International Business - Multilateral Regulation of Trade and Investment under WTO

 

Multilateral Regulation of Trade and Investment under WTO

            The World Trade Organization is the only international organization dealing with the rules of trade between nations. The goal is to help producers of goods and services, exporters and importers conduct their business. The global business environment is very significantly influenced by the WTO principles and their agreements. The agreements in WTO are negotiated and signed by the bulk of the world’s nations and ratified in their parliaments. WTO, the successor to the General Agreement on Tariffs and Trade, is a facilitator and regulator of international business.

Evolution of WTO:

            The General Agreement on Tariffs and Trade, the predecessor of WTO was formed to liberalize trade in 1948 as an interim agreement to fill the gap until ITO (International Trade Organization) charter had been formed. GATT, the international trading system was guided by rules and principles agreed by the signatories of the contracting nations.

            The primary objective of GATT was to expand international trade to bring about economic prosperity by liberalizing trade. The main objectives of GATT as mentioned in its Preamble was as follows:

• Raising Standard of Living
• Ensuring full employment
• Developing full use of the resources of the world
•  Expansion of production and international trade

The conventions of GATT required that

• Any proposed change in the tariff, or other type of commercial policy of a member country should not be undertaken without consultation of other parties to the agreement
• The countries that adhere to GATT should work towards the reduction of tariffs and other barriers to international trade, which should be negotiated within the framework of GATT

GATT adopted the following principles for the realization of its objectives:

• Non-discrimination: No member country shall discriminate between the members of the GATT in the conduct of international trade
• Prohibition of Quantitative Restrictions: As far as possible GATT rules prohibited quantitative restrictions and limited restrictions on trade to the less rigid tariffs
• Consultation: GATT provided a forum for consultation to resolve disagreements and for trade negotiations  

            The first six rounds of Multilateral Trade Negotiations (MTNs) concentrated almost exclusively on reducing tariffs, while the Seventh round moved on to tackle the Non-tariff barriers. The eighth round, Uruguay round sought to broaden the scope of MTNs by including new areas such as trade in services, trade related aspects of intellectual property (TRIPs), trade related investment measures (TRIMs). Following the Uruguay round, GATT was converted from a provisional agreement into a formal international organization called World Trade Organization (WTO), the more powerful body than GATT with an enlarged role, with effect from January 1, 1995.

World Trade Organization – WTO:

            The WTO is a more powerful body with enlarged functions than the GATT and is envisaged to play a major role in the world economic affairs, with its Secretariat in Geneva, Switzerland. The objectives of WTO agreements are:

• To help trade flow as freely as possible
• To achieve further liberalization gradually through negotiation
• To set up impartial means of settling disputes

The fundamental principles, which form the foundation for the multilateral trading systems are as follows:

•  Non-discrimination
• Freer trade, predictable policies, encouraging competition
• Extra provisions for less developed countries

Salient Features of Uruguay Agreement - The WTO Agreements:

            The WTO members operate a non-discriminatory trading system that deals with their rights and their obligations. The rule book of WTO consists of agreements related to trading in goods, trade in services, relative aspects of intellectual property, dispute settlement, and trade policy reviews.

Trade in Goods: 

        This was the only concentration under the GATT, which created a forum for negotiations under lower customs duty and other trade barriers. However, on the onset of WTO, dealings with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping also undertaken. 

Liberalization of trade in manufacturers:

The major liberalization in respect of trade manufacturers, regarding tariffs are done by:

• Expansion of tariff bindings
• Reduction in the tariff rates
• Expansion of duty-free access

While with respect to Non-tariff barriers, the Agreements to abolish Voluntary Export Restraints (VERs) and to phase out the Multi-fiber Arrangements (MFAs) have been regarded as a landmark achievement.

Liberalization of Trade in Agriculture:

Agreement on Agriculture, the specific agreement which provides framework for multilateral trade in agriculture, has been incorporated to establish fair and market oriented agricultural trading system with rules and disciplines such as market access, domestic support and export subsidies. The important aspects of AoA include:

• Tariffication: The replacement of existing non-tariff restrictions on trade such as import quotas by such tariffs as would substantially provide the same level of protection is known as tariffication.
• Tariff binding: Tariff binding means fixing the maximum rate of import duty, above which the country shall not raise the duty unilaterally.
• Reduction in subsidies and domestic support:  The agreement puts restrictions on the use of countervailing measures against competitor’s subsidies, which fall into the following three categories:

§  Prohibited subsidies: Those contingent upon export performance or the use of domestic instead of exported goods

§  Actionable subsidies: Those that have demonstrably adverse effects on other member countries

§  Non-actionable subsidies: Those provided to industrial research and pro-competitive to development activity to disadvantaged regions, or to existing facilities to adapt themselves to new environmental requirements.

Trade in Services: 

        Service industries such as banking, insurance, telecommunications, tourists, hotel and transport companies are allowed to do trade freely and fairly as goods under new system of principles under GATS. The General Agreement of Trade in Services with protective measures such as visa requirements, investment regulations, restrictions on repatriation, marketing regulations, restrictions on employment of foreigners, compulsions to use local facilities, extends multilateral rules and disciplines to services in different countries by four international mode of delivery of services such as cross-border supply, commercial presence, consumption abroad and movement of personnel.

    The framework of GATS includes basic obligation of all member countries on international trade in services as well as movement of workers with most favored nation (MFN) obligation that essentially prevents countries from discriminating among foreign suppliers of service and transparency requirements in which each country shall publish all its relevant laws and regulations pertaining to services.

Trade in Intellectual Property: 

        The WTO agreements related to investments in ideas and creativity states about the obtention and protection of copyrights, patents, trademarks, geographical names that are used in the identification of products, industrial designs, integrated circuit-layout designs and undisclosed information such as trade secrets. Under Uruguay Agreement, General Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) have been formed to protect IPRs. According to WTO, the objectives of IPRs are as follows:

• Encourage and reward creative work
• Technological innovation
• Fair competition
• Consumer protection
• Transfer of technology
• Balance of rights and obligations

           Developing countries generally do not have adequate institutional mechanism and resources to properly administer IPRs regime. IPR system provides a great opportunity to developing countries to benefit from protection of indigenous property rights and traditional knowledge. There are several areas of flexibility within TRIPs that provide potential for developing countries to maximise benefits by promoting access to technology and prevailing anti-competitive abuses.

Anti-dumping measures:

        A product is regarded as dumped when its export price is less than the normal price in the exporting county. Injury is the material retardation to the establishment of an industry. The UR Agreement provides greater clarity and more detailed rules concerning the method of determining dumping and injury, the procedure to be followed in anti-dumping investigations and the duration of anti-dumping measures. Anti-dumping actions may be suspended or terminated id the exporter concerned furnishes an undertaking to revise the price to remove the dumping or the injurious effect of dumping.

Organisational Structure:

            WTO is directed by a Ministerial Conference which meets at least once every two years and its regular business is overseen by a General Council. The General Council meets several times a year in the Geneva headquarters as Trade Policy Review Body and Dispute Settlement Body. At the next level is the Goods Council, Services Council, Intellectual Property Council, that reports to the General Council. There are numerous specialized committees, working groups and working parties that deal with the individual agreements and other areas such as the development, environment, membership applications and regional trade agreements. Decisions in the WTO are made by the entire membership. All WTO members may participate in all councils, committees, etc., except Appellate Body, Dispute Settlement panels, Textiles Monitoring Body and plurilateral committees.

Benefits of WTO:

• Reduction in tariff and non-tariff barriers to trade
• Liberalization of trade and investments has resulted in increase in competition, efficiency of resource utilization, improvement in quality and productivity and acceleration of economic development
• Provides a forum for multilateral discussion of economic relations between nations 
• Settlement of trade dispute and mechanism to deal with violation of trade agreements between nations
•  Monitoring trade policies
• Technical assistance and training for developing countries

      Because of the unequal participation and lack of bargaining power, the developing countries have not been getting a fair deal from the WTO, though the rules and regulations are more transparent that makes trade harassment and unilateral actions more difficult.