PRINCIPLES OF THE TRADING SYSTEM THE MULTILATERAL TRADING

PRINCIPLES OF THE TRADING SYSTEM • THE MULTILATERAL TRADING SYSTEM • OPERATED BY WTO • MOST NATIONS BUT SOME ARE NOT • GOVERNS THE TRADING AMONG VARIOUS COUNTRIES • ATTEMPT TO MAKE BUSINESS ENVIRONMENT PREDICTABLE / STABLE

HISTORY Mercantilism during the 15 th. Century dominated Western Europe, which laid emphasis on Gold and silver, and accumulation of wealth.

The basic principle of International trade Goods when exported to a country should generally have totally free entry into the importing country. Custom duties (tariffs) can be applied at the border. GATT/WTO provides a framework for negotiations on the levels of tariff. It also provides for protection against unfair trade and disguised obstructions to trade (by provision of unnecessarily high standards of quality or performance, or by overvaluation of Imported goods so that a very high custom duty is charged). The objective is that such trade –distorting measures should not be permitted to erode the benefit a country gets by reduction of tariff levels in other countries.

PRINCIPLES and OBJECTIVES Most favored nation (MFN): Treating other countries equally. The WTO agreement countries cannot discriminate between their trading partners. Grant someone a special favor and you have to do the same for all members. National Treatment: treating Foreigners and Locals equally: -Imported and locally produced goods should be treated equally-at least after the foreign goods have entered the markets. ( Thus it is not open for a country to levy on an imported product internal taxes such as Sales tax at rates higher than applied to comparable domestic products). The same should apply to foreign and domestic services and to foreign and local trademarks copyrights and patents. Freer trade, gradually through negotiation. Lowering trade barriers is one of the most obvious means of encouraging trade. Barriers include custom duties or tariffs and measures such as import quota or quotas that restrict quantities selectively. Since GATT’s creation in 1947 -48 there have been eight rounds of trade negotiations A ninth round, under Doha Development Agenda, is now underway. As a result of negotiations, by the mid 1990’s tariff rates on Industrial goods have fallen to less than 4%. Predictability: Through binding and transparency Sometimes promising not to raise a trade barrier can be as important as lowering one, because the promise gives business a clearer view of their future opportunities. With stability and predictability jobs are created , investment is encouraged and consumers can enjoy the benefits of competition –choice and lower prices. NOTE: In the WTO, when countries agree to open their markets for goods or services, they ‘bind’ their commitments. For goods these bindings amount to ceilings on custom tariff rates. Sometimes developing countries, tax imports, at rates that are lower than the bound rates One of the achievements of Uruguay Round of multilateral trade talks was to increase the amount of trade under binding commitments. More competitive –discouraging “unfair” trade practices, such as export subsidies and dumping products below cost to gain market share. More beneficial to less developed counties-giving them more time to adjust, greater flexibility and special privileges. Open Trading system based under the Multilateral agreed rules: During the last 25 yrs. World Trade has grown faster as a result of lower trade barriers -5%per year after the war. Economics tells us that countries can benefit when they trade their goods and services, and their assets –human, industrial natural, financial. The principle of ‘Comparative advantage’ says that countries prosper first by by taking advantage of their assets in order to concentrate on what they can produce best, and then trading them with other countries which they can produce best. Liberal trade policies –that allow unrestricted flow of goods and services sharpen competition, motivate innovation and breed success.

FAILURE OF ITO Over 50 countries participated in negotiations to create ITO which was a specialized agency of the United Nations. Even though American govt. had of the driving forces Afterbeen the failureone of the Havana Conference or the ITO (International Trade Organisation) in 1947 as it could not get Congressional support, GATT behind ITO, ratification in some became the only multilateral instrument governing International Trade. national legislatures proved impossible and some serious opposition came from US Congress.

ROTECTIONISM 1. When foreign competition is reduced or eliminated by import barriers, domestic industries can When economies are booming and jobs become secure, most people support free trade. . develop rapidly In recession they become protectionist because of national interest and pressures from organised labour groups etc. When economies are booming and jobs become secure, most people support free trade. . In recession they become protectionist because of national interest and pressures from organised labour groups etc.

GATT The General Agreement on Tariffs and Trade (GATT) was established in 1948 with 23 countries including India, as a multilateral agreement with a view to liberalize the world trade on the basis of non discrimination. GATT’S legal principle remained same for nearly a century and efforts to reduce Tariffs was done through multilateral negotiations (MTN’s) known as “Trade rounds”. The Kennedy Round in the mid sixties brought about a GATT Antidumping agreement. The Tokyo Round during the seventies was a first major attempt to tackle trade barriers that do not take the form of tariffs and to improve upon the system. The eighth; the Uruguay Round was the most extensive of all and led to establishment of WTO and a new set of agreements. It took 7 -8 years to complete this Round.

The Uruguay Round The seeds of the Uruguay Round were sown in Nov. 1982 at a ministerial meeting of GATT members in Geneva. It took four more years to launch the new round in September 1986, at Punta del Este, Uruguay. But disagreements on agriculture trade nearly led to collapse of the talks. That uncertain time saw the first draft of a final agreement. This draft “Final Act”, also known as “Dunkel Draft” after then GATT Director –General , Arthur Dunkel, became the basis of Uruguay Round Negotiations. Over the following two years the area of concerns was the major differences between United States and European Union(EU) on issues like services , antidumping rules and market access. In Nov. 1992 the US and EU settled most of their differences on agriculture in a deal known as “Blair House Accord”. By July 1993, the “Quad”(US, EU, Japan and Canada ) announced significant progress in negotiations on tariffs and related subjects (“market access”) The final agreement was finally signed in April 15, 1994 by ministers from 123 countries in Marrakech, Morocco. The results of Uruguay round of MTN: The legal Text is a list of about 60 agreements , annexes , decisions and understandings

Implications of the Uruguay Round Phasing out of the multifibre agreement with its Quantitative restrictions such as (determination of quota) with the implementation of Agreement on Textiles and Clothing (ATC) Exporters would not have to obtain Quota for export of readymade garments and textiles. Introduction of new forms of barriers of trade which would protect public health, environment, safety, human rights. They would have the same effect as non tariff barriers and protect domestic industries by restraining imports. (TBT and SPS measures imposed by developed countries imposes stringent rules to protect human , animal and plant life and health, child labour , clear cut specifications on production methods. ) Improvements in Market access- has resulted in lowering of tariffs. As a consequence of the agreement on agriculture developed countries have agreed to replace quantitative restrictions and other non tariff barriers by tariffs. Countries have bound their tariffs and have agreed to reduce both production and export subsidies.

WORLD TRADE ORGANIZATION (WTO) • BASED IN GENEVA • BEGAN OPERATION ON JANUARY 1, 1995 • NUMBERED 147 MEMBERS BY APRIL 2004 • 28 FREE-TRADE AGREEMENTS • OVERSEE WORLD TRADE PRACTICES • ADJUDICATE ON TRADE DISPUTES

WTO Agreements Often called WTO’S trade rules, and the WTO is often described as “rule based”, a system based on rules. But it’s important to remember that the rules are actually agreements that the govts. negotiated. The agreements are: Multilateral Agreements on Trade in Goods with two main components – a)GATT 1994 b)Other agreements in the area of goods , viz. , the twelve agreements covering the following areas –Agriculture, Sanitary and Phytosanitary Measures , Textiles and clothing , Technical Barriers to Trade , Trade – related Investment Measures, Anti –dumping, Custom Valuations, Preshipmnet Inspection, Rules of Origin, Import Licensing , Subsidies, and Safeguards. Agreement on Trade in Services Agreement on Trade –related Intellectual Property Rights , Trade Policy Review Mechanism Understanding on the settlement of Disputes , Plurilateral agreements in four sectors viz, Civil aircraft, Government procurement, Dairy, and Bovine meat.

FUNCTIONS OF WTO Liberalization lowering tariffs open, service markets Settlement of disputes Making trade policies transparent , To facilitate implementation, administration and operation and further the objectives of this agreement. To provide the forum for negotiation among its members. To administer the Trade Policy Review Mechanism (transparency). WTO Agreements have binding force unlike UN Though WTO decides mattersby Consensus it is hardly practicable as meetings take place in ‘green rooms’ and poor countries cannot seek delegation

Ministerial Meetings. Singapore-1996 2. Geneva 1998 Seattle(USA)1999 Doha 2001 Cancun 2003 Hongkong 2005

Doha Linking of Environment with trade Linking of Labour standard with trade Competition policy and Investment policy Government Procurement Trade Facilitation Multilateralism v/s Regionalism – India is a member only of SAARC and no other Regional Trade Agreement. RTA’s provide special treatment to member countries hence it’s a threat to Multilateralism.

DOHA ministerial suggested correctives Called a Developmental Round though it intensified the work in areas which were of interest only to Developed countries. Implementation issues, popularly known as Singapore issues. Competition Policy, Investment, Government Procurement and Trade Facilitation. Operational decisions regarding them were very meager. Severely opposed by developing countries-bringing differences Duty free Electronic Commerce Trade, debt and finance Trade and transfer of technology Protection under Geographical indications is given to Darjeeling Tea, Basmati Rice and Alphanso mangoes from India as the same protection is given to Champagne and Scotch whisky during Doha meeting. Machinery and eqiuipment that improve the environment Investment A proposal for a new round brought a lot of controversy.

Legal Framework for the Multilateral Trading System Consists of – a) Rules governing International Trade b) Agreement on safeguard measures c) Agreements to deal with unfair trade practices namely, Agreement on antidumping practices and Agreement on subsidies and countervailing measures.

Multilateral system works towards a common goal. Why cant a country be self sufficient – why trade at all? Convincing theories on benefits of International trade tells total isolation not a practical option, as we have to obtain technology and knowledge from other countries and we have to pay in foreign currency n this can be done when we export goods. Bilateral system gets lesser benefits

More benefits of multilateral trading system Mutual confidence and benefit –crux of the system Seperation of TRIPS is being contemplated –bulky , complex Developing countries have less resources to give production and export subsidies- giving encouragement through subsidization in critical sectors to boost exports to developing countries Handicap of TRIMS agreement to be removed on national treatement-be allowed to give preference to domestic products UNCTAD can help in furthering consensus in WTO on difficult issues-atmosphere is relaxed and tensions of possible commitments and negotiations will not be there

basic rules of International Trade, of Multilateral Trading system Protection to domestic industries by tariffs only, prohibiting member countries from using quantitative restrictions(QR’s) like import licensing or non tariff barriers on imports, except under article XVIII-B(to counter balance of payment problem) Reduction in tariffs and binding against further increases Conduct of International Trade according to the most favored nation clause Commitment to the national treatment rule.