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Online Course Of

Introduction to the WTO

e- WTO E-LearningCopyright 2012Visit the website: http://etraining.wto.org

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M2: The basic principles of the WTO |

Module 2

The basic principles of the WTO

2

Surveillance of national trade policies through theTrade Policy Review Mechanism

Domestic publication of trade regulations

Notification of trade measures to the WTO

Other transparency mechanisms and tools

Special treatment for less developedMembers WTO development dimension

Who benefits from special and differentialtreatment (S&D) in the WTO?

Why developing and LDC Members need S&D?

How does the WTO provide special treatment?

Summary

Non-discrimination

The MFN principle

The national treatment principle

More open and predictable trade

The progressive reduction and binding of tariffs

The reduction of other barriers to trade

The general elimination of quantitativerestrictions

Transparency

Legal BasisHow does the WTO enhance transparency ininternational trade?

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Introduction

As you studied in Module 1, the WTO facilitates the smooth flow of global trade through the administration and monitoring

of a rules-based system. This set of rules is embodied in the WTO Agreements.

The WTO Agreements consist of several legal documents covering a wide range of trade-related issues including

agriculture, food safety, services and intellectual property. At the heart of all these Agreements are a number of basic

principles which constitute the foundation of the multilateral trading system (MTS). The basic principles of the WTO are:

Non-discrimination


Transparency

Special treatment for less-developed members

In this module, you will study the basic principles of the WTO.

3Introduction

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Non Discrimination

Non-discrimination is a fundamental principal of the WTO. It has two

components:

The Most-favoured nation (MFN) principle: treating other WTO

members equally

The National treatment principle: treating foreigners and locals

equally

These two principles apply to trade in goods, trade in services and trade-

related aspects of intellectual property rights.

This module will focus on the non-discrimination principle as applied in

the context of trade in goods.

4

The Most-favoured nation(MFN) principle

The Nationaltreatmentprinciple

Non Discrimination

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5


The Most-favoured nation (MFN) principle

The MFN principle ensures non-discrimination between

trading partners. If a WTO member grants to a country an

advantage, it has to give such advantage to all WTO

members.

Members of the WTO can be seen as members of a club.

One of the fundamental rules of the club is that each

member will grant all other members the best possible

treatment it grants to any trading partner.

In general, the MFN principles ensures that every time a

WTO member lowers a trade barrier or opens up a

market, it has to do so for the like goods or services from

all WTO members without regard of the members'

economic size or level of development.

It is worth noting that the MFN principle requires to

accord to WTO members any advantage given to anyother country - member or not of the WTO. The opposite

is not an obligation: a WTO member could give an

advantage to other members, without having to accord

such an advantage to non WTO members. There are

important exceptions to the MFN principle, which will be

explained later on.

5

Background information and materials

Supplementary information:

Legal Underpinnings:

http://www.swisslearn.org/wto/module3/e/start.htm

Understanding the WTO Principles of the system:

http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_

e.htm

Non Discrimination
http://www.swisslearn.org/wto/module3/e/start.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.swisslearn.org/wto/module3/e/start.htmhttp://www.swisslearn.org/wto/module3/e/start.htm

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6


The MFN principle is so important, that it is contained in

the first article (Article I) of the GATT for trade in goods.

The MFN principle is contained in Article II of the GATS for

trade in services. In the context of trade in services, the

MFN principle applies to services and services suppliers.

Article 4 of the TRIPS Agreement contains the MFN

principle as applicable to trade-related aspects of

intellectual property rights. In the context of TRIPS, the

MFN principle applies to nationals, including both natural

and legal persons.

These provisions will be explained in Module 4, which

introduces the GATS and the TRIPS Agreement. Now, lets

see how the MFN principle in Article I of the GATT applies

through a practical example:

6

Background information and materials

Legal documents:

Article I of the GATT:

http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.ht

m#articleI

Article II of the GATS:

http://www.wto.org/english/docs_e/legal_e/26-

gats_01_e.htm#ArticleII Article 4 of the TRIPS Agreement:

http://www.wto.org/english/docs_e/legal_e/27-

trips_03_e.htm

Non Discrimination

Legal Basis
http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/27-trips_03_e.htmhttp://www.wto.org/english/docs_e/legal_e/27-trips_03_e.htmhttp://www.wto.org/english/docs_e/legal_e/27-trips_03_e.htmhttp://www.wto.org/english/docs_e/legal_e/27-trips_03_e.htmhttp://www.wto.org/english/docs_e/legal_e/27-trips_03_e.htmhttp://www.wto.org/english/docs_e/legal_e/27-trips_03_e.htmhttp://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

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7M2: The basic principles of the WTO |

Suppose that Vanin and Medatia are WTO members,

while Tristat is not.

Assume that Vanin applies a 20% tariff on imports of

tomatoes coming from all WTO members. Medatia is a

big exporter of tomatoes interested in increasing its

exports of tomatoes to Vanin.

During a WTO negotiating round, Medatia seeks to

negotiate the customs duty rate on tomatoes with

Vanin. After long and difficult bilateral meetings, Vanin

agrees to give Medatia duty-free access for tomatoes

(0% tariff).

DOES VANIN HAVE TO EXTEND THE 0% TARIFF ON

TOMATOES TO ALL WTO MEMBERS?

Yes. According to the MFN principle, Vanin has to extend the

0% tariff (duty-free access) on like tomatoes from all WTO

members, because all WTO members should enjoy the most

favourable treatment for tomatoes granted by Vanin.

COULD VANIN APPLY A 10% TARIFF ON IMPORTS OF

TOMATOES FROM TRISTAT (NON- WTO MEMBER), WHILE

PROVIDING DUTY-FREE ACCESS FOR TOMATOES (0% TARIFF)

TOWTO MEMBERS?

Yes. Vanin can give an advantage to a product from the WTO

members, without having to extend such advantage to non -

members. In other words, only WTO members benefits from

the most favourable treatment.

COULD VANIN APPLY A 10% TARIFF ON IMPORTS OFTOMATOES FROM WTO MEMBERS, WHILE PROVIDING DUTY-

FREE ACCESS FOR TOMATOES (0% TARIFF) FROM TRISTAT

(NON-MEMBER)?

No. All WTO members must benefit from the better treatment

given to "any" country (member or not).

7Non Discrimination

Example

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One relevant issue is whether the tomatoes from Medatia

are like products vis--vis tomatoes from other

members. If they are not like products, different

treatment may be applied. In the example, we are

assuming that the tomatoes from Medatia and those

from other WTO members are like products and

therefore, the benefit (0% tariff) shall apply to all

members.

It is important to note that there are different exceptions

to the MFN principle. If one of the permitted exceptions

to the MFN principle applies, Vanin would not need to

extend the 0% tariff given to tomatoes from Medatia to

all other members.

8Non Discrimination

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The MFN principle requires WTO Members that:

9

Any advantage underArticle I granted to

any country

Shall be accorded"immediately andunconditionally"

To like products of

all other members

Non Discrimination

Main elements of the MFN principle

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ANY ADVANTAGE UNDER ARTICLE I GRANTEDTO ANY COUNTRY

Remember our example above. Suppose now that Vanin

decides to eliminate some import formalities applicable

to imports of tomatoes.

Can Vanin eliminate such import formalities only for

tomatoes imported from Medatia?

No. The MFN principle applies to any advantage under

Article I of the GATT, that is, a broad range of measures in

relation to importation and exportation, as well as

internal measures.

Since the MFN principle also applies to all formalities in

connection with exportation or importation, Vanin has toextend the advantage (elimination of some import

formalities for tomatoes) to all WTO members.

10

Supplementary information and background materials:

WTO Analytical Index Article I of the GATT:

http://www.wto.org/english/res_e/booksp_e/analytic_index_

e/gatt1994_01_e.htm#article1C

Additional information - List of measures covered by

Article I:1 of the GATT(MFN principle):

Any kind of charges imposed on importation or

exportation

Any kind of charges imposed in connection with

importation or exportation

Any charges imposed on the international transfer of

payments for imports and exports

The method of levying such duties and charges

All rules and formalities in connection with importation

and exportation

Internal taxes or other internal charges (covered in Article

III.2)

All laws, regulations and requirements affecting internal

sale, offering for sale, purchase, transportation,

distribution or use of any product (covered in Article III.4)

Non Discrimination
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htm

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SHALL BE ACCORDED "IMMEDIATELY ANDUNCONDITIONALLY

This means that once a WTO member has granted an

advantage to imports from any country (member or not

of the WTO), it must immediately and unconditionally

grant that advantage to imports of like products from all

WTO members.

The advantage may not be subject to reciprocity or made

conditional on whether a member has certain legislation

or undertakes a certain action.

11



http://www.wto.org/english/res_e/booksp_e/analytic_index_

e/gatt1994_01_e.htm#article1C

Non Discrimination
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htm

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TO LIKE PRODUCTS OF ALL OTHERMEMBERS

The essence of the MFN principle is that like products

should be treated equally, irrespective of their origin. In other

words, products which are "not" like products may be

treated differently.

In the example above, Vanin would have to extend thebenefit provided for tomatoes from Medatia (0% tariff) to all

other WTO members only if the tomatoes from Medatia are

likeproducts vis--vis tomatoes from other members.

The term likeproduct is not defined in the GATT. It is also

used in other provisions both in the GATT and in other WTO

Agreements. Hence, you will see the term like products

many times in this course.

How to know whether two products are "like products"?

GATT/WTO case law has used four criteria in determining

whether the products at issue are likeproducts. Which

are these criteria?

The criteria for determining likeness are not spelled outin the WTO Agreements. Four criteria have been used in

several WTO dispute settlement cases (*):

The physical characteristics of the products (nature,

properties and quality)

The products end uses

Consumers tastes and habits

The customs classification of the products

The concept of like products will be further explained in

the next section, which introduces the national treatment

principle.

(*) Note: It is important to note that these four criteria do NOT

constitute a closed list. In other words, there could be other

criteria which may be relevant in determining whether the

products at issue are "like products", depending on the particularcase.

12

red apple = green apple : like products?

rum = vodka : like products?

RUM

Supplementary information and background materials


http://www.wto.org/english/res_e/booksp_e/analytic_inde

x_e/gatt1994_01_e.htm#article1C

Non Discrimination
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_01_e.htm

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Why members have committed themselves to extend concessions made to one trading partner to all WTO members?

How do members benefit from the MFN principle?

The MFN Principle:

13


World Trade Report 2007, p.133-137:

http://www.wto.org/english/res_e/publications_e/wtr07_e.htm

Economic Underpinnings:


(*) Free rider: the term is used to imply that a country which does

not make any trade concessions, profits, nonetheless, from tariff

concessions made by Other Countries under the MFN principle

(Goode, Walter, Dictionary of Trade Policy Terms, Fifth Edition).

Non Discrimination

The MFN principle ensures all members, including small developing members, that they will benefit from the best tradingconditions provided by other membershowever this may sometimes arise problems of free-riding *.

Ensures equal access to international markets:

by ensuring that each country will import from the most efficient supplier. Without the MFN principle, the importingcountry would impose higher tariffs or other trade barriers on the products coming from the most efficient supplier inorder to protect its industry. The imposition of higher barriers would lead to inefficiencies because the most efficient firmswould be punished and production would be shifted to a less efficient firm in another exporting country.

Maximizes efficiency:

by requiring equal treatment among Members, the MFN principle promotes the simplification of procedures andrequirements related to importation and exportation.

Reduces the cost of administration of trade rules:

countries negotiate one multilateral agreement instead of several bilateral agreements.

Minimizes costs of trade negotiations:

Benefits of the MFN principle
http://www.wto.org/english/res_e/publications_e/wtr07_e.htmhttp://www.swisslearn.org/wto/module4/e/start.htmhttp://www.swisslearn.org/wto/module4/e/start.htmhttp://www.swisslearn.org/wto/module4/e/start.htmhttp://www.swisslearn.org/wto/module4/e/start.htmhttp://www.wto.org/english/res_e/publications_e/wtr07_e.htmhttp://www.wto.org/english/res_e/publications_e/wtr07_e.htmhttp://www.wto.org/english/res_e/publications_e/wtr07_e.htm

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The Enabling Clause also allows developing members to

subscribe preferential agreements on trade in goods

among them, without complying with the requirements

provided in Article XXIV of the GATT. The main exceptions

to the MFN principle, including the conditions for their

application, will be introduced in Module 3.

As mentioned before, there are important exceptions to

the MFN principle.

For example, a member may provide preferential

treatment only to some countries within a free trade area

or customs union, without having to extend such better

treatment to all members. This exception is contained in

Article XXIV of the GATT (for trade in goods) and in Article

V of the GATS (for trade in services). It will be explained in

Module 3.

Another important exception enables developed

members to give "unilaterally" preferential treatment to

goods imported from developing countries and least-

developed countries (LDCs), without having to extend

such better treatment to other members.

This exception is contained in the Enabling Clause, which

constitutes one of the main provisions on special and

differential treatment for developing and LDC members.

14

Additional Information - Main exceptions to the MFN

principle:

Specific exceptions to the MFN principle:

Historical Preferences (Article I:2 I:4 of the GATT):

these preferences were significant when the GATT 1947

was negotiated, but their importance has faded over the

years.

Frontier Traffic (Article XXIV:3 of the GATT 1994):

advantages accorded by members to "adjacent

countries" in order to facilitate frontier transactions

constitute an authorized derogation to the MFN

principle. As with the historical preferences, the

importance of this derogation is very limited.

Horizontal exceptions also applicable to other WTO

principles will be explained in Module 3.

Non Discrimination

Exceptions to the MFN principle
http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

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The National Treatment Principle

The national treatment principle constitutes the second

component of the non-discrimination pillar. The national

treatment principle ensures non-discrimination between

domestic and foreign products, services or nationals.

In general, it prohibits a member from favouring its

domestic products over the imported like products of

other members once imported products have entered the

domestic market.

The objective of the national treatment principle is to

provide equality of competitive conditions for imported

products in relation to domestic products.

As with the MFN principle, there are also exceptions that

apply to the national treatment principle.

15


Supplementary information: Legal Underpinnings:


Understanding the WTO Principles of the system:

http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_

e.htm

Non Discrimination
http://www.swisslearn.org/wto/module3/e/start.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.swisslearn.org/wto/module3/e/start.htm

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Article III of the GATT embodies the national treatment

principle for trade in goods (Click on here to see Article III

of the GATT).

For trade in services, the national treatment principle is

contained in Article XVII of the GATS. Under the GATS, the

national treatment obligation is not a general obligation.

It applies only to sectors listed in the individual member's

schedules of commitments and subject to the limitationscontained therein.

Article 3 of the TRIPS Agreement provides the national

treatment principle with respect to trade-related aspects

of intellectual property rights.

The national treatment principle as applied to trade in

services and trade-related aspects of intellectual propertywill be explained in Module 4, which introduces the GATS

and the TRIPS Agreement.

Now, lets take a closer look at Article III of the GATT.

16


Legal documents:

Article III of the GATT:

http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

#articleIII

Non Discrimination

Legal basis
http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

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While the MFN principle seeks to ensure that a WTO

member does not discriminate between like products

originating in, or destined for, other WTO members, the

national treatment principle addresses the non-

discriminatory treatment to be applied to imported and

domestic products.

17Non Discrimination

MFN

Non-discriminatorytreatment between

products of WTOMembers

National Treatment

Non-discriminatorytreatment between

imported and domesticproducts

Difference between the national treatment principle and the MFN principle

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Example

Suppose that Vanin -a WTO member- adopts a regulation

which imposes a sales tax of 20% on imported soft drinks

and a sales tax of 1% on domestic soft drinks. In addition,

Vanin applies a special package requirement for the

internal transportation of imported soft drinks contained

in glass bottles that this country does not apply to

domestically produced soft drinks contained in glass

bottles.

CAN VANIN APPLY A SALES TAX OF 20% TO IMPORTED

SOFT DRINKS AND A SALES TAX OF 1% TO DOMESTIC

SOFT DRINKS?

CAN VANIN IMPOSE A SPECIAL PACKAGE REQUIREMENT

ONLY TO IMPORTED SOFT DRINKS CONTAINED IN GLASS

BOTTLES?

In both cases, the answer is No. Based on the assumption

that the domestic and imported products are like

products, Vanin cannot apply its internal measures in a

way that it favours its domestic products over the

imported products of other WTO members.

The national treatment principle as set forth in Article III

of the GATT applies to internal measures, including both

internal taxes and internal regulations. The sales tax of20% constitutes an internal tax, while the special package

requirement for the internal transportation of imported

soft drinks contained in glass bottles constitutes an

internal regulation.

18

Vanin Imported soft

drinks

Domestic soft

drinks

Sales tax to

soft drinks

20% 1%

Non Discrimination

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Main Elements

THE NATIONAL TREATMENT PRINCIPLEAPPLIES ONLY TO INTERNAL MEASURES

The national treatment principle only applies to internal

measures, as opposed to border measures (e.g. tariffs). In

general, the national treatment principle applies once a

product has entered the domestic market (*).

(*) Note: It should be noted that the Ad note to Article III clarifiesthat an internal measure may be applied at the border on

imported goods.

Internal measures include:


Article III:2

Internal taxation

Article III:4

Internal laws, regulationsand requirements

affecting the internalsale, transportation,distribution or use of

products

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a. Internal taxation (Article III:2) :

Article III: 2 applies the national treatment principle tointernal taxation (e.g. sales tax, value added tax). It

contains two levels of obligations regarding internal

taxation depending on whether imported and domestic

products can be considered:

likeproducts (first sentence of Article III:2); or

directly competitive or substitutable products

(second sentence of Article III:2).

What is the difference between "like products" and

directly competitive or substitutable products?

Like products vs. directly competitive or substitutable

products

The term likeproducts under Article III:2 first sentence

should be considered as a subset of directly competitive

or substitutable products under Article III:2 second

sentence (*)

(*) The determination of whether two products are like

products or directly competitive or substitutable products

should be made on a case-by-case basis.

If the domestic and imported products are not "like

products" under Article III: 2 first sentence, they may still

be "directly competitive or substitutable" under Article III:

2 second sentence, given the broader scope of the term

"directly competitive or substitutable".

Therefore, even if there is no breach of the national

principle under Article III: 2 first sentence, it may be still

necessary to consider if there is an infringement of Article

III: 2 second sentence.

20


WTO Analytical Index Article III of the GATT:

http://www.wto.org/english/res_e/booksp_e/analytic_inde

x_e/gatt1994_e.htm#article3

Directlycompetitive or

substitutableproducts

Likeproducts

directly competitive or

substitutable products =

imperfectly substitutable

like products = perfectly

substitutable

Non Discrimination
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_e.htmhttp://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_e.htm

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The same criteria explained for determining "likeness"under the MFN principle are relevant for determining

whether the imported and domestic products are like

products in the context of the national treatment

principle:

The physical characteristics of the products (nature,

properties and quality)

The products end uses

Consumers tastes and habits

The customs classification of the products

Instead, the determination of whether the imported and

domestic products are directly competitive or

substitutable involves analysing the competitive

conditions in the relevant market.

Other differences between Article III:2, first sentence, andArticle III:2, second sentence of the GATT

21

Article III:2, first sentence

Article III:2, second sentence

Like Products

The imported products are taxed "in

excess of" the domestic products (thesmallest amount of excessive taxingwill constitute an infringement of the

national treatment principle)

Directly Competitive/SubstitutableProducts

domestic and imported productsare not "similarly taxed" (more thande minimis)

"so as to afford protection todomestic production

Non Discrimination

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b. Internal laws, regulations and requirements affecting the internal sale, transportation, distribution or use of products

Article III:4 applies the national treatment principle to alllaws, regulations and requirements affecting the internal

sale, offering for sale, purchase, transportation,

distribution, or use of products.

This provision requires WTO Members to treat imported

products "no less favourable" than domestic like

products.


The scope of likeness in Article III: 4

is broader than the first sentence of Article III: 2, butcertainly not broader than the combined products scope

of the two sentences of Article III: 2.

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Exceptions to the National Treatment principle

Specific exceptions to the national treatment principle (goods):

Government procurement (Article III:8A GATT)

Subsidies to domestic producers (Article III:8B GATT)

Internal maximum price control measures (Article III:9 GATT)

Cinematographic films (Article III:10 and IV of GATT)

The horizontal exceptions, also applicable to other WTO principles, will be explained in Module 3.


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Lowering trade barriers is one of the most obvious means

of encouraging trade. These trade barriers include

customs duties ("tariffs"), as well as import bans or

quotas. However, there are also several other measures

that could restrict or even impede market access for

goods and services.

WTO Members have recognized that the substantial

reduction of tariffs and other barriers to trade constitutes,together with the non-discrimination principle, a key

instrument to achieve the objectives of the WTO.

This section will introduce the main WTO rules related to

the reduction or elimination of trade barriers, namely:

The reduction and binding of tariffs


The general elimination of quantitative restrictions

24


Preamble of the Agreement Establishing the WTO:

http://www.wto.org/english/docs_e/legal_e/04-wto_e.htm

ELearning courses: Market Access and NAMA negotiations

course

In this Module, we will focus on those barriers affecting

market access for trade in goods. Market access for trade

in services, only applicable to committed sectors and

subject to the listed limitations, will be addressed in

Module 4.

The reductionand binding of

tariffs

The reductionof other

barriers totrade

The generalelimination ofquantitativerestrictions

http://www.wto.org/english/docs_e/legal_e/04-wto_e.htmhttp://www.wto.org/english/docs_e/legal_e/04-wto_e.htmhttp://www.wto.org/english/docs_e/legal_e/04-wto_e.htmhttp://www.wto.org/english/docs_e/legal_e/04-wto_e.htm

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The progressive reduction and binding of tariffs

Tariffs, also known as "customs duties", are the mostvisible and commonly used trade barrier for goods.

Import tariffs give a price advantage to similarly produced

local goods and provide revenue for governments, as the

entry of the goods is conditioned upon the payment of

the customs duty. Therefore, tariffs are sometimes used

by governments to protect their domestic industries from

the competition of imports (as a barrier to marketaccess).

Under the GATT/WTO, the use of tariffs is not prohibited

however, Members have committed to carry out

multilateral negotiations periodically with a view to

substantially reducing the general level of tariffs and

other charges on imports and exports.

But that's not all. The value of tariff reductions would not

guarantee enhanced and predictable market access

conditions if Members could freely increase them after

the negotiations. Thus, Members also agreed to bind

their tariffs at the reduced levels and to record such tariff

bindings in their WTO Schedules of concessions.

25More open and predictable trade

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In the context of international trade, a tariff or customsduty is a financial charge in the form of a tax, imposed at

the border on goods going from one customs territory to

another.

Tariffs applied to imports are usually collected by customs

officials of the importing country when goods are cleared

through customs for domestic consumption.

Although tariffs can also be imposed on exports, import

tariffs are the most common type of tariffs and have been

the main focus of attention of GATT/WTO negotiations.

TYPES OF TARIFFS

There are different types of tariffs, depending on the way

they are calculated. Two of the most common types of

tariffs used are ad valorem tariffs and specific tariffs.

Trade economists commonly share the view that ad

valorem duties are preferable over non-ad valorem duties

(all tariffs other than ad valorem tariffs e.g. specific

tariffs) mainly because the former are more transparent

than the latter.

26


WTO website More information on Tariffs:

http://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htm

Ad valorem tariff Specific tariff

A tariff calculated on the

basis of the value of theimported good, expressed

as a percentage of such

value.

An specific tariff is a tariff

calculated on the basis of aunit of measure, such as

weight or volume, of the

imported good.

Example: 10% ad valorem

An ad valorem tariff of

10% on an imported truck

worth US$ 1000 would

lead to a requirement topay US$ 100 as customs

duty.

Example: US$ 20 per ton

A tariff of US$ 20 per ton

on an imported truck of 1

ton in weight would lead

to requirement to pay US$20 as customs duty.


What is a tariff?
http://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htmhttp://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htmhttp://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htmhttp://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htm

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WHAT ARE THE WELFARE EFFECTS OF AN IMPORT TARIFF?

Tariffs are sometimes used by governments to protect their domestic industries from the competition of imports or to

collect revenue.

A tariff levied on an imported product imposes costs on both, the country "exporting" the product and the country

"importing" that product and imposing the tariff.

27

Costs on the country "exporting" the product Costs on the "importing" country imposing the tariff

Producers of the good at issue (exporters) would faceworse market access conditions in the importing

country than as it would be in the absence of the tariff.

The imposition of import tariffs increases the domesticprice of the imported good. This usually brings gains

for domestic producers of the good and the

government in the importing country, but also losses

for consumers (who will buy less of the product since

the price is higher) and for other domestic producers

who use that good as an input. In economic theory,

this is called the welfare effect of a tariff (see below).

A tariff is equivalent to a tax that foreign exportershave to pay in order to sell the good in the domestic

market. The application of the tariff increases the

price of the imported good, thereby making it more

expensive in the domestic (importing) market. The

increase in the price discourages the importation of

the good.

Overall, in the case of a small importing country,international trade theory shows that the country as a

whole will lose and national welfare will be reduced by

the imposition of a tariff. That is because the costs

incurred by consumers are higher than the gains

obtained by the domestic producers and the

government.


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EXAMPLE: EFFECTS OF AN IMPORT TARIFF ON A SMALL IMPORTING COUNTRY UNABLE TO AFFECTWORLD PRICES

In the case of a small country, international trade theoryshows that the country as a whole will lose and national

welfare will be reduced by the imposition of a tariff. This

is mainly because the tariff cost for domestic consumers

outweighs the gains for domestic producers and the

government. The graph below illustrates this.

Suppose initially that there are no tariffs. Then,

consumers in this country pay the world price toconsume. Suppose that the government decides to levy a

tariff on the imports of rice.

The imposition of a tariff will, first of all, increase the

domestic price of the imported good. People who want to

consume rice will now have to pay the world price plus

the tariff. Domestic consumers of rice will, therefore, be

worse off, as they will have to pay more, if they want to

consume the same quantity of rice as before.

On the other hand, domestic producers of rice will gain,

because they will be able to sell rice at a higher price. The

government will also gain, as it will be able to collect tariff

revenue.


See also self-training course - The WTO: economic

underpinning:


http://www.swisslearn.org/wto/module4/e/start.htmhttp://www.swisslearn.org/wto/module4/e/start.htmhttp://www.swisslearn.org/wto/module4/e/start.htm

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Additional information : Welfare effect of a tariff on a small importing country unable to affect world prices

The graph illustrates the welfare effect of a tariff on a small importing country

unable to affect world prices under conditions of perfect competition.

National economic welfare consists of consumer surplus (the difference

between the willingness to pay and the actual price the consumer pays),

producer surplus (the sum of profits earned by domestic suppliers) and

government tariff revenue. Consumer demand is represented by demandcurve D and producers in a competitive market are represented with supply

curve S.

Without a tariff: consumers in the importing country would buy Do at the

price Po. Domestic producers would supply So and the rest (Do - So) would

be imported from other countries. Consumer surplus is given by the sum of

a, b, c, d, e and f whereas producer surplus is given by g.

With a tariff per unit at price Pt (Po + tariff): consumers in the importing

country would buy D1 (since the tariff would lead to a higher price, Pt, the

quantity demanded would be lower than Do). Domestic producers wouldsupply S1 (since the price they can get thanks to the tariff is higher, they will

produce more than So) and the remaining quantity (D1 S1, which would be

lower than Do So) would be imported from other countries.

With a tariff:

Consumer surplus: Area a+b, consumers loose c+d+e+f [consumers have to pay more due to the increase of both the price of the

imports and the price of domestic substitute products]

Producer surplus: Area g+c [part of the consumer loss is captured by domestic producers who gain from the increase of the sale

prices]

Government revenue: Area e [part of the consumer loss is captured by the government - revenue resulting from the tariff]

BUT What about the loss represented by Area d+f ?

Net national loss as a result of the tariff: Area d+f.

No one captures the consumers loss represented by area d+f, which is normally called "deadweight loss". As a result of the price

increase, some consumers are driven out of the market and this loss is captured by triangle f. The increase of domestic production

entails costs that exceed the costs of the imports they replace. The loss of surplus associated with domestic production is captured by

triangle d. Thus, for the country the net welfare effect of the tariff is negative.

Based on: World Trade Report 2009, page 60.

http://www.wto.org/english/res_e/publications_e/wtr09_e.htmhttp://www.wto.org/english/res_e/publications_e/wtr09_e.htm

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A "bound tariff" is a tariff for which a WTO Memberaccepts a legal commitment not to raise it above a certain

level.

In the WTO, Members commit to ''bind'' their tariffs

(often during negotiations), and the "bound rate"

represents the maximum level of import duty that can be

levied on a product imported into that Member.

It is worth noting that not all goods have a bound tariff

rate in the WTO. Whether or not a tariff lines is bound has

been the subject of trade negotiations amongst WTO

Members, including the on-going Doha round of

negotiations.

Overview of tariff bindings after the Uruguay Round and Percentage

increase in the number of bindings after the Uruguay Round.

Source: WTO Secretariat

CAN A MEMBER "APPLY" A TARIFF THAT IS DIFFERENTFROM THE "BOUND LEVEL"?

A Member can apply a tariff that is different from the

''bound tariff'' for that product as long as the applied level

is NOT higher than the bound level.

An ''applied tariff'' is the duty that is actually charged on

imports on an MFN basis. Although bindings represent amaximum tariff level that can be imposed on the

importation of a good, in practice Members often charge

a rate below that maximum level. The difference between

"bound" and "applied" levels is often referred to in the

jargon as "binding overhang" or "water".

(*) Counting the EC-27 and its Member states as one, as well as

Switzerland and Liechtenstein as one.

30

Share of tariff

lines bound (%)

No. of

Members

Developed

countries

Developing

countriesLDCs

100% 54* 2* 43 9+95 < 100% 28 7 17 4

+35 < 95% 14 0 12 2

+15 < 35% 12 0 5 7

< 15% 17 0 7 10

Total 125* 9* 84 32

Background materials:

Legal documents:

Article II:1 of the GATT:

http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.h

tm#articleII


What is a tariff binding?

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Additional information : Pre- and post-Uruguay Round binding coverage for agricultural and non-agricultural products.

Source: World Trade Report 2007


Legal Underpinnings:


31

Agricultural products Non Agricultural products

Percentage of tariffslines bound

Percentage of importsunder bound rates

Percentage of tariffslines bound

Percentage of importsunder bound rates

Pre UR Post UR Pre UR Post UR Pre UR Post UR Pre UR Post UR

Developing

economies 17 100 22 100 21 73 13 61

Transition

economies 57 100 59 100 73 98 74 96

Latin America 36 100 74 100 38 100 57 100

Central Europe 49 100 54 100 63 98 68 97

Africa 12 100 8 100 13 69 26 90

Asia 15 100 36 100 16 68 32 70

Tariff databases:

Consolidated Tariff Schedules (CTS) Database: contains all

WTO Members' concessions on goods, including bound tariffs

: http://tariffdata.wto.organd http://iaf.wto.org)

The Integrated Data Base (IDB): provides annual information

on tariffs (including applied tariffs) and on imports.

http://tariffdata.wto.organd http://iaf.wto.org)

http://www.wto.org/english/res_e/publications_e/wtr07_e.htmhttp://www.swisslearn.org/wto/module3/e/start.htmhttp://tariffdata.wto.org/http://iaf.wto.org/http://tariffdata.wto.org/http://iaf.wto.org/http://iaf.wto.org/http://tariffdata.wto.org/http://iaf.wto.org/http://tariffdata.wto.org/http://www.swisslearn.org/wto/module3/e/start.htmhttp://www.swisslearn.org/wto/module3/e/start.htmhttp://www.wto.org/english/res_e/publications_e/wtr07_e.htm

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EXAMPLE

Suppose that Vanin is a WTO Member who made acommitment to bind its tariff on bicycles at 10% ad

valorem.

CAN VANIN APPLY A 12% AD VALOREM TARIFF ONBICYCLES IMPORTED FROM OTHER WTO MEMBERS?

No. Vanin cannot apply a tariff that is higher than the

bound level (i.e. 10% ad valorem)

CAN VANIN APPLY A 15% AD VALOREM TARIFF TO

RAURITANIA (A NON-WTO MEMBER)?

Yes. Vanin may apply a higher duty to bicycles imported

from non-WTO Members.

CAN VANIN APPLY A 5% AD VALOREM TO IMPORTED

BICYCLES?

Yes. Vanin can apply a tariff that is lower than the

bound level. But reMember that such "lower" tariff has to

be applied on an MFN basis, that is, to like bicycles

imported from all WTO Members.


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WTO negotiations normally produce general rules thatapply to all Members and specific commitments. The

specific commitments are recorded in documents called

Schedules of concessions (*).

For trade in goods, the WTO Schedules of concessions

record each Member's tariff bindings, and other

concessions () resulting from trade negotiations. These

concessions are granted on an MFN basis.

Each Member has its own WTO Schedule of concessions,

except for Members that are part of a customs unions

(e.g. the European Union), that may have a single

common Schedule for all the Members of the union. Most

WTO Members' Schedules of concessions on goods are

based on the Harmonized Commodity Description and

Coding System - HS.

The Schedules form an integral part of the binding

commitments made by WTO Members and cannot be

easily changed. In that way, the Schedules of concessions

provide predictability of market access for goods.

(*)Note: It should be noted that Members' specific commitmentson trade in services (market access and national treatment) have

been incorporated in the WTO Schedules on commitments for

trade in services, which will be explained in Module 4.

33

Glossary:

Other concessions: other concessions include "other duties

and charges". Other duties and charges (ODCs) comprise alltaxes levied on imports in addition to the customs duties (some

times called "para-tariffs"), and can only be charged if they

were recorded in the Member's WTO Schedule of concessions

(Article II:1(b) of the GATT 1994). Examples of ODCs include

"temporary import surcharges" and "revenue taxes".

Harmonized Commodity Description and Coding System

(Harmonized System): Most Members' Schedules of

concessions for goods are based on the Harmonized System,

which is an international product nomenclature for thedescription, classification and coding of goods developed and

administered by the World Customs Organization (WCO).


Where are tariff bindings recorded?: The WTO Schedules of concessions

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Background information:

Legal documents:

Article II:1 of the GATT:


#articleII


WTO website WTO Schedules of concessions (goods):

http://www.wto.org/english/tratop_e/schedules_e/goods_sch

edules_e.htm

WTO website Get Tariff data:

http://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.

htm

WTO Tariff database (Members' bound and applied tariffs):

http://tariffdata.wto.org

WTO website Members' WTO Schedules of concessions:

http://www.wto.org/english/docs_e/legal_e/legal_e.htm#sch

edules

WTO website More information about WTO Schedules of

concessions (goods):

http://www.wto.org/english/tratop_e/schedules_e/goods_sch

edules_table_e.htm

http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_e.htmhttp://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htmhttp://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htmhttp://tariffdata.wto.org/http://www.wto.org/english/docs_e/legal_e/legal_e.htmhttp://www.wto.org/english/docs_e/legal_e/legal_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htmhttp://www.wto.org/english/docs_e/legal_e/legal_e.htmhttp://www.wto.org/english/docs_e/legal_e/legal_e.htmhttp://tariffdata.wto.org/http://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htmhttp://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_e.htmhttp://www.wto.org/english/tratop_e/schedules_e/goods_schedules_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

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Column 4 (Bound Rate of Duty): records what is

probably the most important outcome of tariff

negotiations, that is, the final bound tariff rates to be

achieved at the end of the implementation period (if any

Column 5). In the example, Member X has made a

commitment to bind its tariffs on carp at 5.0 % ad

valorem.

Column 5 (Implementation Period): reflects the year

"from" and "to" in which the tariff reduction will take

place. It refers to 1st January of the year concerned.

EXAMPLE OF A WTO SCHEDULE OF CONCESSIONS FOR TRADE IN GOODS

35

Column 1 (Tariff item number) & Column 2 (Description

of products): reflects the tariff code and the product

description used by the Member. It often refers to the

Harmonized System (HS) Nomenclature, which was

established under the auspices of the World Customs

Organization (WCO).

Column 3 (Base rate of duty): reflects the starting-point

from which the tariff cuts takes place as part of the

Modalities for the negotiations. The tariff rate can be

bound "B" or unbound "U".


Member X

This Schedule is authentic only in the English Language

PART I MOST-FAVOURED NATION TARIFF

SECTION II Other Products

Tariff Item

NumberDescription of

ProductsBase Rate of Duty Bound Rate of Duty Implementation Period Initial

Negotiating

Right (INR)Other

Duties and

ChargesOther

Terms and

ConditionsAd valorem(%) Other U/B Ad valorem(%) Other From To

1 2 3 4 5 6 7 803010 Live Fish:0301.10.00 Ornamental

fish $5/kg B 0.0 1995 2004 Member Z 2%0301.90.00 Other live

fish:

0301.93.00 Carp 0.0 U 5.0 Member W&

Member Y$5/kg

(...)

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Column 7 (ODCs): specifies other duties and charges

(ODCs) inscribed in Members' Schedules according to the

Understanding on the Interpretation of GATT Article

II:1(b)".

Column 8 (Other terms and conditions): wherever

necessary, clarifications or comments regarding the scope

of the concessions shall be included in the Schedule.

EXAMPLE OF A WTO SCHEDULE OF CONCESSIONS FOR TRADE IN GOODS

36

In the example, the tariff concession on "ornamental fish"

made by Member X will be implemented in 10 equal

reductions, starting on 1st January 1995. After the end of the

designated implementation period (1st January 2001), tariffs

are not allowed to be applied on "ornamental fish" beyond

the level specified in Column 4.

Column 6 (Initial negotiating rights (INRs): indicates the

Members holding initial negotiating rights on the

concession, if any. Rights can be invoked in the context of

GATT Article XXVIII renegotiation of Concessions.


Member X

This Schedule is authentic only in the English Language

PART I MOST-FAVOURED NATION TARIFF

SECTION II Other Products

Tariff Item

NumberDescription of

ProductsBase Rate of Duty Bound Rate of Duty Implementation Period Initial

Negotiating

Right (INR)Other

Duties and

ChargesOther

Terms and

ConditionsAd valorem(%) Other U/B Ad valorem(%) Other From To

1 2 3 4 5 6 7 803010 Live Fish:0301.10.00 Ornamental

fish $5/kg B 0.0 1995 2004 Member Z 2%0301.90.00 Other live

fish:

0301.93.00 Carp 0.0 U 5.0 Member W&

Member Y$5/kg

(...)
http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htmhttp://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

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As tariff barriers are reduced in both developed and developing countries, increased market access opportunitieswill allow Members to improve welfare by expanding export volumes and revenues and through better access totheir markets for imports.

Tariff negotiations are not only about negotiating tariff reductions, but also about negotiating tariff bindings.Tariffs bindings provide predictability to traders by setting an upper limit on the amount of duty that can belevied on a product. In other words, traders know that the import tariff that they will have to pay for a productcannot be higher than the bound level recorded in the Schedule of concessions for that product.

Enhanced market access and predictability for traders

Tariff negotiations shall be held on a reciprocal and mutually advantageous basis (Article XXVIII bis of the GATT).This requirement is normally referred to as ''reciprocity''. Generally, this requirement implies that negotiationsfor the reduction of tariffs should achieve a result that is mutually beneficial to all participants.

However, the principle of reciprocity does not apply in the same manner to tariff negotiations betweendeveloped and developing country Members since it has been adapted to take account of the principle of specialand differential treatment. This involves requiring from developing countries ''lesser'' liberalization than fromdeveloped countries in multilateral rounds of negotiations a principle originally referred to as "non-reciprocity"or, more recently, as "less-than-full reciprocity". This principle will be explained in the last section of this module.

Tariff negotiations shall be held on a reciprocal and mutually advantageous basis

The MFN principle plays an important role in enhancing market access for goods. With respect to tariffnegotiations, the MFN rule serves to avoid concession-erosion after tariff negotiations (see example below).

In addition, for developing countries and others with little bargaining power in the negotiations, the MFNprinciple ensures that they will benefit from the best tariff treatment resulting from the negotiations.

Any tariff reduction granted by a Member to any country must be extended to all WTO Members (MFN principle)


Why governments agree to reduce and bind their tariffs?

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Tariff concessions can be modified or withdrawn throughrenegotiations, subject to certain rules and procedures.

The possibility of allowing for such modifications stems

from the consideration that a negotiated tariff binding

may become too cumbersome to maintain at times due

to changing circumstances.

Renegotiations should aim to reach compensatory

agreement with Members holding special rights in orderto maintain the balance of rights and obligations achieved

prior to such renegotiations (Article XXVIII of the GATT).

Such compensation could consist, for example, in the

reduction of bound tariff rate(s) applicable to another

product(s) of interest to the Members concerned.


Legal documents:

Article XXVIII of the GATT:


#articleXXVIII


Can Members modify their tariff bindings?

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With the progressive reduction of tariffs, it was perceivedthat governments were gradually shifting to other forms

of measures to restrict market access for goods and

protect their domestic industries. These measures may

take different forms and include: quantitative restrictions

(e.g. quotas), arbitrary application of trade regulations,

excessive customs formalities, and technical barriers to

trade, etc.

GATT Contracting Parties recognized that the benefits

resulting from tariff reductions and tariff bindings would

only be effective if they could not be undermined by the

application of other measures.

As a result of the Uruguay Round, Members agreed on a

number of Agreements which set out specific disciplines

on non-tariff measures (all measures other than tariffs

that may restrict trade). In general, they impose

disciplines on the application and administration of these

measures so that they would not constitute unnecessary

barriers to international trade.

One of the best-known forms of non-tariff barriers arequantitative restrictions (quotas), which will be

introduced in the next section of this Module. Module 4

will introduce the WTO Agreements that set out specific

disciplines on other types of non-tariff measures.

39


E-Learning courses: Market Access and NAMA negotiations

course


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The general elimination of quantitative restrictions

WTO Members cannot, as a general rule, imposequantitative restrictions (e.g. bans or quotas) on the

goods imported from or exported to another Member.

While tariffs are allowed as long as they do not exceed

the bound levels and are applied on a non-discriminatory

basis, quantitative restrictions are generally prohibited.

It should be noted however that there are exceptionswhich allow the imposition of quantitative restrictions in

certain circumstances and subject to specific conditions

(for example, they cannot be applied in a discriminatory

manner, according to the MFN principle).


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EXAMPLE

WOULD THIS MEASURE CONSTITUTE A QUANTITATIVERESTRICTION IN THE SENSE OF ARTICLE XI:1 OF THE

GATT?

Yes. The measure applied by Vanin constitutes a limitation

on the amount of goods imported (import quota) and

thus, a quantitative restriction according to Article XI:1 of

the GATT.

Quantitative restrictions can be defined as specific limitson the quantity or value of goods that can be imported

(or exported) during a specific time period. The most

common quantitative restrictions are prohibitions and

quotas.

LEGAL BASIS

The general prohibition of quantitative restrictions iscontained in Article XI:1 of the GATT.

This principle also applies to trade in services (Article XVI

of the GATS), although in a different manner, as it will be

explained in Module 4. It does not apply to trade-related

aspects of intellectual property rights.

Suppose that Vanin is a WTO Member. After determining

the potential market for watches in Vanin, this country

decides to adopt a new regulation which limits the amount

of imported watches to 10,000 per year.


What is a quantitative restriction?

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In general, the effects of an import quota are similar tothe effects of an import tariff, although there are some

important differences. The figure below illustrates the

welfare effects of an import quota on a small importing

country.

The trade effects of an import quota are different from

the trade effects of a tariff in the following aspects:

IMPORT QUOTAS ARE MORE TRADE-RESTRICTIVE THAN

TARIFFS - while an import quota imposes an absolute

limit on imports of goods, an import tariff does not

impose limitations on the quantity or value of imports. If

domestic demand increases imports increase in the case

of a tariff, but not in the case of a quota.

IMPORT QUOTAS ARE MORE TRADE-DISTORTIVE THANTARIFFS - the imposition of a tariff on an MFN basis would

allow the source of the imports from the most efficient

foreign supplier. However, in the case of a quota, the

source of the imports is dependent upon to whom the

license to import is allocated, not the most efficient

foreign supplier.

THE ADMINISTRATION OF AN IMPORT QUOTA IS LESSTRANSPARENT AND MORE COSTLY THAN A TARIFF - who

benefits from the rent depends on the administration

of the quota licences. Moreover, in the presence of

licensing systems, administration and compliance costs

can be very high.

IT IS MORE DIFFICULT TO MEASURE THE TRADE EFFECT

OF A QUOTA THAN THAT OF A TARIFF.These differences between an import quota and a tariff

provide an explanation of why tariffs were preferred in

the WTO as a policy instrument of protection over

quantitative restrictions.

The market access conditions achieved through

GATT/WTO tariff negotiations would be easily

undermined if Members were free to impose restrictions

or limitations on the quantity or value of imports.


Why are quantitative restrictions generally prohibited?

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Additional information : The welfare effect on an import quota on a small importing country

The figure illustrates the welfare effects of an import quota of 10,000 units

under condition of perfect competition. We assume that Medatia is a small

importing country so that its import quota cannot affect the world price. We

also assume that Medatia's domestic industry is competitive with or without

the quota.

In the absence of the quota, consumers of Medatia would buy Do at the givenworld price Pw (120) per unit. Domestic producers would supply So, while

(Do So or 25,000 5000) would be imported from other countries.

Suppose the government imposes an import quota. This prevents the

domestic economy from importing as much as before. After the imposition of

the quota, the imports would be automatically limited to (D1 S1 or 20,000

10,000) units. The effect of the quota is that, at existing prices, demand will

exceed supply. In order to satisfy demand, domestic suppliers would have to

produce any quantity demanded in excess of the quota. The domestic supply

curve is represented in bold. A quota has the effect of shifting the supply

curve to the right by the amount of the quota whenever the price is above

the world price. Since the cost of producing these extra units is strictly higher

than the costs of importing them, the domestic price will increase (Pq),

leading to an effect similar to the one of a tariff.

Consumer surplus: Area a+b, consumers loose c+d+e+f+h

Producer surplus: Area g+c

Deadweight loss / Net welfare loss: Area d+h

Who gains the part of consumer loss represented by area e+f?

In the case of a tariff, this area is collected by the government. However, in the case of a quota, area e+f (the "rent") may be captured

by those holding a license to import.

Who benefits from the "rent" depends on the method for allocating quota shares, unless these are auctioned off. In other words, the

welfare effects of a quota will depend on how the importing government allocates the legal right to import. In addition, a quota grants

discretion as to how a government allocates import licenses. As a result, quotas are considered less transparent and might entail

additional inefficiencies, which is why tariffs are commonly seen as a better means of protection.

Based on: World Trade Report 2009, pages 60-61.

http://www.wto.org/english/res_e/publications_e/wtr09_e.htmhttp://www.wto.org/english/res_e/publications_e/wtr09_e.htm

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ARTICLE X:1 APPLIES ONLY TO "BORDER" MEASURESArticle XI: 1 of the GATT only applies to "border

measures" (as opposed to internal measures). As you

studied in the previous section, internal measures are

instead subject to the national treatment principle set

forth in Article III of the GATT.

ARTICLE X:1 COVERS A "BROAD RANGE" OF BORDER

MEASURESBy referring to import or export restrictions made

effective through "quotas, imports or export licenses or

other measures", Article XI:1 of the GATT provides for a

wide range of measures.

Article X:1 applies to all measures applied by a Member

prohibiting or restricting the importation, exportation or

sale for export of products (other than duties, taxes orother charges compatible with GATT rules).

The Council for Trade in Goods, in a 1996 Decision

provided an illustrative list of the ways in which

quantitative restrictions could be made effective (G/L/59,

Annex).

EXAMPLE

WOULD THIS MEASURE CONSTITUTE A QUANTITATIVE

RESTRICTION IN THE SENSE OF ARTICLE XI:1 OF THE

GATT?The measure may constitute a quantitative restriction.

ReMember that the scope of Article XI:1 is very broad. It

covers any border measure which has the effect of

restricting or limiting the importation of goods in the

terms set forth in Article XI.

44

Suppose that Vanin decides to impose to all watch

importers the requirement to submit to customs

authorities detailed information on the production and

sale of watches (including information on productions

costs, materials used for their production, sale prices) as

a condition for the importation of watches. No watch can

be imported into Vanin without the fulfilment of this

requirement. Since the adoption of this regulation, thevolume of watches imported from other WTO Members

has decreased notably due to the burdensome

requirement to submit detailed information on the

production and sale of watches.


Main Elements

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What would happen if now Vanin decides to apply apreferential tariff rate of 5% to watches up to 3,000 units.

Beyond 3,000 units, Vanin allows the importation of

watches, but applying a higher import tariff of 70%.

WOULD THIS MEASURE CONSTITUTE A QUANTITATIVE

RESTRICTION IN THE SENSE OF ARTICLE XI:1 OF THE

GATT?

No. The measure applied by Vanin constitutes a tariffquota, which is different from a quota. Tariff quotas are a

form or tariff and, therefore, are allowed under the WTO

Agreements.

A tariff quota is a two-tiered tariff under which,

predetermined quantities of goods can be imported at a

"preferential" (lower) rate of customs duty over a given

period of time ("in-quota" rate). Once the tariff quota

volume has been filled, one can continue to import the

product without limitations but paying a higher tariff rate

("out-of-quota" rate).

DIFFERENCE BETWEEN A "QUOTA" AND A "TARIFFQUOTA

In the example (tariffquota), Vanin is not imposing any

numerical limitation on the amount of watches that can

be imported. Instead, Vain is providing better market

access through a preferential duty (5%) for imported

watches up to 3,000 units. Once this tariff quota volume

has been filled, one can continue importing watches into

Vanin without limitations but paying a higher tariff rate(70%). This is different from the quota first applied by

Vanin, which imposed an absolute limit on the quantity of

watches that could be imported (up to 10,000). Imports

above 10,000 were prohibited, even if willing to pay a

much higher tariff.


What about "tariff quotas"?

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Exceptions

As mentioned above, there are exceptions to the principle of general elimination of quantitative restrictions:

(*) Note: the "agricultural exception" ended when the WTO Agreement on Agriculture entered into force. Therefore, quantitative

restrictions remain possible only on fishery products, which are treated as non-agricultural products in the framework of the WTO. Their

administration is subject to the rules onnon-discrimination (see below).

46

Specific exceptions contained in Article XI ofthe GATT:

Export prohibitions or restrictionstemporarily applied to prevent or relievecritical shortage of foodstuffs or otherproducts essential for the exporting Member

(Article XI(2)(a)). Import and export prohibitions or restrictions

necessary to the application of standards orregulations for the classification, grading ormarketing of commodities in internationaltrade (Article XI(2)(b)).

Import restrictions on [agricultural and] (*)fisheries products necessary to theenforcement of governmental measures

which operate to restrict the domesticproduction of certain products or to remove atemporary surplus of certain domesticproducts (Article XI(2)(c)).

Other Exceptions contained in otherGATT/WTO provisions:

they allow Members to depart from the mainWTO principles, including the generalprohibition of quantitative restrictions. Theseexceptions will be explained in Module 3.


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In cases where the use of a quantitative restriction isallowed, as well as in the case of tariff quotas, there are

requirements applicable to their administration.

The basic requirement is that, where authorized,

quantitative restrictions must be imposes on a non-

discriminatory basis (Article XIII of the GATT). That is, a

Member cannot limit the quantity of imports from some

Members, but not from others.

In applying import restrictions to any product, Members

shall aim at a distribution of trade approaching as closely

as possible the shares which the various Members might

be expected to obtain in the absence of such restrictions

(Article XIII:2).

See also section on the Agreement on Import LicensingProcedures (Module 4).


Non-discriminatory administration of quantitative restrictions (applied as anexception) and tariff quotas

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Transparency

Transparency is another fundamental principle of the WTO.It is important that trade policies and regulations are made

accessible to governments and, in particular, traders, as to

allow them to know what are the trade rules around the

world.

Transparency has also a systemic importance. It allows the

monitoring of Members trade measures and practices as

well as their impact on the multilateral trading system.

This section will introduce the principle of transparency

and the different WTO mechanisms and tools to enhance

transparency of international trade.

Module 5 will develop further on these mechanisms and

tools.

48


Understanding the WTO- Transparency

http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

Legal Basis

How does theWTO enhancetransparency

ininternational

trade?

Surveillance ofnational trade

policiesthrough theTrade Policy

ReviewMechanism

Domestic

publication oftraderegulations

Other

transparencymechanismsand tools

Notification of

trademeasures tothe WTO

Transparency
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

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Legal Basis

Most WTO Agreements include transparency obligations.The general principle on transparency for trade in goods is

set forth in Article X of the GATT (explained below). As

you will see later on in this course, most WTO agreements

on trade in goods include transparency obligations.

For trade in services, the transparency provision is

provided in Article III of GATS, and in the case of trade-

related aspects of intellectual property rights, in Article 63of the TRIPS Agreement.

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How does the WTO enhance transparency in international trade?

The WTO mechanisms and tools to enhance transparencyinclude mainly those directed to keep the WTO

Membership informed about individual Members policies

and practices having an impact on trade (internal

transparency - within the WTO). The principle of

transparency applies to trade in goods, trade in services

and trade-related aspects of intellectual property rights.

There are also a number of initiatives and programmesdirected to inform the general public, including academics

and civil society, about WTOs activities (external

transparency).

In Doha Ministerial Conference, Members reaffirmed the

importance of ensuring internal transparency (see Doha

Ministerial Declaration, para. 10). While emphasizing the

intergovernmental character of the organization, they

committed to making the WTO's operation moretransparent, including through more effective and prompt

dissemination of information and to improve dialogue

with the public.

This Module will introduce the mechanisms to keep theWTO and its Members informed. It is worth noting that

some of these mechanisms have also the effect of

improving external transparency.

50

Internal transparency: keeping the WTO informed

Review of Members national trade policies throughthe Trade Policy Review Mechanism

Domestic publication of Members trade regulations

Notification of Members trade measures to the WTO

Other transparency mechanisms

External transparency: keeping the public informed

Initiatives and programmes aimed at informing thegeneral public about WTOs activities.

Transparency

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Surveillance of national trade policies through the Trade Policy ReviewMechanism

As explained in Module 1, one of the functions of theWTO is to implement the Trade Policy Review Mechanism

(TPRM). The TPRM was an early result of the Uruguay

Round being provisionally introduced into GATT in 1989.

With the creation of the WTO in 1995, it was made

permanent and broadened to cover also trade in services

and trade- related aspects of intellectual property rights.

The reviews focus on Members domestic trade policiesand practices taking into account Members wider

economic and developmental needs their policies and

objectives, and the external economic environment that

they face.

The reviews take place in the Trade Policy Review Body

(TPRB), which is the General Council operating under

special rules and procedures, and comprises all WTO

Members.

The reviews are not intended to serve as a basis for the

enforcement of specific obligations under the WTO

Agreements, for dispute settlement procedures or to

impose new commitments on Members.


WTO website Trade Policy Reviews:

http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm

Brief introduction:

http://www.wto.org/english/tratop_e/tpr_e/tp_int_e.htm

51Transparency
http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htmhttp://www.wto.org/english/tratop_e/tpr_e/tp_int_e.htmhttp://www.wto.org/english/tratop_e/tpr_e/tp_int_e.htmhttp://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm

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The main objectives of the TPRM are (*):

the smoother functioning of the MTS by achieving greater transparency and understanding ofMembers' trade policies and practices

enable the collective appreciation and evaluation of the full range of individual Members' tradepolicies and practices and their impact on the MTS

contribute to improved adherence by all Members to rules, disciplines and commitments madeunder the WTO Agreements

What are the objectives of the TPRM?

All WTO Members are subject to review under the TPRM. The frequency of each Members review

varies according to its share of world trade. The reviews have two broad results: they enable

outsiders to understand a Members trade policies and practices and they provide feedback to the

reviewed Member.

Who is subject to the TPRM?

The frequency of reviews of a Member is defined by the Member's share of world trade in goods and

services: the four biggest traders (the European Union, the United States, Japan and China) are examined

once every two years.

the next 16 countries with a lesser share in world trade are reviewed every four years.

all other Members (most developing Members and economies in transition) are reviewed every sixyears, with the possibility of a longer interim period for LDCs.

When do the reviews take place?

The TPRM review process

52

(*) Note: Annex 3 of the Agreement Establishing the WTO, paragraph A.

Transparency

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The reviews focus on the extent to which individual trading entities follow basic WTO principles

concerning transparency of trade policies, non-discrimination in treatment of trading partners, the

pattern of protection and the extent to which tariffs only are used as measures of protection in tradein goods. They also consider restrictions used in trade in services, the record of adherence to the MTS

and participation in dispute settlement.

What is subject to review?

For each review two documents are prepared:

A report written independently by the WTO Secretariat: it follows a format, which contains

summary observations. It is mainly based on official information and comments provided by theMember under review.

A policy statement by the Member under review: it takes the form of a policy statement, whichoutline the objectives and main directions of trade policies.

These two documents, which form the basis of the review, are then discussed by the WTOs fullMembership in the TPRB. Both documents and the proceedings of the TPRBs meetings are publishedshortly afterwards.

How it works?

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The TPRM is a valuable tool for the development of tradepolicies in developing and LDC Members. Given the fact

that these Members may confront with particular

difficulties in adjusting their domestic policies in

compliance with the WTO Agreements, a trade policy

review would assist them to undertake a process of self-

assessment, including an examination of their

participation in the WTO.

Preparation for and participation in a trade policy review

can be onerous for small developing countries. The WTO

Secretariat may assist the Member concerned during the

review process.

54Transparency

The TPRM and developing Members

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Domestic publication of trade regulations

The WTO Agreements require the prompt publication ofdomestic laws, regulations, judicial decisions,

administrative rulings and international agreements

affecting trade in such a manner as to enable

governments and traders to become acquainted with

them. This general obligation related to the domestic

publication of trade regulations is provided in Article X of

the GATT.

Members shall also refrain from enforcing certain

measures (e.g. increasing a rate of duty or imposing more

burdensome requirements on imports) before their

publication.

Article X also requires Members to administer their trade-

related regulations in a uniform, imp

m2_e

Documents