the
“understanding on Rules and Procedures Governing the Settlement of Disputes”.
The full Article XXII states: “Consultation”
1. Each contracting party shall accord sympathetic consideration to, and shall afford adequate
opportunity for consultation regarding, such representations as may be made by another contracting
party with respect to any matter affecting the operation of this Agreement.
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2. The contracting parties may, at the request of a contracting party, consult with any contracting party
or parties in respect of any matter for which it has not been possible to find a satisfactory solution
through consultation under paragraph 1.
If consultations fails, a member may seek multilateral consultation with the contracting parties as a whole
under Art. XX (2-+). This consultation process outlined in Article XXII becomes a more formal process of
dispute settlement in Article XXIII (1) which provides for consultations in specific instances. If agreement
cannot be reached, Article XXIII (2) provides procedures for investigation, possibly resulting in the
authorization of suspension of concessions or other obligations by the complaining member.
2.6.3 Preferential Treatment
Preferential treatment is provided for in Article XVIII and Part IV of the GATT, but other Articles are also
relevant. The prohibition of “quantitative restrictions” contained in Article XI of the GATT is subject to an
exception regarding measures imposed for balance-of-payment purposes.
This exception is found in Article XII with special provision for developing countries being made in Article
XVIII s B of GATT. Under these provisions, any country may restrict the quantity or value of imports in order
to safeguard its external financial position to protect its balance-of-payment or to ensure a level of reserves
adequate for the implementation of its program of economic development. However, restrictions must not
exceed those necessary to forestall the imminent threat of, or to stop, a serious decline in monetary reserves;
or if such reserves are very low, to achieve a reasonable rate of increase. Due regard must be paid to special
factors which may affect reserves nor the need for reserves. As the conditions improve, the restrictions must
be progressively relaxed.
2.6.4 Development Programs
Part IV of GATT, consisting of Articles XXXVI, XXXVII, XXXVIII commits developed countries in assisting
developing countries in their development programs.
The developed countries agreed that “There is need for a rapid and sustained expansion of the export
earnings of the less-developed countries” (Article XXXVI(2) and for “positive efforts designed to ensure lessdeveloped contracting parties secure a share in growth in international trade commensurate with the needs
of their economic development’ (Article XXXVI(3).
Article XXXVI which sets out the general principles and objectives, recognizes the development needs of
less-developed contracting parties. It emphasizes the importance to these countries of improved market
access, commodity price stability, and the diversification of economic structures.
The commitments of developed contracting parties are contained in Article XXXVI(1)(a). They undertake,
among other things, to “accord high priority to the reduction and elimination of barriers to products currently
or potentially of particular export interest to less-developed contracting parties, including customs duties and
other restrictions which differentiate unreasonably between such products in their primary and in their
processed forms”. More importantly, Article XXXVI(8) of the GATT provides that “the developed countries do
not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and
other barriers to the trade of less-developed contracting parties”.
Contracting parties, without prejudice to any bilateral consultations that may be undertaken, are obliged to
consult with other concerned countries to reach solutions satisfactory to all contracting parties to further the
objectives set out in Article XXXVI. In the course of these consultations, the reasons for not complying with
the provisions of Article XXXVII(1-3) are examined.
In accordance with Article XXXVIII(2)(C), the consultations by the contracting parties may result in joint action
designed to further the objectives of GATT. In particular, Article XXXVIII provides for joint action, where
appropriate, to take action:
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To provide improved and acceptable conditions of access to world market for primary products of
particular interest to developing countries;
To devise measures designed to attain stable, equitable and remunerative prices for exports of such
products.
To seek appropriate collaboration in matters of trade and development policy with the United Nations
and its organs and agencies, including institutions that may be created based on recommendations
by the United Nations Conference on Trade and Development (UNCTAD).
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To analyse the export potential of developing countries to facilitate access to export markets for the
products of the industries thus developed; and
To seek appropriate collaboration with governments and international organizations.
2.7 Structure of the WTO
The World Trade Organization (WTO) is an intergovernmental organization that is concerned with the
regulation of international trade between nations.
The WTO deals with regulation of trade in goods, services and intellectual property between participating
countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed
at enforcing participants' adherence to WTO agreements, which are signed by representatives of member
governments and ratified by their parliaments. The WTO prohibits discrimination between trading partners,
but provides exceptions for environmental protection, national security, and other important goals. Traderelated disputes are resolved by independent judges at the WTO through a dispute resolution process.
They prescribe special treatment for developing countries. They require governments to make their trade
policies transparent by notifying the WTO about laws in force and measures adopted, and through regular
reports by the secretariat on countries’ trade policies.
These agreements are often called the WTO’s trade rules, and the WTO is often described as “rules-based”,
a system based on rules. But it is important to remember that the rules are actually agreements that
governments negotiated.
The Uruguay Round agreements (incorporated in the Marrakesh Declaration) are the basis of the present
WTO system. Additional work is also now underway in the WTO. This is the result of decisions taken at
subsequent Ministerial Conferences, in particular the meeting in Doha, November 2001, when new
negotiations and other work were launched.
2.7.1 Overview of WTO Agreements
The agreements fall into a simple structure with six main parts: an umbrella agreement (the Agreement
Establishing the WTO); agreements for each of the three broad areas of trade that the WTO covers (goods,
services and intellectual property); dispute settlement; and reviews of governments’ trade policies.
The agreements for the two largest areas — goods and services — share a common three-part outline, even
though the detail is sometimes quite different.
They start with broad principles:
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The General Agreement on Tariffs and Trade
(GATT) (for goods),
The General Agreement on Trade in Services (GATS)
Trade-Related Aspects of Intellectual Property Rights (TRIPS),
Then come extra agreements and annexes dealing with the special requirements of specific sectors or issues.
Finally, there are the detailed and lengthy schedules (or lists) of commitments made by individual countries
allowing specific foreign products or service providers access to their markets. For GATT, these take the form
of binding commitments on tariffs for goods in general, and combinations of tariffs and quotas for some
agricultural goods. For GATS, the commitments state how much access foreign service providers are allowed
for specific sectors, and they include lists of types of services where individual countries say they are not
applying the “most-favoured nation” principle of non-discrimination.
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3. Exceptions to GATT
3.1 Exceptions Security Interest
3.1.1 Article XXI - Security Exceptions
Nothing in this Agreement shall be construed to require any contracting party to furnish any
information the disclosure of which it considers contrary to its essential security interests;
or to prevent any contracting party from taking any action, which it considers necessary for
the protection of its essential security interests
Relating to fissionable materials or the materials from which they are derived.
Relating to the traffic in arms, ammunition and implements of war and to such traffic in other
Goods and materials as are carried on directly or indirectly for the purpose of supplying a
military establishment;
Taken in time of war or other emergency in international relations; or
to prevent any contracting party from taking any action in pursuance of its obligations under
the United Nations Charter for the maintenance of international peace and security.
Recent international trade disputes between the United States and other Members of the World Trade
Organization (WTO) have raised thorny questions about the relationship between national sovereignty and
the multilateral rules-based trading system.
In response to the Trump Administration’s imposition of tariffs on U.S. imports of certain steel and aluminium
products pursuant to authority provided in Section 232 of the US Trade Expansion Act of 1962, several WTO
Members have brought dispute settlement cases against the United States.
The complaining parties, which include Canada, China, and the European Union, among others, have argued
that the Section 232 measures, along with exemptions from the application of these measures for certain
countries, are contrary to U.S. obligations in the WTO agreements. Many of these obligations are contained
within various provisions in the General Agreement on Tariffs and Trade (GATT), the WTO’s foundational
agreement governing parties’ international trade in goods. In retaliation to the Administration’s tariffs, some
of the complaining countries have imposed tariffs on certain U.S. exports without awaiting the outcome of
WTO dispute settlement proceedings. These retaliatory measures, in turn, have been challenged by the
United States at the WTO.
In defence of the steel and aluminium tariffs, the United States has cited national security reasons.
Specifically, the United States contends that the tariffs are necessary to ensure the long-term viability of the
domestic steel and aluminium industries, which must meet U.S. national defence requirements, by protecting
the industries from foreign competition. The United States has argued that even if the steel and aluminium
measures are inconsistent with U.S. obligations under the GATT, a WTO adjudicator cannot examine whether
the Section 232 measures violate the GATT because the United States considers the measures to be
necessary for the protection of its “essential security interests” under GATT Article XXI—the so-called
“national security exception.”
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The new USA tariffs were imposed in pretext of ART. XXI (b)
GATT Article XXI’s Exception for Essential Security Interests
The meaning of the national security exception in Article XXI of the GATT - a provision also is implicated in
a recent WTO dispute between Russia and Ukraine; a blockade of Qatar by Saudi Arabia, Bahrain, and the
United Arab Emirates; and a few other disputes.
GATT Article XXI does not clearly address whether a WTO panel should either
1. Completely defer to a WTO Member’s judgment that its trade measures are justified to protect the
Member’s national security or
2. Evaluate, at least to some degree, whether the Member’s use of the exception is valid.
Although WTO Members and parties to the organization’s predecessor, the GATT, have invoked Article XXI
a few times in trade disputes, neither the WTO members nor a WTO panel have formally interpreted the
Article XXI exception to define its scope.
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In the absence of current formal guidance, if a WTO panel or the WTO’s Appellate Body were to interpret
Article XXI, the deciding body would likely rely on Article 3.2 of the WTO’s Dispute Settlement Understanding,
which states that the WTO agreements should be interpreted “in accordance with customary rules of
interpretation of public international law.”
The WTO’s Appellate Body has not established a formal process for interpreting the WTO agreements, but
it has generally relied on the rules for treaty interpretation incorporated into Articles 31-33 of the Vienna
Convention on the Law of Treaties to ascertain the intended meaning of WTO agreement provisions.
In past cases, the Appellate Body’s interpretive approach has examined various factors, including three
particularly relevant to Article XXI’s interpretation:
1) “The ordinary meaning to be given to the terms of the WTO agreements in their context and in the
light of their object and purpose”—a method that also uses relevant canons of treaty interpretation
(e.g., the principle that an interpreter must give effect to all the terms of a treaty);
2) WTO Members’ subsequent practices in applying the WTO agreements that establish consensus of
the WTO membership as to the agreements’ interpretation; and
3) Relevant rules of international law that do not conflict with the agreements (e.g., the Vienna
Convention’s concept of “good faith”). The Appellate Body has sometimes supplemented the meaning
derived from these methods by considering the drafting history of the provision.
3.1.2 Text, Context, and Purpose of the WTO Agreements
The Appellate Body’s approach to interpreting the WTO agreements has often focused on the ordinary
meaning of the relevant WTO provisions, as informed by the context in which those provisions appear, and
in light of the purposes of all of the WTO agreements.
Applying these interpretive methods to Article XXI provides some guidance as to its intended meaning. On
the one hand, Article XXI, which states that nothing in the GATT prevents a WTO Member from taking “any
action which it considers necessary” to protect its “essential security interests,” arguably makes each WTO
Member the sole judge of whether its trade-restrictive actions are justified. In other words, once a WTO
Member has invoked the exception to justify a measure potentially inconsistent with its GATT obligations, a
WTO panel cannot independently evaluate whether the WTO Member’s use of the exception is essential to
its security interests or fits within the enumerated list of national security justifications in Article XXI(b).
Interpretive context provided by other GATT provisions arguably supports this broad view of the Article XXI
exception. GATT Article XX provides general, non-security-related exceptions to GATT obligations;
WTO Members can rely upon these exceptions when implementing certain public policy measures that
restrict trade. However, unlike the Article XXI exception, GATT Article XX does not provide an exception for
measures that an individual Member subjectively “considers necessary” to protect its interests.
Perhaps as a result, WTO panels have examined whether a Member’s invocation of an Article XX exception
is objectively valid. Thus, it could be argued that, in contrast to the general exceptions in Article XX, the
Article XXI national security exception was intended to be “self-judging.” In addition, several other
provisions of the WTO agreements beside Article XXI use the word “considers” when reserving judgment
about a particular matter to a single specified actor.
A broad reading of Article XXI could also arguably be consistent with the WTO’s stated objective to serve as
the “common institutional framework for the conduct of trade relations among its Members.” The WTO is a
trade organization that arguably lacks competence to deliver an opinion on matters of national security—a
point made by one of the representatives of the parties to the drafting of the GATT.
On the other hand, it could be argued that a WTO panel should not completely defer to a WTO Member’s
judgment about the appropriateness of invoking GATT Article XXI and must evaluate whether use of the
exception is proper. At least one scholar and former WTO Appellate Body Member has argued that the United
States must at least demonstrate to the panel that the Section 232 tariffs on steel and aluminium fit within
one of the three specific categories of actions that a Member may take for national security reasons
enumerated in Article XXI(b):
1) Actions related to nuclear materials.
2) Actions related to traffic in arms or ammunition and traffic in other goods “carried on directly or
indirectly for the purpose of supplying a military establishment.”
3) Actions “taken in time of war or other emergency in international relations.”
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A narrower view of the exception might also draw support from certain canons of treaty interpretation. The
Appellate Body has repeatedly applied the principle that an interpretation must give effect to all provisions of
a treaty. If a WTO panel declined to evaluate whether the United States’ justification for the Section 232 of
the Trade Expansion Act of 1962, measures fits within Article XXI (b)’s list, the list would arguably become
ineffective, contravening this principle of treaty interpretation.
Furthermore, the Appellate Body has stated that, under the Vienna Convention, a treaty should be interpreted
under the assumption that its parties will make reasonable use of its exceptions and perform their obligations
in good faith. Therefore, the United States arguably must prove that it adopted the Section 232 measures in
good faith for national security reasons rather than to circumvent its trade obligations and protect domestic
industries.
The argument for a more limited scope of the Article XXI exception may also draw support from one of the
central purposes of the WTO agreements and dispute settlement system: to provide “security and
predictability to the multilateral trading system” so that businesses can conduct international trade with
certainty.
Arguably, allowing a WTO Member to take any measure it deems essential to its security interests would
defeat this objective by undermining the predictability and certainty of the rules-based system. A reading of
Article XXI that permits WTO Members to retain complete discretion over use of the exception could lead
countries to enact a multitude of protectionist measures under the guise of national security, potentially
undermining the purpose of WTO rules.
A Further argument that might be in favour of USA and others invoking the security exception is that “an
interpretation of Article XXI that would allow a WTO panel to review a WTO Member’s use of the exception
would perhaps interfere with a Member’s sovereignty because the panel could substitute its judgment
regarding the validity of a national security justification for that of the invoking Member”. For example, so far,
the United States has argued that Article XXI is drafting history, which a panel might rely upon as a
supplementary means of interpretation, shows that the drafters intended to preclude such a result.
The above argument could be countered with the following potential response: “Although the practices of
some parties to the GATT suggest that the Article XXI exception is broad, this historical practice is not
necessarily an indication of how the entire WTO membership interprets the Article XXI exception”. Support
for this answer can be found in the early drafting history of Article XXI for the notion that a panel may review
a WTO Member’s use of the Article XXI exception. In fact, one of the U.S. negotiators and drafters of an early
version of Article XXI reportedly stated that the exception was not intended to be “so broad that, under the
guise of security, countries will put on measures which really have a commercial purpose,” suggesting some
limits to the scope of Article XXI.
Paragraph (c): “any action in pursuance of its obligations under the United Nations Charter for the
maintenance of international peace and security”.
Again, there is no official invocation of this Paragraph (c) under current WTO. But mainly this paragraph
would cover situations where the country is under UN Sanctions such currently North Korea or to some extent
Iran. But there are some references to it by individual countries when Iraq in 1991 was at war with Kuwait
(annexation of Kuwait) and the subsequent Desert Storm war that liberated Kuwait and the position then
assumed by Saddam Husain (then Iraqi President) and few other countries.
For example the India’s 1994 background document for simplified balance-of-payments consultations notes
that while almost all of India’s trading partners received most-favoured-nation treatment in the issue of import
licences, import licences were not issued for imports from countries facing UN mandated sanctions, at the
time (in 1994) were Iraq, Fiji, Serbia and Montenegro”. Again, in Brazil’s 1994 notification on import licensing
noted that the import licensing system of Brazil applied for goods entering from or exported to any country
except for those covered by UN embargoes. The import licensing notification of Cyprus similarly noted that
imports from certain countries were prohibited in accordance with United Nations resolutions. The 1993
licencing notification of Norway noted that all imports from Iraq and Serbia/Montenegro were prohibited.
Other invocations of Article XXI during GATT 1994 Discussions at the Negotiating Council Meetings.
The United States embargo on trade with Cuba, which was imposed by means of Proclamation 3447 by the
President of the United States, dated 3 February 1962, was not formally raised in the contracting parties but
notified by Cuba in the inventory of non-tariff measures. The United States invoked Article XXI as justification
for its action.
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3.1.3 Relationship between Article XXI and general international law.
For example: On the discussion in Council of a certain 1986 Report on “United States -Trade Measures
Affecting Nicaragua”, whose report was never adopted by the Council, the reported referenced the different
views of the parties to the dispute concerning the relationship between Article XXI and general international
law including decisions of the United Nations and the International Court of Justice.
In discussion at the Forty-seventh Session of the Negotiating Council Meetings before WTO, in December
1991 concerning trade measures for non-economic purposes against Yugoslavia, the representative of India
stated, “India did not favour the use of trade measures for non-economic reasons. The representative of
India argued that such measures should only be taken within the framework of a decision by the United
Nations Security Council. Therefore, in the absence of such a decision or resolution, there was a serious risk
that such measures might be unilateral or arbitrary and would undermine the multilateral trading system”.
3.1.4 Invocations of Article XXI by the United States
At various times since the inception of GATT1947, but prior to WTO, the United States had invoked Article
XXI a few times to justify trade restrictions on the world stage.
In the late 1940s, during the early stages of the Cold War, the US Congress passed the Marshall Plan, part
of which established an export-control regime. It provided that products that were in short supply or of
particular military significance could be licensed freely to 16 Western European countries, but exports to
Eastern Europe were controlled carefully. The then Czechoslovakia republic (now two countries, Czech and
Slovakia) challenged the export-control regime, arguing that it violated the Most Favoured Nation principle
enshrined in Article I of GATT - essentially the cornerstone of the rules-based trading system.
The Czechoslovakian delegates argued that an expansive interpretation of Article XXI would undermine the
entire premise of GATT. In response, the United States asserted that Article XXI overrode Article I and
permitted it to restrict exports to Eastern Europe. By a vote of 17-1 margin (with three abstentions and two
absent) the GATT’s Contracting Parties voted to support the U.S. interpretation of Article XXI.
In May 1985, the then US President Ronald Reagan utilized such an exception to issue an executive order
that prohibited all trade between the United States and Nicaragua. The administration justified the embargo
on the grounds that the Sandinista government of Nicaragua posed a national security threat to the United
States. The Nicaraguan government challenged the embargo, arguing that it did not target an “essential
security interest” [as required under Article XXI (a)] and that it was not established during a time of “war or
other emergency in international relations” as required by Article XXI (b) (iii). The Reagan administration
countered that Article XXI’s national security exception granted GATT’s Contracting Parties exclusive rights
to determine whether trade with a particular country threatened its own national security. An overwhelming
majority of Contracting Parties to GATT agreed with the United States that Article XXI is essentially selfjudging.
Concerns about abuse of the security exception were recognized from the beginning. General Agreement on
Tariffs and Trade (GATT) negotiators feared that the exception would create a "very big loophole in the whole
GATT Charter.” The delegation from the United States, which drafted the exception, shared this concern
stating that there "was a great danger of having too wide an exception . . . that would permit anything under
the sun.” Therefore, the exception was drafted so it could be invoked in limited circumstances-such as war
or international emergencies, but then left to the Member States' sole discretion when invoked in those
circumstances.
The WTO regime includes a number of devices to dress this concern, including opting out of normal trade
relations, opting in to deeper trade relations, granting preferential treatment to developing countries
consistent with security interests, and protecting against the nullification or impairment of Member States'
legitimate expectations even in the absence of a WTO violation. These arrangements provide broad
discretion to act in furtherance of the national interest without violating trade rules. As such, Member States
quite often can advance national objectives without the need to invoke the security exception.
Notwithstanding these mitigating factors, a self-judging security exception poses grave risks. If abused, it
could undermine the entire WTO regime. But the practice of WTO Member States is to invoke the security
exception in good faith, with a margin of discretion. A Member State may do so because of a fear of sanction,
out of a sense of norm legitimacy, or because it is in its self-interest to do so.
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Compliance with a self-judging rule offers useful insights into larger questions of why nations obey
international law. Rational choice and normative theories best explain compliance with a self-judging
international norm.
3.1.5 Discretionary Benefits under GATT
In addition to the opt-out and the opt-in approaches, discretionary tariff preferences serve as the third major
factor that mitigates bad faith applications of the security exception.
The WTO rules authorize developed countries to "accord differential and more favourable treatment to
developing countries, without according such treatment to other contracting parties."
These benefits under these so-called "Generalized System of Preferences" (GSP) are subject to "negative
conditionality"-conditions that must be satisfied for a developing country to receive the benefit. Because these
benefits are discretionary, a Member State can grant, deny, suspend, or remove them if doing so is in the
national interest. Moreover, these benefits may be accorded "notwithstanding the provisions of Article 1 of
the General Agreement.”
In other words, preferential treatment for developing countries is not discrimination against developed
countries. Granting or denying GSP benefits is not a WTO violation, therefore there is no need to invoke a
WTO exception to grant or deny these benefits. Rather than resort to measures that violate WTO rules-such
as a trade embargo - the first-place developed countries typically turn to punish a misbehaving developing
country is to withdraw discretionary tariff preferences.
Thus far, the WTO Appellate Body has identified only one significant limitation on the granting and withdrawal
of GSP benefits: similarly, situated developing countries cannot be treated differently. Thus, in reviewing
whether the European Union's drug-trafficking condition for GSP eligibility was consistent with the WTO, the
Appellate Body concluded that the policy "may be found consistent with the 'non-discriminatory' requirement
only if the EU proves, at a minimum, that the preferences granted under the Drug Arrangements are available
to all GSP beneficiaries 'that are similarly affected by the drug problem.”
The GSP programs of the United States and the European Union illustrate the use of discretionary benefits
to sanction Member States without the need to invoke a security exception. Targeted countries have little
recourse to challenge the withdrawal of a discretionary benefit.
3.1.6 Nullification and Impairment of Benefits
In rare cases, a Member State may challenge the conduct of another Member State that nullifies or impairs
expected trade benefits, even in the absence of a WTO violation.
GATT 1947, Art. XXIII: If any contracting party should consider that any benefit accruing to it directly or
indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the
Agreement is being impeded as the result of the application by another contracting party of any measure,
whether or not it conflicts with the provisions of this Agreement. . .the contracting party may, with a view to
the satisfactory adjustment of the matter, make written representations or proposals to the other contracting
party or parties which it considers to be concerned."
Article XXIII(2) - "If the contracting parties consider that the circumstances are serious enough to justify such
action, they may authorize a contracting party or parties to suspend the application to any other contracting
party or parties of such concessions or other obligations under this Agreement as they determine to be
appropriate in the circumstances.".
The theory of the "non-violation remedy" is that Member State action that does not violate the WTO may
nonetheless undermine the benefits of promises made during tariff negotiations. "The idea underlying “the
non-violation remedy” is that the improved competitive opportunities that can legitimately be expected from
a tariff concession can be frustrated not only by measures proscribed by the General Agreement but also by
measures consistent with that Agreement.
The remedy for a successful non-violation claim is unique. Because there is no WTO violation, the
Member State is not required to remove the measure that nullifies or impairs the anticipated benefit. As for
damages, the WTO's recommendation is for a "mutually satisfactory adjustment,” a standard that is distinct
from, and likely lower than, violation cases where the level of authorized suspension of concessions is
"equivalent to the level of nullification or impairment.
The drafting history of GATT indicates that the non-violation remedy was intended to cover measures invoked
under the security exception. For example, the Indian delegation, in particular, considered it critical to provide
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Member States with the power to challenge abuses of the security exception using the non-violation remedy,
because "the knowledge of the possibility of such counter action would serve as a deterrent to any misuse of
the security exceptions”. The drafting committee recognized that this remedy was appropriate for security
exception invocations.
The working party considered that this sub-paragraph on the NVNI remedy would apply to the situation of
action taken by a Member pursuant to Article XXI of GATT 1947. Such action, for example, in the interest of
national security in time of war or other international emergency would be entirely consistent with the Charter
but might nevertheless result in the nullification or impairment of benefits accruing to other Members. Such
other Members could, under those circumstances, have the right to bring the matter before the Organization,
not on the ground that the measure taken was inconsistent with the Charter, but on the ground that the
measure so taken effectively nullified benefits accruing to the complaining Member.
In essence, the non-violation remedy addresses security measures that cannot reasonably be anticipated,
discouraging unreasonable invocations, and is available to a Member State subject to unforeseeable trade
sanctions. Recourse to the non-violation remedy has been rare, reflecting the fact that it is an "exceptional
remedy" that "should be approached with caution”. This can be concluded from the fact that Member States
"negotiate the rules that they agree to follow and only exceptionally would expect to be challenged for actions
not in contravention of those rules. The infrequent success of a non-violation remedy suggests that this
approach may be relevant in only the most controversial national’s security invocations.
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4. WTO dispute settlement system
The general exceptions provided for in Art XX of the GATT and Art XIV of the GATS deal particularly with the
following:
1.
2.
3.
4.
The text, purpose, and structure of the general exceptions
The scope of the general exceptions, such dealing with health, morals, fraud and environment
The requirements to be met to fall within the general exceptions
The clauses which require certain measure falling within the general exceptions not be applied in a
manner constituting arbitrary or unjustified discrimination
5. A range of other issues, which include the application of the general exceptions other that the GATT
or GATS
GATT 1994 exceptions
Purpose of Art XX:
The purpose of this article is to ensure that members are not precluded from adopting measures that pursue
policy objectives that the members agree are legitimate and important. The words ‘nothing in this agreement’
in the chapeau make it clear that the exceptions within Art XX will apply to all obligations in the GATT.
The exceptions are limited and conditional as per the GATT Panel Report and within the Appellate Body
Report in relation to Shrimp matter. Art XX does not allow members to justify measure that is prima facie
inconsistent with provisions of GATT on any policy grounds. The measure must pursue one of the policy
objectives set out in Art XX. This must satisfy the requirements found in the subparagraphs.
In order to achieve the objective, it should be ‘necessary’ in the case of being to protect public morals, to
protect human, animal or plant life or health, securing compliance with laws which are not inconsistent with
provisions of the agreement relating to customs enforcement, the enforcement of monopolies, the protection
of patents, trademarks and copyrights, and the prevention of deceptive practice or must not be applied in any
way that would constitute arbitrary or unjustifiable discrimination between members or a disguised restriction
on international trade.
Structure of Art XX
Art XX provides for exceptions, not primary obligations. This generally play no role until after the measure at
issue was found to be prima facie inconsistent with one of the primary obligations in the GATT. As soon as
the complaint was established as an inconsistency, the respondent may invoke one or more of the exceptions
to justify the measures. The respondent will bear the onus of proving two things which is known as the twotiered test.
Two things to be proven:
1. That the measure meets the requirements set out in one of the subparagraphs of Art XX. That is
relates or is necessary to achieve objective.
2. That the measure is not inconsistent with the chapeau. (Within principle of good health)
Once the respondent demonstrates the above elements, the exception will apply, and the measure of the
issue will not be inconsistent with the GATT.
Example:
The Appellate Body’s report in Brazil known as Rethreaded Tyres to which Art XX was invoked. An import
ban on rethreaded tyres due to shorter life span compared to new tyres and this led to the creation of tyre
dumps. The tyre dumps became breeding grounds for the spread of dengue, yellow fever and malaria which
also created health risks in relation to fumes released. Brazil argued that the bad was justified because it was
necessary to protect human, animal or plant life or health and was not inconsistent with the requirements of
the chapeau.
The Appellate body noted that the panel found the ban prima facie inconsistent with Art XI: 1 of GATT since
it was quantitative restriction on imports. The Appellant body further noted that the purpose was to protect
human life and health and found that the ban was necessary to achieve that objective. Lastly, the body found
Brazil applied the ban in a manner constituting arbitrary or unjustifiable discrimination by providing
exemptions to some countries but not others for reasons which were unrelated to protection of life or health.
The import band was found not to be justified under Art XX (b) and was inconsistent with Art XI: 1 of the
GATT.
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DS58: United States – import prohibition of certain shrimp and shrimp products
Consultations were sought with the United States by Malaysia, Pakistan and Thailand for ban of importation
of shrimp and shrimp products from the complainants (consultation seekers) which was imposed by the US
under S 609 of the US Public Law. This were seen as violations of Art I, XI and XIII of the GATT, to which
nullification and impairment of benefits were alleged.
A panel was established to which the Dispute Settlement Body deferred to a panel. The DSB panel were
requested to set more panels with other countries which was then consolidated to one single panel, thereafter
a panel report was circulated to members. The panel thus found that the import ban in shrimp and shrimp
products applied by the US was inconsistent with Art XIl1 of the GATT and could not be justified under Art
XX of the GATT.
The US then notified the intention to appeal the panel. The appellant body reversed the panel’s findings due
to the US measure at issue was not within the scope of measures permitted under the chapeau of Art XX of
the GATT but concluded that the US measure, which did qualify for provisional justification under Art XX (g),
but failed to meet the requirements of the chapeau. The DSB adopted both bodies report.
Exceptions
Further exceptions exist known as the general and security exceptions in Art XX and XXI of the GATT, Art
XIV and XIV of the GATS. These exceptions are known as key provisions of the agreements, allowing
members to justify a number of non-trade policy ground measures that would otherwise be inconsistent with
the WTO agreement. This includes protecting the environment, public health and public morals, preventing
deceptive practices. This provides mechanisms for balancing trade liberalisation with important policy
objectives which the members choose to pursue.
The exceptions serve a similar function, which ensure that the GATT and GATS do not require members to
compromise their essential security interests. The security exceptions featured less prominently in WTO
litigation.
4.1 Rules and procedures governing the settlement of disputes:
 Based on the Dispute Settlement Understanding (the document).
 This is attached to the WTO as Annexure 2
 It is considered to be the most important achievement of the Uruguay Round Negotiations.
4.2 WTO in terms of settling disputes:
 The central pillar of the WTO can be said to be dispute settlement.
 This is regarded to be the unique contribution by the WTO to stabilize the global economy.
 The procedure of the WTO underscores the rule of law and makes the trading system more
secure and predictable.
4.3 System under old GATT:
 A procedure for settling disputes existed under the old GATT, but it had no fixed timetables,
rulings were easier to block, and many cases dragged on for a long time inconclusively.
 Each case needed its own terms of reference
 The Uruguay Round agreement introduced a more structured process with more clearly
defined stages in the procedure.
 It introduced greater discipline for the length of time a case should take to be settled, with
flexible deadlines set in various stages of the procedure.
 It sets out in considerable detail the procedures and the timetable to be followed in resolving
disputes.
 If a case runs its full course to a first ruling, it should not normally take more than about one
year — 15 months if the case is appealed.
 The agreed time limits are flexible, and if the case is considered urgent (e.g. if perishable
goods are involved), it is accelerated as much as possible.
 Now Panels are established by Dispute Settlement Bodies.
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4.4 Principles under WTO dispute settlement:
Object and purpose of WTO dispute settlement system:
 Primary objective: prompt settlement of disputes between WTO members concerning their
respective rights and obligations under WTO.
 Article 3.3 of DSU: the prompt settlement of disputes is “essential to the effective functioning
of the WTO and the maintenance of a proper balance between the rights and obligations of
Members”.
 Article 3.2 of DSU: “The dispute settlement system of the WTO is a central element in
providing security and predictability to the multilateral trading system. The Members
recognize that it serves to preserve the rights and obligations of Members under the covered
agreements, and to clarify the existing provisions of those agreements in accordance with
customary rules of interpretation of public international law”.
4.5 Institutions under WTO dispute settlement:
DSU is one of the important instruments of the WTO in protecting the security and predictability of
the multilateral trading system.
1. Settlement of disputes through multilateral procedures:
 Article 23.1 of the DSU states: “When members seek redress of a violation of obligations or
other nullification or impairment of benefits under the covered agreements or an impediment
to the attainment of any objective of the covered agreements, they shall have recourse to,
and abide by, the rules and procedures of this Understanding.”
 Based on this, members may not make a unilateral determination that a violation of WTO law
has occurred and may not take retaliation measures unilaterally.
2. Settlement of disputes through consultation if possible:
 Article 3.7 of the DSU states: “The aim of the dispute settlement mechanism is to secure a
positive solution to a dispute. A solution mutually acceptable to the parties to a dispute and
consistent with the covered agreements is clearly preferred.”
 Each dispute settlement proceeding must start with consultations between the parties to the
dispute, with a view to reaching a mutually agreed solution.
 This is also cheaper and more satisfactory




3. Settlement of disputes and the clarification of WTO law:
Article 3.2 of the DSU states that the dispute settlement system serves not only ‘to preserve
the rights and obligations of Members under the covered agreements’ but also ‘to clarify the
existing provisions of those agreements. As the covered agreements are full of gaps, there
is much need for clarification of such provisions.
Last sentence of Article 3.2 - “Recommendations and rulings of the DSB cannot add to or
diminish the rights and obligations provided in the covered agreements”; and
Article 19.2 - “In accordance with paragraph 2 of Article 3, in their findings and
recommendations, the panel and Appellate Body cannot add to or diminish the rights and
obligations provided in the covered agreements”.
While allowing the WTO dispute settlement system to clarify WTO law, Article 3.2 and 19.2
explicitly preclude the system from adding to or diminishing the rights and obligations of
members.
4. Settlement of disputes in good faith:
 Article 3.10 of the DSU provides that the use of the dispute settlement procedures: ‘should
not be intended or considered as contentious acts’ and that all members must ‘engage in
these procedures in good faith in an effort to resolve the dispute’.
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4.6 Methods of dispute settlement
i.
ii.
iii.
iv.
Consultations or negotiations
Adjudication by panels and the Appellate Body
Arbitration
Good offices, conciliation, and mediation.




4.6.1 Consultation:
The DSU expresses a clear preference for resolving disputes through consultations”, i.e,
negotiations between the parties to the dispute.
Therefore “consultations” or at least an attempt to consultations, must always precede
‘adjudication’.
The Rules and procedures for consultations are set out in Article 4 of the DSU.
If ‘consultations’ fail to resolve the dispute, the complaining party may resort to ’adjudication’
by a panel, and if parties to the disputes appeal the findings of the Panel, adjudication by the
Appellate Body follows.
4.6.2 Use of good offices, conciliation, and mediation:
Article 5 of the DSU provides for alternatives means of solving disputes other than
adjudication:
 Good offices, conciliation and mediation are procedures that are undertaken voluntarily if the
parties to the dispute so agree.
 Proceedings involving good offices, conciliation, and mediation, and in particular positions taken
by the parties to the dispute during these proceedings, shall be confidential, and without
prejudice to the rights of either party in any further proceedings under these procedures.
 Good offices, conciliation or mediation may be requested at any time by any party to a dispute.
They may begin at any time and be terminated at any time. Once procedures for good offices,
conciliation or mediation are terminated, a complaining party may then proceed with a request
for the establishment of a panel.
 When good offices, conciliation or mediation are entered into within 60 days after the date of
receipt of a request for consultations, the complaining party must allow a period of 60 days after
the date of receipt of the request for consultations before requesting the establishment of a panel.
The complaining party may request the establishment of a panel during the 60-day period if the
parties to the dispute jointly consider that the good offices, conciliation, or mediation process has
failed to settle the dispute.
 If the parties to a dispute agree, procedures for good offices, conciliation or mediation may
continue while the panel process proceeds.
 The Director-General may, acting in an ex officio capacity, offer good offices, conciliation, or
mediation with the view to assisting Members to settle a dispute.
4.7 Jurisdiction of the WTO dispute settlement system:
i.
ii.
One integrated system for all WTO disputes
Compulsory jurisdiction
4.7.1 One integrated system for all WTO disputes:
 Article 1.1 of the DSU establishes “an integrated dispute settlement system’ which applies to
all the covered agreements.
 The DSU provides for a single coherent system of rules and procedures for dispute
settlement, applicable to disputes arising under any of the covered agreements.
 The covered agreements, listed in appendix 1 to the DSU, include the WTO Agreement, the
GATT 1994 and all other multilateral agreements on trade in goods, the GATS, the TRIPS
Agreement and the DSU.
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




4.7.2 Compulsory jurisdiction:
The jurisdiction of the WTO dispute settlement is compulsory in nature (article 23.1 of the
DSU states:
“When Members seek the redress of a violation of obligations or other nullification or
impairment of benefits under the covered agreements or an impediment to the attainment of
any objective of the covered agreements, they shall have recourse to, and abide by, the rules
and procedures of this Understanding”.
Based on this, a complaining member is obliged to bring any dispute arising under the
covered agreements to the WTO dispute settlement system.
The Uruguay Round agreement also made it impossible for the country losing a case to block
the adoption of the ruling. Under the previous GATT procedure, rulings could only be adopted
by consensus, meaning that a single objection could block the ruling. Now, rulings are
automatically adopted unless there is a consensus to reject a ruling — any country wanting
to block a ruling has to persuade all other WTO members (including its adversary in the case)
to share its view.
Although much of the procedure does resemble a court or tribunal, the preferred solution is
for the countries concerned to discuss their problems and settle the dispute by themselves.
The first stage is therefore consultations between the governments concerned, and even
when the case has progressed to other stages, consultation and mediation are still always
possible.
4.8 How are disputes settled?
Settling disputes is the responsibility of the Dispute Settlement Body (the General Council in another
guise), which consists of all WTO members. The Dispute Settlement Body has the sole authority to
establish “panels” of experts to consider the case, and to accept or reject the panels’ findings or the
results of an appeal. It monitors the implementation of the rulings and recommendations and has
the power to authorize retaliation when a country does not comply with a ruling.
First stage: consultation (up to 60 days). Before taking any other actions the countries in dispute
must talk to each other to see if they can settle their differences by themselves. If that fails, they can
also ask the WTO director-general to mediate or try to help in any other way.
Second stage: the panel (up to 45 days for a panel to be appointed, plus 6 months for the panel to
conclude its decision). If consultations fail, the complaining country can ask for a panel to be
appointed. The country “in the dock” can block the creation of a panel once, but when the Dispute
Settlement Body meets for a second time, the appointment can no longer be blocked (unless there
is a consensus against appointing the panel).
Officially, the panel is helping the Dispute Settlement Body make rulings or recommendations. But
because the panel’s report can only be rejected by consensus in the Dispute Settlement Body, its
conclusions are difficult to overturn. The panel’s findings must be based on the agreements cited.
The panel’s final report should normally be given to the parties to the dispute within six months.
In cases of urgency, including those concerning perishable goods, the deadline is shortened to three
months.
4.9 Appeals under DSU
 Either side can appeal a panel’s ruling. Sometimes both sides do so.
 Appeals must be based on points of law such as legal interpretation — they cannot reexamine
existing evidence or examine new issues.
 Each appeal is heard by three members of a permanent seven-member Appellate Body set up
by the Dispute Settlement Body and broadly representing the range of WTO membership.
 Members of the Appellate Body have four-year terms. They must be individuals with recognized
standing in the field of law and international trade, not affiliated with any government.
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 The appeal can uphold, modify, or reverse the panel’s legal findings and conclusions. Normally
appeals should not last more than 60 days, with an absolute maximum of 90 days.
 The Dispute Settlement Body must accept or reject the appeals report within 30 days — and
rejection is only possible by consensus.
4.10 What happens after a case has been decided
 If a country has done something wrong, it should swiftly correct its fault.
 And if it continues to break an agreement, it should offer compensation or face a suitable
response seen as a “remedy”, the ultimate goal being for the country to comply with the ruling.
 The priority is for the losing “defendant” to bring its policy into line with the ruling or
recommendations, and it is given time to do this.
 The dispute settlement agreement stresses that “prompt compliance with recommendations or
rulings of the DSB [Dispute Settlement Body] is essential in order to ensure effective resolution
of disputes to the benefit of all Members”.
 If the country that is the target of the complaint loses, it must follow the recommendations of the
panel report or the appeals report.
 It must state its intention to do so at a Dispute Settlement Body meeting held within 30 days of
the report’s adoption.
 If complying with the recommendation immediately proves impractical, the member will be given
a “reasonable period of time” to do so.
 If it fails to act within this period, it has to enter into negotiations with the complaining country (or
countries) in order to determine mutually-acceptable compensation — for instance, tariff
reductions in areas of particular interest to the complaining side.
 If after 20 days, no satisfactory compensation is agreed, the complaining side may ask the
Dispute Settlement Body for permission to retaliate (to “suspend concessions or other
obligations”).
 This is intended to be temporary, to encourage the other country to comply. It
 could for example take the form of blocking imports by raising import duties on products from the
other country above agreed limits to levels so high that the imports are too expensive to sell —
within certain limits.
 The Dispute Settlement Body must authorize this within 30 days after the “reasonable period of
time” expires unless there is a consensus against the request.
 In principle, the retaliation should be in the same sector as the dispute. If this is not practical or
if it would not be effective, it can be in a different sector of the same agreement.
 In turn, if this is not effective or practicable and if the circumstances are serious enough, the
action can be taken under another agreement.
 The objective is to minimize the chances of actions spilling over into unrelated sectors while at
the same time allowing the actions to be effective.
 In any case, the Dispute Settlement Body monitors how adopted rulings are implemented.
 Any outstanding case remains on its agenda until the issue is resolved.
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5. Anti-Dumping Agreement
Agreement on implementation of Art VI of the General Agreement on Tariffs and Trade 1994. Under Art VI:1
of the agreement principles were laid out such as that anti-dumping measures shall be applied under
circumstances provided for in Art VI, this is pursuant with investigations initiated and conducted in accordance
with the provisions of the agreement. The provisions govern the application of Art VI as to how action should
be taken under anti-dumping legislation or regulation.
Dumping is known as a mechanism in which the market share within a country can be expanded. The export
price is therefore below that of the manufacturing costs, which is lower than normal value.
To further elaborate the contracting parties, recognize that dumping to which products of one country are
introduced within another at less than normal value. It causes or threatens to injure an established industry
within the territory of the contracting party or the establishments of the domestic industry.
5.1 Article VI: 1 Agreement between All WTO members
A product would be considered introduce within into the commerce of an importing country at less than normal
value if exported from one country to another:
1. In less than comparable price, compared to ordinary trade
2. In the absence of domestic price, is less than
a. The highest comparable price for like product for export to any third country in the ordinary
course of trade.
b. The cost of the production of the product in the country of origin plus a reasonable addition for
selling cost and profit.
In each matter the cases will differ in conditions and terms of sale, for differences in taxation and other
differences affecting price comparability. Therefore, in order to prevent dumping, the contracting party can
levy any dumped product on anti-dumping duty not greater in amount that the margin of dumping in respect
of such product. The margin of dumping is the price difference determined in accordance with the provision
of paragraph 1.
Therefore no countervailing duty shall be levied on any product of the territory of the contracting party which
is imported in the territory of the other contracting party in excess amount equal to the estimated bounty or
subsidy which is determined to be granted, directly or indirectly, on the manufacture, production or export of
the product in the country of origin or exportation, which includes the special subsidy to the transportation of
the particular product. The countervailing duty is understood to be a special duty levied for the purpose of
offsetting any bounty or subsidy bestowed, directly or indirectly, upon the manufacture, production, or export
of any merchandise.
5.2 Art VI: 2 Determination of Dumping
The product which is considered to be dumped into the commerce of another country at less than normal
value, if the export price of the product exported from one country to another is less than comparable price.
The like product when destined for consumption in the exporting country.
When no sales of the like product within the domestic market of exporting country or when, because the
particular market situation of the low volume of sales within the domestic market of exporting country, such
sales do not permit proper comparison, the margin of dumping shall be determined by comparison with the
comparable price of the like product when exported to a third country.
If the products are not imported directly from the country of origin which is exported to importing member, the
price at which it is sold from the country export to the importing member from the intermediate country, the
price at which the product is sold from the exporting country to the importing member normally comparable
to the comparable price in the country of export. If the product are transhipped through the country of export,
or the product not produced in the country of export, or there is no comparable price for them in the country
of export.
5.2.1 “Like product” as per Art 2
The like product is interpreted to mean an identical product. This is in respect to the product under
consideration, or in the absence of such product, another which has characteristic closely to such product.
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5.3 Art VI: 3 Determination of Injury
In relation to the injury, such shall be based on positive evidence and involve an objective examination of
both:
a. The volume of the dumped imports and the effect of dumped imports on the prices on the like
products in the domestic markets.
b. The consequent impact of the imports on domestic producers of such products.
The dumped imports through the effect of dumping causing the injury within the meaning of the agreement,
the demonstration of the casual relationship between the dumped imports and the injury of the domestic
industry is based on the examination of the evidence produced before the authorities. The examination will
take place in relation to other factors which injure the domestic industry in relation to the relevant evidence
provided for. These other factors should thus not attribute the dumped imports.
Other factors which may be relevant include:
The volume and prices of imports not sold at dumping prices, contraction in demand or changes in the
patterns of consumptions, trade restrictive practices of and competition between the foreign and domestic
producers, developments in technology and the export performance and productivity of the domestic industry.
5.4 Art VI: 11 Duration and Review of Anti-Dumping Duties and Price undertakings
The duty of anti-dumping shall remain as long as long as necessary to counter dumping which causes the
injury. The authorities shall review the imposition of the duty where warranted, on their own initiative or
provided that the reasonable period elapsed. The interested party could therefore submit information
substantiating the need for review of such. This right to request whether the imposition of the duty is
necessary to offset dumping exist to the interested party. Whether such injury would continue or be removed,
varied, or both. If the authorities determined that such is no longer necessary under review, it shall be
terminated.
5.5 Art VI: 14 Anti-dumping action on behalf of a third country
A application for anti-dumping on behalf of a third country can be made by the authorities of the third country
requesting such. The application will have to be supported by price information in relation to the imports being
dumped, with detailed information to show the alleged dumping, which causes injury to the domestic industry.
The government should afford all assistance necessary to the authorities of the importing country in order to
obtain information, which the authorities may require.
The authorities of the importing country should consider the effects of the alleged dumping in relation to the
whole industry of the third country. When a decision is made as to proceed with a case or not in the importing
company, the importing company could decide to take action, the initiation should thus be made in
approaching the Council for Trade in Goods in order to seek approval for such action.
5.6 Art VI: 15 Developing Country Members
Special regard should be given to developed country members in regard to developing country members
when considering such application of anti-dumping. The possibility of constructive remedies should be
explored before applying anti-dumping duties, which could affect essential interest of the developing countries
members.
5.7 Art VI: 18 Final provisions: Anti –dumping agreement
No specific action against dumping of exports can be taken from another member; the reservation may not
be entered without the consent of the other members. This provision shall apply to investigations, reviews of
existing measures, which were initiated pursuant to applications made on or after the date of entry into force
for a member of the WTO agreement.
The calculation of such margins of dumping in refund procedures in relation to Art VI:9 rules should be applied
for determination or review of dumping. The existing anti-dumping measures should be deemed imposed on
a date not later that the entry into force for a member of the WTO agreement. Except in domestic legislation
cases of a member in force on that date already included a clause of the type provided for.
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6. Sanitary & Phytosanitary Measures (SPS)
The measures that WTO members apply can be classified as sanitary (relating to human or animal life or
health) or phytosanitary (relating to plant life or health). They are commonly known as SPS measures.
The international trade aspect of the SPS Agreement basically means that, in seeking to protect health, WTO
members must not use SPS measures that are: unnecessary, not science-based, arbitrary, or which
constitute a disguised restriction on international trade.
6.1 General Provisions
Article 1




This Agreement applies to all sanitary and phytosanitary measures which may, directly or indirectly,
affect international trade. Such measures shall be developed and applied in accordance with the
provisions of this Agreement.
For the purposes of this Agreement, the definitions provided in Annex A shall apply.
The annexes are an integral part of this Agreement.
Nothing in this Agreement shall affect the rights of Members under the Agreement on Technical
Barriers to Trade with respect to measures not within the scope of this Agreement.
6.2 Definitions
6.2.1 Sanitary or phytosanitary
Sanitary or phytosanitary measure are – any measure applied:
a) to protect animal or plant life or health within the territory of the Member from risks arising from the
entry, establishment or spread of pests, diseases, disease-carrying organisms, or disease-causing
organisms.
b) to protect human or animal life or health within the territory of the Member from risks arising from
additives, contaminants, toxins or disease-causing organisms in foods, beverages, or feedstuffs.
c) to protect human life or health within the territory of the Member from risks arising from diseases
carried by animals, plants or products thereof, or from the entry, establishment or spread of pests; or
d) to prevent or limit other damage within the territory of the Member from the entry, establishment or
spread of pests.
Sanitary or phytosanitary measures include all relevant laws, decrees, regulations, requirements and
procedures including, inter alia, end product criteria; processes and production methods; testing, inspection,
certification and approval procedures; quarantine treatments including relevant requirements associated with
the transport of animals or plants, or with the materials necessary for their survival during transport; provisions
on relevant statistical methods, sampling procedures and methods of risk assessment; and packaging and
labelling requirements directly related to food safety.
6.2.2 Harmonisation
The establishment, recognition, and application of common sanitary and phytosanitary measures by different
Members.
6.2.3 International standards, guidelines, and recommendations
a) For food safety, the standards, guidelines, and recommendations established by the Codex
Alimentarius Commission relating to food additives, veterinary drug and pesticide residues,
contaminants, methods of analysis and sampling, and codes and guidelines of hygienic practice.
b) For animal health and zoonoses, the standards, guidelines and recommendations developed under
the auspices of the International Office of Epizootics.
c) For plant health, the international standards, guidelines and recommendations developed under the
auspices of the Secretariat of the International Plant Protection Convention in cooperation with
regional organizations operating within the framework of the International Plant Protection
Convention; (Note: For the purpose of these definitions, "animal" includes fish and wild fauna; "plant"
includes forests and wild flora; "pests" include weeds; and "contaminants" include pesticide and
veterinary drug residues and extraneous matter).
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d) For matters not covered by the above organizations, appropriate standards, guidelines and
recommendations promulgated by other relevant international organizations open for membership to
all Members, as identified by the Committee.
In epizoology, an epizootic (from Greek: epi- upon + zoon animal) is a disease event in a nonhuman animal
population, analogous to an epidemic in humans. An epizootic may be: restricted to a specific locale (an
"outbreak"), general (an "epizootic") or widespread ("panzootic"). Therefore Epizootic: is an epidemic
outbreak of disease in an animal population, often with the implication that it may extend to humans.
6.2.4 Risk assessment
The evaluation of the likelihood of entry, establishment or spread of a pest or disease within the territory of
an importing Member according to the sanitary or phytosanitary measures which might be applied, and of the
associated potential biological and economic consequences; or the evaluation of the potential for adverse
effects on human or animal health arising from the presence of additives, contaminants, toxins or diseasecausing organisms in food, beverages or feedstuffs.
6.2.5 Appropriate level of sanitary or phytosanitary protection
The level of protection deemed appropriate by the Member establishing a sanitary or phytosanitary measure
to protect human, animal or plant life or health within its territory.
6.2.6 Pest- or disease-free area
An area, whether all of a country, part of a country, or all or parts of several countries, as identified by the
competent authorities, in which a specific pest or disease does not occur.
A pest- or disease-free area may surround, be surrounded by, or be adjacent to an area – whether within
part of a country or in a geographic region which includes parts of or all of several countries -in which a
specific pest or disease is known to occur but is subject to regional control measures such as the
establishment of protection, surveillance and buffer zones which will confine or eradicate the pest or disease
in question.
6.2.7 Area of low pest or disease prevalence
An area, whether all of a country, part of a country, or all or parts of several countries, as identified by the
competent authorities, in which a specific pest or disease occurs at low levels and which is subject to effective
surveillance, control or eradication measures.
6.3 Transparency of Sanitary and Phytosanitary Regulations
i.
ii.
iii.
Members shall ensure that all sanitary and phytosanitary regulations (Sanitary and phytosanitary
measures such as laws, decrees or ordinances which are applicable generally) which have been
adopted are published promptly in such a manner as to enable interested Members to become
acquainted with them.
Except in urgent circumstances, Members shall allow a reasonable interval between the publication
of a sanitary or phytosanitary regulation and its entry into force in order to allow time for producers in
exporting Members, and particularly in developing country Members, to adapt their products and
methods of production to the requirements of the importing Member.
Each Member shall ensure that one enquiry point exists which is responsible for the provision of
answers to all reasonable questions from interested Members as well as for the provision of relevant
documents regarding:
a. any sanitary or phytosanitary regulations adopted or proposed within its territory.
b. any control and inspection procedures, production and quarantine treatment, pesticide
tolerance and food additive approval procedures, which are operated within its territory.
c. risk assessment procedures, factors taken into consideration, as well as the determination of
the appropriate level of sanitary or phytosanitary protection.
d. the membership and participation of the Member, or of relevant bodies within its territory, in
international and regional sanitary and phytosanitary organizations and systems, as well as in
bilateral and multilateral agreements and arrangements within the scope of this Agreement,
and the texts of such agreements and arrangements.
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iv.
v.
Members shall ensure that where copies of documents are requested by interested Members, they
are supplied at the same price (if any), apart from the cost of delivery, as to the nationals of the
Member concerned (when "nationals" are referred to in this Agreement, the term is be deemed, in the
case of a separate customs territory Member of the WTO, to mean persons, natural or legal, who are
domiciled or who have a real and effective industrial or commercial establishment in that customs
territory).
General reservations: Nothing in this SPS Agreement shall be construed as requiring: (a) the provision
of particulars or copies of drafts or the publication of texts other than in the language of the Member
except as stated in paragraph 8 of this Annex; or (b) Members to disclose confidential information
which would impede enforcement of sanitary or phytosanitary legislation or which would prejudice the
legitimate commercial interests of particular enterprises.
6.4 Control, Inspection and Approval Procedures
Members shall ensure, with respect to any procedure to check and ensure the fulfilment of sanitary or
phytosanitary measures, that: (a) such procedures are undertaken and completed without undue delay and
in no less favourable manner for imported products than for like domestic products;
Where a sanitary or phytosanitary measure specifies control at the level of production, the Member in whose
territory the production takes place shall provide the necessary assistance to facilitate such control and the
work of the controlling authorities.
Nothing in this Agreement shall prevent Members from carrying out reasonable inspection within their own
territories.
6.5 SPS Measures - Key Principles
Regional
conditions
Harmonisation
Equivalence
Risk assessment
Transparency
Appropriate level
of protection
6.6 Health and International Trade
The SPS Agreement is essentially about health and international trade.
International trade and travel have expanded significantly in the past 50 years. This has increased the
movement of products that may pose health risks. The SPS Agreement recognises the need for WTO
members to protect themselves from the risks posed by the entry of pests and diseases, but also seeks to
minimize any negative effects of SPS measures on trade.
The health aspect of the SPS Agreement basically means that WTO members can protect human, animal or
plant life or health by applying measures to manage the risks associated with imports. The measures usually
take the form of quarantine or food safety requirements.
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6.6.1 International Standard
For the purposes of paragraph 3 of Article 3, there is a scientific justification if, on the basis of an examination
and evaluation of available scientific information in conformity with the relevant provisions of this Agreement,
a Member determines that the relevant international standards, guidelines or recommendations are not
sufficient to achieve its appropriate level of sanitary or phytosanitary protection.
For purposes of paragraph 6 of Article 5, a measure is not more trade-restrictive than required unless there
is another measure, reasonably available taking into account technical and economic feasibility, that achieves
the appropriate level of sanitary or phytosanitary protection and is significantly less restrictive to trade.
6.7 Basic Rights and Obligations
In terms of Article 2:
Members have the right to take sanitary and phytosanitary measures necessary for the protection of human,
animal or plant life or health, provided that such measures are not inconsistent with the provisions of this
Agreement.
Members shall ensure that any sanitary or phytosanitary measure is applied only to the extent necessary to
protect human, animal or plant life or health, is based on scientific principles and is not maintained without
sufficient scientific evidence, except as provided for in paragraph 7 of Article 5.
Members shall ensure that their sanitary and phytosanitary measures do not arbitrarily or unjustifiably
discriminate between Members where identical or similar conditions prevail, including between their own
territory and that of other Members. Sanitary and phytosanitary measures shall not be applied in a manner
which would constitute a disguised restriction on international trade.
Sanitary or phytosanitary measures which conform to the relevant provisions of this Agreement shall be
presumed to be in accordance with the obligations of the Members under the provisions of GATT 1994 which
relate to the use of sanitary or phytosanitary measures, in particular the provisions of Article XX(b).
The basic rights and obligations of WTO members are covered in Article 2 of the SPS Agreement, the text of
which is given in the box below. At various points in this booklet, we will refer to other Articles in connection
with some of the topics discussed.
Who administers the SPS Agreement?
The SPS Agreement is administered by the Committee on Sanitary and Phytosanitary Measures (the ‘SPS
Committee’), in which all WTO members can participate. The SPS Committee is a forum for consultations
where WTO members regularly come together to discuss SPS measures and their effects on trade, to
oversee implementation of the SPS Agreement, and to seek to avoid potential disputes.
6.8 Risks and commodities
The SPS Agreement applies to essentially all measures taken by a WTO member to protect human, animal
or plant life or health within its territory from certain risks, and which may affect international trade.
The risks to animal life or health come from: the entry, establishment or spread of pests (including weeds),
diseases, disease carrying organisms or disease-causing organisms; or additives, contaminants (including
pesticide and veterinary drug residues and extraneous matter), toxins or disease-causing organisms in
feedstuffs.
The risks to plant life or health may come from: the entry, establishment or spread of pests (including weeds),
diseases, disease carrying organisms or disease-causing organisms.
The risks to human life or health come from additives, contaminants, toxins or disease-causing organisms in
foods or beverages; diseases carried by animals, plants or their products; or the entry, establishment or
spread of pests.
Therefore, imports of food, plants (including plant products), and animals (including animal products) are
three of the main risk pathways — but risks are not restricted to food and agricultural commodities.
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Q: If a country exports machinery, not agricultural commodities. Why do they need to know about the SPS
Agreement and SPS measures?
A: While the exports themselves may not represent a risk, they may be contaminated with soil or plant
residues, or may be shipped using packaging materials such as timber pallets or plant straw. SPS measures
are therefore relevant to all exporters and importers.
6.9 Resources needed to implement the SPS Agreement
Responsibility for implementing the SPS Agreement usually lies with the government departments and
national repositories that have the expertise and information relevant to plant and animal health, as well as
food safety matters. The implementing bodies typically include the National Plant Protection Organization
(NPPO) and the equivalent animal health and food safety authorities.
A domestic regulatory framework covering the work, responsibilities and powers of these bodies is needed,
together with systems to enforce compliance. This encourages confidence in assessments and confidence
in certificates issued in connection with SPS measures.
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Establishing animal or plant health status, and developing appropriate SPS measures, involves the
collection of a lot of varied information from many different sources.
This information is of continuing value, and it is important that it is organised, categorized and stored
so that it is readily retrievable.
To identify risks and to research, develop and implement science based SPS measures, WTO
members need access to personnel trained in appropriate areas of expertise.
Access to expertise in the detection and diagnosis of animal and plant pests and diseases is needed
to support trade in agricultural commodities, including skills in entomology, plant pathology, veterinary
pathology, epidemiology, and taxonomy.
Quarantine and inspection officers trained in sampling and detection techniques are needed at import
entry and export exit points.
Collections of specimens, reference material on insects and plants, and laboratories equipped with
diagnostic facilities, are of great importance.
Implementing the SPS Agreement in Namibia is going to cost us a lot and our resources are scarce.
Will it be worthwhile?
A recent World Bank study found that the costs of complying with international food standards may be less
than expected and that the benefits may be underestimated because they are harder to measure than the
costs. The report also notes that those developing countries that have adopted international standards have
maintained or improved their access to markets for agricultural commodities and are in a good position to
continue to do so. A technical assistance specialist speaking at a recent WTO workshop pointed out that
countries sometimes underestimate the resources they have available to implement the SPS Agreement. For
example, they might have many of the people with the expertise required but need to bring them together in
the one agency.
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7. Technical Barriers to Trade
7.1 What are technical barriers to trade?
 These can be seen as a category of non-tariff barriers to trade
 These are the widely divergent measures that countries use to regulate markets, protect their
consumers, or preserve their natural resources (among other objectives), but they also can be
used (or perceived by foreign countries) to discriminate against imports in order to protect
domestic industries.
 The term "technical barriers to trade" (TBT) refers to mandatory technical regulations and
voluntary standards that define specific characteristics that a product should have, such as its
size, shape, design, labelling / marking / packaging, functionality, or performance.
 The specific procedures used to check whether a product is in compliance with these
requirements are also covered by the definition of TBT. These so-called "conformity
assessment procedures" can include, for example, product testing, inspection, and certification
activities.
 TBTs are usually introduced by government authorities with a legitimate public policy objective
in mind.
 Nevertheless, TBTs often have an impact on trade and the competitiveness of exporters, and in
particular small and medium enterprises (SMEs).
 Adjusting products and production processes to comply with different requirements in export
markets, as well as demonstrating compliance with these requirements, increase product costs
and time-to-market, and can ultimately hurt the competitiveness of a country’s exporters.
Therefore, many of the exporters put technical requirements at or near the top of their concerns
on trade barriers.
7.1.1 WTO and the Technical Barriers to Trade Agreement:
 The objective of the World Trade Organization's Agreement on Technical Barriers to Trade as a
preventive instrument is to ensure that such measures do not result in discrimination or arbitrary
restrictions on international trade.
 The Agreement does not in any way undermine the right of governments to take measures to
pursue legitimate public policy objectives, it simply aims to ensure that such measures are
prepared, adopted and applied according to some basic principles, in order to minimize the
negative impact on trade.
7.2 The structure of the Technical Barriers to Trade Agreement:
 The TBT agreement applies to technical regulations, standards, and conformity assessment
procedures. They are each treated in separate portions of the Agreement.
 Technical regulations are dealt with in Articles 2 and 3
 Standards are governed by Article 4. Article 4, however, makes an explicit reference to Annex
3 of the Agreement. Annex 3 of the Agreement contains the Code of Good Practice for the
Preparation, Adoption and Application of Standards (“Code of Good Practice”). This
“Code” is very important. It is in the Code where almost all of the substantive provisions
governing the treatment of standards are found.
 Conformity assessment procedures are dealt with in Articles 5 and 9 of the TBT Agreement.
 The principles and rules discussed in Articles 10 through 15 of the TBT Agreement are applicable
to each of these areas. There are however certain minor differences in scope and treatment.
 In the WTO Agreement, important provisions, definitions, are found in Annexes. In the TBT
Agreement, Annex 1 provides definitions and Annex 3 contains the Code of Good Practice.
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7.3 Principles of the Technical Barrier to Trade Agreement:
5 Core Principles:
Transparency
Nondiscrimination
and national
treatment
Use of
international
standards
Proportionality
Equivalence
7.3.1 Transparency:
A WTO Member planning to introduce a measure that might have an important impact on trade
should notify this to the WTO and take into account comments submitted by other countries on the
draft legislation.
Transparency is the process whereby the creation, terms, and application of technical regulations,
standards and conformity assessment procedures are made public, and opportunities are provided
for the public (including other Members) to comment on proposed technical regulations, standards
and conformity assessment procedures.
Transparency obligations are found throughout the WTO Agreement.
The WTO TBT Agreement requires Member countries to:
 Notify draft measures to the WTO at an early stage, when comments from third countries can
still be taken into account in the legislative process
 Allow sufficient time (usually 60 days) for other WTO Members to comment on the draft measure
in writing, and take these comments into account in the final version of the measure
 Ensure that all adopted measures are promptly published (for example in that country's Official
Journal)
 Allow a reasonable period between the publication and entry into force of the measure, to allow
foreign operators to adapt their products to the new requirements. This delay should be of at
least 6 months, except in those cases where a measure needs to be implemented immediately
in order to address an urgent health, safety, environmental or national security concern.
Transparency obligations take several different forms and are applicable at different points in the
promulgation and application of a measure. They include the following requirements set out in
Articles 2.9, 2.10, 5.6 and 5.8 as well as Annex 3 (L), (M), (N) and (O):
 The publication of a pre-implementation notices prior to enactment of a measure sufficient
to allow interested parties to become acquainted with a proposed measure.
 Prior to the enactment of a technical regulation or a conformity assessment procedure
(when amendments to the measure can still be introduced), the notification of other
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Members through the WTO Secretariat of the products to be covered and the provision of
a brief indication of the objective and rationale for the technical regulation or procedure.
For draft standards, the provision of a 60-day period for comments.
Upon request, provide Members with copies of draft technical regulations, standards, and
conformity assessment procedures.
Prior to the enactment of a measure, allow Members a reasonable time for written
comment, and for discussions concerning proposed measures, and take these
comments/discussions into Consideration.
Publish “or otherwise make available” technical regulations, standards, and conformity
assessment procedures to other members and to interested parties
In addition, Members are required, pursuant to Article 10 of the TBT Agreement, to
establish “enquiry points” to answer reasonable inquiries from, and provide relevant
documents to, Members and other interested parties concerning technical regulations,
standards and conformity assessment procedures.
7.3.2 Non-discrimination and national treatment:
A measure should not discriminate among different importing Members and should apply in the
same way to both imports and similar domestic goods.
The principle of non-discrimination is found in the following provisions of the TBT Agreement:
 For technical regulations: Article 2.1
 For standards: Annex 3(D) (Code of Good Practice)
 For conformity assessment procedures: Article 5.1.1.
The non-discrimination obligation has two elements: “most-favoured-nation treatment” (“MFN
treatment”), and “national treatment”. In a nutshell, “most-favoured-nation” (MFN) treatment is
an obligation not to discriminate between “like products” imported from different WTO Members.
“National treatment” is an obligation not to discriminate between domestic and imported “like
products.”
If two products are not like products, the non-discrimination principle does not apply as between
those products. This raises the important question of what constitutes a like product for purposes of
the TBT Agreement.
Likeness is determined on a case-by-case basis and the notion of likeness is not consistent
throughout the WTO Agreement. To date there has not been a TBT case in the WTO in which the
term “like product” has been defined. The concept of “like product” has been examined in a number
of WTO disputes on Article III of the GATT 1994, but it is unknown to what extent the ruling in these
cases should be applied to the concept of “like product” in the TBT Agreement.
One of the most important WTO dispute settlement decisions interpreting “likeness” is that of the
Appellate Body in Japan – Alcoholic Beverages II.
The Appellate Body noted in its interpretation of GATT Article III:2 of the GATT 1994, in what has
become a famous passage, that:
The concept of ‘likeness’ is a relative one that evokes the image of an accordion. The accordion of
‘likeness’ stretches and squeezes in different places as different provisions of the WTO Agreement
are applied. The width of the accordion in any one of those places must be determined by the
particular provision in which the term ‘like’ is encountered as well as by the context and the
circumstances that prevail in any given case to which that provision may apply (Appellate Body
Report Japan – Alcoholic Beverages II, p. 114).
WTO decisions examining Article III of the GATT 1994 have applied a four- part test in which the
following factors are examined:
• physical characteristics (the properties, nature and quality of a product),
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• HS classification,
• consumers’ tastes and habits (perception and behaviour), and
• product end uses.12
Although this multi-part test is widely accepted in GATT Article III cases, until a panel or Appellate
Body decision examines what is a like product for TBT purposes, there is no way to be certain that
the same test will be applied in TBT cases. Its application does, however, seem likely.
7.3.3 Proportionality:
A measure should not be more trade restrictive than necessary to achieve the legitimate goal
pursued. Technical regulations, standards and conformity assessment procedures must not be prepared,
adopted, or applied so as to create unnecessary obstacles to international trade.
The prevention of unnecessary obstacles to international trade is a principle applicable to technical
regulations, standards, and conformity assessment procedures, but its application is not necessarily identical
in all three areas. The obligation to prevent unnecessary obstacles to international trade is set forth in the
following provisions:
o For technical regulations: Article 2.2
o For standards: Annex 3(E) (Code of Good Practice)
o For conformity assessment procedures: Article 5.1.2.
With respect to technical regulations, the prevention of unnecessary obstacles to international trade
is defined in Article 2.2 to mean that technical regulations must: (1) not be more trade restrictive
than necessary to achieve a policy goal (the least-trade-restrictive measure), and must (2) fulfill a
legitimate objective, taking into account the risks that non-fulfilment would create. The concepts of
“necessary”, “legitimate objective” and “risk of non-performance” are discussed below.
With respect to conformity assessment procedures, the phrase “unnecessary obstacles to
international trade” is defined in Article 5.1.2 which provides:
“…conformity assessment procedures are not prepared, adopted or applied with a view to or
with the effect of creating unnecessary obstacles to international trade. This means, inter alia,
that conformity assessment procedures shall not be more strict or be applied more strictly
than is necessary to give the importing Member adequate confidence that products conform
with the applicable technical regulations or standards, taking account of the risks nonconformity would create.”
The terms underlined in the above explanation of “unnecessary obstacles to international trade) are
examined below. Understanding these terms is essential to comprehend what constitutes an
unnecessary obstacle to international trade:
7.4 Legitimate Objectives
Technical regulations must fulfill a legitimate objective. This is, in fact, one of the “goals” of the TBT
Agreement.
Examples of the legitimate objectives permissible with respect to technical regulations are set forth
in a non-exclusive list in Article 2.2. Legitimate objectives for technical regulations include:
 national security requirements,
 prevention of deceptive practices,
 protection of human health or safety,
 protection of animal life or health,
 protection of the environment, and
 other undefined objectives.
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As noted earlier, the other legitimate objectives, not listed in Article 2.2 almost certainly include:
• regulations designed to standardize electrical products, computers,
equipment, communications equipment; etc., and
• quality standards.
Both types of regulations already exist widely, particularly in developed countries.
7.4.1 Necessity:
The concept of “necessity” is found in the provisions applicable to regulations, standards and
conformity assessment procedures. Article 2.2 of the TBT Agreement provides that technical
regulations cannot be more trade restrictive than necessary to achieve a policy goal.
In the Thailand - Cigarettes case a GATT panel concluded that a measure could be considered to
be “necessary” in terms of Article XX(b) of the GATT 1947 only if there were no alternative measure
consistent with the GATT, or less inconsistent with it, which a contracting party could “reasonably”
be expected to employ to achieve its regulatory (health policy) objective - Thailand - Restrictions
on Importation of and Internal Taxes on Cigarettes.
This test, the least restrictive trade measure appears to have been given voice in the Article 2.2 of
the TBT definition of “necessary”. With respect to technical regulations and conformity assessment
procedures, an “assessment” of the risks of nonperformance of the legitimate objective is carried
out.
A non-exclusive list of elements that can be considered in a risk assessment I s provided in Article
2.2 of the TBT Agreement (applicable to technical regulations) of the TBT Agreement:
 available scientific and technical information,
 related processing technology, and
 intended end-uses of products.
7.4.2 Reasonableness
The term “reasonable” does not appear in the definition of “necessary” in the TBT Agreement, but
there is no doubt that a requirement of reasonableness must be read into Article 2.2 of the TBT
Agreement, as it was in Article XX of the GATT by panels and the Appellate Body. Without the
requirement that a less restrictive trade measure be reasonably available, the “necessity” test would
be unworkable – establishing a standard that would be extraordinarily difficult to achieve.
In both the Korea-Beef and the EC – Asbestos decisions the Appellate Body examined what
constitutes a “reasonably available” measure for purposes of the exceptions (predicated on the
necessary test) provided in Article XX(b) and (d). The Appellate Body found that:
 A determination of whether a WTO consistent alternative measure is reasonably available
requires a “weighing and balancing process” in which an assessment is made as to whether
the alternative measure “contributes to the realization of the end pursued.”
 The more vital or important the common interests or values pursued, the easier it would be
to accept as “necessary” measures designed to achieve those ends (para 172 and 162
Respectively).
 A measure should be sufficient to achieve a member’s chosen level of health protection.
 A measure does not cease to be “reasonably” available simply because it involves
administrative difficulties for a Member.
Applying the “reasonableness standard” set forth in Korea-Beef and EC -Asbestos in conjunction
with the “necessary test” set forth in the TBT Agreement would reduce the likelihood that legitimate
TBT measures would be struck down based on an overly strict interpretation of the TBT Agreement.
Without this standard, far fewer TBT measures would be permitted.
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7.4.3 Changed Circumstances:
In order to assure that unnecessary obstacles to international trade are avoided, Article 2.3 of the
TBT Agreement provides with respect to technical regulations that if circumstances change or an
objective can be addressed in a less trade restrictive manner, the more restrictive trade measure
must be removed.
The Code of Good Practice, applicable to standards, does not refer to “changed circumstances”
This concept is nevertheless implicit in the avoidance of unnecessary obstacles to international
trade. This is evident from the notion of avoiding unnecessary obstacles, as well as it is
demonstrated by Article 5.2.7, which limits the scope of conformity assessment procedures used to
verify that a standard is met in the event that product specifications are changed.
With regard to conformity assessment procedures, normally product’s specifications are changed
after the product has been found to conform with a technical regulation or standard, pursuant to
Article 5.2.7 the conformity assessment procedure for the modified product is to be limited to what
is necessary to provide adequate confidence that the product still conforms with the technical
regulation or standard. This provision reduces the potential that conformity assessments will be
applied to impede trade. Instances may nevertheless arise when significant changes in a product’s
specifications necessitate a complete conformity reassessment.
7.4.4 Harmonization:
Harmonization is a central pillar of the TBT Agreement. Members are encouraged to participate in
the international harmonization of standards, and to use agreed international standards as a basis
for domestic technical regulations and standards.
The emphasis on harmonization is based on the view that (a) trade is disrupted less if Members use
internationally agreed standards as a basis for domestic regulations and standards, and (b)
producers and consumers benefit from a degree of harmonization (because of economies of scale
and questions of technical compatibility respectively). The relevant provisions of the TBT Agreement
relating to harmonization and the use of relevant international standards are:
o for technical regulations: Articles 2.4-2.6
o for standards: Annex 3(F)-(G) (Code of Good Practice)
o for conformity assessment procedures: Articles 5.4 and 5.5
7.4.5 Use of international standards:
Whenever possible, international standards should be used as a basis for technical regulations.
With respect to technical regulations, Article 2.4 of the TBT Agreement provides that:
Where technical regulations are required and relevant international standards exist or their
completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their
technical regulations except when such international standards or relevant parts would be an
ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance
because of fundamental climatic or geographical factors or fundamental technological problems.
In the EC - Sardines decision the Panel found, and the Appellate Body confirmed, that “The
international standard need not be promulgated by consensus by the recognized standardizing body
in order to fall within Article 2.4.23”.
If a Member prepares, adopts or applies a technical regulation for one of the legitimate objectives
explicitly mentioned in article 2.2 and, the measure is in accord with the relevant international
standard, this measure is, pursuant to Article 2.5 rebuttably presumed not to create an unnecessary
obstacle to international trade. This presumption makes it harder for a complaining Member
challenging the WTO consistency of a TBT to make a prima facie case that the measure at issue
does create an unnecessary obstacle to international trade.
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7.4.6 Equivalence:
WTO Members should consider accepting technical regulations of other Members as equivalent to
their own, provided that these measures are an effective way of addressing the objectives pursued.
Members are encouraged to accept foreign conformity assessment procedures as “equivalent” to
their own procedures provided they are satisfied that those procedures offer an assurance of
conformity with standards and technical regulations equivalent to their own procedures.
Although the notion of equivalence is not mentioned in the Code of Good Practice (applicable to
standards), the principle of equivalence is made applicable to standards through Article 6.1
(conformity assessment procedures).
Members are encouraged to enter into negotiations for the mutual recognition of the results of
conformity assessment procedures. By accepting the results of another Member’s conformity
assessment procedures, testing costs are reduced and less time is lost. Confidence in a trading
partner’s testing procedures would seem to be a prerequisite to the acceptance of a mutual
recognition agreement.
The relevant provisions of the TBT Agreement on equivalence and mutual recognition are:
o for technical regulations: Article 2.7 (on equivalence)
o for standards: none but equivalence is incorporated in Article 6.1 are: conformity assessment
procedures
o for conformity assessment procedures: Article 6 (on both equivalence and mutual
recognition).
There is some skepticism among WTO Members concerning the effectiveness of international
standardization efforts, and the extent to which harmonization, equivalence and mutual recognition
can be increased between countries at different stages of development.
7.5 Aim of TBT Agreements:
The purposes of the TBT Agreement can be broadly described as:
 assuring that technical regulations, standards and conformity assessment procedures do not
create unnecessary obstacles to international trade, while
 leaving Members adequate regulatory discretion to protect human, animal and plant life and
health, national security, the environment, consumers, and other policy interests.
The TBT Agreement seeks to assure that:
 mandatory product regulations
 voluntary product standards, and
 conformity assessment procedures (procedures designed to test a product’s conformity with
mandatory regulations or voluntary standards) do not become unnecessary obstacles to
international trade and are not employed to obstruct trade.
The TBT Agreement seeks to balance two competing policy objectives:
i.
The prevention of protectionism, with
ii.
The right of a Member to enact product regulations for approved (legitimate)
public policy purposes (i.e., allowing Members sufficient regulatory
autonomy to pursue necessary domestic policy objectives).
(1) The Prevention of Protectionism

The progressive tariff reductions that have taken place in the GATT/WTO framework have left
certain industrial and political leaders looking for other means of protecting their industries. These
means of protection frequently take the form of non-tariff barriers (i.e., means other than tariffs
for protecting business sectors).
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
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Technical regulations, standards and conformity assessment procedures are all potential nontariff measures that are sometimes used for protectionist purposes. As such, they can be
potential barriers to international trade.
The TBT Agreement establishes rules and disciplines designed to prevent mandatory technical
regulations, voluntary standards, and conformity assessment procedures from becoming
unnecessary barriers to international trade. However, the TBT Agreement seeks to leave
Members with sufficient domestic policy autonomy to pursue legitimate regulatory objectives
(2) The legitimate regulation of products for public policy purposes:
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The need to assure that Members retain sufficient regulatory autonomy to accomplish domestic
policy goals. Domestic regulations can accomplish several objectives unrelated to protectionism.
For example, domestic regulations can serve as a means of protecting consumer health and
safety, the environment and national security.
Domestic regulations can also further economies of scale, and increase consumer confidence,
by assuring uniform technical and production standards.
Economic development, and the improved education that should result, can lead to demands
from consumers and sometimes the business community for an increase in regulations or
standards.
Both the preamble of the TBT Agreement and Article 2.2 of the TBT Agreement identify certain
regulatory goals that are deemed “legitimate” for regulatory purposes.
Article 2.2 sets forth a list of legitimate TBT objectives which includes
- protection of life/health (human, animal and plant),
- safety (human)
- protection of national security,
- protection of the environment, and
- prevention of deceptive marketing practices
The list of legitimate objectives in Article 2.2 is not exclusive. While not specified, it is widely
agreed that technical harmonization (for example, regulations that standardize electrical
products, computers, communications equipment, etc.), and quality standards (for example
grading requirements for produce and commodities) are legitimate.
Both technical harmonization and quality standards are already widely utilized, particularly by
developed country Members.
The TBT Agreement seeks to achieve a fine balance between permitting Members the
regulatory autonomy to protect legitimate interests (through the use of technical regulations,
standards and conformity assessment procedures) and assuring that technical regulations,
standards and conformity assessment procedures do not become unnecessary obstacles to
international Article 2.2 TBT.
If the TBT Agreement is applied too strictly, the legitimate policy interests of Members will be
thwarted. If the TBT is applied too laxly, technical regulations may be used for protectionist
purposes and the gains Members have achieved through progressive rounds of tariff reductions
may be lost.
Some sensitivity is required when dealing with TBT issues. Developing countries fear that trade
measures (technical regulations and standards) allegedly taken by developed countries for social
policy goals may in reality be for protectionist purposes. Developed countries fear that the TBT
Agreement will be applied too strictly and that trade measures designed to pursue legitimate
social policy objectives will be struck down.
7.6 Brief history of TBT:
 GATT 1947 Technical regulations and standards are not treated in great detail in the General
Agreement on Tariffs and Trade (“GATT”).
 Historically, Article III of the GATT 1947 on national treatment was subject to abuse. Early in the
life of the GATT 1947, certain contracting parties began to use technical regulations and
inspection requirements as trade barriers, necessitating the establishment of a stronger regime
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governing the application of technical regulations and standards. This gave birth to the
“Standards Code” of 1979.
 Standards Code of 1979: After prolonged negotiations in the Tokyo Round of Trade Negotiations,
a plurilateral agreement (i.e., an agreement not signed by all GATT contracting parties) was
concluded in 1979. This served as a basis for the WTO’s TBT Agreement. With only 32
signatories, and few teeth (therefore, being dependent on consensus, the GATT 1947 system
lacked a strong enforcement mechanism), the Standards Code nevertheless provided a good
testing ground for how best to discipline the use of technical regulations and standards
 TBT Agreement: The Uruguay Round, which entered into force on 1 January 1995, bears a
resemblance to the Tokyo Round Standards Code. However, much was learned from the Tokyo
Round experience, and some of the weaknesses of the Tokyo Round agreement were remedied
in the WTO’s TBT Agreement.
 First, the TBT Agreement is a multilateral as opposed to a plurilateral agreement meaning that it
applies to all WTO Members – it forms part of the Uruguay Round’s “single undertaking”. Second,
the TBT Agreement has a much stronger enforcement mechanism, being subject to the WTO’s
Dispute Settlement Understanding (DSU).
7.7 Scope of the TBT objectives:
The TBT Agreement is applicable to “technical regulations” “standards”, and “conformity
assessment procedures” applicable to technical regulations and standards. These terms are each
defined in Annex 1 of the Agreement. These definitions establish the general scope of the
Agreement.
(i)
Technical Regulation:
Pursuant to paragraph 1 of Annex I of the TBT Agreement a “technical regulation” is a: Document
which lays down product characteristics or their related processes and production methods,
including the applicable administrative provisions, with which compliance is mandatory. It may also
include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements
as they apply to a product, process or production method.
In EC – Sardines the Appellate Body referring back to its Report in EC –Asbestos set forth a threepart test for determining if a measure is a technical regulation:
1) the document applies to an identifiable product or group of products.
2) the document must lay down one or more product characteristics; and
3) compliance with these characteristics must be mandatory
(ii)
Standard:
Pursuant to paragraph 2 of Annex I of the TBT Agreement a “standard” is defined as a: Document
approved by a recognized body, that provides, for common and repeated use, rules, guidelines or
characteristics for products or related processes and production methods, with which compliance is
not mandatory. It may also include or deal exclusively with terminology, symbols, packaging,
marking or labelling requirements as they apply to a product, process or production method.
(iii)
Conformity Assessment Procedure:
Pursuant to paragraph 3 of Annex I of the TBT Agreement, a “conformity assessment” procedure
is: Any procedure used, directly or indirectly, to determine that relevant requirements in technical
regulations or standards are fulfilled.
Paragraph 3 further explains that conformity assessment procedures include, inter alia, procedures
for sampling, testing and inspection; evaluation, verification and assurance of conformity;
registration, accreditation and approval as well as their combinations.
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Questions concerning the scope of the application of the TBT agreement:
TBT measures and the GATT 1994:
With respect to the relationship between the GATT 1994 and the TBT Agreement and the
applicability of the GATT 1994 to TBT measures, the Panel in the case EC – Asbestos stated the
following:
 Both the GATT 1994 and the TBT Agreement form part of Annex 1A to the WTO Agreement
and may apply to the measures in question.
 Consequently, although we do not in principle exclude application of the TBT Agreement
and/or the GATT 1994 to the Decree, we have to determine the order in which we should
consider this case.
 According to the Appellate Body in European Communities – Regime for the Importation,
Sale and Distribution of Bananas, when the GATT 1994 and another Agreement in Annex 1A
appear a priori to apply to the measure in question, the latter should be examined on the
basis of the Agreement that deals “specifically, and in detail,” with such measures.
 The Panel thus decided to examine first whether the measure at issue was consistent with
the TBT Agreement, the agreement that deals specifically and in detail with what was
allegedly a TBT measure.
The definitions of a “technical regulation” and a “standard” are ambiguous with respect to one point.
Does the TBT Agreement govern technical regulations and standards applicable to manufacturing
“processes and production methods” (“PPMs”) when the PPMs utilized are not detectable in the final
product –so-called “Non-Product-Related PPMs” (“NPR-PPMs”)?
 This is a controversial question. The view generally held in the trade community is that the
TBT Agreement was not intended to apply to PPMs, unless the PPM is product-related
(detectable in the final product). However, Members have notified certain NPR-PPMs to the
TBT Committee (“Notification” in the TBT sense of the term means to inform officially other
WTO members of a particular action through the WTO Secretariat). This has been the case,
for example, for eco-labelling schemes based on a life-cycle analysis.
SPS v TBT measures?
Article 1.5 of the TBT Agreement provides: “The provisions of this Agreement do not apply to
sanitary and phytosanitary measures as defined in annex A of the Agreement on the Application of
Sanitary and Phytosanitary Measures”.
Pursuant to Annex A (1) the SPS Agreement, an SPS measure is any measure applied:
(a) To protect animal or plant life or health within the territory of the Member from risks arising
from the entry, establishment or spread of pests, diseases, disease-carrying organisms,
or disease-causing organisms.
(b) To protect human or animal life or health within the territory of the Member from risks
arising from additives, contaminants, toxins or disease-causing organisms in foods,
beverages, or feedstuffs.
(c) To protect human life or health within the territory of the Member from risks arising from
diseases carried by animals, plants, or products thereof, or from the entry, establishment
or spread of pests; or
(d) To prevent or limit other damage within the territory of the Member from the entry,
establishment or spread of pests.
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TBT Agreement and Government Procurement Specifications
 The TBT Agreement is not applicable to purchasing specifications prepared by governmental
bodies for production or consumption requirements of governmental bodies. Such measures
could fall instead under the WTO Agreement on Government Procurement (“AGP”).
However, not all WTO Members are bound by the AGP, and not all government procurement
activities fall within the AGP.
The TBT Agreement and Import Prohibitions

Although the definition of technical regulation does not list import prohibitions or bans among
the covered measures, the TBT Agreement is applicable to certain import prohibitions and
bans. The TBT Agreement applies when an import prohibition or ban is based on product
characteristics, and exceptions to the prohibition or ban (based also on particular product
characteristics) exist.
7.8 The growing importance of TBTs in the multilateral trade context
In the context of WTO, the European Union has consistently pushed to:
 Achieve greater harmonization, through more widespread use of international standards
 Adopt a more risk -oriented approach in deciding what conformity assessment procedures
should be used for assessing compliance of products
 Improve the implementation of transparency provisions, to ensure that trade partners are
systematically consulted on regulatory initiatives that might influence trade
 Promote and enhance the effectiveness of technical assistance to developing countries in
the TBT field.
7.9 Overview of the TBT Agreement:
Although the TBT Agreement has three separate fields of application (technical regulations,
standards, and conformity assessment procedures), there are common principles and rules that are
generally applicable throughout. The common principles and rules in outline are as follows:
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Non-discrimination
The prevention of unnecessary obstacles to international trade
Legitimate objectives
Necessity
Reasonableness
Changed circumstances
Harmonization
Use of international standards
Equivalence and Mutual recognition
Transparency
Derogations in the event of urgent measures.
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8. Regional Trade Agreements
Regional Trade Agreements:

Most Regional Trade Agreements are created under Article XXIV of GATT.
8.1 Text of Article XXIV of GATT: Territorial Application — Frontier Traffic — Customs
Unions and Free-trade Areas
 The provisions of this Agreement shall apply to the metropolitan customs territories of the contracting
parties and to any other customs territories in respect of which this Agreement has been accepted.
Each such customs territory shall, exclusively for the purposes of the territorial application of this
Agreement, be treated as though it were a contracting party.
 A customs territory shall be understood to mean any territory with respect to which separate tariffs or
other regulations of commerce are maintained for a substantial part of the trade of such territory with
other territories.
 The contracting parties recognize the desirability of increasing freedom of trade by the development,
through voluntary agreements, of closer integration between the economies of the country’s parties
to such agreements. They also recognize that the purpose of a customs union or of a free-trade area
should be to facilitate trade between the constituent territories and not to raise barriers to the trade of
other contracting parties with such territories.
 The provisions of this Agreement shall not prevent, as between the territories of contracting parties,
the formation of a customs union or of a free-trade area or the adoption of an interim agreement
necessary for the formation of a customs union or of a free-trade area; Provided that:
a.) with respect to a customs union, or an interim agreement leading to a formation of a customs
union, the duties and other regulations of commerce imposed at the institution of any such union
or interim agreement in respect of trade with contracting parties not parties to such union or
agreement shall not on the whole be higher or more restrictive than the general incidence of the
duties and regulations of commerce applicable in the constituent territories prior to the formation
of such union or the adoption of such interim agreement, as the case may be;
b.) with respect to a free-trade area, or an interim agreement leading to the formation of a free trade
area, the duties and other regulations of commerce maintained in each of the constituent territories
and applicable at the formation of such free-trade area or the adoption of such interim agreement
to the trade of contracting parties not included in such area or not parties to such agreement shall
not be higher or more restrictive than the corresponding duties and other regulations of commerce
existing in the same constituent territories prior to the formation of the free-trade area, or interim
agreement as the case may be; and
c.) any interim agreement referred to in subparagraphs (a) and (b) shall include a plan and schedule
for the formation of such a customs union or of such a free-trade area within a reasonable length
of time.
8.2 Why are RTA’s important?
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To increase market access
To promote investment
To shield against unfair use of trade remedies
To guard against slowed multilateral liberalization
To increase support for multilateral liberalization
To achieve “WTO-plus” levels of integration
To solidify domestic reforms
To increase competitiveness in global markets
To increase clout in international negotiations
To achieve economic stability
To meet other strategic goals
8.2.1 To increase market access:
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Lower tariff barriers are the type of market access that is easiest to see and measure.
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The degree to which an RTA grants preferential access—the margin of preference—can be
substantial: For example, the US imposes a 25 percent tariff on imported light trucks, but qualifying
light trucks made in fellow NAFTA countries Canada and Mexico face no tariff.
But market access can also come from reduced non-tariff barriers such as reduced regulations.
It should be noted that the margin of preference varies among RTAs, among economic sectors in an
RTA, and even within one sector over time (the more multilateral liberalization spreads, the lower the
margin of preference).
Some RTAs do not liberalize trade substantially and thus are less economically consequential for
their members.
8.2.2 To promote investment:
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Better access to foreign markets also makes a country a more attractive investment site. This is
especially the case given the preferential nature of the market access.
In many cases, RTAs do spur investment.
Investment flowing to Spain and Portugal after their entry to the European Community—now called
the European Union (EU)—helped to make EU membership coveted.
However not all RTAs have significant economic consequences. So the investment argument is not
universal.
Another reason that RTAs can increase investment is that they may include specific investment
provisions designed to make foreign investors feel secure: For example, prohibitions on expropriating
property without due compensation, due process regarding investment disputes (sometimes including
arbitration and adjudication of disputes outside shaky domestic legal systems), equal treatment
between foreign and domestic investment, and reduced bureaucratic hurdles.
8.2.3 To shield against perceived unfair use of trade remedies:
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One reason for RTAs is their use as a shield against purported abuse of trade remedies such as
antidumping measures, countervailing duties, and safeguards.
8.2.4 To guard against slow multilateral liberalisation:
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Another reason for RTAs is to promote liberalization, especially when multilateral trade negotiations
are stalled, as has been the case in the DDA negotiations.
Specifically, the discord exhibited at a DDA meeting in Cancún in 2003 seems to have made countries
more interested in RTAs.
For example, Australian prime minister John Howard cited the “glacial pace” of liberalization in the
WTO as one rationale for Australia pursuing bilateral free trade agreements.
8.2.5 To increase support for multilateral liberalization
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The logic behind this strategy is that as more countries signed liberalizing RTAs with another powerful
country such as USA, others would be compelled to also form liberalizing RTAs with the US.
As this network of liberalization spreads, multilateral liberalization would become more palatable to
these countries because they would have already made difficult choices in liberalizing their trade
regimes relative to one of their most significant trading partners.
8.2.6 To increase competitiveness in world markets
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Increasing competitiveness in world markets can sometimes be enhanced through regional
production strategies. Central to this goal is to often include using cheap labour—as the US does with
Mexico and as Western Europe does with Central Europe, Turkey, and North Africa, and South Africa
with Zimbabwe and Mozambique.
The model for this “integrated regional production” is to use the capital-intensive high-skill portion of
production in a developed nation and the lower-skill portion where wages are less expensive.
In other words, RTAs may enhance companies’ ability to “source globally, produce regionally, and
sell locally.” China is increasingly interested in achieving stable sources of inputs for its massive
industrial production boom, and RTAs assist in this goal.
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Critics argue that regional production leads to exploitation in developing countries and places
downward pressure on wages in wealthy countries, thus also weakening labor unions and the rights
they promote.
Supporters argue that greater efficiency means regional production can more effectively compete in
an increasingly global economy and that without regional production, manufacturing jobs would still
flow out of relatively wealthy countries and the so-called exploited workers in poor countries would
find themselves jobless.
8.2.7 To achieve “WTO-plus” levels of liberalization
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Some countries want liberalization beyond what the WTO has currently established and joining
together with like-minded countries for deeper liberalization is much quicker than waiting for the
multilateral system to increase its liberalization.
On some issues, it does not take much to move to deeper levels of liberalization than offered by the
WTO: intellectual property rights (IPRs), trade in services, and coverage of the so-called Singapore
issues.
Many developed countries argue the WTO’s level of protection for IPRs such as patents and
copyrights are insufficient.
Trade in services is far less liberalized in the WTO than trade in goods, and those RTAs that include
services—more common in 1990s onward– RTAs tend to go well beyond the WTO standards set in
the General Agreement on Trade in Services (GATS), established under the Uruguay Round of WTO
negotiations.
The so-called Singapore issues: trade and investment (e.g., policies on foreign investment), trade and
competition policy (e.g., antitrust laws), transparency in government procurement (e.g., anticorruption
laws), and trade facilitation (e.g., customs administration)—are areas where WTO rules are
insufficiently liberal, according to many developed nations.
8.2.7 To increase clout in international negotiations:
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There are two ways in which countries join an RTA to increase negotiating clout:
The first is by pooling representation. Countries in an RTA can have more clout in international
negotiations than the countries would have separately, assuming the RTA is sufficiently integrated
and cohesive. In fact, it is quite common that poorer countries cannot send permanent representatives
to the secretariats of important multilateral organizations such as the WTO or to some other important
negotiations. An RTA can help countries’ clout by creating institutionalized channels for coordinating
RTA representation at other institutions or in other negotiations. The importance of banding together
for greater international clout is particularly true of smaller and poorer states. They often view such
coordinated action as a necessity.
Secondly, being in an RTA or ongoing RTA negotiations also creates a degree of negotiation
enhancement in other negotiations. How so? Countries in an RTA may be able to claim the RTA
is a plausible alternative to other negotiations, should those other negotiations not go well. This may
change the negotiating power of the countries, or at least change perceptions about that negotiating
power. How so? If one is negotiating about the price of a car, it will be a different negotiation if one
walks rather than drives to the dealership. The car buyer who drives to the dealership has greater
credibility to “walk away” from a bad deal.
8.2.8 To achieve economic stability
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Unstable economies hope to gain stability by forming RTAs with more stable economies. Typically,
this means developing countries forming an RTA with developed countries, although it has been an
increasing trend to see developing countries form RTAs with other developing countries.
Some of the sought-after stability may come from increased market access and investment, and some
may come from having a larger economic pool; larger bodies of water take longer to change
temperature when the weather changes and thus fluctuate less than smaller bodies of water.
Certainly, the EU’s newer entrants have seen greater levels of economic stability since membership.
Currency stability has been the primary goal behind the monetary integration of the Central African
franc zone (CFA franc zone), which consists of two regions: the Economic and Monetary Community
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for Central Africa (CAEMC), and the West Africa Economic and Monetary Union (WAEMU) and the
Comoros.
8.2.9 To meet other strategic goals:
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Countries enter into RTAs for reasons having little to do with economic integration. The US has called
for bilateral RTAs across the Middle East and, by 2013, the formation of the Middle East Free Trade
Agreement. Why? This Introduction to Regional Trade Agreements is part of a broader initiative. The
USA wants to be perceived by those in the Middle East as having altruistic goals, not just the goals
of oil and Israel’s survival, as is commonly believed in the region.
The European Union seeks trade agreements with North African and Middle Eastern countries for
many reasons, some of which are altruistic. One reason—even before the riots in France over
treatment of Muslims and across Europe over the Danish Muhammad cartoons—is the hope that
stronger economies in North Africa and the Middle East will slow future immigration. The strategic
goals that drive RTAs are varied, but it is clear that they are an essential reason that countries seek
RTAs.
8.3 Assessing the impact of RTAs:
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To understand the impact of RTAs, it is important first to recognise that they are intrinsically different
from both multilateral liberalization (under the aegis of the WTO) and unilateral liberalization.
In both of those cases, countries lower trade barriers on all sources of imports of a good by exactly
the same extent.
In contrast, under an RTA, tariffs fall on imports from the other members of the agreement, but they
need not change on imports from non-members.
As a result, RTAs imply both trade liberalization and trade discrimination. Whereas there is a nearconsensus among economists that the former is desirable, that is not true for the latter.
Trade liberalisation within a trading bloc tends to be beneficial when it promotes a shift of resources
from inefficient domestic suppliers to more efficient producers within the region.
Economists call this phenomenon ‘trade creation’. Conversely, a trading bloc is likely to be harmful if
it generates a shift of resources from efficient external producers to inefficient producers within the
region. This is a consequence of trade discrimination, which economists call ‘trade diversion’.
In principle, either trade creation or trade diversion can prevail within an RTA. There are theoretical
arguments that support the primacy of each effect under similar circumstances. Thus, in the end,
which effect dominates is an empirical matter.
Estimating trade creation and trade diversion is no easy task. It requires knowledge of the
counterfactual: what would have happened to trade if there were no trade agreement? As this
is unknown, assumptions must be made.
A variety of approaches have been employed. While results inevitably vary depending on the
methodology employed (as well as the time period, the trading bloc in question and the level of
aggregation in the data), at least two general messages arise from the large set of studies
investigating trade creation and trade diversion in RTAs around the world.
1. First, trade creation tends to be the norm in RTAs – and trade diversion is the exception.
2. Second, when trade diversion is observed, its magnitudes are normally relatively small.
At the centre of the debate on RTAs are discrimination and the potential for trade diversion. Trade
diversion is the shift of production from efficient external suppliers to inefficient members. In contrast,
trade creation is the shift of production from in efficient domestic providers to efficient RTA members.
While trade creation is associated with the standard gains from trade, trade diversion can make a
trade agreement harmful for both members and non-members.
8.4 Trade creation v trade diversion:
 Why is there such a dominance of trade creation over trade diversion? The answer is in two parts.
 First, governments seem to be choosing their RTA partners well. For example, variables that suggest
greater gains from a bilateral RTA (such as proximity between the members, a similarity in their GDPs
and a large difference in their factor endowments) are also sharp predictors of whether the two
countries actually have a common RTA.
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 Second, when countries form an RTA, their governments not only lower tariffs vis-à-vis their RTA
partners, as they are supposed to do; they also bring down the trade barriers on imports from countries
outside the bloc. This is not part of the agreement, so governments liberalize externally because they
choose to do so – and without any type of reciprocity from the favoured non-members of the bloc.
There is increasing evidence of external trade liberalization following an RTA, especially in developing
countries. The lower external tariffs provide a double blessing: they imply that RTAs are responsible
for more trade liberalization than they mandate (amplifying trade creation) and for less trade
discrimination than might be expected (limiting trade diversion).
 At first, it may seem odd that governments, pressured by special interests as they are virtually
everywhere, would voluntarily lower their external tariffs without any compensation from the favoured
countries. But it does make sense. Suppose that domestic special interest groups pressure the
government and induce it to set relatively high tariffs, which allow the domestic industry to maintain
high prices and enjoy a large market share. If subsequently the country enters into a RTA, exportoriented firms benefit (and support the agreement) because of the better access to foreign markets,
whereas purely domestic firms suffer from the tougher competition from the RTA partners. But this
also weakens the domestic firms’ stance on protection against non-members. The reason is that the
free access to the domestic market enjoyed by the partners’ exporters under the RTA lowers the
market share of the domestic industry.
 As a result, the RTA makes any price increase generated by a higher tariff less valuable for the
domestic industry: now whenever the government attempts to help domestic producers through higher
external tariffs, the partners’ producers absorb part of that surplus.
 In other words, the RTA creates ‘leakage’ in the trade policy redistributive channel. External
protection also becomes more costly, because of the trade diversion that accompanies the RTA. As
a result, external tariffs tend to fall after the formation of an RTA both because the economic marginal
cost of external protection rises and because the political- economy marginal gain from external
protection falls.
 For developing countries, empirical research supports this rationale because trade preferences tend
to lead to lower external tariffs. Results for the United States and the European Union (EU), however,
indicate that they are less likely to reduce external tariffs on goods where preferences are offered.
But since the tariffs of both the United States and the EU are very low to start with, and cannot be
raised because of their WTO commitments, there is not much room for change anyway.
8.5 Problems with RTA’s:
The discriminatory character of these agreements has raised three main concerns:
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that trade diversion would be rampant, because special interest groups would induce governments
to form the most distortionary agreements
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that broader external trade liberalization would stall or reverse; and
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that multilateralism could be undermined.
Theoretically, all of these concerns are legitimate, although there are also several theoretical arguments that
oppose them. Empirically, neither widespread trade diversion nor stalled external liberalization has
materialized, while the undermining of multilateralism has not been properly tested. There are also several
aspects of regionalism that have received too little attention from researchers, but which are central to
understanding its causes and consequences.
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9. RTA-AFCFTA -Africa Continental Free Trade Area
The African Continental Free Trade Area is a free trade area consisting of 28 countries. It was created among
54 of 55 African Union Nation. This free trade is providing for the largest participating countries apart from
the World Trade Organization.
This agreement required of members to remove tariffs from 90% of goods, allowing for free access to
commodities, goods and services across the African continent. The United Nations Economic commission
for Africa estimate that this will boost intra-African trade.
9.1 Objective of the agreement
AfCFTA set the following objectives:
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Creating a single market, deepening economic integration
Establishing liberalized market through multiple rounds of negotiations
Aid movement of capital and people, facilitating investments
Establishing future continental customs union
Achieve sustainable and inclusive socio-economic development, gender equality and structural
transformations within the member states
Enhancing competitiveness of member state in the African and global market
Encourage industrial development through diversification and regional value chain development,
agricultural development and food security
Resolving challenges of multiple and overlapping memberships
9.2 Historical Background
In 1963, the Organization of African Unity was founded by newly independent states with the aim to promote
cooperation between African states. In 1980 Lagos Plan of Action was adopted by the organization
suggesting minimizing reliance upon the Western World by prompting intra-African trade. This provided for
creation of regional cooperation organizations such as the SADCC, leading to the Abuja treaty, 1991 which
created the African Economic Community. This African Economic Community promoted for the development
of free trade areas, custom unions, African Central Bank, and African Common Currency Union.
The Organization of African Unity was succeeded by the African Union, having a primary goal to accelerate
economic integration of the continent. The second, to coordinate and harmonize policies between existing
and future regional economic communities to attain the objectives of the Union.
It was thus agreed to create the Continental Free Trade Area which started with negotiations, by 2018, the
10th session took place, leading to the creation of The African Continental Free Trade Agreement, The Kigali
Declaration, and the Protocol on Free Movement of persons.
9.3 Institutions
The institutions established to facilitate the implementation has been set in phase 1 of negotiations, however,
phase 2 can establish more committees via protocols. Currently a Secretariat is established for the
coordinating the implementation of the agreement. This secretariat is an autonomous body within the African
union, working closely with the AU commission. It is a independent legal personality which will receive budget
from the AU. The council of ministers will decide Headquarter, structure, role, and responsibilities. The
Assembly of African Union Heads of State and Government will be the highest decision-making body. The
Council of Ministers will be responsible for trade providing trade policy oversight and ensuring effective
implementation and enforcement of this Agreement.
More committees have been established. Dispute resolution rules and procedures still to be negotiated. The
Committee of senior Trade Officials implement the council’s decisions and is responsible for development of
programs and action plans for implementation of this Agreement.
9.4 Implementation
The AfCFTA is to be implemented in phases, which is still under negotiation. The first phase in Kigali provided
for trade protocols, dispute settlement procedures, customs cooperation, trade facilitation and rules of origin.
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This covered goods and services liberalization. This included reduction in tariffs of 90% of goods. The
operational phase was called for in 2019 to which 5 operational instruments were activated to govern AfCFTA:
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5.
The rules of origin
The online negotiating forum
The monitoring and elimination of non-tariff barriers
A digital payment system
The African Trade Observatory
Therefore, phase 2 negotiations are underway since February 2019 and expected to finish end of 2020. As
per 12th summit in July 2019, gaps were identified within phase 1, leading to further negotiations divided into
2 sub phases:
phase 1: covering trade in goods and trade service disciplines and a dispute settlement; tariff concessions to
negotiation on rules of origin, trade in services, the specific commitments etc.
phase 2: focusing on cooperation on investment, competition and intellectual property rights.
In relation to the matter of tariff concession, such is an important source of government revenue, it also
reduces import competition and protect domestic industries. All states aim to reach the same level of tariff
liberalisation. 90 % of the tariff lines should be liberalised, whilst 10% is divided in 2 categories. The 10% is
divided to 7% of sensitive products and 3% excludes from liberalisation entirely.
LCD: 10 years to achieve 90% liberalisation, 13 years to eliminate tariffs on sensitive products. Angola, Sao
Tome and Principe will graduate to LCD status in 2021 and 2024
Non-LCDs: 5 years to achieve liberalisation, 10 years to eliminate tariffs on sensitive products – may retain
status quo of liberalisation in year 6
Both LCD and Non-LCD can exclude 3% of tariff lines but excluded product may not account for more than
10% of total trade.
G6: consisting of Ethiopia, Madagascar, Malawi Sudan, Zambia, Zimbabwe face challenged and has been
provided a 15 year phase out period. How to divide the 10% will still be determined.
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LDCs Countries: Angola, Benin, Burkina Faso, Burundi, Central African Republic, Chad, Comoros,
Democratic Republic of Congo, Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Lesotho,
Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Sao Tome and Principe, Senegal,
Sierra Leone, Somalia, South Sudan, Sudan, Togo, Uganda, United Republic of Tanzania, Zambia.
G6 countries: Ethiopia, Madagascar, Malawi, Sudan, Zambia, Zimbabwe
At the Niamey submit, the implementation of liberalisation commitments in relation to LDC’s facing adjustment
challenges were addressed. African Export–Import Bank (Africa’s largest trade bank) unveiled $ 1 billion
financing facility to support countries in order to adjust in manner to sudden tariff losses as the result of
AfCFTA agreement. The digital payment system is to be developed within collaboration of AU domesticating
intra-regional payments. A simplified trade regime to be developed, which is very important within substantial
communities of informal traders.
This Agreement is thus a flagship project of the AU, the other project focusing on industrial and infrastructure
development will be important for LCDs as they deal with challenged of implementation.
9.5 AfCFTA coverage after negotiations
This will form several legal instruments covering trade in goods, trade in services, dispute settlement,
investment, competition policy and intellectual property rights. Already within Phase 1 a founding agreement
and protocols on trade in goods, trade in services and dispute settlement was adopted and entered into force
by May 2019. Trade will however only commence after outstanding aspects and basic rules on trade in
services were finalized. Negotiations of tariffs and rules of origin as well preparatory implementation at
national levels shall begin in July of 2020. Phase 2 will thus cover investment, competition policy and
intellectual property right expected to be completed in 2020.
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10.
SADC Protocol on Trade
As SADC has many more protocols, the specific protocol we’ll be covering is Protocol on Trade
1996. Other protocols such as on Finance and Investment, 2006; Declaration on Productivity, 1999;
Trade in Services, 2012; and Transport Communications and Meteorology, 1996 deals with trade
as well.
This protocol constitutes cooperation of SADC’s goals on economic development and poverty
eradication.
10.1
SADC in general
10.1.1 Member of SADC
SADC exists of 16 member states. The following states are members:
Angola
Botswana
DRC
Lesotho
Madagascar Malawi
Swaziland
South Africa
Seychelles Namibia
Malawi
Mauritius
Tanzania
Zambia
Zimbabwe Comoros
10.1.2 Historical origins of SADC
Within 1960 to 1970, leaders of majority-ruled countries and national liberation movements
coordinated the political, diplomatic and military struggles in order to bring a end to white-minority
and colonialism within southern Africa. The forerunner of the political and security cooperation leg
of SADC was Frontline States (FLS) grouping formed in 1980.
South African Development Coordination Conference (SADCC) was the socio-economic
cooperation leg of today’s SADC. With the adoption of 9 majority-ruled southern African countries,
this paved the way for the establishment of SADCC.
SADCC was transformed into SADC with 1992, with such the members of SADCC and Namibia
which lead to SADC establishment. Both Socio-economic cooperation and political and security
cooperation. The original SADCC founding treaty was signed by Angola, Botswana, Lesotho,
Malawi, Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe.
10.1.3 SADC treaty
This founding document provided for the pursuance of the principles towards a Southern African
Development Community, a declaration made by the Heads of State or Government of Southern
Africa affirming commitment to establish a development community in the region.
The declaration outlines principle, objectives, and general undertakings by the community. The
membership, institutions, meetings, areas of cooperation and relations with other states and
organisations are covered within the document. Further touching upon resources and funds,
immunities and privileges, disputes, sanctions, amendments, language, saving provisions,
ratification, and termination of the memorandum of understanding. As such SADC has 27 protocols
dealing with defence, development, illicit drug trade, free trade, and movement of people, etc.
Example:
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Protocol on Energy, 1996: promoting harmonious development of national energy policies.
Setting out objectives for SADC and member state for the infrastructure development in
energy and subsectors of wood fuel, petroleum, natural gas, electricity, goal, renewable
energy, and energy efficiency and conservation
-
Protocol on Gender and Development: Member states are urged in implementation efforts
towards achievements of concrete and transformative changes in lives of women and girls in
the region. Such is due to gender-based violence in the region, and child marriages.
10.2
Principles of SADC
As such SADC and its members shall act in accordance of the following:
-
Sovereign equality of all member states
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Solidarity, peace, and security
Human rights, democracy, and the rule of law
Equity, balance and mutual benefit
Peaceful settlement of disputes
10.3
SADC institution
As per Art 9 of the SADC protocol, the following institutions are established:
- The summit of Heads of State and Government
- The Organ on Politics, Defence and Security
- The Council of Ministers
- The integrated Committee of Ministers
- The standing Committee of Officials
- The Secretariat
- The Tribunal
- SADC National Committees
- And other if necessary.
10.4
SADC Objectives
As per Art 5 (1), objectives such it is set to:

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

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
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



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Promote sustainable and equitable economic development,
Eliminating poverty,
Enhancing quality of life for people in Southern Africa and
Support the socially disadvantaged.
Promotion of common political values, systems and shared values which are transmitted
through institutions which are democratic, legitimate, and effective.
Further consolidating, defending, and maintaining democracy, peace, security, and stability.
Promote self-sustainability development on basis of collective self-reliance and
interdependence of member states.
To achieve complementarity between regional strategies and programmes.
Promoting and maximizing productive employment and utilisation of resources in the region.
Achieve sustainable utilisation of natural resources and effective protection of environments.
Strengthening and consolidating the historical, social, and cultural affinities and links among
people within the region.
Combat of HIV/AIDS and deadly or communicable diseases.
Ensure that poverty eradication is addressed within SADC activities and programmes, and
mainstream gender in the process of community building.
Further in Art 5 (2), in order to achieve the objectives within Art 5 (1):
 SADC shall harmonise political and socio-economic policies and plans of member states.
 Encourage the people within the region and institutions to take initiative to develop economic,
social, and cultural ties across said regions, and participation within the implementation of
the programmes and projects.
 The creation of appropriate institutions and mechanics for mobilisation of requisite resources
for the implementation of programmes and operations of SADC and the institutions.
 Development of policies which aim at elimination of obstacles to free movement of capital
and labour, goods and services and peoples of regions generally.
 Promoting of human resources; the development, transfer, and mastery of technology; the
coordination and harmonisation of internal relations and improve economic management and
performance through co-operation.
 To further secure international understanding, co-operation, and support, mobilising the
inflow of public and private resources and development of such other activities as member
states may decide.
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10.5
Co-operation
Art 21 provides that members are to co-operate in fostering regional development and integration
on the basis of balance, equity and mutual benefit. Through the appropriate institutions to
coordination, rationalise and harmonise macro-economic and sectoral policies and strategies,
programmes, and projects. Member state thus agree to co-operation in areas.
These areas consist of:
-
food security, land, and agriculture.
infrastructure and services.
industry, trade, investment, and finance.
human resources development, science, and technology.
natural resources and environment.
social welfare, information, and culture; and
Politics, diplomacy, international relations, peace, and security.
Additional areas of co-operation may be decided upon by the Council.
10.5.1 Elimination of import duties
Art 4 of the trade provides that a reduction and eventual elimination of import duties shall be phased
on goods which originate from member states, further to which members shall not raise import duties
in existence at the time of entry of the protocol. This process to be accompanied with industrialization
strategy to approve competitiveness of member states.
10.5.2 Elimination of export duties
Art 5 provides that members shall not apply export duties on goods for export to other member
states. However, this article shall not prevent applying of export duties to prevent erosion of
prohibitions or restrictions which apply to exports outside the community, provided that no less
favourable treatment is granted to member states than to third countries.
10.5.3 Non-tariff barriers
Art 6 provides that member states shall if provided for such in the protocol, shall intra-SADC trade
to adopt policies and implement measures to eliminate all existing forms of NTBs and further refrain
from imposing any new NTBs.
10.5.4 Quantitative import restrictions
Art 7 provides that no new quantitative restrictions will apply and phasing out of existing restrictions
on the import of goods which originate from member states, except if otherwise provided in the
protocol. Members may apply a quota system provided that the tariff rate under such system is
favourable.
10.5.5 Quantitative export restrictions
Art 8 provides that the members shall not apply any restrictions on exports to any other member
state, except provided for in the protocol. Members states may take measure necessary to prevent
erosion of prohibitions or restrictions which apply to such exports outside the community, provided
that no less favourable treatment is granted to member states than to that of third parties.
10.6
Sanctions
Art 33 provides that sanctions to be imposed on a member state that fails without good reason to
fulfil obligations, implement policies which undermine the principles and objectives of SADC; or is in
arrears with payment contributions to SADC, for reasons other than those caused by natural
calamity or exceptional circumstances which gravely affect economy and has not secured
dispensation of the summit. Such sanctions will be determined by Summit on a case-by-case basis.
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10.7
Exceptions
10.7.1 General
Art 9 provided for general exceptions subject to which measures applied will not constitute arbitrary
or unjustified discrimination between member states, or disguised restrictions on intra-SADC trade.
Nothing within Art 7 and 8 (Quantitative import and export restrictions) shall be construed as to
prevent the adoption or enforcement of any measurement by the member state. Such measures to
be set if:
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necessary to protect public morals or maintain public order
necessary to protect human, animal or plant life or health
necessary to secure compliance with laws and regulations consistent with the WTO
necessary to protect intellectual property rights, or deceptive trade practices
relating to transfer of gold, silver, precious or semi-precious stones or metals
imposed for protection of national treasures of artistic, historic, or archaeological value
necessary to prevent or relieve critical shortages of foodstuffs in any exporting member state
in relation to conservation of exhaustible natural resources and environment
necessary to ensure compliance with existing obligations under the international agreements.
10.7.2 Security
Nothing within the protocol under Art 10 will prevent a member state from taking measures in
protecting security interest or maintaining of peace.
10.8
National Agreement
Member states under Art 11 shall accord immediately or unconditionally, to goods traded in the
community the same treatment to goods produced nationally in relation to all laws, regulations, and
requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or
use.
10.8.1 Standard and technical regulations on trade
A member state shall use international standards relevant within standard-related measure, except
id such would be ineffective or inappropriate in fulfilling the legitimate objectives. This standard
measure to be used should conform to international standard which should not create an obstacle
within trade. Such should not reduce levels of safety, the protection of human, animal or plant life or
health of the environment or consumers, or prejudice member state rights. Such should consider
the international standardization to which such measures should be practicable, compatible in order
to facilitate trade in goods and services in the community. The member state will thus except such
as equivalent technical regulation of other member states, and if such differ, to provide that an
adequately fulfilment towards the objectives in relation to their regulations. A member state on
request of another state, should seek appropriate measures in order to promote compatibility of
specific standards or confirm assessment procedures maintained in said territory, with such
maintained in the other member states.
10.9
Anti-dumping measures
Art 18 provides that the protocol will not prevent anti-dumping measures which are in conformity
with the WTO.
10.10
Subsidies and countervailing measures
Art 19 provides that member states shall not grant subsidies which will distort or threaten competition
within the region, however, may continue such in accordance with Article III. A member state may
offset the effects of subsidies subject to WTO provisions, levy countervailing duties on a product of
another state. A member state may introduce a new subsidy if it is in accordance with the WTO.
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10.11
Protection of infant industries
Art 21 provides that upon application, member state may apply for a measure which promote an
infant industry, to which a member state is authorised to suspend certain obligations of the protocol
in respect of the like goods imported from other member states. However, this should be subject to
WTO provisions. The committee can then impose terms and conditions in authorizing such,
preventing excessive disadvantages which may result in trade imbalances. The committee will
regularly review the protection of infant industries by a member state.
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11.
Rules of origin – Agreement on rules of Origin (WTO agreement)
11.1
Article 1: Rules of Origin
Rules of Origin is defined as laws, regulations and administrative determinations on general application
applied by any member to determine the country of origin of goods. The rules of origin are not related to
contractual or autonomous trade regimes leading to the granting of tariff preferences.
The rules of origin include all rules of origin used in non-preferential commercial policy instruments. Such
include: Most favoured-nation treatment; anti-dumping and countervailing duties; safeguard measures; origin
marking requirements; and any discriminatory quantitative restrictions or tariff quotas. These shall also
include rules of origin used for government procurement and trade statistics.
11.1.1 Other definitions:
Within the Convention on the Simplification and Harmonization of Customs procedures, Rules of origin means
the specific provisions, developed from principles established by national legislation or international
agreements, applied by a country to determine the origin of goods.
Rules of origin are this the criteria to determine the origin of goods. This is developed by principles of national
legislation or international treaties. However, this is to be implemented on a country level. The purpose is
thus to define the country of origin. The country of origin is found in the label.
11.2
Objectives and principles of the Agreement on Rules of Origin
The objectives and principles are the following, such is further provided in Article 9:
1.
2.
3.
4.
5.
6.
To develop clear and predictable rules of origin
To facilitate the flow of international trade
No to create unnecessary obstacles to trade
Not to nullify or to impair the rights of members under GATT 1994
To provide transparency of Laws, regulations, and practices regarding rules of Origin
To ensure that rules of origin are prepared and applied in an impartial, transparent, predictable,
consistent, and neutral manner
7. To make available consultation mechanisms and procedures for speedy, effective, and equitable
resolution of disputes arising under the Agreement
8. To harmonize and clarify non-preferential rules of origin.
11.3
Role of Rules of origin
The basic being the determination of economic nationality. Several mandatory legal requirement are used to
observe when goods are traded on the international market. Thus the necessary need for implementation of
various trade policy instruments, such as: import duties, allocating quotas or collection of trade statistics.
11.3.1 Determination of country of origin
This is known as the last step within customs clearance procedures. The first step being classification of the
goods, determination of the value of the goods. The classification and valuation are important for the customs
clearance; however, they also form part of the basic tools within determining the country of origin of goods.
Rules of Origin are known to be produce specific rules which is linked to specific codes. Thus, in order to
assess if the value-added rules are fulfilled, the composition of customs value is needed. The harmonized
system is designed for such.
11.4
Rules of Origin and Trade Policy
As the rules of origin is used as a trade measure, it does not constitute as an instrument and should not be
used to pursue trade objective directly or indirectly or as policy measure. The rules of origin are to be used
to address commercial policy instruments and to attain specific purposes of national or international policies.
Potential abuse may exist with such. Thus, it is useful to identify the different types of discriminatory trade
measures where and origin determination is required:
1. Measures designed to correct ‘unfair trade’
2. Measures designed to protect local industry
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3. Measures designed to give preference to products from developing countries or from beneficiary
countries in regional cooperation agreements
In addition, rules of origin are used in the following manner:
1.
2.
3.
4.
To administer ‘buy national’ policies
To control access to the domestic market by foreign exporters
To implement environmental or sanitary measures
To ensure national security or political policy
11.5
Economic consequences of rules of origin
11.5.1 Effects to international trade
11.5.1.1 Allocation of resources
By minimizing restrictions, free trade will produce an economically efficient allocation of resources. According
to free trade assumption based on comparative advantage, protective impediments will produce a less
efficient outcome in trade. Such is the case if used as instrument to reinforce protectionist measures. If one
assumes that world trade is imperfectly competitive, trade restrictive measures may be employed for strategic
policy purposes. This provides to ensure helpful trade policy measures are effective.
11.5.1.2 Trial of correction against already distorted market
If unfair trade distorts the market, which is not a result of efficient distribution of production and trade
according to comparative advantage, discriminatory counter action may be justified. Within defined origin
requirement can reinforce measure to correct the market distortion.
If implement, rules of origin even for justified protectionist measures could do more than correcting distortion,
through diverse interpretation in some cases to be seen a s a Non-Tariff Barrier to trade.
11.6
Origin Criteria
Two basic criteria exist, such as the:
11.6.1 Wholly obtained criterion
Naturally occurring, live animals, plants harvested, minerals extracted from given country. Also covers
goods produced from wholly obtained goods, scrap or waste derived from manufacturing or processing
operations or from consumption.
11.6.2 Substantial/sufficient transformation criterion
Three major criteria to express such.
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Change in tariff classification: good substantially transformed when good is classified in heading or
subheading different from all non-originating materials used.
Merits:
Simplicity and predictability. HS is used for multi-purpose language and established as a common Customs
language.
Demerits:
In HS chapters extensive knowledge is needed (Traders and custom officers are familiar with the HS). This
HS is not always suitable for origin determination purposes.
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A criterion of value added (Ad valorem percentages): a good considered to be substantially
transformed when the value added of good increases up to a specified level expressed by ad valorem
percentage.
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Can be expressed within two ways: Maximum allowance for non-originating materials or minimum
requirement of domestic content
Merits:
Suitable to address certain goods which are refined or value-added. The value provides a simpler threshold
than manufacturing or processing operations.
Demerits:
Lack of predictability and consistency due to currency fluctuation and exposure to transfer pricing. Thus,
difficulty to calculate the real value of the good.
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A criterion of manufacturing or processing operations: a good transformed when the good has
undergone specified manufacturing or processing operations
Merits:
More technical, objective criteria
Demerits:
Frequent modifications to catch up with technological developments. More precise, longer, and detailed texts
required.
11.6.3 Minimal Operations:
A form of specific manufacturing operations found in the Agreement under Non-preferential Rules of Origin
and Preferential trade agreements. As such goods are specifically identified manufacturing operations which
are insufficient to confer origin.
11.6.4 De Minimis or tolerance rule:
This permits a specific share of the value or volume of a final product to be non-originating without the final
product losing its originating status. Within some agreements, such rule is specifically identified. However,
within negative lists of components it may not be included in the allowance or list of products to which the
tolerance rule does not apply.
11.7
Non-preferential rules of origin
A need exists in WTO terms to distinguish non-preferential origin of a product. If a country wish to apply the
WTO rules on anti-dumping duties, countervailing measures, safeguard measures or origin labelling.
11.7.1 The WTO agreement on Rules of Origin
The absence of clear and binding multilateral discipline in the field of rules of origin has been one of the
reasons for utilization of rules of origin as trade policy instruments. The concern over the trade policy
implications of the rules of origin ultimately generated the efforts which matured in the long-awaited
multilateral discipline.
As such the rules of origin can be applied by all WTO Members, however, their own non-preferential rules of
origin. The complexities of national rules lead to complications and increased costs for custom
administrations and for the business community. All members of the WTO will apply harmonized rules of
origin, as part of being a member of the WTO as soon as the WTO Agreement on Rules of Origin is entered
into force. This will bring uniformity on how the origin of a specific product is determined and how the rules
are applied.
11.7.2 Direct consignment rule
Most rules of origin require direct consignment of goods. The product should thus be eligible for origin
treatments and must be transported from the place of production to preferential destination directly. This rule
is to ensure imported goods, in bulk which identity is difficult to establish, are identical with the goods that left
exporting country. This reduce the risk of eligible goods being mixed with non-eligible goods. A certificate of
non-manipulation from transit country can be required in the country of destination.
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11.7.3 Documentary evidence
Evidence for a good to benefit from the preferential regimes. The evidence can be a certificate issued by
competent authorities, a certified declaration of origin certified by a competent body or an origin declaration
made by a commercial document from the supplied, producer, manufacturer, exporter, importer or competent
person.
Competent authority is stipulated in free trade agreements, in general requirements, the procedure of issue,
the validity of the proof of origin and possible exemptions from proof of origin.
11.7.4 Prohibition of duty drawback
The rules of origin preferential trade agreements is that they are accompanies with restrictive administrative
conditions. A frequent condition is prohibition on beneficiary countries to provide exporters with remission or
exemption from import duties on non-originating raw materials or components, where these enter into
products benefiting from preferential treatment when the final product is exported.
11.8
General Common Aspects
11.8.1 Documentary evidence
A specific certificate or declaration identifying a given product, in which authority, manufacturer or a
competent person certify that the goods originate from a specific country. This is required for the following:
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preferential customs duties,
economic or trade measures, whether these are adopted unilaterally or under bilateral or multilateral
agreements, or
Measures adopted for reasons of health or public order.
11.8.2 Verification of Proofs of Origin and Administrative Assistance
Contracting partied of preferential trade agreement as well as that of non-preferential rules of origin shall
upon request provide administrative assistance for control of the origin of goods. The principles of reciprocity
govern the assistance, and the competent authority of the requested party shall only comply with provision if
the competent authority of the requesting party would be able to furnish the assistance if the positions were
reversed.
The competent authority of the importing country may request the competent authority in the exporting
country to carry out control of the proof of origin:
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When there is reasonable doubt as to the authenticity of a document
Where there are reasonable doubts to the accuracy of the information on the document
On a random basis
The requested competent authority shall carry out the necessary controls and reply to the request by
answering questions and furnishing any information which it would require relevant. Such is for verification.
This request shall however not prevent the release of the goods, provided that such is not subject to import
prohibitions or restrictions and no suspicion of fraud exists. According to legislation of the importing a
preference, granting country, goods can be released after payment of preferential import duties or after
payment of import duties. A difference between preferential rate and the most favoured nation rate may be
due in a negative reply to the verification request. A difference between the two rates may be reimbursed in
case a positive reply to verification request. Within false documentary evidence sanctions will depend on the
national legislation.
11.8.3 Origin Fraud
Falling within Commercial Fraud, a high risk of fraud within an origin area due to the level of duties and
complexity of rules of origin. Fraud is discoverable via physical checks of documents, exchange of information
between countries, information from trade associations, studies on cargo vessels or other traffic studies
through statistical tools, studies on the internet. Sanctions relating to fraud in origin depend on the national
legislation both in the exporting and the importing country.
The reasons for fraud in origin are multiple:
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Obtaining illicit access to preferential duty rates via a false indication of the country of origin of the
imported goods
Evading quantitative restrictions in the importing country
Evading import prohibitions on import of goods
Avoiding anti-dumping or countervailing duties in the importing country. The good will in fact penetrate
the market of the importing country and gain a commercial advantage.
Illegally satisfying the documentary requirements laid down in the importing country.
There can be several authors of fraud, including:
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Brokers –in order to keep or to attract customers with “good deals”
Exporters on the demand of the importer – to falsely claim preferential duty rates
Exporters – to abuse consumers in the importing country (if there is attraction for one determined
origin)
Exporters – to avoid anti-dumping or countervailing duties and be able to sell at a good price
Exporters – to realize importation of goods normally subject to prohibitions or restrictions (quotas,
sanitary or Phyto-sanitary requirements etc.) in the country of destination.
11.9
Part 3: Disciplines to Govern the Application of Rules of Origin
Article 2: Disciplines during the transition period
Article 3: Disciplines after the transition period
11.10
Part 3: Procedural Arrangements on Notification, Review, Consultation and
Dispute Settlement
Article 4: Institutions
A committee on Rules of Origin, consisting of Members ensuring consultations, further objectives and
carrying out of responsibilities. A Technical Committee on Rules of Origin under the auspices of the Customs
Co-operation which shall request information and advice from the Committee.
Article 5: Information and Procedures for Modification and Introduction of New Rules of Origin
Each member to provide the Secretariat, the date of entry into force of the WTO Agreement, the rules of
origin, judicial decisions and administrative rulings of general application relating to rules of origin. Members
which introduce modifications, which are not included, shall publish a notice before the entry into force to
enable interested parties to become acquainted with the intention to modify rule of origin or introduction of
new rule of origin.
Article 6: Review
The committee is to review the implementation and operations with regards to objectives annually. It will
propose amendments as necessary. Further the Committee in co-operation with Technical Committee shall
set mechanisms and propose amendments for the harmonization work programme.
Article 7: Consultation
Consultation will be elaborated and applied by the Dispute Settlement Understanding as per Article XXII of
GATT 1994.
Article 8: Dispute Settlement
Consultation will be elaborated and applied by the Dispute Settlement Understanding as per Article XXII of
GATT 1994.
11.11
Part 4: Harmonization of Rules of Origin
Article 9: Objectives and Principles
Annex 1: Technical Committee on Rules of Origin
Annex 2: Common Declaration with Regard to Preferential Rules of Origin
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12.
GATS
General Agreement on Trade in Services
Trade agreements seek to encourage international competition in a vast range of service sectors.
The new trade agreements encompass everything that you cannot drop on your foot, and include
banking, telecommunications, postal services, tourism, transportation, waste disposal, oil and gas
production and electricity. They also cover those services universally considered to be essential to
human health and development, like healthcare, education and drinking water.
In many countries, citizens’ access to essential services as well as a fundamental function of
government is to ensure and protect this access. Traditionally, this has meant that governments
have provided the services themselves. While we often don't think of essential services as primarily
profit-making operations, many essential services such as health care and schools have proved
highly profitable when privatized and freed from public interest regulation.
For corporations, health care and education represent a combined $5.5 trillion market worldwide,
and the new trade agreements like the WTO General Agreement on Trade in Services (GATS)
would increase their access to that market, without building in protections for consumers, workers
or the environment. It came into effect in 1995 was the first multilateral agreement covering this
important and growing area of services trade.
The GATS is a product of complex, protracted and difficult negotiations among a large number of
countries, both developing and developed. It has a potentially broad scope of application, in the
sense that most measures imposed by governments – national, regional and local –affecting trade
in services are covered, with the important exception of services supplied in the exercise of
governmental authority and certain specific sectors, such as air transport services. Having said this,
Members were permitted to exempt certain service sectors from the scope of the GATS by taking
Annex II Exemptions in strict compliance with the provisions of Article II and that Annex.
However, the general obligations that apply to all measures affecting trade in services are few, most
notably the most-favoured-nation (“MFN”) and transparency obligations. Many other key obligations,
such as market access and national treatment, apply only when and if a WTO Member has decided
to make specific commitments relating to a particular service sector in its Schedule.
The GATS is a complex web of rights, obligations, exemptions/exceptions, and specific
commitments. Its obligations cannot be understood without reference to all of the relevant legal
documents: the text of the GATS itself, the MFN exemptions taken pursuant to the Annex on Article
II Exemptions and listed in WTO Members’ Schedules; the specific commitments on market
access, national treatment, and additional commitments inscribed in Members’ Schedules; the
Annexes to the GATS, which deal with certain sectors and subjects such as Air Transport Services,
Financial Services, Maritime Transport Services, Telecommunications and Movement of Natural
Persons, Ministerial Decisions and Declarations and, subsequent Protocols that have been entered
into with respect to certain services sectors. Depending upon the subject matter of a particular
dispute, the applicable legal provisions may be contained in a number of these different documents.
GATS remains a “work in progress”. Although there are many important obligations contained in the
text of the GATS, most of the real obligations and commitments are contained in Members’
Schedules.
The GATS called for negotiations on basic telecommunications and financial services. Sectoral
agreements were reached on these subjects among groups of countries, and their results were
implemented as specific commitments in those Members’ Schedules.
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Given the obvious importance of the rights and obligations in the GATS for this extensive and
growing sector of the world economy, it is perhaps surprising that so few disputes have been brought
relating to this Agreement in the WTO to date.
Council for Trade in Services:

This Council on Trade in Services operates under the guidance of the General Council (WTO
General Council) and is responsible for overseeing the functioning of the General Agreement
on Trade in Services (GATS).
 It is open to all WTO members, and can create subsidiary bodies as required.
Articles in GATS:
Article I:3(a) of the GATS defines the expression “measures by Members” very broadly. According
to this definition, the GATS covers virtually all levels of government activity – central, regional or
local as well as non-governmental bodies that have powers delegated to them by governments.
Article I:3(a) reads as follows:
Article 3 (scope & definition)
For the purposes of this Agreement:
(a) “measures by Members” means measures taken by:
(i) central, regional or local governments and authorities; and
(ii) non-governmental bodies in the exercise of powers delegated by central, regional
or local governments or authorities.
In fulfilling its obligations and commitments under the Agreement, each Member shall take
such reasonable measures as may be available to it to ensure their observance by regional
and local governments and authorities and non-governmental bodies within its territory.
The term “measure” is defined in Article XXVIII of the GATS as follow:
(a) “measure” means any measure by a Member, whether in the form of a law, regulation, rule,
procedure, decision, administrative action, or any other form.
As a result of the combined effect of above two definitions, the obligations and disciplines of the
GATS apply to all forms of intervention by central, regional, and local governments as well as nongovernmental bodies with delegated governmental powers.
A “measure” includes laws, regulations, rules and decisions of courts and administrative authorities,
but it also covers practices and actions of governments or non-governmental bodies with delegated
governmental powers. Examples of measures would include legislation of a Member, by-laws of a
municipal authority, and rules adopted by professional bodies in respect of professional
qualifications and licensing. All such measures could potentially come within the scope of the GATS.
It is important to note that each Member has an obligation to take reasonable measures to ensure
that all “sub-national” levels of government and non-governmental bodies with delegated
governmental powers within its territory comply with the disciplines of the GATS.
The question of whether a particular action of a government constitutes a “measure by a Member”
within the meaning of Article I:1 has not specifically arisen as yet in any WTO dispute settlement
case. The scope of the GATS, however, does not extend to actions of purely private persons or
enterprises which do not exercise any delegated governmental powers.
The phrase “affecting trade in services” has been interpreted by the Appellate Body. In Canada –
Autos case, the Appellate Body stated that “two key issues must be examined to determine whether
a measure is one ‘affecting trade in services’”. Those issues are:
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First, whether there is “trade in services” in the sense of Article I:2; and, second, whether the
measure in issue “affects” such trade in services within the meaning of Article I:1.
12.1
Trade in Services
The first issue to determine in a particular dispute settlement case is whether there is “trade in
services”. Article I:2 of the GATS defines the concept of “trade in services” as “the supply of a
service” within one of four defined “modes of supply”. It reads as follows:
(2) For the purpose of this Agreement, trade in services is defined as the supply of a service:
(a) from the territory of one Member into the territory of any other Member.
(b) in the territory of one Member to the service consumer of any other Member.
(c) by a service supplier of one Member, through commercial presence in the territory of any
other Member.
(d) by a service supplier of one Member, through presence of natural persons of a Member
in the territory of any other Member.
The above definition of “trade in services” through the four different modes of supply is fundamental
to understanding the scope and operation of the GATS. It is especially important when in relation to
specific commitments inscribed by Members in their GATS Schedules relating to market access and
national treatment. Each mode is described, and examples given below.
Paragraph (a) of Article I:2 – “Mode 1” – describes what is often called the “cross-border” mode
of supply. It involves supply of a service across the border from the territory of one Member into the
territory of another Member.
One example is an enterprise in one Member providing transportation services for waste material
from one country being transported into another country for disposal. Another example is a transfer
of funds from a bank in one country to a financial institution or a customer in another country.
Paragraph (b) of Article I:2 – “Mode 2” – describes the “consumption abroad” mode of supply. It
deals with the situation where the consumer of a service travels to the territory of another Member
in order to consume the services.
The most common example of services provided under Mode 2 is tourism services. Another
example is a person resident in the territory of one Member travelling to the territory of another
Member in order to receive medical treatment.
Paragraph (c) of Article I:2 – “Mode 3” – describes what is called “commercial presence”. The
supply of services under this mode requires that the service provider of a Member has established
a commercial presence in the territory of another Member. Article XXVIII of the GATS defines
“commercial presence” as follows:
(d) “commercial presence” means any type of business or professional establishment,
including through
(i) the constitution, acquisition or maintenance of a juridical person, or
(ii) the creation or maintenance of a branch or a representative office, within the
territory of a Member for the purpose of supplying a service.
An example of Mode 3 would be the provision of financial or banking services by a branch office of
a South African bank operating within the territory of Namibia. Another example would be legal
services provided by lawyers in an office in Namibia of a law firm based in South Africa.
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Paragraph (d) of Article I:2 “by a service supplier of one Member, through presence of natural
persons of a Member in the territory of any other Member” – “Mode 4” – describes the mode of
supply known as “movement of natural persons”. This is where a service provider of one Member
travels to the territory of another Member in order to supply the service. An example would be the
case of a doctor from one Member who travels to the territory of another Member to perform surgery
on a patient. This mode requires the presence of natural persons of another country within the
territory of the Member where they are supplying a service.
Mode 4 refers to the temporary migration of workers, to provide services or fulfill a service
contract. Because the current framework of Mode 4 allows for only temporary movement of workers
across borders to provide services, and their visa as well as their right to stay and work are tied to
their original terms of employment or contract and to their employer.
Misconceptions of GATS:
 Civil society representatives have repeatedly voiced concerns about public policy implications
of the GATS. Such concerns revolve, inter alia, around the Agreement’s perceived impact on
governments’ ability to regulate socially important services and ensure equitable access
across regions and population groups. It has been alleged that the concept of progressive
liberalization, combined with the commercialization of some public services in individual
countries, could result in subjecting core governmental activities to external (multilateral)
disciplines.
 There have also been assertions that the Agreement contravenes basic notions of national
sovereignty, requiring governments against their will to liberalize access and/or to accept
constraints on socially motivated subsidy schemes.
 The complexity of the GATS and the absence, in potentially relevant areas, of authoritative
legal interpretations may have added a sense of uncertainty.
 In response, the WTO Secretariat has authored, or contributed to, several publications
explaining the structure and functioning of the Agreement and, by the same token, debunking
frequently traded myths. Relevant sources include a Special Study, Market Access:
Unfinished Business, a brief booklet, GATS: Fact and Fiction, and a Joint Study with the
WHO, WTO Agreements & Public Health.
 The Facts:
 First and foremost, it may be worth reiterating one of the core concepts of the Agreement,
the distinction between services liberalization and deregulation. Domestic
regulations are not considered as barriers to market access and national treatment under
the GATS and, therefore, are not subjected to trade negotiations. No WTO Member has
ever questioned this basic tenet.
 Moreover, there are various exemption clauses in the Agreement, including Articles XII,
XIV and XIV bis, that allow governments to ignore their obligations in specified
circumstances with a view, for example, to protecting public security or life and health.
The Secretariat is not aware of any cases to date where these provisions proved
insufficient to address legitimate policy interests.
 Should a Member feel the need to withdraw or modify its market access and national
treatment obligations in a given sector, procedures are available under Article XXI. At the
request of affected trading partners, the modifying Member is required to negotiate any
necessary compensatory adjustment and, if unsuccessful, to accept arbitration. These
procedures have been invoked only recently, after a long time since the Agreement
entered into force. In turn, this testifies to the continued scope for political flexibility,
despite the existence of scheduled commitments, in critical circumstances.
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 Services provided in the exercise of governmental authority are fully exempt from
coverage.
 No changes are envisaged in the new rounds of negotiations. The Negotiating Guidelines
and Procedures explicitly provide that the existing structure and principles of the GATS
shall be respected.
 Consensus is the basic decision-making principle in the WTO. Like the GATT or the
TRIPS Agreement, the GATS thus poses no risk to national sovereignty. It is simply not
possible in negotiations within the purview of WTO to outvote a Member and/or subject it
to disciplines that it is not prepared to accept. Moreover, it is worth bearing in mind that,
as a last resort, nothing would prevent a frustrated government from quitting the
Organization altogether. However, this has not happened to date.
 On the contrary, GATT/WTO membership has continued to prove highly attractive.
12.2
Complexity of the GATS:
The GATS is structurally more complex than the GATT. Among the most conspicuous differences
are the existence of four modes of supply and of two distinct legal parameters – market access and
national treatment – to determine conditions of market entry and participation. Thus, while a tariff
schedule under GATT, in its simplest form, displays one tariff rate by sector, all specific
commitments under the GATS consist of at least eight inscriptions, four each under market access
and national treatment.
This relatively complex structure is intended to enable Members to accommodate sector- or modespecific constraints that they may encounter in the scheduling process and to liberalize progressively
their services trade in line with their national policy objectives and levels of development. Complexity
can thus be viewed, in part, as a precondition for effectiveness and flexibility.
Nevertheless, national administrations, in particular in small developing countries, may harbor
doubts. From their perspective, the complexity of the Agreement implies a formidable negotiating
challenge. It not only complicates internal decision-making and consultation procedures with other
ministries and the private sector but commands more attention (and resources) in the interpretation
of requests received from, and the preparation of offers to be sent to, trading partners.
The Agreement seeks to address such concerns. First, it expressly recognizes the situation of
developing countries and provides individual Members with “appropriate flexibility” for opening fewer
sectors and liberalizing fewer types of transactions in line with their development situation.
While these provisions in Article XIX:2 may have been intended mainly to protect developing
countries from overly ambitious commitments that, especially in the absence of appropriate
regulatory frameworks, may cause excessive adjustment pains, they also protect from undue
negotiating pressure across too wide a range of sectors and policy areas.
Moreover, Article XXV of the GATS expressly recognizes the need for the WTO Secretariat to
provide technical assistance to developing countries. The Article needs to be read in conjunction
with the Negotiating Guidelines and Procedures of March 2001 and, even more important, the Doha
Ministerial Declaration of November 2001. The Declaration further emphasizes, and elaborates on,
the role and necessity of technical co-operation and capacity building.
12.3
General obligations and disciplines:
These obligations are contained in Part II: General Obligations and Disciplines of the GATS. Of
these, the most important substantive obligation that applies to all measures affecting trade in
services is the obligation on Members to provide MFN treatment, that is, to provide services and
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service suppliers of any other Member treatment no less favorable than the Member accords to like
services and service suppliers of any other country.
This Part II also establishes certain general transparency obligations and provides important
exceptions for certain economic integration agreements and labor markets integration agreements
that meet prescribed requirements. In addition, it contains certain provisions designed to ensure
transparency and due process on subjects such as domestic regulation, recognition of standards
and criteria for the authorization, licensing and certification of service suppliers, monopolies and
exclusive service suppliers, business practices, payments and transfers, and government
procurement.
There are provisions allowing restrictions on trade in services to be imposed in the event of serious
balance-of-payments or external financial difficulties, as well as general exceptions and security
exceptions providing legal justification for certain measures taken to protect certain enumerated
social, environmental or security policy objectives. Finally, provisions in this Part II mandate further
negotiations in areas including domestic regulation, emergency safeguard measures, subsidies and
government procurement.
12.4
MFN Treatment
Under Article II of the GATS, each Member is required to “accord immediately and unconditionally
to services and service suppliers of any other Member treatment no less favorable than that it
accords to like services and service suppliers of any other country”.
This MFN obligation applies generally to all services and all service suppliers (through all modes of
supply), except where MFN exemptions have been inscribed in a Member’s List of MFN Exemptions
in its Schedule in accordance with the terms and conditions of the Annex on Article II Exemptions:
Key terms to consider in interpreting the MFN obligation are: “services”, “service suppliers” and “like
services and service suppliers”. The term “services” is defined very broadly in Article I:3(c) of the
GATS to include “any service in any sector except services supplied in the exercise of governmental
authority”.
“Service supplier” is defined as “any person who supplies a service” and includes natural and
juridical persons as well as service suppliers which provide their services through forms of
commercial presence, such as a branch or a representative office.
It is important in any dispute involving claims under the GATS to first identify the precise nature of
the services at issue in the case. Typically, Members have listed service sectors and sub-sectors
according to the Services Sectoral Classification List which refers to the more detailed United
Nations Central Product Classification system (“CPC”). In the EC – Bananas III case, for example,
there was a dispute about whether the relevant services were “distributive trade services”, a
relatively broad sector, or “wholesale trade services”, a narrower sub-sector, as described in a
headnote to section 6 of the CPC. It is also necessary to identify the relevant modes of supply of
the service and who the suppliers of the service are. This is not as easy as it may seem.
The Appellate Body clarified that the MFN obligation in Article II of the GATS applies both to de jure
as well as to de facto discrimination. A measure may be said to discriminate de jure in a case in
which it is clear from reading the text of the law, regulation or policy that it discriminates among
services or services suppliers of different countries. If the measure does not appear on the face of
the law, regulation or policy to discriminate, it may still be determined to discriminate de facto if on
reviewing all the facts relating to the application of the measure, it becomes obvious that it
discriminates in practice or in fact.
In this case, the Appellate Body stated as follows:
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The obligation imposed by Article II is unqualified. The ordinary meaning of this provision does not
exclude de facto discrimination. Moreover, if Article II was not applicable to de facto discrimination,
it would not be difficult – and, indeed, it would be a good deal easier in the case of trade in services,
than in the case of trade in goods – to devise discriminatory measures aimed at circumventing the
basic purpose of that Article [Article 1:3 (c)].
In order to determine whether services or service suppliers of different countries – for example,
Country A and Country B – are discriminated against, it is necessary to examine: 1) the origin of the
services and/or the service suppliers; and 2) whether the services and/or service suppliers of
Country A and Country B are “like”. With respect to the supply of services across borders (Mode 1),
the location of the service supplier is critical in determining the origin of the service. In other words,
if the suppliers of the service at issue are located in Country A as well as in Country B, then the
origin of the service is the same as the location of the service supplier. If a service is supplied through
commercial presence (Mode 3), the key factor in determining the origin of the service is the origin
of the supplier.
The terminology used in the GATS is “a service supplier of another Member”, which can include
either “a natural person of another Member” or “a juridical person of another Member”. A
“natural person of another Member” is defined as a natural person who resides in the territory of that
other Member or a national or, in certain cases, a resident of that other Member. A “juridical person
of another Member” can be either: 1) a juridical person which is constituted or otherwise organized
under the law of that other Member and is engaged in substantive business operations in the territory
of that other Member; or, 2) in the case of a service that is supplied through commercial presence,
a juridical person which is owned or controlled by natural or juridical persons of that other Member.
The issue of whether services or service suppliers of different Members are “like” has only been
addressed peripherally in one WTO dispute to date. Although lessons could obviously be drawn
from the interpretation of the term “like products” in provisions of other agreements, such as Article
III:2 and Article III:4 of the GATT 1994, the terms “like services” and “like service suppliers” in the
context of the GATS raise much more difficult conceptual problems.
In EC – Bananas III case, the panel held that:
The nature and the characteristics of wholesale transactions as such, as well as each of the
different subordinated services mentioned in the headnote to section 6 of the CPC, are “like”
when supplied in connexon with wholesale services, irrespective of whether these services
are supplied with respect to bananas of EC and traditional ACP origin, on the one hand, or
with respect to bananas of third-country or non-traditional ACP origin, on the other...
Indeed, it seems that each of the different services activities taken individually is virtually the
same and can only be distinguished by referring to the origin of the bananas in respect of
which the service activity is being performed. Similarly, ... to the extent that entities provide
these like services, they are like service suppliers.
Thus, it is reasonably obvious that services that are the same or similar to each other should be
determined to be “like”. A determination of the “likeness” of services should include an examination,
on the facts, of the characteristics of the service, its classification and description in the CPC, and
an analysis of consumer preferences.
In EC – Bananas III case, the panel found that wholesale transactions and subordinated services
described in the headnote to section 6 of the CPC were “like” when supplied in connection with
bananas originating from certain countries with the same type of wholesale services supplied in
connection with bananas originating from other countries. That panel, however, also assumed that
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when there are suppliers which are providing services that are “like”, those suppliers will also be
“like service suppliers”. There has been no case to date other than the first panel report in EC –
Bananas III that has examined the question of whether services are “like services” or whether
service suppliers are “like service suppliers”.
There could be much more difficult situations in other cases in which it would not be as clear that all
service suppliers supplying the same or similar services would necessarily be “like service
suppliers”. In addition to the characteristics of the services that the service suppliers provide, there
could be other supplier- related factors that could demonstrate that the suppliers are not “like”. Such
factors might include the size of the enterprises, the nature of their businesses, the number of
employees, the types of assets they possess, the nature of their technological activities, or in the
case of professionals, their education and training. There could be situations in which the service
suppliers, examined from the perspective of supplier-related factors rather than the characteristics
of the service, are sufficiently different from each other that they could be found to be not “like service
suppliers”.
In Canada – Autos case, the Appellate Body stated that the analysis of whether or not a measure
is consistent with Article II:1 of the GATS should proceed in several steps. First, a threshold
determination must be made under Article I:1 that the measure is covered by the GATS. This
requires that a demonstration that there is “trade in services” in one of the four modes of supply,
and also that the measure at issue “affects” this trade in services. Once that is demonstrated, the
next step is to compare, on the facts, the treatment by the Member concerned of the services or
service suppliers at issue of one Member with the treatment of the “like services” or “like service
suppliers” of any other country. In Canada – Autos the Appellate Body emphasized that panels
must be careful to analyze the effect of the measure on the conditions of competition among the
service suppliers “in their capacity as service suppliers”.
The MFN obligation in Article II:1 applies to both de jure and de facto discrimination, as determined
by the Appellate Body in EC – Bananas III case.
Therefore, in order to determine whether or not services or services suppliers of one Member have
been treated less favorably than services or service suppliers of another country, a panel must
analyze, on the facts, whether the measure has altered, or has the potential to alter, the conditions
of competition between the services or service suppliers of one Member as compared with like
services or like service suppliers of another country. This analysis will necessarily be very fact
intensive.
Finally, it is important to note that the MFN obligation in Article II:1 applies very broadly to all
“measures by Members affecting trade in services” in all service sectors, with the important
exceptions of services supplied in the exercise of governmental authority, and measures listed in a
Member’s Schedule and meeting the conditions of the Annex on Article II Exemptions. Such
measures include subsidies.
12.5
Transparency in GATS:
 There is a general obligation in Article III of the GATS requiring each Member to “publish
promptly” “all relevant measures of general application which pertain to or affect the operation
of” the GATS.
 Members are required to “promptly or at least annually” inform the Council for Trade in
Services of the introduction of any new, or any changes to existing, laws, regulations or
administrative guidelines which “significantly affect trade in services covered by its specific
commitments” under the Agreement.
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 Members are also required to respond promptly to all requests from other Members for
specific information on any of their measures of general application, and also to establish
enquiry points to provide such specific information to other Members.
12.6
Increasing Participation of Developing Countries in GATS
 In Article IV of the GATS the special needs of developing and especially least-developed
countries are recognized.

In particular, the increasing participation of developing country Members in world services
trade is to be facilitated through negotiated specific commitments, by different Members, in
their Schedules, relating to: the strengthening of developing countries’ domestic services
capacity, efficiency and competitiveness, including through access to technology; the
improvement of developing countries’ access to distribution channels and information
networks; and the liberalization of market access in sectors and modes of supply of export
interest to developing countries.
 Special priority is to be given to least-developed countries, and particular account shall be
taken of the serious difficulties such countries have in accepting negotiated specific
commitments in view of their special economic situation and their development, trade and
financial needs.
12.7
Economic Integration and Labour Markets Integration Agreements in GATS
Economic integration, or regional, agreements are permitted under Article V of the GATS, but only
if such agreements meet the following conditions:
(a) they must have substantial sectoral coverage (which is understood in terms of the number
of sectors, the volume of trade affected and the modes of supply); and
(b) they must provide for the absence or elimination of substantially all discrimination, in a
national treatment sense, between or among the parties in all of the covered sectors, either
at the time of entry into force of the agreement or, within a reasonable time-frame.
Where developing countries are parties to an economic integration agreement, flexibility is to be
provided with respect to the above requirements, particularly with reference to paragraph (b) above,
in accordance with the level of development of the countries concerned, both overall and in individual
sectors and subsectors.
There is also an obligation, similar to the provision in Article XXIV of the GATT 1994, that any such
agreement shall be designed to facilitate trade between the parties to the agreement and shall not
raise the overall level of barriers to trade in services with respect to any Member outside the
agreement.
The GATS also do not prevent any of its Members from being a party to an agreement establishing
the full integration of the labor markets between or among Members, provided that such an
agreement:
(a) exempts citizens of parties to the agreement from requirements concerning residency and
work permits; and
(b) is notified to the Council for Trade in Services.
Monopolies and Exclusive Service Suppliers; Restrictive Business Practices
(Article VIII of GATS)
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With respect to monopolies and exclusive service suppliers, each Member is required to ensure that
such suppliers within their territories do not act in a manner inconsistent with that Member’s MFN
obligations and specific commitments.
Furthermore, where a Member’s monopoly supplier competes, either directly or indirectly, in the
supply of a service outside of the scope of its monopoly rights, that Member is required to ensure
that such a supplier does not abuse its monopoly position to act in a manner inconsistent with that
Member’s commitments under the GATS. These requirements apply also to exclusive service
suppliers where a Member, through its regulation, authorizes or establishes a small number of
service suppliers and substantially prevents competition among those suppliers.
(Article IX of GATS)
Members also recognize that certain business practices of service suppliers may restrain
competition and restrict trade in services. Members are required to enter into consultations with
other Members, upon request, with a view to eliminating such restrictive business practices.
12.8
General Exceptions and Security Exceptions (ARTICLE XIV)
 Article XIV provides for exceptions from the obligations and commitments under the GATS
for any measures of a Member that are necessary to protect or maintain certain specified
public policy goals.
 These exceptions are subject to the general requirement in the chapeau that such measures
must not be “applied in a manner which would constitute a means of arbitrary or unjustifiable
discrimination between countries where like conditions prevail, or a disguised restriction on
trade in services”.
 In any dispute settlement case in which claims are brought against a Member relating to
obligations or specific commitments under the GATS, the defending Member may plead one
of the exceptions contained in Article XIV in its defense.
 The burden of proof in pleading an exception is on the party seeking to invoke it. In order to
claim the benefit of this defense, the defending party must first demonstrate that its measure
meets the requirements of one of the enumerated paragraphs.
For example, if such a party seeks to invoke paragraph (a) of Article XIV, it would have to prove that
its measure is “necessary to protect public morals or to maintain public order”. This provision has
never been interpreted, and neither has a similar provision in Article XX(a) of the GATT 1994. With
respect to the “public order” justification, there is a footnote to paragraph (a) which clarifies that this
exception “may be invoked only where a genuine and sufficiently serious threat is posed to one of
the fundamental interests of society”.
Article XIV reads as follows:
Subject to the requirement that such measures are not applied in a manner which would constitute
a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail,
or a disguised restriction on trade in services, nothing in this Agreement shall be construed to
prevent the adoption or enforcement of any Member measures:
(a) necessary to protect public morals or to maintain public order.
(b) necessary to protect human, animal or plant life or health.
(c) necessary to secure compliance with laws or regulations which are not inconsistent with
the provisions of this Agreement including those relating to:
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(i) the prevention of deceptive and fraudulent practices or to deal with the effects of a
default on services contracts.
(ii) the protection of the privacy of individuals in relation to the processing and
dissemination of personal data and the protection of confidentiality of individual
records and accounts.
iii) safety.
(d) inconsistent with Article XVII, provided that the difference in treatment is aimed at ensuring
the equitable or effective imposition or collection of direct taxes in respect of services or
service suppliers of other Members.
(e) inconsistent with Article II, provided that the difference in treatment is the result of an
agreement on the avoidance of double taxation in any other international agreement or
arrangement by which the Member is bound.
12.9
Specific Commitments in GATS [ART XX]
The obligations contained in Part III of the GATS relating to market access, national treatment and
additional commitments apply only to the extent that a Member has inscribed specific commitments
with respect to specific service sectors in its Schedule of Specific Commitments (“Schedule”).
Market access commitments for specific service sectors are bindings which prescribe the minimum
treatment that a foreign service or service supplier must be accorded by the Member concerned.
The Member may always accord better treatment in practice than that to which it has committed
itself in its Schedule. However, the specific commitment, with any particular conditions, qualifications
or limitations inscribed in the relevant column, indicates the lowest, or the worst permissible
treatment that the Member concerned is required to accord in regard to that service sector to foreign
services and service suppliers.
The principle of national treatment, which is a cornerstone of the GATS, is applied very differently
than it is under the GATT 1994. In the GATS, this fundamental principle of non-discrimination
applies only to those service sectors specifically designated by a Member in its Schedule.
Even when a Member decides to make specific commitments on market access or national
treatment for specific services sectors, such commitments may be made subject to certain
conditions, qualifications and limitations specified in the relevant columns of its Schedule. Thus, the
obligations of a Member on market access and national treatment, cannot be understood without
reference to the specific commitments made in relation to specific service sectors in that Member’s
Schedule.
MARKET ACCESS (ARTICLE XIV)
Article XVI of the GATS provides for each Member to undertake market access commitments
relating to specific service sectors by inscribing them in its Schedule. In contrast with the general
obligations which apply to all services and service suppliers, market access commitments are limited
in application to the service sectors inscribed in a Member’s Schedule. With respect to sectors not
included in its Schedule, a Member is not subject to any commitments on market access.
Given that services can be internationally traded through four different modes of supply, market
access in the GATS means more than simply importing the service into the national market in which
it will be consumed. Mode 1 (cross-border supply) contemplates the cross-border movement of the
service from the supplier in one country to the consumer in another country, like trade in goods.
However, Modes 2, 3 and 4 contemplate the movement of the service consumer, capital, or the
service supplier from the territory of one Member into the territory of another Member.
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Paragraph 1 of Article XVI requires each Member to accord, with respect to market access through
the modes of supply identified in Article I, treatment no less favorable than that provided for under
the terms, limitations and conditions agreed and specified in its Schedule. In inscribing a market
access commitment for a particular service sector in its Schedule, a Member binds itself to the
minimum, or the lowest possible, treatment that it is required to accord to foreign services or
suppliers in that sector. In practice, any Member may always accord to foreign services and service
suppliers better or a higher level of treatment than that inscribed in its Schedule.
Paragraph 2 of Article XVI describes how market access commitments operate. For the service
sectors listed in its Schedule, a Member is required not to maintain or adopt any of the limitations or
restrictions on market access that are specified in the six subparagraphs of paragraph 2, unless the
Member has indicated otherwise in its Schedule. For sectors where a Member makes market access
commitments, the list contained in paragraph 2 is a list of limitations and restrictions that would
otherwise be inconsistent with the GATS unless a Member has inscribed specific conditions or
qualifications protecting such measures.
These six forms of measures restricting market access that may not be applied to foreign services
and their suppliers unless their use is provided for in a Member’s Schedule are:
(a) limitations on the number of service suppliers whether in the form of numerical quotas,
monopolies, exclusive service suppliers or the requirements of an economic needs test.
(b) limitations on the total value of service transactions or assets in the form of numerical
quotas or the requirement of an economics needs test.
(c) limitations on the total number of service operations or on the total quantity of service
output expressed in terms of designated numerical units in the form of quotas or the
requirement of an economic needs test.
(d) limitations on the total number of natural persons that may be employed in a particular
service sector or that a service supplier may employ and who are necessary for, and directly
related to, the supply of a specific service in the form of numerical quotas or the requirement
of an economics needs test.
(e) measures which restrict or require specific types of legal entity or joint venture through
which a service supplier may supply a service.
(f) limitations on the participation of foreign capital in terms of maximum percentage limit on
foreign shareholding or the total value of individual or aggregate foreign investment.
The following are some examples of the types of market access restrictions that may be
found in a Member’s Schedule:
1. A rule that foreign service suppliers may only establish a specified number of branches or
subsidiaries with the territory of a Member.
2. A ceiling on the number of service transactions that can be entered into with foreign service
suppliers.
3. A requirement that foreign service suppliers be incorporated or otherwise constituted in a certain
legal form under the law of the Member.
4. Nationality requirements for suppliers of services or for their boards of directors.
5. A limitation on the time that foreign radio or television signals may be broadcast on a national
network.
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6. A restriction on the amount of equity that foreign nationals may have in a domestic service
supplier.
Even in sectors listed in a Member’s Schedule, Article XVI does not necessarily impose the
obligation to grant unconditional and unfettered market access to all foreign services and service
suppliers. By inscribing limitations, conditions and qualifications in the relevant columns of their
Schedule, Members can effectively tailor the extent of the commitments they make so as to preserve
their rights to maintain or adopt restrictions on market access in specific scheduled sectors.
12.9.1 National Treatment (ARTICLE XVII)
Like Article XVI of the GATS, the national treatment obligation contained in Article XVII does not
apply generally to all measures affecting trade in services, but instead is triggered by the specific
commitments undertaken by each Member. It applies only to the particular service sectors with
respect to which a Member has made specific commitments. These commitments are set out in the
national treatment column of each Member’s Schedule.
Unlike Article XVI, however, Article XVII does not set out a definitive list of measures that would
always be incompatible with the national treatment obligation for scheduled sectors. Rather, it
stipulates that in the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out in that Schedule, each Member is required to accord to foreign services and
service suppliers, in respect of all measures affecting the supply of services, treatment no less
favourable than that it accords to its own like services and service suppliers.
For the sectors in which a Member has made commitments, the national treatment obligation in the
GATS is, in principle, similar to the national treatment obligation in the GATT 1994. The general
requirement is that a Member cannot maintain or impose a measure - a law, regulation, policy or
practice - that discriminates against foreign services or service suppliers as compared to like
domestic services or service suppliers.
Paragraph 2 of Article XVII clarifies that in order to meet the “no less favourable treatment”
standard, a Member may provide “either formally identical or formally different treatment” to foreign
services or service suppliers compared to the treatment it accords to its own domestic “like services
and service suppliers”.
Whether formally identical or formally different, treatment will be “considered to be less favourable
if it modifies the conditions of competition in favour of services or service suppliers of the Member
compared to like services or service suppliers of any other Member”. The key requirement is that
Members must not maintain or adopt measures which modify, in law or in fact, the conditions of
competition in favour of a Member’s own services or service suppliers.
12.9.2 Additional Commitments (ARTICLE XVIII)
Article XVIII of the GATS allows Members to negotiate “additional commitments affecting trade in
services not subject to scheduling under Articles XVI and XVII”. Such commitments may include,
but are not limited to, undertakings with respect to qualifications, technical standards, licensing
requirements or procedures, and other domestic regulations such as those covered by Articles VI,
VIII and IX of the GATS. Additional commitments are required to be inscribed in a Member’s
Schedule.
12.9.3 Schedules of Specific Commitments
The specific commitments assumed by Members are inscribed in their GATS Schedules. The extent
to which, and the conditions under which, the market access and national treatment obligations in
Part III of the GATS apply to individual service sectors in any Member can be assessed only by
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referring to the inscriptions in that Member’s Schedule. The Schedules are annexed to the GATS
and form an integral part of the treaty text.
The general part of any Member’s GATS Schedule takes the form of items arranged in four columns,
specifying in each case:
 the sector subject to commitments.
 the terms, limitations and conditions on market access for each scheduled sector designated
by mode of supply.
 the conditions and limitations on national treatment for each scheduled sector designated by
mode of supply.
 the undertakings relating to additional commitments, if any.
 where appropriate, the timeframe for implementation of such commitments; and
 the date of entry into force of such commitments.
The sectoral part of a Member’s Schedule is preceded by “horizontal commitments”, that is, a list of
the commitments and limitations that apply generally to all scheduled sectors. Many of these
horizontal commitments relate to derogations from market access and national treatment obligations
regarding particular modes of supply, such as “presence of natural persons”.
For example, most Members inscribed horizontal commitments to limit the movement of natural
persons in all scheduled service sectors to intra-corporate transfers covering essential personnel or
short-term (i.e., temporary) business visitors not employed in the host country.
Sector-by-sector entries in the Schedules then indicate the nature and extent of the commitments
that each Member has agreed to undertake. Under each designated sector, these commitments are
inscribed separately for each of the four modes of supply. The following is a descriptive list of the
levels of commitments that could be inscribed in a Member’s Schedule:
Full commitment
“None” is inscribed in the Schedule under the relevant mode of supply. This means that the Member
agrees to accord full market access or national treatment rights, with no conditions or qualifications,
to services and service suppliers of other Members.
Commitment with limitations
The Member inscribes the specific limitations, conditions or qualifications that limit the scope of its
market access or national treatment commitments. Often, Members have inscribed specific
measures that they viewed as otherwise inconsistent with the market access or national treatment
obligations.
No commitment
“Unbound” is inscribed in the Schedule under the relevant mode. This indicates that the Member
remains free to maintain or establish any measures inconsistent with the market access and national
treatment obligations.
No commitment technically feasible
The Member indicates that in the sector in question, the supply of the service cannot occur under
one of the modes (e.g., cross-border supply of hairdressing services.
Article XXI of the GATS sets forth rules and procedures under which a Member may modify or
withdraw any specific commitment in its Schedule.
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In order to commence proceedings to modify or withdraw a commitment, at least three years must
have elapsed from the date of the entry into force of that commitment. At the request of any Member
affected by a proposed modification or withdrawal, the Member seeking to modify its commitment
must enter into negotiations with a view to reaching agreement on any necessary compensatory
adjustment In any such negotiations, the objective is “to maintain a general level of mutually
advantageous commitments not less favourable to trade than that provided for in the Schedules of
specific commitments prior to such negotiations”. Any compensatory adjustments agreed through
negotiation with affected Members must be made on an MFN basis.
12.10
Dispute settlement under GATS:
1. Consultations:
•
Under the GATS, as in any other dispute settlement proceeding in the WTO, the parties to a
dispute are required to first consult with each other about the matter in contention. The GATS
contemplate two types of consultations: bilateral and multilateral.
Article XXII.
1. Each Member shall accord sympathetic consideration to, and shall afford adequate opportunity
for, consultation regarding such representations as may be made by any other Member with respect
to any matter affecting the operation of this Agreement. The Dispute Settlement Understanding
(DSU) shall apply to such consultations.
2. The Council for Trade in Services or the Dispute Settlement Body (DSB) may, at the request of a
Member, consult with any Member or Members in respect of any matter for which it has not been
possible to find a satisfactory solution through consultation under paragraph 1.
Finally, a Member may not make a claim under Article XVII of the GATS, dealing with national
treatment, in a case involving a measure that falls within the scope of an international agreement
between the parties to the dispute relating to the avoidance of double taxation. If there is a
disagreement between the Members as to whether a measure falls within the scope of such an
international agreement, both parties may agree to bring this matter before the Council for Trade in
Services. The Council shall then refer such a matter to arbitration, and the decision of the arbitrator
is final and binding on both parties.
12.10.1 Special Procedures for Specific Services Sectors.
The Decision on Certain Dispute Settlement Procedures for the GATS provides that any panel
dealing with complaints relating to trade in services should be composed of well-qualified
governmental or non-governmental individuals who have experience in trade in services and,
include persons with expertise in the sector at issue in the dispute. The Annex on Financial Services
also requires that in any dispute involving financial services, panelists must have the necessary
expertise in prudential issues and other financial matters.
The Annex on Air Transport Services precludes the GATS and its dispute settlement rules and
procedures from applying to any measures affecting:
(a) traffic rights, however granted; or
(b) services directly related to the exercise of traffic rights.
The GATS does apply, however, to measures affecting:
(a) aircraft repair and maintenance services.
(b) the selling or marketing of air transport services; and
(c) computer reservation systems. However, in these latter areas, the dispute settlement rules
and procedures apply only where specific commitments have been assumed by the Member
concerned, and where dispute settlement procedures in other bilateral or multilateral
agreements and arrangements have been exhausted.
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13.
TRIPS
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international
agreement administered by the World Trade Organization (WTO) that sets down minimum
standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO
Members.
The areas of intellectual property that it covers are:
1) Copyright and related Rights (i.e. the rights of performers, producers of sound recordings and
broadcast organizations)
2) Trademarks, including service marks
3) Geographical indications, including appellations of origin
4) Industrial designs
5) Patents (including the protection of new varieties of plants
6) the Layout-designs of integrated circuits; and
7) Undisclosed information, including Trade Secrets and test data.
13.1
What is Intellectual Property?
Intellectual property refers to rights in creations of the human mind which arise under the laws of
patents, copyrights, trademarks, trade secrets, unfair competition, and related laws. Article 2 of the
Convention Establishing the World Intellectual Property Organization (WIPO) defines intellectual
property as follows:
Intellectual property shall include the rights relating to:
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literary, artistic, and scientific works
performances of performing artists, phonograms, and broadcasts
inventions in all fields of human endeavour
scientific discoveries
industrial designs
trademarks, service marks, and commercial names and designations
protection against unfair competition; and
all other rights resulting from intellectual activity in the industrial, scientific, literary, or artistic
fields.
Intellectual property rights (IPRs) are the legal rights given to creators of intellectual property. IPRs
usually give the creator of intellectual property the right to exclude others from exploiting the creation
for a defined period of time. Intellectual property laws provide the incentives that foster innovation
and creativity and strive to ensure that the competitive struggle is fought within certain bounds of
fairness. The protection of IPRs contributes significantly to technological progress, competitiveness
of businesses and our country's well-being.
13.2
Overview of the TRIPS agreement:
The TRIPs Agreement incorporates by reference most of the substantive provisions of: the Paris
Convention for the Protection of Industrial Property (1967) (covering patents, trademarks, trade
names, utility models, industrial designs and unfair competition) and the Berne Convention for the
Protection of Literary and Artistic Works (1971) (covering copyrights).
•
The TRIPs Agreement applies to all WTO Members; it is not a plurilateral agreement (such
as the Agreement on Government Procurement).
•
WTO Dispute Settlement Understanding applies to the TRIPs Agreement (including right of
cross-retaliation in products and services).
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•
Dispute Resolution and Parallel Importation ("International Exhaustion of Intellectual Property
Rights"): "For purposes of dispute settlement under this Agreement" (other than regarding
national treatment and most favored nation obligations), "nothing in this Agreement shall be
used to address the issue of the exhaustion of intellectual property rights." (Article 6)
•
Articles 3 and 4 contain national treatment and most favoured nation obligations, respectively,
concerning the "protection of intellectual property," subject to specified exceptions
(particularly those contained in international conventions such as the Berne Convention for
the Protection of Literary and Artistic Works (1971), the Paris Convention for the Protection
of Industrial Property (1967) and the Rome Convention (International Convention for the
Protection of Performers, Producers of Phonograms and Broadcasting Organizations, on 26
October 1961.)
13.3
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Different types of intellectual property rights:
13.3.1 Patents:
A patent consists of a disclosure of an invention to the public in exchange for a limited period of
time to exclude others from using the invention without the owner's consent.
A patent may be granted if the invention meets the statutory requirements of novelty (it’s new),
utility (it’s capable of practical application), and non-obviousness (the invention would not be
obvious to someone of ordinary skill who practiced in the technical field in question). These
statutory requirements apply to both product and process inventions.
(Patent rules vary from country to country.
A patent contains "claims" which define the scope of invention. A patent also often contains a
drawing illustrating the invention claimed. In most countries the patent applicant must disclose
the "best mode"–the best method known at the time of application–of practicing the invention.
There are two basic types of patents:
1. Product patents (covering the composition of a product (the chemical composition of an
antibiotic) and
2. Process patents (covering a method of producing a product (a process for producing an
antibiotic).
o Both product and process patents are collectively referred to as "utility patents" because
they are capable of industrial application.
o Some countries also permit a special "design patents" covering the ornamental features
of goods (e.g. the shape of a chair). (For example, in the United States such design
patents have a term of 14 years from the date that the patent is granted. The U.S. is one
of the few countries in the world that uses design patents. Most other countries protecting
designs use an "industrial designs" system of protection.
o Patents are territorial – you must file for protection in each country where you want
protection. The Patent Cooperation Treaty (a multilateral convention administered by the
World Intellectual Property Organization) permits nationals from member states
(including the U.S.) to file a single international application in each country in which patent
protection is sought.
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Who Receives the Patent if There are Competing Applications? "First to Invent" vs. "First to
File”:
 In the cases of competing patent applications, the United States awards the patent to the
"first to invent"; However, all other countries (including Namibia) issuing patents award
patents to the “first to file”.
TRIPs Requirements for Patents: Patentable Subject Matter:
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Subject to the exceptions discussed below, patents must be available "for any inventions,
whether products or processes, in all fields of technology, provided they are new, involve an
inventive step and are capable of industrial application." (Article 27.1)
•
Members may bar the patenting of inventions in order to "protect public order or morality,
including to protect human, animal or plant life or health or to avoid serious prejudice to the
environment, provided that such exclusion is not made merely because the exploitation is
prohibited by their law." (Article 27.2)
•
The TRIPs Agreement also permits Members to exclude from patentability: diagnostic,
therapeutic and surgical methods for the treatment of humans or animals; and plants and
animals other than micro-organisms, and essentially biological processes for the production
of plants or animals other than non-biological and microbiological processes. However,
Members must provide for the protection of plant varieties either by patents or by
"effective sui generis system" (e.g. plant breeders rights) or any combination thereof. (Article
27.3)
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Subject to the provisions on transition periods, permissible exclusions from patentable
subject matter, and "mailbox requirements" for pharmaceutical and agricultural chemical
product patent applications, "patents shall be available and patent rights enjoyable without
discrimination as to the place of invention, the field of technology and whether products are
imported or locally produced." (Article 27.1)
Scope of rights:
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TRIPs Agreement requires that a patent must exist for a minimum period of 20 years from the
date of filing of the patent application. (TRIPs Article 33).
A product patent confers on its owner the right to prevent third parties not having the owner's
consent from making, using, offering for sale, selling or importing for such purposes the
patented product. (Article 28.1)
A process patent confers on its owner the right to prevent third parties not having the owner's
consent from the act of using the process, and from using, offering for sale, selling or importing
for such purposes at least the product obtained directly by that process. (Article 28.1)
Members Not Providing Article 27 Consistent Product Patent Protection for
Pharmaceutical and Agricultural Chemicals on 01 January 1995 had to Comply with the
Mailbox/ Exclusive Marketing Rights Requirements in Articles 70.8 and 70.9:
The "mail box" requirements in Article 70.8 enable foreign patent applicants to preserve their
filing dates (a critical issue in "first to file" patent systems) for the eventual award of
pharmaceutical and agricultural chemical product patents once the transition period has
expired.
Similarly, TRIPs Article 70.9 requires that WTO Members not currently in compliance with
TRIPs requirements for pharmaceutical and agricultural chemical product patent protection
provide exclusive marketing rights to applicants for pharmaceutical and agricultural chemical
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product patents, for five years after marketing approval is granted in that Member, or until a
product patent is granted or rejected in the Member, whichever period is shorter, provided that,
subsequent to the entry into force of the WTO Agreement, such patent has been granted and
marketing approval received in another WTO Member.
As noted earlier, the TRIPs Council has agreed to grant a waiver to least-developed countries
until 01 January 2016 regarding the exclusive marketing rights obligation for pharmaceutical
products. This decision was subject to approval by the WTO's General Council.
Report of the Appellate Body, India–Patent Protection for Pharmaceutical and Agricultural
Chemical Products, The Appellate Body determined that India did not provide TRIPs consistent
mailbox and exclusive marketing rights for foreign holders of pharmaceutical and agricultural
chemical product patents, as required by TRIPs Articles 70.8 and 70.9. The Appellate Body
also held that Indian legislation complying with TRIPs Articles 70.8 and 70.9 should have been
in effect since 01 January 1995–the entry into force of the WTO Agreement.
Trade secrets:
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Secret information that has commercial value, which the person lawfully in control of such
information is taking reasonable steps under the circumstances to keep secret (e.g., keeping
the information locked in a safe when not in use, non-disclosure clauses in employment
agreements).
Trade secrets are valuable. Some examples of trade secrets are the Coca Cola formula,
customer lists, and confidential pharmaceutical test data used to obtain governmental
marketing approval.
How do patents and trade secrets differ?
Patents expire at the end of their term (e.g., 20 years from date of filing); trade secrets have no
expiration date as long as they remain secret. Most states Countries have their own laws protecting
Trade Secrets. These laws also vary from one country to another.
TRIPs Agreement
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Article 39.1 requires Members to enable persons who lawfully are in control of "undisclosed
information" (trade secrets) to prevent such information "from being disclosed to, acquired
by, or used by others without their consent in a manner contrary to honest commercial
practices" as long as the information remains a trade secret.
It also Prohibits unfair commercial use of test or other data, the origination of which involved
considerable effort, used in approving the marketing of pharmaceutical and agricultural
chemical products employing new chemical entities. (TRIPs Article 39.3).
13.3.2 Trademark:
 A trademark (or service mark) is any sign or combination of signs capable of distinguishing
the goods or services of one firm from another. Some countries have two types of trademarks:
registered and unregistered trademarks.
 Most common law jurisdictions grant trademarks on the basis of “first use”. By contrast, civil
law jurisdictions usually grant trademarks on the basis of “first to register”.
 Trademarks are territorial; if you want trademark protection in another country, you must file
in that country; international protection through the Madrid Protocol is possible. The Madrid
Protocol permits the nationals of Madrid Protocol members to file a single international
trademark application to obtain protection in multiple members of the Madrid Protocol.
 Six-month priority periods for foreign trademark filings under the Paris Convention for the
Protection of Industrial Property (1967).
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TRIPs Agreement and Trademarks
 TRIPs Agreement incorporates the substantive obligations of Articles 1 through 12 and Article
19 of the Paris Convention for the Protection of Industrial Property (1967). The TRIPs
Agreement mandates protection for both trademarks and service marks. Trademarks and
service marks must have a minimum term of seven years and must be renewable
indefinitely. (Article 18)
Restrictions on cancellation of trademark registrations for non-use:
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"If use is required to maintain a registration, the registration may be cancelled only
after an uninterrupted period of at least three years of non-use, unless valid reasons
based on the existence of obstacles to such use are shown by the trademark owner.
Circumstances arising independently of the will of the owner of the trademark which
constitute an obstacle to the use of the trademark, such as import restrictions on or
other government requirements for goods or services protected by the trademark, shall
be recognized as valid reasons for non-use." (Article 19.1)
 The TRIPs Agreement states that the owner of a registered trademark has the "exclusive
right to prevent all third parties not having the owner’s consent from using in the course of
trade identical or similar signs for goods or services which are identical or similar to those in
respect of which the trademark is registered where such use would result in a likelihood of
confusion.”
 (Article 16.1) Parallel importation (unauthorized importation of genuine trademarked
products):
- Except with respect to the National Treatment and Most Favored Nations obligations in
Articles 3 and 4, parallel importation ("exhaustion of intellectual property rights") is not
subject to dispute resolution under the TRIPs Agreement (TRIPs Article 6).
Enhanced Protection for "well-known" marks:
In determining whether a trademark is well-known, Members shall take account of the knowledge of
the trademark in the relevant sector of the public, including knowledge in the Member concerned
which has been obtained as a result of the promotion of the trademark. (Article 16.2)
Under the Paris Convention (which is generally incorporated by reference into the TRIPs
Agreement), well-known marks are entitled to protection in all Paris Convention/TRIPs
Members, regardless of whether the mark is registered. (For an interesting discussion of the
general issue of when an unregistered well-known mark must be protected see the decision by the
Supreme Court of South Africa, Appellate Division, in McDonald’s Corporation v. Joburgers
Drive-Inn Restaurant (PTY) Limited, (1997 (1) SA 1 (A)).
Geographical indications:
TRIPS sets forth standards to regulate international intellectual property protection and
enforcement, and establishes international minimum standards for geographical indications.
Part II, Section 3 of TRIPS, in Articles 22-24, specifies the minimum standards of protection that
WTO Members must provide for geographical indications.
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Geographical indications are for purposes of the TRIPS Agreement, a type of intellectual
property.
Article 22(1) of the TRIPS Agreement defines it as "indications which identify a good as
originating in the territory of a Member, or a region or locality in that territory, where a given
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quality, reputation or other characteristic of the good is essentially attributable to its
geographic origin.“
The TRIPS Agreement requires that WTO Members provide the legal means for interested
parties to prevent the use of a geographic indication that:
1. Indicates or suggests that a good originates in a geographical area other than the true
place of origin in a manner which misleads the public as to the geographical origin of
the good; or
2. Constitutes an act of unfair competition.
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The TRIPS Agreement also provides for an "enhanced" minimum level of protection for
geographic indications that identify wines and spirits.
WTO Members are required to provide the legal means for interested parties to prevent the
use of geographic indications even if they do not imply that the wines or spirits originate in
a place other than the true place of origin.
The TRIPS Agreement provides some exceptions to these requirements. For instance,
TRIPS does not require that a WTO Member extend protection to a geographic indication if
that geographic indication is the "generic" name for the goods in the Member.
Another exception to the protection afforded arises in situations where a trademark already
exists. Where a trademark has been applied for or registered in good faith, or where the rights
to the trademark have been acquired through actual use in good faith, either (1) before the
date of application of the TRIPS Agreement for a particular WTO member, or (2) before the
GI was protected in its country of origin, the trademark maintains its legal presumption of
superiority, based on the principle of "first-in-time, first-in-right.”
Why Are Geographical Indications Important?
 Geographical indications are valuable to producers from particular regions for the same
reasons that trademarks are valuable.
 First, they are source-identifiers: they identify goods as originating in a particular territory, or
a region or locality in that territory.
 Geographical indications are also indicators of quality: they let consumers know that the
goods come from an area where a given quality, reputation or other characteristic of the
goods is essentially attributable to their geographic origin.
 In addition, geographic indications are business interests: they exist solely to promote the
goods of a particular area.
 Finally, for purpose of the TRIPS Agreement, GIs are intellectual property, eligible for relief
from acts of infringement and/or unfair competition
 Geographical indications are used to indicate the regional origin of particular goods, whether
they are agricultural products or manufactured goods - provided that those goods derive their
particular characteristics from their geographic origin.
 The TRIPS definition highlights the source-indicating capacity of the indication. Not
every indication can rise to the level of a GI. There must be a link between some characteristic
of the good and the particular region where it was produced. That link must inform consumers
of some important characteristic of the product which is material in their decision to purchase
the good.
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13.3.3 Copyrights and related rights:
A copyright protects the expression of the idea, but not the idea itself. By contrast, a patent protects
the use of the idea.
Berne Convention for the Protection of Literary and Artistic Works (1971):
 The Berne Convention provides a high level of "formality free" copyright protection.
 The Berne Convention has recently been "updated" for the digital age by the WIPO Copyright
and Performances and Phonograms Treaties.
 The U.S. did not join the Berne Convention until 1989 because of the many provisions of U.S.
copyright law that were incompatible with Berne (e.g., mandatory copyright notices, copyright
renewal, shorter copyright term than life plus 50 years, mandatory registration with the
Copyright Office).
The TRIPs Agreement:
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Incorporates substantive obligations of Berne Convention (1971) other than provisions on
moral rights of authors (i.e., right to be acknowledged as the author and right of the author to
object to changes in a copyrighted work that would reflect adversely on the author).Copyright
protection is only available for expression, and not for ideas, procedures, methods of
operation, or mathematical concepts. (Article 9.2).
Articles 3 and 4 of the TRIPs Agreement contain fairly broad exceptions to national treatment
and most favored nation obligations regarding copyrights and related rights, including the
exceptions in the Berne Convention for the Protection of Literary and Artistic Works (1971)
and the International Convention for the Protection of Performers, Producers of Phonograms
and Broadcasting Organizations ("Rome Convention").
Members must permit authors and their successors in interest the right to bar rental of
computer programs, sound recordings and cinematographic works (exemption permitted if
no widespread copying of such cinematographic works has occurred in a Member because
of rentals).
Copyrighted works originating in a WTO/Berne member are automatically protected in all
other WTO/Berne members without formalities (i.e., copyright registration and copyright
notices are not required).
13.3.4 Layout-Designs (Topographies) of Integrated Circuits (Semiconductor Mask Works):
 Members must provide a ten-year term of protection counted from the date of filing of an
application for registration or from the first commercial exploitation wherever in the world it
occurs. (Article 38.1)
 The following are infringements of a protected layout-design if performed without
authorization of the right holder:
 importing, selling, or otherwise distributing for commercial purposes a protected
layout-design, an integrated circuit in which a protected layout-design is incorporated,
or an article incorporating such an integrated circuit only in so far as it continues to
contain an unlawfully reproduced layout-design.
 (Article 36) Innocent infringers may continue using a layout-design, with respect to
stock on hand or ordered before being notified that there was an unlawful reproduction
of a protected layout-design, but they must pay a reasonable royalty to the owner of
rights in the layout-design. (Article 37)
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13.3.5 Industrial Designs
 WTO Members must provide at least 10 years of protection to independently created
industrial designs that are new or original.
 Designs that are functional may be excluded from protection. (Article 25.1 and 26.3)
 Members must provide reasonable cost-effective protection to textile designs. Textile
designs may be protected either through industrial design law or copyright law. (Article 25.2)
Enforcement of the TRIPS Agreement:
Part III of the TRIPs Agreement--"Enforcement of Intellectual Property Rights"--contains provisions
on general obligations, civil and administrative procedures and remedies, provisional measures,
border measures and criminal procedures. It should be noted that Part III contains only a general
description of mandatory and permissive provisions, but not detailed rules governing the application
of such provisions. Enforcement issues are becoming increasingly important as more countries
enact laws which are generally TRIPs consistent. Increasingly, the compliance issues in the IPR
area will not be inadequate foreign laws, but rather inadequate enforcement of TRIPsconsistent IPR laws.
General Obligation: Members Must Permit "Effective Action" Against Infringement
 Article 41 describes the general obligation of Members, both with respect to enforcement of
intellectual property rights and procedural due process. From the perspective of intellectual
property owners, Article 41.2 contains a critically important general enforcement obligation:
 Members shall ensure that enforcement procedures...are available under their law so as to
permit effective actions against any act of infringement of intellectual property rights covered
by this Agreement, including expeditious remedies to prevent infringements and remedies
which constitute a deterrent to further infringements. These procedures shall be applied in
such a manner as to avoid the creation of barriers to legitimate trade and to provide for
safeguards against their abuse. (Article 41.1)
 It should be noted that this language is mandatory, not merely permissive; extends to all
intellectual property rights covered by the TRIPs Agreement; and specifically requires
"expeditious remedies to prevent infringements and remedies which constitute a deterrent to
further infringements." This paragraph is the cornerstone for IPR enforcement obligations
under the TRIPs Agreement.
Injunctions, Damages and Disposition of Infringing Goods:
Members must make available to IPR rights holders "civil judicial procedures concerning the
enforcement of any intellectual property right covered" by the TRIPs Agreement. (Article 42)
Courts in WTO Members must have the authority to order a party to desist from an infringement,
including to prevent the entry into domestic commerce of imported goods that involve the
infringement of IPR’s, immediately after customs clearance. Courts must also have the authority to
award damages for infringements. (Articles 44 and 45)
Courts must have "the authority to order that goods that they have found to be infringing be, without
compensation of any sort, disposed of outside the channels of commerce in such a manner as to
avoid any harm caused to the right holder, or unless this would be contrary to constitutional
requirements, destroyed."
Courts must also have "the authority to order that materials and implements the predominant use of
which has been in the creation of the infringing goods be, without compensation of any sort,
disposed outside the channels of commerce in such a manner as to minimize the risks of further
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infringements." Except in "exceptional cases", simply removing the unlawfully used trademark does
not permit the release of the goods into the channels of commerce. (Article 46)
Deterrent Criminal Sanctions Required: Trademarks and Copyright Infringement on a
Commercial Scale:
Members must "provide for criminal procedures and penalties to be applied at least in cases of wilful
trademark counterfeiting or copyright piracy on a commercial scale. Remedies available shall
include imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the
level of penalties applied for crimes of a corresponding gravity."
Members must also provide, in "appropriate cases", for seizure, forfeiture and destruction of the
infringing goods and of any materials or implements the predominant use of which has been in the
commission of the criminal offense. (Article 61)
TRIPS: Enforcement: (Border Enforcement)
Trademark and copyright owners must have the right to petition customs authorities for orders
barring the release of imported goods into free circulation, where they have "valid grounds for
suspecting that the importation of counterfeit trademark or pirated copyright goods may take
place...". (Article 51)
Members may also permit applications for suspension of customs release of goods that involve
other intellectual property rights (e.g., patents) provided that the requirements of Articles 51 through
60 are satisfied. Such suspension of customs clearance procedures may also be adopted regarding
the export of infringing goods.
Any right holder seeking to suspend the release of goods by customs authorities is "required to
provide adequate evidence to satisfy the competent authorities that, under the laws of the country
of importation, there is prima facie an infringement of the right holder’s intellectual property rights
and to supply a sufficiently detailed description of the goods to make them readily recognizable by
the customs authorities. The competent authorities shall inform the applicant within a reasonable
period whether they have accepted the application and, where determined by the competent
authorities, the period for which the customs authorities will take action." (Article 52).
Article 55 imposes stringent time limits on the suspension of customs clearance. Within ten working
days after the applicant has been served notice of the suspension of customs clearance,
proceedings leading to a decision on the merits of the case must be initiated by a party other than
the defendant or a competent authority must have "taken provisional measures prolonging the
suspension of the release of the goods..." In "appropriate cases" this time limit may be extended by
another ten working days. Otherwise, if all other conditions for export or import have been complied
with, the goods must be released by customs authorities.
Competent authorities must have the authority "to require an applicant to provide a security or
equivalent assurance sufficient to protect the defendant and the competent authorities and to
prevent abuse. Such security or equivalent assurance shall not unreasonably deter recourse to
these procedures." (Article 53). Members must give both the right holder and the importer "sufficient
opportunity" to have goods detained by customs authorities inspected. (Article 57)
As noted earlier in the discussion of Article 46, Members must give their competent authorities the
authority to order the destruction or disposal of infringing goods. Of particular interest to trademark
owners is a provision that bars the re-exportation of counterfeit trademark goods "in an unaltered
state or subject them to a different customs procedure, other than in exceptional circumstances."
(Article 59)
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14.
World Bank and IMF
14.1
World Bank Group
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The World Bank
World Bank Group, a member of the United Nations Economic and Social Council, and a family of
five international organizations that make leveraged loans to poor countries:
International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)
International Finance Corporation (IFC)
Multilateral Investment Guarantee Agency (MIGA)
International Centre for Settlement of Investment Disputes (ICSID)
The World Bank Institute (WBI) creates learning opportunities for countries, World Bank staff and clients, and
people committed to poverty reduction and sustainable development. WBI's work program includes training,
policy consultations, and the creation and support of knowledge networks related to international economic
and social development.
The World Bank Institute (WBI) can be defined as a "global connector of knowledge, learning and innovation
for poverty reduction". It aims to inspire change agents and prepare them with essential tools that can help
achieve development results. WBI has four major strategies to approach development problems: innovation
for development, knowledge exchange, leadership and coalition building, and structured learning. World
Bank Institute (WBI) was formerly known as Economic Development Institute (EDI), established on 11 March
1955 with the support of the Rockefeller and Ford Foundations. The purpose of the institute was to serve as
provide an open place where senior officials from developing countries could discuss development policies
and programs. Over the years, EDI grew significantly and in 2000, the Institute was renamed as the World
Bank Institute. Currently Sanjay Pradhan is the Vice President of the World Bank Institute
14.2
International Bank for Reconstruction and Development
IBRD is an international financial institution which offers loans to middle-income developing countries. The
IBRD is the first of five member institutions which compose the World Bank Group and is headquartered in
Washington DC, United States of America. It was established in 1944 with the mission of financing the
reconstruction of European nations devastated by World War II. Together, the International Bank for
Reconstruction and Development and its concessional lending arm, the International Development
Association, are collectively known as the World Bank as they share the same leadership and staff. Following
the reconstruction of Europe, the Bank's mandate expanded to advancing worldwide economic development
and eradicating poverty. The IBRD provides commercial-grade or concessional financing to sovereign states
to fund projects that seek to improve transportation and infrastructure, education, domestic policy,
environmental consciousness, energy investments, healthcare, access to food and potable water, and
access to improved sanitation.
The IBRD is owned and governed by its member states but has its own executive leadership and staff which
conduct its normal business operations. The Bank's member governments are shareholders which contribute
paid-in capital and have the right to vote on its matters. In addition to contributions from its member nations,
the IBRD acquires most of its capital by borrowing on international capital markets through bond issues. In
2011, it raised $29 billion USD in capital from bond issues made in 26 different currencies. The Bank offers
a number of financial services and products, including flexible loans, grants, risk guarantees, financial
derivatives, and catastrophic risk financing. It reported lending commitments of $26.7 billion made to 132
projects in 2011.
The IBRD provides financial services as well as strategic coordination and information services to its
borrowing member countries. The Bank only finances sovereign governments directly, or projects backed by
sovereign governments. The World Bank Treasury is the division of the IBRD that manages the Bank's debt
portfolio of over $100 billion and financial derivatives transactions of $20 billion.
The Bank offers flexible loans with maturities as long as 30 years and custom-tailored repayment scheduling.
The IBRD also offers loans in local currencies. Through a joint effort between the IBRD and the International
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Finance Corporation, the Bank offers financing to subnational entities either with or without sovereign
guarantees. For borrowers needing quick financing for an unexpected change, the IBRD operates a Deferred
Drawdown Option which serves as a line of credit with features similar to the Bank's flexible loan program.
Among the World Bank Group's credit enhancement and guarantee products, the IBRD offers policy-based
guarantees to cover countries' sovereign default risk, partial credit guarantees to cover the credit risk of a
sovereign government or subnational entity, and partial risk guarantees to private projects to cover a
government's failure to meet its contractual obligations. The IBRD's Enclave Partial Risk Guarantee to cover
private projects in member countries of the IDA against sovereign governments' failures to fulfil contractual
obligations. The Bank provides an array of financial risk management products including foreign exchange
swaps, currency conversions, interest rate swap, interest rate caps and floors, and commodity swaps. To
help borrowers protect against catastrophes and other special risks, the bank offers a Catastrophe Deferred
Drawdown Option to provide financing after a natural disaster or declared state of emergency. It also issues
catastrophe bonds which transfer catastrophic risks from borrowers to investors. The IBRD reported $26.7
billion in lending commitments for 132 projects in fiscal year 2011, significantly less than its $44.2 billion in
commitments during fiscal year 2010.
Catastrophe Deferred Drawdown Option: The Development Policy Loan with a Catastrophe Deferred
Drawdown Option (Cat DDO) is a contingent credit line that provides immediate liquidity to IBRD member
countries in the aftermath of a natural disaster. It is part of a broad spectrum of risk financing instruments
available from the World Bank Group to help borrowers plan efficient responses to natural disasters. The Cat
DDO gives a government immediate access to funds after a natural disaster, a time when liquidity constraints
are usually highest. This type of financing is typically used to finance losses caused by recurrent natural
disasters. It is most effective as part of a broader risk management strategy in countries highly exposed to
natural disasters.
14.3
International Finance Corporation (IFC)
The International Finance Corporation (IFC) is an international financial institution that offers investment,
advisory and asset management services to encourage private sector development in developing countries.
The IFC is a member of the World Bank Group and is headquartered in Washington, DC., United States. It
was established in 1956 as the private sector arm of the World Bank Group to advance economic
development by investing in strictly for-profit and commercial projects that purport to reduce poverty and
promote development. The IFC's stated aim is to create opportunities for people to escape poverty and
achieve better living standards by mobilizing financial resources for private enterprise, promoting accessible
and competitive markets, supporting businesses and other private sector entities, and creating jobs and
delivering necessary services to those who are poverty-stricken or otherwise vulnerable. Since 2009, the IFC
has focused on a set of development goals that its projects are expected to target. Its goals are to increase
sustainable agriculture opportunities, improve health and education, increase access to financing for
microfinance and business clients, advance infrastructure, help small businesses grow revenues, and invest
in climate health.
The IFC is owned and governed by its member countries but has its own executive leadership and staff that
conduct its normal business operations. It is a corporation whose shareholders are member governments
that provide paid-in capital and which have the right to vote on its matters. Originally more financially
integrated with the World Bank Group, the IFC was established separately and eventually became authorized
to operate as a financially autonomous entity and make independent investment decisions. It offers an array
of debt and equity financing services and helps companies face their risk exposures, while refraining from
participating in a management capacity. The corporation also offers advice to companies on making
decisions, evaluating their impact on the environment and society, and being responsible. It advises
governments on building infrastructure and partnerships to further support private sector development.
The corporation is assessed by an independent evaluator each year. In 2011, its evaluation report recognized
that its investments performed well and reduced poverty but recommended that the corporation define
poverty and expected outcomes more explicitly to better-understand its effectiveness and approach poverty
reduction more strategically. The corporation's total investments in 2011 amounted to $18.66 billion. It
committed $820 million to advisory services for 642 projects in 2011 and held $24.5 billion worth of liquid
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assets. The IFC is in good financial standing and received the highest ratings from two independent credit
rating agencies in 2010 and 2011.
14.4
The World Bank’s mandate
The World Bank promotes long-term economic development and poverty reduction by providing technical
and financial support to help countries reform particular sectors or implement specific projects—such as,
building schools and health centres, providing water and electricity, fighting disease, and protecting the
environment. World Bank assistance is generally long term and is funded both by member country
contributions and through bond issuance. World Bank staff are often specialists in particular issues, sectors,
or techniques. The International Monetary Fund (IMF) and the World Bank are institutions in the United
Nations system. They share the same goal of raising living standards in their member countries. Their
approaches to this goal are complementary, with the IMF focusing on macroeconomic issues and the World
Bank concentrating on long-term economic development and poverty reduction.
Framework Cooperation
The IMF and World Bank collaborate regularly and at many levels to assist member countries and work
together on several initiatives. In 1989, the terms for their cooperation were set out in a concordat to ensure
effective collaboration in areas of shared responsibility.
High-level coordination. During the Annual Meeting of the Board of Governors of the IMF and the World
Bank, Governors consult and present their countries’ views on current issues in international economics and
finance. The Boards of Governors decide how to address international economic and financial issues and
set priorities for the organizations.
A group of IMF and World Bank Governors also meet as part of the Development Committee, whose meetings
coincide with the Spring and Annual Meetings of the IMF and the World Bank. This committee was
established in 1974 to advise the two institutions on critical development issues and on the financial resources
required to promote economic development in low-income countries.
14.5
The IMF Mandate
The IMF promotes international monetary cooperation and provides policy advice and technical assistance
to help countries build and maintain strong economies.
The IMF also makes loans and helps countries design policy programs to solve balance of payments
problems when sufficient financing on affordable terms cannot be obtained to meet net international
payments. IMF loans are short and medium term and funded mainly by the pool of quota contributions that
its members provide. IMF staff are primarily economists with wide experience in macroeconomic and financial
policies.
14.6
History of World Bank and IMF
History
During and immediately after the Second World War, the United States, the United Kingdom, and other allied
nations engaged in a series of negotiations to establish the rules for the post-war international economy. The
result was the creation of the International Monetary Fund and the World Bank at the July 1944 Bretton
Woods Conference and the signing of the General Agreement on Tariffs and Trade at an international
conference in Geneva in October 1947.
Thus, the World Bank was created at the 1944 Bretton Woods Conference, along with three other institutions,
including the International Monetary Fund (IMF).
Twenty-three nations meeting in Geneva from April to October 1947 concluded the first post-war round of
tariff negotiations, leading to reductions in tariffs and imperial preferences, as well as a draft charter for a new
institution, the International Trade Organization (ITO).
Participants also signed the General Agreement on Tariffs and Trade (GATT), designed not only to implement
the agreed tariff cuts but to serve as an interim codification of the rules governing commercial relations among
its signatories until the ITO was created. In November 1947, the United Nations Conference on Trade and
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Employment convened in Havana to consider the draft ITO charter; four months of negotiations later, the
representatives of 53 countries signed the finished charter in March 1948. However, strong opposition in the
U.S. Congress meant that the ITO never came into existence. Instead, it was the GATT that governed postwar international trade relations for almost fifty years.
The president of the World Bank is, traditionally, an American. The World Bank and the IMF are both based
in Washington DC and work closely with each other.
Although many countries were represented at the Bretton Woods Conference, the United States and United
Kingdom were the most powerful in attendance and dominated the negotiations.
14.6.1 1944–1968
Before 1968, the reconstruction and development loans provided by the World Bank were relatively small.
The Bank's staff was aware of the need to instil confidence in the bank.
When the Marshall went into effect in 1947, many European countries began receiving aid from other
sources. Faced with this competition, the World Bank shifted its focus to non-European countries. Until 1968,
its loans were earmarked for the construction of income-producing infrastructure, such as seaports, highway
systems, and power plants, that would generate enough income to enable a borrower country to repay the
loan.
14.6.2 1968 – 1980
From 1968 to 1980, the bank concentrated on meeting the basic needs of people in the developing world.
The size and number of loans to borrowers was greatly increased as loan targets expanded from
infrastructure into social services and other sectors.
14.6.3 1989–present
Beginning in 1989, in response to harsh criticism from many groups, the bank began including environmental
groups and NGOs in its loans to mitigate the past effects of its development policies that had prompted the
criticism. It also formed an implementing agency, in accordance with the Montreal Protocols, to stop ozonedepletion damage to the Earth's atmosphere by phasing out the use of 95% of ozone-depleting chemicals,
with a target date of 2015. Since then, in accordance with its so-called "Six Strategic Themes," the bank has
put various additional policies into effect to preserve the environment while promoting development. For
example, in 1991, the bank announced that to protect against deforestation, especially in the Amazon, it
would not finance any commercial logging or infrastructure projects that harm the environment.
In order to promote global public goods, the World Bank tries to control communicable disease such as
malaria, delivering vaccines to several parts of the world and joining combat forces.
14.7
Goals and Criteria for the World Bank
Millennium Development Goal (initially targeted for 2015).
Criteria
Various developments have brought the MILLENIUM DEVELOPMENT GOAL targets for 2015 within reach
in some cases. For the goals to be realized, six criteria must be met: stronger and more inclusive growth in
Africa and fragile states, more effort in health and education, integration of the development and environment
agendas, more and better aid, movement on trade negotiations, and stronger and more focused support from
multilateral institutions like the World Bank.
1. Eradicate Extreme Poverty and Hunger
From 1990 through 2004, the proportion of people living in extreme poverty fell from almost a third to less
than a fifth. Although results vary widely within regions and countries, the trend indicates that the world as a
whole can meet the goal of halving the percentage of people living in poverty. Africa's poverty, however, is
expected to rise, and most of the 36 countries where 90% of the world's undernourished children live are in
Africa. Less than a quarter of countries are on track for achieving the goal of halving under-nutrition.
2. Achieve Universal Primary Education
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The percentage of children in school in developing countries increased from 80% in 1991 to 88% in 2005.
Still, about 72 million children of primary school age, 57% of them girls, were not being educated as of 2005.
3. Promote Gender Equality
The tide is turning slowly for women in the labour market, yet far more women than men- worldwide more
than 60% – are contributing but unpaid family workers. The World Bank Group Gender Action Plan was
created to advance women's economic empowerment and promote shared growth.
4. Reduce Child Mortality
There is somewhat improvement in survival rates globally; accelerated improvements are needed most
urgently in South Asia and Sub-Saharan Africa. An estimated 10 million-plus children under five died in 2005;
most of their deaths were from preventable causes.
5. Improve Maternal Health
Almost all of the half million women who die during pregnancy or childbirth every year live in Sub-Saharan
Africa and Asia. There are numerous causes of maternal death that require a variety of health care
interventions to be made widely accessible.
6. Combat HIV/AIDS, Malaria, and Other Diseases
Annual numbers of new HIV infections and AIDS deaths have fallen, but the number of people living with HIV
continues to grow. In the eight worst-hit southern African countries, prevalence is above 15 percent.
Treatment has increased globally, but still meets only 30 percent of needs (with wide variations across
countries). AIDS remains the leading cause of death in Sub-Saharan Africa (1.6 million deaths in 2007).
There are 300 to 500 million cases of malaria each year, leading to more than 1 million deaths. Nearly all the
cases and more than 95 percent of the deaths occur in Sub-Saharan Africa.
7. Ensure Environmental Sustainability
Deforestation remains a critical problem, particularly in regions of biological diversity, which continues to
decline. Greenhouse gas emissions are increasing faster than energy technology advancement.
8. Develop a Global Partnership for Development
Donor countries have renewed their commitment. Donors have to fulfil their pledges to match the current rate
of core program development. Emphasis is being placed on the Bank Group's collaboration with multilateral
and local partners to quicken progress toward the MDGs' realization.
To make sure that World Bank-financed operations do not compromise these goals but instead add to their
realization, environmental, social and legal Safeguards were defined. However, these Safeguards have not
been implemented entirely yet. At the World Bank's annual meeting in Tokyo 2012 a review of these
Safeguards has been initiated which was welcomed by several civil society organizations.
9. Monitoring progress on the MDGs
Since 2004, the Fund and the Bank have worked together on the Global Monitoring Report (GMR), which
assesses progress towards the 2015 UN Millennium Development Goals (MDGs). New Sustainable
Development Goals (SDGs) will replace the MDGs in 2015 as the basis for the post-2015 development
agenda. The Fund and the Bank will support the implementation of the new SDGs and contribute to
monitoring progress toward their achievement.
10. Assessing financial stability
The IMF and the World Bank are also working together to make financial sectors in member countries resilient
and well regulated. The Financial Sector Assessment Program (FSAP) was introduced in 1999 to identify the
strengths and vulnerabilities of a country's financial system and recommend appropriate policy responses.
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14.8
Poverty reduction strategies
For the poorest developing countries in the world, the bank's assistance plans are based on poverty reduction
strategies; by combining a cross-section of local groups with an extensive analysis of the country's financial
and economic situation the World Bank develops a strategy pertaining uniquely to the country in question.
The government then identifies the country's priorities and targets for the reduction of poverty, and the World
Bank aligns its aid efforts correspondingly.
Forty-five countries pledged US$25.1 billion in "aid for the world's poorest countries", aid that goes to the
World Bank International Development Association (IDA) which distributes the loans to eighty poorer
countries. While wealthier nations sometimes fund their own aid projects, including those for diseases, and
although IDA is the recipient of criticism, Robert B. Zoellick, the former president of the World Bank, said
when the loans, that IDA money "is the core funding that the poorest developing countries rely on”.
World Bank organizes Development Awards which is a competitive grant program that surfaces and funds
innovative, development projects with high potential for development impact that are scalable and/or
replicable. The grant beneficiaries are social enterprises with projects that aim to deliver a range of social
and public services to the most underserved low-income groups.
14.9
Bond Issuance
14.9.1 What is a bond
A bond is a debt investment in which an investor loans money to an entity (typically corporate or
governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.
Thus, a bond issue is a debt instrument issued by government agencies or corporations to raise money. The
issuer must pay a fixed amount each year until the certificate of debt reaches its predetermine maturity date.
When companies need to raise money, issuing bonds is one way to do it. A bond functions like a loan between
an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a
specific period of time in exchange for periodic interest payments at designated intervals.
14.10
Criticism Against World Bank
The World Bank has long been criticized by non-governmental organizations, such as the indigenous rights
group survival international, and academics, including its former Chief Economist Joseph Stieglitz, Henry
Hazlitt and Ludwig Von Mises, among others.
Henry Hazlitt argued that the World Bank along with the monetary system it was designed within would
promote world inflation and "a world in which international trade is State-dominated" when they were being
advocated. Stiglitz argued that the so-called free market reform policies which the Bank advocates are often
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harmful to economic development if implemented badly, too quickly (“shock therapy”), in the wrong sequence
or in weak, uncompetitive economies.
One of the strongest criticisms of the World Bank has been the way in which it is governed.
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While the World Bank represents 188 countries, it is run by a small number of economically powerful
countries.
These countries (which also provide most of the institution's funding) choose the leadership and senior
management of the World Bank, and so their interests dominate the bank.
Titus Alexander argues that the unequal voting power of western countries and the World Bank's role
in developing countries makes it similar to the South African Development Bank under apartheid, and
therefore a pillar of global Apartheid.
In the 1990s, the World Bank and the IMF forged the Washington Consensus, policies which included
deregulation and liberalization of markets, privatization, and the downscaling of government. Though the
Washington Consensus was conceived as a policy that would best promote development, it was criticized
for ignoring equity, employment and how reforms like privatization were carried out. Joseph Stiglitz argued
that the Washington Consensus placed too much emphasis on the growth of GDP, and not enough on the
permanence of growth or on whether growth contributed to better living standards.
The United States Senate on Foreign Relations report criticized the World Bank and other international
financial institutions for focusing too much "on issuing loans rather than on achieving concrete development
results within a finite period of time" and called on the institution to "strengthen anti-corruption efforts”.
Criticism of the World Bank often takes the form of protesting as seen in recent events such as the World
Bank Oslo 2002 Protests, the October Rebellion, and the Battle of Seattle. Such demonstrations have
occurred all over the world, even amongst the Brazilian Kayapo people.
Another source of criticism has been the tradition of having an American head the bank, implemented
because the United States provides the majority of World Bank funding. "When economists from the World
Bank visit poor countries to dispense cash and advice," observed The Economist in 2012, "they routinely tell
governments to reject cronyism and fill each important job with the best candidate available.
14.11
ICSID - International Centre for Settlement of Investment Dispute
The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration
institution which facilitates legal dispute resolution and conciliation between international investors. The
ICSID is a member of the World Bank Group, from which it receives funding, and is headquartered in
Washington, D.C., in the United States. It was established in 1966 as an autonomous, multilateral specialized
institution to encourage international flow of investment and mitigate non-commercial risks by a treaty drafted
by the International Bank for Reconstruction and Development's executive directors and signed by member
countries. As of 2012 there were 158 member countries contracting with and governing the ICSID.
Contracting member states agree to enforce and uphold arbitral awards in accordance with the ICSID
Convention. The centre performs advisory activities and maintains several publications.
In the 1950s and 1960s, the Organization for European Economic Cooperation (now the Organisation for
Economic Co-operation and Development (OECD) had made several attempts to create a framework for
protecting international investments, but its efforts revealed conflicting views on how to provide compensation
for the expropriation of foreign direct investment.
In 1961, then-General Counsel of the International Bank for Reconstruction and Development (IBRD) Aron
Broches developed the idea for a multilateral agreement on a process for resolving individual investment
disputes on a case by case basis as opposed to imposing outcomes based on standards. Broches held
conferences to consult legal experts from all parts of the world, including Europe, Africa, and Asia, to discuss
and compose a preliminary agreement. The IBRD staff wrote an official draft of the agreement and consulted
with legal representatives of the IBRD's board of directors to finalize the draft and have it approved. The
board of directors approved the final draft of the agreement, titled Convention on the Settlement of Investment
Disputes between States and Nationals of Other States, and the Bank president disseminated the convention
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to its member states for signature on 18 March 1965. Twenty states immediately ratified the convention. The
convention establishing the ICSID entered into force on 14 October 1966.
14.11.1
Governance
The ICSID is governed by its Administrative Council which meets annually and elects the centre’s SecretaryGeneral and Deputy Secretary-General, approves rules and regulations, conducts the centre’s case
proceedings, and approves the centre’s budget and annual report. The council consists of one representative
from each of the centre’s contracting member states and is chaired by the President of the World Bank Group,
although the president may not vote. The ICSID's normal operations are carried out by its Secretariat which
comprises 40 employees and is led by the Secretary-General of the ICSID. The Secretariat provides support
to the Administrative Council in conducting the centre’s proceedings. It also manages the centre’s Panel of
Conciliators and Panel of Arbitrators. Each contracting member state may appoint four persons to each panel.
In addition to serving as the centre’s principal, the Secretary-General is responsible for legally representing
the ICSID and serving as the registrar of its proceedings.
14.11.2
Membership
ICSID's 158 member states which have signed the centre’s convention include 157 United Nations member
states plus Kosovo. Of these member states, only 150 are "contracting member states", that is they have
ratified the contract. Former members are Bolivia, Ecuador (withdrew 2009), and Venezuela, which withdrew
in 2012.
All ICSID contracting member states, whether or not they are parties to a given dispute, are required by the
ICSID Convention to recognize and enforce ICSID arbitral awards.
14.11.3
Activities
The ICSID does not conduct arbitration or conciliation proceedings itself, but offers institutional and
procedural support to conciliation commissions, tribunals, and other committees which conduct such matters.
The centre has two sets of rules that determine how cases will be initiated and conducted, either under the
ICSID's Convention, Regulations and Rules or the ICSID's Additional Facility Rules. To be processed in
accordance with the ICSID Convention, a legal dispute has to exist between one of the centre’s contracting
member states and a national of another contracting member state. It must also be of a legal nature and
relate directly to an investment. A case can be processed under the ICSID Additional Facility Rules if one of
the parties to the dispute is either not a contracting member state or a national of a contracting member state.
However, most cases are arbitrated under the ICSID Convention. Recourse to ICSID conciliation and
arbitration is entirely voluntary. However, once the parties have consented to arbitration under the ICSID
Convention, neither party can unilaterally withdraw its consent.
The ICSID Secretariat may also administer dispute resolution proceedings under other treaties and regularly
assists tribunals or disputing parties in arbitrations among investors and states under the United Nations
Commission on International Trade Law (UNICTARL)'s arbitration regulations. The centre provides
administrative and technical support for a number of international dispute resolution proceedings through
alternative facilities such as the Permanent Court of Arbitration in The Hague, Netherlands, the London Court
of International Arbitration, and the International Chamber of Commerce in Paris, France.
The ICSID also conducts advisory activities and research and publishes Investment Laws of the World and
of Investment Treaties. Since April 1986, the center has published a semi-annual law journal entitled ICSID
Review: Foreign Investment Law Journal.
Although the ICSID's proceedings generally take place in Washington, D.C., parties may agree that
proceedings be held at one of a number of possible alternative locations, including the Permanent Court of
Arbitration, the Regional Arbitration Centres of the Asian-African Legal Consultative Committee in Cairo, in
Kuala Lumpur, or in Lagos, the Australian Centre for International Commercial Arbitration in Melbourne, the
Australian Commercial Disputes Centre in Sydney, the Singapore International Arbitration Centre, the Gulf
Cooperation Council Commercial Arbitration Centre in Bahrain, the German Institution of Arbitration, the
Maxwell Chambers in Singapore, the Hong Kong International Arbitration Centre, and the Centre for
Arbitration and Conciliation at the Chamber of Commerce of Bogota (Colombia).
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Case studies
The Indonesian government was sued in June 2012 by a London-based mining company Churchill Mining
after the local government revoked the concession rights held by a local company in which the firm had
invested. The government is countering the Churchill case, claiming that Churchill did not have the correct
type of mining licenses.
In October 2012, an ICSID tribunal awarded a judgment of $1.8 billion for Occidental Petroleum against the
government of Ecuador. Additionally, Ecuador had to pay $589 million in backdated compound interest and
half of the costs of the tribunal, making its total penalty around $2.4 billion. The South American country
annulled a contract with the oil firm on the grounds that it violated a clause that the company would not sell
its rights to another firm without permission. The tribunal agreed the violation took place but judged that the
annulment was not fair and equitable treatment to the company.
Irish oil firm Tullow Oil took the Ugandan government to court in November 2012 after value-added tax (VAT)
was placed on goods and services the firm purchased for its operations in the country. The Ugandan
government responded that the company had no right to claim tax on such goods prior to commencement of
drilling. The case also attracted criticism for Tullow's use of local legal representation, Kampala Associated
Advocates (KAA); the Ugandan law firm was founded by Elly Kurahanga, the president of Tullow's operations
in Uganda and concerns were raised over his impartiality in the issue.
Tobacco major Philip Morris sued Uruguay for alleged breaches to the Uruguay-Swiss BIT for requiring
cigarette packs to display graphic health warnings and sued Australia under the Australia-Hong Kong BITS
for requiring plain packaging for its cigarettes. The company claims that the packaging requirements in both
countries violate its investment.
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15.
Foreign Direct Investments
As Globalisation has become evident within 1990s, this produces successful exploiting of foreign investments
whish increased growth within economy in developing countries. Such growth lead to competition among
countries, attracting more foreign investors. However, in developing economies, such development becomes
limited by changes occurring in demand and technology, slowing such growth. An opportunity providing high
profits and low interest rates, with an external stimulus to an investment is imperative to boost capital
formation in the economy.
Developing countries have low levels of productivity which leads to low level of wages, low level of savings
and investments. Thus, producing again low productivity levels. An external injection of foreign investments
acts to break the cycle. The investment supplements national savings, facilitate access to internationally
available technologies and management, raising efficiency and expanding output, in order for the inward
spiral to trajectory economic growth and prosperity.
The developing, emerging and transition of economies liberalize foreign capital regimes and pursue policies
in order to attract investment. Foreign investment can be in the form of foreign direct investment (FDI) and
foreign portfolio investment (FPI).
15.1
Difference between Foreign Direct Investment and Foreign Portfolio Investment
FDI is motivated within long-term realization of returns from an enterprise in a foreign country involving
establishment of a physical entity. All capital contributions like stock acquisitions, reinvestments of business
profits by a parent firm in foreign subsidiary or direct lending by subsidiary company are included in FDI. As
such, a direct interest takes place as foreign investor has influence in the managing and strategic decisionmaking.
FPI is aimed at short-term benefits, and frequently adjust to the short-term conditions in host country. FPI
can readily be withdrawn in unfavourable business conditions.
Within FPI and FDI when violating net inflows, FDI is smaller than FPI. Countries thus aspire to FDI due to
highly volatile and erratic nature of FPIs. FDI can result in financial instability and can rapidly respond to
economic changes. FDI is invested in financial assets; changes in rate and volume of reinvestment can result
in fluctuation and instability. As such FDI can borrow funds locally in order to export capital, generating rapid
capital outflow.
However, volatility between FDI and FPI flows are smaller in developed economies than in developing
economies. Thus, the investor is to make a strategic choice between FDI and FPI. FDI requires higher
investment-specific costs than FPI, as FDI cannot be readily adjusted and FPI can be attuned immediately
to short-term changes in environment.
FPI is found to wash out and be found irrelevant in the long run as FDI contribute to the growth rate of the
economy more due to yielding higher returns. FDI foreign equity flows is larger in a developing country then
developed ones, as high production cost in developed countries makes a project less profitable while high
transparency in developed economies makes FPI more efficient.
15.2
What is Foreign Direct Investment?
This implies an existence of a long-term relationship between direct investor which is a resident entity in one
economy and the direct investment enterprise (entity resident in another country), having a degree of
influence on management of the enterprise. Direct investments involves both initial transaction between two
entities, and all subsequent capital transactions between them and among affiliated enterprises.
15.3
What is direct investment enterprise?
No fixed definition to the concept, however, can be defines as an incorporated or unincorporated enterprise
to which a foreign investor owns 10% or more of ordinary shares or voting power of an incorporated enterprise
or the equivalent of an unincorporated enterprise.
In certain instances, ownership of 10% shares or voting power may not lead to significant influence, while a
direct investor owning less than 10% may have substantial control over the management. An existence of
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elements of a direct investment relationship may be indicated through a number of factors, such as
representation in board of directors, participation in policy-making processes, interchange of managerial
personnel, access to technical information and provision of long-term loans at lower existing market rates.
15.4
Definition of FDI
The net inflow of investment to acquire a lasting management interest in enterprise operating in an economy
other than that of the investor. FDI is not just a transfer of ownership, however also the transfer of
complementary factors to capital, such as management, technology and organisationally skills. Therefore,
FDI is distinguished from portfolio foreign investments by element of control.
Example as FDI has 3 types:
1. Horizontal: Companies carry out same activities abroad as at home.
2. Vertical: Different stages of activities are added abroad. Forward FDI takes a firm nearer to the
market, Backward FDI to which international integration moves back towards raw materials.
3. Conglomerate: An unrelated business is added abroad, which attempts to overcome two barriers at
the same time. However, this leads to internationalisation and diversification to other alternative
strategies.
15.5
Modes of Foreign Direct Investment
Strategic decision making should be made within the different modes of FDI through which a Multi-National
Enterprise or foreign investor can intake to the production process in a host country. Such modes include
Mergers and Acquisitions or, Greenfield Investments or cooperation with a local firm. The market entry is
influenced by a number of determinants, such to be discussed with each mode.
1. Cross border Merger & Acquisitions:
- Acquisition of local firm and its production capacity, therefore in cross-border mergers the assets
and operations of two firms from different countries combine to establish a new legal identity.
Cross-border acquisitions control assets and operations is transferred from local to a foreign
company. The target company legally ceases to exist, the buyer takes over the business and the
buyers stock continues to be traded.
- Cross border mergers and Acquisitions involve private firms only and take specific form of
privatization with participating foreign buyers.
- Firm-level factors:
o multinational experience
o local experience
o product diversity
o international strategy
- Industry level factors:
o technological intensity
o advertising intensity
o sales force intensity
- Country level factors:
o Market size
o Growth in the host country
o Cultural differences between home and host countries
2. Greenfield:
- Setting up a new foreign affiliate or plant in a host country to produce goods locally.
- Foreign takeover: acquisition of an existing foreign company
- Interaction with ownership strategy – wholly owned subsidiaries v joint ventures
3. Cooperation with a local firm:
- Setting up of a joint venture to execute a particular business undertaking, sharing profits, risk and
expertise. Parties create a new entity by contributing equity and sharing the revenues, expenses
and control of the enterprise.
- Known as an information-based trade-off between direct investments and portfolio investments
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15.6
Green-field Investment
In terms of green-field investment, is a launching venture, thus prepping the green field. The projects are
foreign direct investments, simply known as direct investments that provide the highest degree of control for
the sponsoring company.
Indirect investment occurs one’s specifications are done, employees are trained to company standards,
fabrication processes can be tightly controlled, purchasing of foreign currencies.
The distance between Greenfield project and indirect investments are referred to as brown field investments.
Within such a corporation leases existing facilities and land which are adapted to suit the needs. Renovation
and customization result in lower expenses and quicker turn-around that building a building from scratch
15.6.1 Risks and benefits of Green Field investments
Developing countries attract prospective companies with offers of tax breaks, receive subsidies, or incentives
to set up a Greenfield investment. While concessions can result in lower corporate tax revenues for the
foreign community, economic benefits and enhancement of local human capital further delivering positive
returns for host nation.
A Greenfield investment entail higher risks and higher costs as to building new factories and manufacturing
plants. Smaller risk includes construction overruns, problems with permitting, difficulties in accessing
resources and issues with local labour. Companies contemplating green-field projects invest large sums of
time and money before hand in advance research.
Pro
Tax breaks, financial incentives
Everything done to specifications
Complete control of venture
15.7
Cons
Greater capital outlay
More complex to plan
Longer term commitment
Foreign Portfolio Investment
FPI refers to investors or investment companies that are not located in the territory of the country in which
the invested for realizing financial return, which does not result in foreign management, ownership or legal
control. These investors ae known as outsiders in the financial markets of the particular company with no
direct contact with the management of the company.
The money through FPI is referred to as ‘hot money’ as such can be taken out the market at any time by the
investors. The institutions involved in FPI are mutual funds, hedge funds, pension funds, insurance
companies etc.
15.8
Magnitude of FDI
Most FDI flows originated from OECD (Organization of Economic Cooperation and Development) and other
developed countries. In developing countries an increase does exist, however, the decline real interest rates
in developed economies and improved investment environment in developing countries flowing from
Liberalization and economic reforms, have been instrumental in a surge to FDI to developing countries.
15.8.1 Role of FDI in Developing Countries
As such is spread unevenly, 2/3 of total FDI flows from OECD members to NON-OECD countries going to
Asia and Latin America, however in a few countries strong concentration existed, such as China, Singapore.
Developing countries account to 52% of the global FDI inflows, exceeding flows to developed economies.
In Africa high gross returns can be made, however, such is at a significant risk of capital losses due to
macroeconomic instability, non-enforceability of contracts and physical destruction caused by armed
conflicts. Other factors include national economic policies, poor quality of public services and closed trade
regimes. Moreover, due to lack of effective regional trade integration, national markets remain small and grow
at a modest pace.
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Therefore, FDI is due to favourable domestic business climates, which results from government policies
towards trade liberalization, launching of privatization programmes, and modernization of investment codes,
adoption of international FDI agreements and development of few priority projects of wider economic impact.
15.8.2 Determinants of Foreign Direct Investments
The general contention among economists and policymakers that FDI inflows are both source and a
consequence of productive efficiency stimulates in an apparent virtuous circle of competition among countries
to attract FDI. The fundamental determinants are highly controversial of FDI. FDI is complex and the
motivation of such having a variety of factors which relate to competitive environment in which firms operate
to specific characteristics and economic factors in the home and host countries.
Question to ask:
1. Why a firm would choose to serve a foreign market through affiliate production, rather than other
options such as exporting or licensing arrangements?
2. What the criteria is which determine the investor firms location decision?
Determinant of FDI has been analysed broadly from perspectives of partial equilibrium and general
equilibrium. Partial equilibrium studies examine the internal firm-specific factors that motivate a firm to
become an MNE, while a general equilibrium examine by the external factors that are likely to determine the
location and magnitude of direct investments by MNE’s.
FDI is motivated by potential of high profitability in growing markets, possibility of financing investments at
low rates of interest in a host country.
Ohlin mentioned partial equilibrium analysis suggest FDi is better than direct exports or licensing of
production to local firms as tariffs, transport costs and exchange rate is excluded to exports. Thus FDI is a
vent to internalize trade costs and externalities from firm-specific assets.
Hymer preferred foreign markets which direct investments when they compete with local firms having better
knowledge of the local market, due to their compensatory advantage on being multinationals. Thus, such can
occur when imperfect competition in commodity market and factor market, internal or external economies of
scale and governmental intervention.
Kindleberger adds that monopolistic competitive market structure determines the behaviour of
multinationals, whilst Caves claim FDIs are sectors dominated by oligopolies. In presence of a product
differentiation, investments will occur in same sector, while within no differentiation, investments will be made
in sectors within the productive chain of firms. Direct investment can be determined by specific assets that
compensate the disadvantage face by foreign firms in relation to local firms.
Buckley and Casson developed the hypothesis of transaction cost internalization, in which imperfect
intermediate product markets have high transaction costs when managed by different firms, cost will be
minimized if market integrated multinationals.
General Equilibrium identify:
Market-seeking FDI, motivating to avoid trade frictions like tariff and transport cost.
Production cost-minimizing FDI, seeking to have access to lower-cost inputs.
Natural resource seeking FDI
Strategic asset-seeking FDI, looking for technology, skills or brand names.
Dunning: for FDI to take place three conditions should be fulfilled, namely OLI – Ownership, Location,
Internalization. Multinationals should thus have ownership advantage to have a specific assets, locational
advantage in both home and host countries like low production costs to that multination invest in one country
but not in the other, and internalization advantage arising due to internalizing business contacts and not
outsource.
4 broad factors determine the production location of multinationals:
1. Trade restrictions and other policies of host countries
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2. Proactive measures that countries adopt to promote and facilitate investment
3. Characteristics of their economies.
4. Institutional variables
Multinationals take more liberal FDI regimes for granted, and consider the convergence of FDI regimes to be
the natural consequence of globalization. As such, openness to FDI may be characterized by diminishing
returns.
Privatisation of state-owned enterprises that couple with economic reforms have been successful in inducing
FDI in developing countries. Privatisation lead to rising share in FDI services and growing importance in
Mergers & Acquisitions. Such can produce additional investment. This also sends an optimistic signal
regarding the government’s commitment to economic reform.
Other determinants include resource-seeking MNC’s being more selective on grounds of accessibility of raw
materials, complementary factors of production, mainly labour and nature and quality of physical
infrastructure. As the market-seeking FDI is important in size and growth of the host country, while the
efficiency-seeking FDI looking for cost competitiveness.
Countries with larger market size, faster economic growth and higher degree of economic development have
the potential to provide more and better opportunities for marketing. For efficiency seeking MNCs,
productivity-adjusted labour costs, availability of sufficiently skilled labour, business-related services and
trade policy reflecting openness and exchange rates are vital. The degree of development of host countries
is important as it positively related to domestic entrepreneurship, education level and local infrastructure.
15.8.3 Outward Flow of FDI from Developing Countries
Capital is expected to flow from capital-abundant developed countries to capital-scarce developing countries.
Such occurs due to opportunities obtaining higher returns on investments. However, a substantial outflow of
developing countries. Within the beginning of globalization, the main flow of capital was due to new
industrializing economies which provided for direct investments abroad. FDI inflows to least developed
countries increase as such was led by developing countries.
Outward direct investment can play an important role in enhancing the global competitiveness of firms from
developing economies. Such is possible through providing access to strategic assets, technology, skills and
natural resources and markets, investment flows between developing economies.
Developing countries tend to make use of labour-intensive technology and produce for domestic and
international markets. As such within the economic development the outward and inward FDI position relates.
As an increase within the country’s income increase, the enlarged outward FDI will generate as economy
grows and income increases. Outward FDI from developing countries has undertaken to access localized
innovative assets and capabilities. Asset-seeking FDI tries to engage dynamic competitive advantage for
strategically locating itself around geographically dispersed local innovation centres.
Push factors rise in South-South flows being wealth in emerging markets, rising cost of labour and nontradable, breaking up of domestic monopolies, new technology and communications leading to improved
information sharing and reduced transaction costs, strategic desire to procure inputs such as oil, capital
account liberalization regarding outward FDI, changes in trade barriers, regional trade agreements ad
government policies encouraging outward FDI.
Pull factors include large and growing markets, geographical proximity, ethnic and cultural ties, supply of
cheap labour, abundance in raw materials, incentives in host countries, the ability to use domestic skilled
labour to design and operate projects abroad at low cost and to lower the costs of technical personnel and
management preferential treatment of foreign companies and export markets through preferential treatments.
15.8.4 Economic Recession and FDI
Recession initiated in 2008, this caused capacity of companies to invest to weaken due to reduced access
to financial resources, both internally and externally and propensity to invest has been severely affected by
shrunken growth prospects and burgeoning risk.
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This recession impacting a lot of developing countries, this is a result of protracted and deepening problems
which affected financial institutions and liquidity crises in financial markets.
15.8.5 Coronavirus pandemic impacts on foreign direct investments
As coronavirus impact the foreign direct investment across the world, the expected fall falls within 13% to
32% across the world. The UN conference on Trade and Development anticipated global FDI flows to rise
marginally in 2020.
However, as the pandemic grows, UNCTAD project that global FDI flows can fall between 5% to 15% during
2020 and 2021. The latest estimates between 30% and 40% as the spread continues. The change due to
earnings revisions confirming the rapid deterioration of global prospects, global demand shocks impact on
sales and global supply chain disruptions. As the government invest policies, such creates obstacles which
affect the outflow of FDI as well as effecting major investors.
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16.
Foreign Convention on Sale of Goods
United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG)
CISG governs contract for international sale of goods between private businesses excluding sales to
consumers and sales of services, and sales of certain specified types of goods. This applies to contracts for
sale of good between parties whose places of business are in different contracting states, or when the rules
of private international law lead to the application of the law of a contracting state.
16.1
What is CISG?
Known as the United Nation Convention on Contracts for international Sale of Goods (CIsg), but also
referred to as the Vienna Convention on Sale of Goods. This treaty is for uniform international sales law.
Since February 2020, it was ratified in 93 countries. As such one of the most successful international
uniform laws.
16.1.1 CISG & UNICITRAL:
CISG was developed by the United Nations Commission on International Trade Law, signed in Vienna in
1980. Coming into force as a Multilateral Treaty since 1988. This aims to harmonize international sales law,
which companies trading internationally can use to avoid hurdles in their international businesses, specially
sales law.
16.1.2 What CISG does in international Trade?
This allows exporters/importers to avoid choice of law issues, as it offers substantive rules on which
contracting parties, courts, and arbitrators can rely. Unless such is excluded by the express terms of a
contract. CISG is deemed to be incorporated into any applicable domestic laws with respect to transactions
on goods between parties from different contracting states.
16.2
UNCITRAL & UNCTAD explained
Two UN agencies devoted to issues of trade.
16.2.1 UNCITRAL:
The United Nations Commission on International Trade Law being a subsidiary body of the U.N. General
Assembly which is responsible for helping to facilitate international trade and investment.
As such the official mandate is “to promote the progressive harmonization and unification of international
trade law, through conventions, model laws, and other instruments that address key areas of commerce,
from dispute resolution to procurement and sale of goods. This was necessary when national government
started to realise that a global set of standards and rules were needed to harmonize national and regional
regulations.
Activities of UNCITRAL:
-
Co-ordinating the work of active organizations and encouraging co-operation
Promoting wider participation of existing international conventions and wider acceptance of existing
models and laws.
Preparing or promoting adoption of new international conventions, model laws and uniform laws.
Promoting codification and acceptance of international trade terms, provisions, customs and
practice in collaboration where appropriate with organizations which operate in said field.
Promoting ways and means of ensuring uniform interpretation and application of international
conventions and uniform laws
Collecting and disseminating information on national legislation and modern legal developments,
including case law
Establishing and maintaining a close collaboration with the UN Conference on Trade and
Development
Maintaining liaison with other UN Organs and specialized agencies concerned with international
trade.
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16.2.2 UNCTAD:
The United Nations Conference on Trade and Development established in 1964 as a permanent
intergovernmental body. This forms part of the United Nations Secretariat dealing with trade, investment, and
development issues.
The organization goals are to maximize the trade, investment and development opportunities of developing
countries and assist them in efforts to integrate into the world economy on equitable basis. Thus, UNCTAD
as forming part of the United Nations Secretariat reports to the UN General Assembly and United Nations
Economic and Social Council.
The primary objective being to formulate policies relating to all aspects of development including trade, aid,
transport, finance, and technology. A principal achievement by UNCTAD being the it conceived and
implemented the Generalized System of Preferences (GSP). UNCTAD promoted exports of manufactured
goods from developing countries, as such developed countries under the GSP scheme which make
manufacturing imports and exports from developing countries duty-free or having a reduction in rates in
developed countries.
Other Activities:
UNCTAD conduct technical cooperation programs such as ASUCUDA, DMFAS, EMPRETEC and WAIPA.
UNCTAD has the aim of building a computer system to assist customs authorities all over the world to
automate and control core processes and obtain timely, accurate and valuable information which will further
support government projections and planning.
ASYCUDA:
-
Computerized system designed to administer a country’s customs
Largest technical cooperation program of UNCTAD
3 generations: ASYCUDA v 2.7, ASYCUDA++ and ASYCUDA World
DMFAS:
-
Debt Management and Financial Analysis System Program
Objective is to assist countries
o to develop administrative, institutional and legal structures for effective debt management,
o provide technical assistance to government offices in charge of debt management
o to deploy and advance debt analysis and management systems
o to act as a focal point for discussion and exchange of experiences in debt management
EMPRETEC:
-
Emendators and Tecnologia – acronym to create EMPRETEC name
Established by the United Nations Conference on Trade and Development
Promotes the creation of sustainable, innovative and international competitive small- and mediumsized enterprises (SMEs)
An integrated capacity building program for entrepreneurial skills promotion in the area of SMEs.
Dedicated to help promising entrepreneurs put ideas to action and fledgling businesses to grow.
Forms part of UNCTADs mandate to enhance productive capacity and international competitiveness
for benefit of economic development, poverty eradication and equal participation of developing
countries and transition economies in the world economy.
WAIPA:
-
World Association of Investment Promotion Agencies – Non-governmental organization
Acts as a forum for Investment Promotion Agencies
Provides for networking and promotion of best practices in investment promotion
Objectives of WAIPA as reflected in the Associations statutes:
o Promote and develop understanding and cooperation amongst IPAs
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o
o
o
o
Strengthen information gather systems, prompted the efficient use of information and facilitate
access to data sources
Share country and regional experiences in attracting foreign investment and enhancing
outward investments
Assisting IPAs to advocate the promotion of policies, which are beneficial to increase foreign
direct investment and promoting economic development
Facilitate access to technical assistance and promote training of IPAs
Additional:
-
Conduct ethnical cooperation with the WTO through the joint International Trade Centre (ITC)
Hosts the Intergovernmental Working Group of Experts on International Standards of Accounting and
Reporting (ISAR)
Partnership initiatives:
o Founding member of Sustainable Stock Exchange initiate:
 Promoting corporate investment in sustainable development
 Provides for a learning platform for stock exchanges, investors, regulators and
companies
o Principles for Responsible Investment
o United Nations Environment Program Finance Initiated (UNEP-FI)
o UN Global Compact:
 Non-binding United Nations pact to encourage businesses worldwide to adopt
sustainable and socially responsible policies and report on their implementation
 Based on framework for business
 Companies are brought together with UN agencies, Labour groups and civil society.
16.3
Basic Structure of CISG


Part I: Sphere of Application and General provisions Articles 1-13
Part II: Formation of Contract Articles 14-24

Part III: Sale of Goods Articles 25-88

Part IV: Final Provisions Articles 89-101
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16.4
Sphere of Application and General Provisions (Articles 1 – 13)
CISG applies to contracts of the sale of goods between parties whose place of business is situated in different
states. CISG applies to contracting parties in different states and that of different countries. CISG is intended
to apply to commercial goods and products only, with some limited exceptions. CISG does not apply to
personal, family or household goods, nor does it apply to auctions, ships, aircraft or intangibles and service.
Parties which contract may exclude or vary the application of the CISG.
CISG expresses a practice-based, flexible, and relational character. Placing few or no restrictions of form on
formation or adjustment of contracts. It offers interim measures before the aggrieved party resort to avoiding
the contract, additionally does not operate under ‘perfect tender, rule. The criteria for conformity are functional
rather than formal. The rules of interpretation rely on custom and manifest on acts rather than on intent. CISG
does include Nachlass rule, however, the scope is limited. In good faith obligation may seem limited and
obscure. All communications require reasonable time. Depending on the country, the CISG represent small
or significant departure from legislation in relation to sale of goods, and can provide important benefits to
companies from one contracting state which import goods in other states that have ratified CISG.
As CISG is written in Palin business language, it allows for the judges to have the opportunity to make the
convention workable in range of sales situations. However, it is problematic because of the reluctance of
some courts to use solutions adopted on the same point by courts in other countries, creating inconsistent
decisions. As such CISG advocates that the judges which interpret the CISG should use methods familiar to
them from their country, rather than attempting to apply general principles of the convention or rules of private
international law.
Within interpreting the CISG, the international character of the convention is taken into account, the need for
uniform application and need for good faith in international law. Disputes over interpretation of the CISG are
resolved through applying the general principles of the CISG, where there are no principles, but the matters
are governed by the CISG (a gap praeter legem) by applying the rules of international private late.
Praeter legem:
Outside of the law, referring to an item that is not regulated by law and is not illegal. Items are generally
labeled praeter legem include certain customs.
Contra legem:
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Referring to something directly against the law and therefore illegal
Intra legem:
Within the law.
A key point of controversy being whether a contract requires a written memorial to be binding, the CISG
allows for sale to be oral or unsigned, but in certain countries, contracts are not valid unless in writing. Oral
contracts are accepted in many countries, to which states have no objection to sign. States with strict written
requirement exercised have the ability to exclude articles under the oral contract, enabling them to sign. As
the CISG is not complete, gaps are filled with applicable National Law taking in due consideration of the
conflict of law rules applicable and the place of jurisdiction.
16.5
Formation of the Contract (Art 14 – 24)
An offer to contract must be addressed to a person, describing the goods, quantity, and price, further
indicating the intention for the offeror to be bound on acceptance. The CISG does not recognize unilateral
contract, however, subject to clear indication by the offeror, the CISG treats any proposal not afforested to a
specific person as an invitation to make an offer. No explicit price or procedure to implicitly determine price,
the parties are then assumed to have agreed on a price based upon generally charged at the time of the
conclusion of the contract for such goods sold under comparable circumstances. An offer may be revoked
provided that the withdrawal reached the offered before or at the same time as the offer, or before the offeree
sent the acceptance. Other offers may not be revoked (e.g. when the offeree reasonably relied on the offer
as being irrevocable.) The CISG requires positive act in order to indicate acceptance, silence or inactivity
does not constitute as acceptance.
Further, the CISG, attempt to resolve common situation where an offeree reply to an offer is to accept the
original offer, however, attempts to change the conditions. CISG provides that any change to the original
conditions is a rejection of such offer, or counteroffer. Modified terms do not alter terms of the offer, however,
changes to price, payment, quality, quantity, delivery, liability of the parties and arbitration conditions may
materially alter the terms of the offer.
16.6
Interpretation of CISG Contract
The United Nations Convention on Contracts for International Sale of Goods (CISG) aims to unify the sales
law. However, the interpretation provision, particularly principles which in anchors – uniformity,
internationality, and good faith. Certain aspects of the civil and common law cultures and mentioned and
briefly commented upon. To achieve uniform results the drafter made several compromises in the “travaux
preparatoires”. International case law and scholarly writing support the presence of the compromises and
within the application of the interpretation rules agreed in the Vienna convention on the Law of Treaties,
various commentaries and judicial practice have been devised.
However, in case law, a problem in the process of unification of sales law is seen, as a recourse to national
law in cases were unnecessary. Due to the different approaches within common and civil law countries,
however, this may help in the unification of interpretation. Though such doesn’t pose as an obstacle, as many
cases the judge benefits through the narrow possibility of recourse to private international law. As such to
achieve uniformed application of sales law under the CISG, several databases exist to make the search for
international cases and opinions of scholars easily accessible.
CISG database as Pace University is considered most comprehensive collection of legal materials in
relation to CISG and most helpful tools within interpreting whilst unifying sales law.
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16.7
Part III: Sale of Goods (Art 25 – 88)
The articles cover the sale of goods, obligations of the seller and the buyer, passing of risks, obligations
common to the seller and the buyer.
The CISG defined the duty for the seller:
-
Seller must deliver goods
Hand over any documentation relating to goods
Transfer the property in the goods as required by contract
Obliged to deliver goods that are not subject to claims from a third party for infringement of industrial
or intellectual property right within state where the goods are to be sold.
The duty of the buyer being similar, however inclusive of:
-
Take all steps reasonably expected to take delivery of the goods
Pay for the goods
Obliged to promptly examine the goods and subject to qualification, must advise seller of any lack of
conformity within reasonable time and no later than within 2 years of receipt.
The goods must be the quality, quantity and description required by the contract, be suitably packaged, and
fit for purpose.
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The risk passes from the seller to the buyer is observed in practice, as most contracts define the seller’s
delivery obligations quite precisely by adopting an established shipment terms such as FOB and CIF.
The remedies of the buyer and seller do depend upon the character of the breach of contract. If breach
fundamental, the other party is substantially derived of what is expected to be received under the contract.
Provided the objective test shows the breach could not be foreseen, the contract may be avoided, and the
aggrieved party may claim damages. If part of the performance of a contract occurred, then he is performing
party may recover any payment made or good supplies. This contract the common law where there is
generally no right to recover a good supplied unless titles has been retained or damages are inadequate,
only a right to claim the value of the good.
If the breach is not fundamental, the contract is not avoided, and remedies may be sough including claiming
damages, specific performance and adjustment of price. The damages to be awarded by conforming to the
English common Law rules in Hadley v Baxendale, but the test of foreseeability is substantially broader and
more generous to aggrieved party.
CISG excuses party from liability to claim damages if failure to perform is attributable to an impediment
beyond the party’s, or third-party sub-contractors’ control, which could not be reasonably be expected.
Thus, the extraneous event known as force majeure and frustration of the contract or impossibility doctrine.
When seller refunded the price paid, the seller must also pay interest to the buyer from the date of payment.
The interest rate is based on rates in current seller’s state. The payment of interest is to make restitution and
not of the buyers right to claim damages. In a mirror of the seller’s obligations, where a buyer has to return
the goods and the buyer is accountable for any benefits received.
16.8
Force Majeure and Hardship
As the concepts deal with changed circumstances, Art 79 of the CISG and the deliberations on force majeure
and hardship clauses in international sales contracts, the two concepts are considered on general and
theoretical basis. As such this convention is to uniform application of uniform rules.
16.8.1 Force Majeure
This creates the discharge of both or on party which the contract becomes impossible to perform. The
approach of domestic legal systems to such situations vary from country to country. However, general
characteristics of the concept can be determined.
As this is known to be an Act of God, the event is defined as happening independently of human volition,
which human foresight and case could not reasonably anticipate or avoid. This concept has been extended
to cover the dislocation of a business due to a universal coal strike, accidents to machinery, and cannot cover
bad weather, football matches, or funerals. Force Majeure occur when the performance of a contract is
impossible due to unforeseeable events beyond the control of the parties. Thus, this concept has the aim to
settle the problems which result from non-performance either by suspension or termination.
16.8.2 Hardship
This concept usually discussed within hardship clauses introduced in contracts in international trade,
however, is used within legislation too. Hardship is used in National Security regulations, to be regarded as
the subjective effect of a detrimental nature upon the person concerned which include any matter of
appreciable detriment being financial, personal, or otherwise. However, in Namibia and South Africa,
situations of hardship do not discharge a party of its liability.
For Hardship to exist, three elements need to exist:
1. Beyond either party, self-induced hardship is irrelevant,
2. Must be fundamental character,
3. Must be entirely uncontemplated and unforeseeable.
16.8.3 Differences between the two concepts
Both concepts share the following:
-
Both cater for situations of changed circumstance
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The difference:
-
Hardship is a stake where the performance is disadvantaged party which becomes for burdensome,
however not impossible.
Hardship having a reason for a change in contractual program of parties, as the parties aim to keep
the contract implemented
Force majeure means the performance of the party concerned became impossible, temporarily
Force majeure situated in the context of non-performance which deals within suspension or
termination of the contract.
16.9
Passing of Risk under CISG
Art 68 states that the risk in respect of goods sold in transit passes to the buyer from the time of the conclusion
of the contract. The risk for goods in transit passes ex nunc to the buyer. (Rolling floating, flying goods).
Art 31 to 34, and 66 to 70 are related, as when the seller performs in accordance with the contract of sale,
then the risk passes. However, the parties may deviate by agreement from the default risk allocation (Art 6).
INCOTERM may be used, or applicable standard contract terms may bring about partitioning. The party’s
intention is to be sought, however, leading to issues of interpretation. Parties practices and sectorial trade
usages intervene to determine whether a risk has passed, or when such occurs:
-
The burden of proof with regard to risk transfer is connected to problem of proving the performance
of the seller’s obligation and timing of his performance.
Once goods delivered, it is buyers’ task to prove that they were defective already.
As such the termination of the purchase agreement in a stage after the first passing of risk, revert
back from the buyer to the seller (Art 81 – 84)
16.9.1 The risks transferred to the buyer:
Loss or Damage – Physical Loss and Deterioration:
-
As no definition is provided, the risks covered by the rules on transfer or risks leave uncertainty.
UNCITRAL digest offers illustrations
Wording used in CISG is ‘loss or damage’ or ‘goods that have perished or deteriorated’
Physical risks to the goods include entire destruction
Disappearance of goods include theft, misplacing of goods, their transfer to a wrong address or
person, mixing up the goods with other goods.
Broadly: occurrences in transporting the goods from one party to another, handling and storage which
include the risk of natural processes leading to decline in quality.
Economic Risk – not part of the passing risk to buyer
-
Relating to fluctuation of value of goods on the market.
At time of conclusion of sale, the price is fixed in currency of account
The market price of goods and the currency exchange rate could fluctuate thereafter
Later fluctuations of the market price bring advantage wither to seller (price drop) or buyer (price
increase)
The risk of such passes at time of valid conclusion of the agreement.
Contractual risk - seller is liable for lack of conformity:
-
Buyer is liable to pay the price
The CISG explicitly treats the passing of risk, the risk is with the seller before it passes, and
subsequently with the buyer after it passes.
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-
Before contract concluded, all risk including legal, economic and physical risk, lies with the seller, but
after conclusion, the rules apply which passes to the buyer.
16.10
Final Provisions (Article 89 – 101)
These articles include how and when the convention will come intor force, permitted reservations and
declarations, and the application of the convention to international sales where both states concerned have
similar law on the subject.
This part is clarified as the primarily to States, no to business-people attempting to use the convention for
international trade. They may have a significant impact upon the CISGs practical applicability, thus requiring
careful scrutiny when determining each particular case.
16.11
Limitation of actions due to passage of time (Prescription period)
As it is often difficult to ascertain when a legal claim from foreign transaction become unenforceable by the
passage of time. The Convention on the Limitation in the International Sale of goods addresses this
uncertainty with respect to claims arising from international sales transactions. States become parties to the
convention substitute its uniform rules for different national rules on limitation periods that might otherwise
apply to the international sales claims.
Thus, no uniformity in how national legal systems treat limitation periods as such range from 6 months to 30
years. This creates for “forum shopping” to which a party faced with potential limitation problem will shop
around to find a jurisdiction that has both long limitation periods and the view that the limitation period is
procedural.
Civil law jurisdictions: treat limitations (prescription) as an issue of substantive law and will enforce foreign
substantive law applicable
Common law jurisdictions: traditionally classify limitation as a procedural issue governed by the law of the
forum. When the limitations (prescription) rules of two national legal systems are similar, the rules are very
likely to differ on narrow but significant details, such as scope, length of the limitation period, the time when
a claim accrues, and the effect of instituting legal proceedings.
By replacing this diversity with uniform rules, the Limitation Convention provides the same type of uniformity
in the international arena to all parties to a contract.
Prescription law (limitation laws) have the same basic objective: to provide a limitation period appropriate to
commercial transactions and to provide uniformity among diverse legal rules. Thus, the rationale given in
domestic law on prescription are fully captured by CISG read together with the Limitation Convention.
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The basic limitation period prescribed by the Limitation Convention: 4 years, however, subject to
qualifications:
-the seller and buyer may not extend or shorten the period in original agreement. The limitation period can
be started afresh by written acknowledgement of the obligation arising from the sales contract. Alternatively,
a party against which the claim has been asserted may extend the limitation period by written declaration.
However, the effect is that if the party does so before the original period has run. The party may renew the
extension one or more times, however, may not extend beyond the absolute limit of 10 years.
The Convention's rules for calculating the limitation period and the effect of legal holidays are selfexplanatory. Limitation Convention, arts. 28, 29. The Gregorian calendar is used as the standard for
measuring a year. Limitation Convention, art. 1(3)(h).
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17.
Incoterms
 The Incoterms rules or International Commercial Terms are a series of pre-defined
commercial terms published by the International Chamber of Commerce (ICC), based in
Paris (France).
 They are widely used in International Commercial Transactions or procurements processes.
A series of three-letter trade terms related to common contractual sales practices, the
Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks
associated with the transportation and delivery of goods.
 The Incoterms rules are accepted by governments, legal authorities, and practitioners
worldwide for the interpretation of most commonly used terms in international trade. They are
intended to reduce or remove altogether uncertainties arising from different interpretation of
the rules in different countries. As such they are regularly incorporated into sales contracts
worldwide.
 First published in 1936, the Incoterms rules have been periodically updated, with the eighth
version— Incoterms® 2010'—having been published on January 1, 2011.
 “Incoterms" is a registered Trademark of the ICC.
17.1
Incoterms in Government Regulations (Preliminary Note)
In some jurisdictions, the duty costs of the goods may be calculated against a specific Incoterm (for
example in India, duty is calculated against the CIF value of the goods, and in South Africa the duty
is calculated against the FOB value of the goods).
Because of this it is common for contracts for exports to these countries to use these Incoterms,
even when they are not suitable for the chosen mode of transport. Care must be exercised to ensure
that the liability issues are addressed by negotiation with the customer.
17.2







EXW – Ex Works (named place)
FCA – Free Carrier (named place of delivery)
CPT – Carriage Paid To (named place of destination)
CIP – Carriage and Insurance Paid to (named place of destination)
DAT – Delivered at Terminal (named terminal at port or place of destination)
DAP – Delivered at Place (named place of destination)
DDP – Delivered Duty Paid (named place of destination)
17.3




General Transport Incoterms
Sea and Inland Waterway
FAS – Free Alongside Ship (Named Port of Shipment)
FOB – Free on Board (named port of shipment)
CFR – Cost and Freight (named port of destination)
CIF – Cost, Insurance and Freight (named port of destination)
17.4
Description of incoterms:
17.4.1 General Transport
- EXW – Ex Works (named place)
The seller makes the goods available at his/her premises. This term places the maximum obligation
on the buyer and minimum obligations on the seller. The Ex Works term is often used when making
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an initial quotation for the sale of goods without any costs included. EXW means that a buyer incurs
the risks for bringing the goods to their final destination.
Either the seller does not load the goods on collecting vehicles and does not clear them for export,
or if the seller does load the goods, he does so at buyer's risk and cost. If parties wish seller to be
responsible for the loading of the goods on departure and to bear the risk and all costs of such
loading, this must be made clear by adding explicit wording to this effect in the contract of sale.
The buyer arranges the pickup of the freight from the supplier's designated ship site, owns the intransit freight, and is responsible for clearing the goods through Customs. The buyer is also
responsible for completing all the export documentation.
These documentary requirements may cause two principal issues. Firstly, the stipulation for the
buyer to complete the export declaration can be an issue in certain jurisdictions (not least the
European Union) where the customs regulations require the declarant to be either an individual or
corporation resident within the jurisdiction.
Secondly, most jurisdictions require companies to provide proof of export for tax purposes. In an Ex
Works shipment, the buyer is under no obligation to provide such proof, or indeed to even export
the goods. It is therefore of utmost importance that these matters are discussed with the buyer
before the contract is agreed. It may well be that another Incoterm, such as FCA seller's premises,
may be more suitable.
-
FCA – Free Carrier (named place of delivery)
The seller delivers the goods, cleared for export, at a named place. This can be to a carrier
nominated by the buyer, or to another person nominated by the buyer.
It should be noted that the chosen place of delivery has an impact on the obligations of loading and
unloading the goods at that place. If delivery occurs at the seller's premises, the seller is responsible
for loading the goods on to the buyer's carrier. However, if delivery occurs at any other place, the
seller is deemed to have delivered the goods once their transport has arrived at the named place;
the buyer is responsible for both unloading the goods and loading them onto their own carrier.
-
CPT – Carriage Paid To (named place of destination)
CPT replaces the venerable C&F (cost and freight) and CFR terms for all shipping modes outside
of non-containerized sea freight.
The seller pays for the carriage of the goods up to the named place of destination. Risk transfers to
buyer upon handing goods over to the first carrier at the place of shipment in the country of Export.
The Shipper is responsible for origin costs including export clearance and freight costs for carriage
to named place (usually a destination port or airport). The shipper is not responsible for delivery to
the final destination (generally the buyer's facilities), or for buying insurance. If the buyer does
require the seller to obtain insurance, the Incoterm CIP should be considered.
-
CIP – Carriage and Insurance Paid to (named place of destination)
This term is broadly similar to the above CPT term, with the exception that the seller is required to
obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110%
of their value under at least the minimum cover of the Institute Cargo Clauses of the Institute of
London Underwriters (which would be Institute Cargo Clauses (C)), or any similar set of clauses.
The policy should be in the same currency as the contract.
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CIP can be used for all modes of transport, whereas the equivalent term CIF can only be used for
non-containerized sea freight.
-
DAT – Delivered at Terminal (named terminal at port or place of destination) - now replaced
by DPU (Delivery at Place Unloaded).
The previous term DAT meant that the seller covered all the costs of transport (export fees, carriage,
unloading from main carrier at destination port and destination port charges) and assumed all risk
until destination port or terminal. The terminal could be a Port, Airport, or inland freight interchange.
Import duty/taxes/customs costs were to be borne by Buyer.
-
DAP – Delivered at Place (named place of destination)
Can be used for any transport mode, or where there is more than one transport mode. The seller is
responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving
conveyance, at the named place. Duties are not paid by the seller under this term. The seller bears
all risks involved in bringing the goods to the named place.
-
DDP – Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the country of the buyer, and
pays all costs in bringing the goods to the destination including import duties and taxes. The seller
is not responsible for unloading.
This term is often used in place of the non-Incoterm "Free in Store (FIS)". This term places the
maximum obligations on the seller and minimum obligations on the buyer. With the delivery at the
named place of destination all the risks and responsibilities are transferred to the buyer and it is
considered that the seller has completed his obligations.
17.4.2 Sea and Inland Waterway Transport
The following four (4) INCOTERMS deal with both Sea and Inland Waterway Transport:
1. FAS – Free Alongside Ship (Named Port of Shipment)
2. FOB – Free on Board (named port of shipment)
3. CFR – Cost and Freight (named port of destination)
4. CIF – Cost, Insurance and Freight (named port of destination)
It is important to note that these terms are generally not suitable for shipments in shipping
containers; the point at which risk and responsibility for the goods passes is when the goods are
loaded on board the ship, and if the goods are sealed into a shipping container it is impossible to
verify the condition of the goods at this point. Also, of note is that the point at which risk passes
under these terms has shifted from previous editions of Incoterms, where the risk passed at the
ship's rail.
1. FAS – Free Alongside Ship (named port of shipment)
The seller delivers when the goods are placed alongside the buyer's vessel at the named port of
shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the
goods from that moment. The FAS term requires the seller to clear the goods for export, which is a
reversal from previous Incoterms versions that required the buyer to arrange for export clearance.
However, if the parties wish the buyer to clear the goods for export, this should be made clear by
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adding explicit wording to this effect in the contract of sale. This term can be used only for sea or
inland waterway transport.
2. FOB – Free on Board (named port of shipment)
FOB means that the seller pays for delivery of goods to the vessel including loading. The seller must
also arrange for export clearance. The buyer pays cost of marine freight transportation, insurance,
unloading and transportation cost from the arrival port to destination. The buyer arranges for the
vessel, and the shipper must load the goods onto the named vessel at the named port of shipment
according to the dates stipulated in the contract of sale as informed by the buyer.
Risk passes from the seller to the buyer when the goods are loaded aboard the vessel. This term
has been greatly misused over the last three decades ever since Incoterms 1980 explained that
FCA should be used for container shipments.
3. CFR – Cost and Freight (named port of destination)
Seller must pay the costs and freight to bring the goods to the port of destination. However, risk is
transferred to the buyer once the goods are loaded on the vessel. Insurance for the goods is NOT
included.
4. CIF – Cost, Insurance and Freight (named port of destination)
Exactly the same as CFR except that the seller must in addition procure and pay for the insurance.
This is a trade term requiring the seller to arrange for the carriage of goods by sea to a port of
destination and provide the buyer with the documents necessary to obtain the goods from the carrier.
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