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ITE Unit 1 Notes

International Trade Economics (Karnataka State Law University)

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SYLLABUS
LAW RELATING TO INTERNATIONAL TRADE
ECONOMICS
OBJECTIVES:
International trade has assumed great importance in 21st century and its regulation under law has
become a necessity to prevent exploitation of the weaker people. A new legal regime to regulate
international trade is emerging. Students of law should have understanding of these
developments. This course is worked out to provide the future lawyers basic inputs in the area of
international trade law.

COURSE CONTENTS:
UNIT-I
Historical perspectives of International Trade, Institutions – UNCTAD, UNCITRAL, GATT
(1947-1994); World Trade Organization-Objectives, Structure, Power; Most Favored Nation
Treatment and National Treatment; Tariffs and Safeguard measures.

UNIT-II
Technical Barriers to Trade; Sanitary and Phyto- sanitary measures; Trade Related Investment
Measures (TRIMs); Anti- Dumping, Subsidies and Countervailing Measures; Dispute Settlement
Process.

UNIT-III
International Sales of Goods Formation and Performance of International Contracts, Various
Forms and Standardization of Terms; Acceptance and Rejection of Goods, Frustration of
Contract, Invoices and packing, Product liability.

UNIT-IV
Exports – Insurance of Goods in Transit; Marine Insurance and kinds; Law on Carriage of goods
by sea, land and air, Container transport, Pre-Shipment Inspection; Licensing of Export and
Imports.

UNIT-V
Laws Governing Finance and Investments; Foreign Collaboration and Investment Policy;
Foreign Direct Investment in Industries and Governing Policies; Foreign Institutional Investors
(FIIs): Investment by Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs);
Foreign Collaboration Agreement- Foreign Technology Agreement; Foreign Companies and
Foreign Nationals in India

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UNIT 1
1. Explain the concept of ‘MFN’ treatment and discuss the importance of national
treatment clause as a pillar of equality in World Trade Law. ***
2. Do you agree that MFN Clause in WTO agreement is the basic principle for the
promotion of International Trade? Justify the statement. **
3. Write a note of Most Favoured Nation Treatment and discuss the importance of
National Treatment Clause.
4. Explain MFN clause in WTO agreement as an essential principle of International
Trade. State nits exceptions if any.
5. Explain the principle of ‘Most Favoured Nation Treatment’ and What are the
exceptions to it.
6. Explain how National Treatment and MFN treatment principles are main pillers of
International Trade.
7. Analyse the importance of Most Favoured Nations Clause in International Trade
Agreement.
8. Explain the evolution of World Trade Organization (WTO) as a trading institution in
International Trade.
9. Discuss the organizational structure, objectives and scope of WTO. **
10. Explain the evolution and development of World Trade Organization.
11. Discuss the historical evolution of emergence of WTO. **
12. Explain the scope and objectives of WTO. **
13. Explain the role of GATT on establishing WTO. ***
14. Explain the role of GATT in establishing WTO. What are the principles of WTO?
15. Discuss the importance of ‘National Treatment’ clause in GATT.
16. Give the background of International Trade in India. **
17. Discuss the historical background of UNCTAD. What are its objectives?
18. Define the term ‘BOUND’ and explain the limitations on tariff bindings.
19. Explain what are Tariff and Non Tariff Barriers to trade between countries of the
world.

SHORT NOTES
1. UNCTAD. **
2. Historical Background of UNCTAD.
3. Historical background of UNCTAD.
4. GATT **
5. National Treatment.
6. BOUND. **
7. Tariffs and Quotas. ***
8. UNCITRAL **
9. National Treatment. **

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UNIT:1

QUESTION NO: 1

1. Explain the concept of ‘MFN’ treatment and discuss the importance of national
treatment clause as a pillar of equality in World Trade Law. ***
2. Do you agree that MFN Clause in WTO agreement is the basic principle for
the promotion of International Trade? Justify the statement. **
3. Write a note of Most Favoured Nation Treatment and discuss the importance of
National Treatment Clause.
4. Explain MFN clause in WTO agreement as an essential principle of
International Trade. State its exceptions if any.
5. Explain the principle of ‘Most Favoured Nation Treatment’ and What are the
exceptions to it.
6. Explain how National Treatment and MFN treatment principles are main
pillers of International Trade.
7. Analyse the importance of Most Favoured Nations Clause in International
Trade Agreement.

(For National Treatment refer Question No: 2)

ANSWER:
Introduction

Non-discrimination is a fundamental principle of the World Trade Organization (WTO) and is

embodied in the:

 Most Favored Nation Treatment; and,

 National Treatment.
Article I and Article III of the GATT 1994, deals with Most Favored Nation Principle and
National Treatment Principle respectively. With further development in the scope of these
principles, now these principles not only deal with the trade in goods practices rather now they
also govern the trade in services and trade in IPR.

The principle of Most Favored Nation (popularly known as the MFN treatment) by name
implies especially favorable treatment. The MFN principle is a fundamental principle of trade
ensuring non-discrimination between ‘like’ goods and services. It is a legal obligation to accord

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equal treatment to all nations accorded the benefits. The clause relates to providing the same
benefit and concession to one Member in case benefits and concessions are provided to another
Member. MFN hence calls for non-discrimination amongst Members.

For example, in case a country ‘A’ provides a tariff concession to a country ‘B’ by imposing a
10% duty on import of cars, ‘A’ is obligated to charge the same rate of 10% to the imports of
cars by Country ‘C’. In this sense, a nation is bound to treat every other nation as its favorite or
most favored nation. The World Trade Organization (WTO) has made the most favored nation
principle part of its rules.

Thus, with respect to WTO, the members are not allowed to favor any one country with, for
example, lower tariffs on particular products without giving all members the same benefit.

Modes of discrimination

In order to obtain a thorough understanding of the principle of most-favored nation, it is vital to

understand the forms of discrimination. Discrimination may either be de jure or de facto.

De jure discrimination

By de jure discrimination, we mean that discrimination that is spelt out by law. Hence, when
foreign goods and services are not given the same treatment as domestic goods or services or
that which is given to other Members; despite of being similar or like, it is a case of de jure
discrimination. For example, there may be laws or regulations that have the impact of
discriminating between goods and services that are like. Also, there may be an application of
taxes in a different manner to domestic and imported goods, when in reality there is no real
difference between the two.

De facto discrimination

De facto discrimination is discrimination that is not as explicit as de jure discrimination and is

implicit in the type of measures used. De facto discrimination occurs when there can or cannot
be an issue of a legal instrument but the discrimination can be found in the material facts. To
establish de facto discrimination, all the facts relating to the application of the measure must be
reviewed.

For example, there may be a variable tax rate on beverages with high alcohol content than those

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with low alcohol content. There being no real discrimination apparent in such a measure, it will
be regarded as de facto discrimination if, based on the market scenario, domestic beverages have
a low alcohol content and imported beverages have a higher content. Discrimination must hence
operate so as to distort the conditions of competition‟ between goods and services that are like.
Mere existence of different rule, does not lead us to the conclusion that like goods and services
have been discriminated unless the “conditions of competition” have been adversely impacted.

Most Favored Nation Obligations under the GATT, 1947

The MFN principle works to:

 Maximize efficiency.
 Minimize transaction costs.
 Promote further reciprocal liberalization- These benefits particularly small developing
countries, which benefit from the most-favored treatment provided to other Members.
 Minimize the costs of trade negotiations.
Article I of the GATT, 1947 that invokes the principle of most-favored nation treatment
prohibits discrimination that may be in the form of de facto and de jure discrimination,
against the Contracting Parties. It provides for non-discrimination amongst trading partners;
and applies to every governmental measure in the form of customs duties and charges, the
method of levying the same and the rules and formalities applicable in the importation and
exportation of goods.

Article 1 of the GATT additionally calls for non-discrimination amongst Members inter-se
in the importation of products that are “like”. Article I.1 states that “any advantage, favor,
privilege or immunity granted by any Member to any product originated in or destined for any
other country shall be accorded immediately and unconditionally to the like product originated
in or destined for the territories of other Members”

The MFN principle under the GATT prohibits discrimination that is either de jure or de facto.
Hence, discrimination that is either is the form of explicit provisions of laws or regulations, or
by means of a conduct is prohibited.

Belgian Family Allowances dispute:

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The Belgian Family Allowances dispute comprehensively elucidates the scope of

discrimination, and the phrase “any advantage, favor, privilege or immunity” for the purpose of
understanding the nature and scope of discrimination prohibited by the MFN principle. In this
dispute, the measure at issue was whether Belgium had violated the MFN principle because of
levying a charge on exports only due to the fact that such countries did not have a similar
family allowance policy in place. As a result, countries like Denmark and Norway had to pay a
charge on exports only by reason of not having a similar family allowance policy as that of
Belgium. The question was whether Belgium was justified in imposing a special charge on the
condition that exporting nations should also have a policy similar to that of Belgium.

In this context, the Panel held that Belgium had Article I:1 of the GATT as a result of this
measure. It elaborated that any advantage, etc. which was granted by one Contracting Party
with respect to products originating or destined for any country must also be granted to all other
countries. Hence, the Panel stated that such classifications made for certain products must
exclusively be based on the characteristics of the products themselves; as against being based
on the characteristics of the country where they originate from.

Three-Tier Test or The Essentials Considering MFN principles-

One needs to check these three elements to find an inconsistency with MFN principles:

 Any advantage or favor or privilege or immunity covered by Article I:1 of the GATT
1994; and
 Like products; and,
 The advantage issued to a specific nation is not granted immediately and
unconditionally to the like products of every member nation.
Product must be a “like” product

In order to prove that the principle of MFN has been violated, the aggrieved party must first
prove that the products are “like”.

Border Tax Adjustment case

The jurisprudence of the concept of “likeness” evolved in the case of Border Tax Adjustment

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wherein the Panel laid down the guidelines to determine “like” goods by following four general
criteria:

a. the property, nature and quality of the products;

b. the end uses of the product;
c. consumer tastes and habits and
d. tariff classification of the products.
Hence, the physical properties, the extent to which the product may be perceived as serving the
same end use, the extent to which consumers perceive and treat the products as an alternative
and the international classification of the products for tariff purposes is what ought to be taken
into account.

The Japan-Alcoholic Beverages Case

This case is also known for its jurisprudence on the concept of “like products”. The question
before the Panel in this case was whether “vodka” and the Japanese drink “sochu” were alike.
While Japan argued that the two shared no similarities, the Panel in its report (which was later
upheld by the Appellate Body) stated that the two should be regarded as alike due to the fact
that the two shared the same physical characteristics and even the same end-use. The
differences in the same simply lie in the fact that the process of filtration is not the same.

In elaboration, the Panel gave a comparison of other alcoholic beverages like rum to sochu,
stating that the two cannot be considered as “like” products because of the difference in the
ingredients, while “whiskey” and “brandy” had different appearances to that of “sochu”. At the
same time, “gin” “genever” and “liqueurs” contained certain addictives. To this extent, vodka
and sochu must be considered as like products given the fact that they are similar in
appearances and even have identical end-uses. There were however, no clear guidelines as to
the circumstances in which goods may be considered as “like”. Hence, products that are “like”
must be treated equally, irrespective of their origin. Considerations in determining “like”
products are essentially the same in case of the MFN clause as well. Discrimination among
“like” goods arises when goods that are otherwise similar are discriminated by governmental
measures.

Types of measures covered under Article I: 1 ( If you wanna write about it you can its

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optional)

The principle of most-favored nation under Article I: 1 of the GATT covers the following types
of governmental measures:

i. Customs duties and charges of any kind: (for example, transport or warehouse charges)
Custom duties and charges of any kind which are requisite for free and fair trade; must
be imposed in connection with charge imposed on the internal transfer of payments for
imports or exports. Hence, suppose a member charges a different exchange rate or
service charge on the importation or exportation of goods only for a particular WTO
Member in a discriminatory manner, the measure is in violation of Article I: 1.

ii. Other rules and formalities in connection with importation and exportation:
This means that rules and formalities with respect to importation and exportation of like
products must be uniform for all Members so as to maintain a level playing field.

iii. The method of levying such duties and charges:

This measure refers to the method used to calculate the duties and charges; and in turn
refers to the application of ad voleram 1 versus specific duties. Accordingly, if a WTO
Member applies ad voleram duties on the (like) products imported or exported to some
Members, while imposing specific duties on similar products of other WTO members;
the same would be considered as a different method of levying duties and charges.

iv. Measures referred to in Article III: 4 of the GATT, 1947:

With respect to all laws, regulations and requirements affecting their internal sale,
offering for sale, purchase, transportation, distribution or use must also be uniform for
like products from goods destined to or coming from another Member’s territory.

Exceptions to the MFN Principle

The MFN obligation has certain exceptions. There are also general exceptions and the security
exceptions to the obligations of GATT.
1

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i. Regional Integrations:
It is a process in which neighboring nations come into an agreement to integrate their
cooperation through common rules with the help of Regional Trading Agreements
(GATT Article XXIV). RTA have become in recent years a very prominent feature of
the Multilateral Trading System (MTS). Some 380 RTAs have been notified to the
GATT/WTO up to July, 2007. Regional integration liberalizes trade among countries
within the region, while allowing trade barriers with countries outside the region.
Regional integration therefore may lead to results that are contrary to the Most-Favored
Nation principle because countries inside and outside the region are treated differently.
This may have a negative effect on countries outside the region, and thus lead to results
contrary to the liberalization of trade.

The regional trading groups such as the European Union (EU), the North America Free
Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEANS),
the South Asian Association for Regional Cooperation (SAARC), the Southern
Common Market (MERCOSUR), the Common Market of Eastern and Southern Africa
(COMESA), etc. have posed a great challenge to the Most-Favored Nation principle
which have lowered or eliminated tariffs among the members while maintaining tariff
walls between member nations and the rest of the world. The WTO agreements
recognize that regional arrangements and closer economic integration can benefit
countries. It also recognizes that under some circumstances regional trading
arrangements could hurt the trade interests of other countries. Normally, setting up a
customs union or free trade area would violate the WTO's principle of equal treatment
for all trading partners (most-favored-nation).

ii. Historical Preferences (Article I:2 GATT 1994)-

We can easily understand with the words when the trading nations are favoring any
trade preference to any nations from many years then such trade benefits don’t come
under the trade preference restriction of MFN principles and hence becomes an
exception to MFN principles.

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iii. Frontier Traffic (Article XXIV:3 GATT 1994)-

Frontier Traffic means certain trade advantages to adjacent or neighboring countries/
nations. Unlike historical preferences, the economic impact of this exception is very
limited.

iv. Customs Union:

A Customs Union is defined in Article XXIV: 8(a) of the GATT, 1994 as “a
substitution of a single customs territory for two or more customs territory so that duties
and other restrictive regulations of commerce are eliminated [Link] all trade
between the constituent territories of the union or at least w.r.t. substantially all trade in
products originating in such territories.”
Furthermore, the existence of customs union justifies a measure that is otherwise GATT
inconsistent if the formation of that customs union were made to be impossible if the
introduction of that measure was not permitted. At the same time, the existence of a
customs union makes it obligatory for the members of the customs union to apply
substantially the same duties and other regulations of commerce to each of the trade
territories not included in the union. In the application of substantially the same duties
and other regulations of commerce, Article XXIV: 8(5) (a) (of the GATT) also imposes
the obligation that such duty and other regulations are not higher or more trade
restrictive than they were before the constitution of the customs union.

v. Free Trade Area:

Measures inconsistent with the MFN obligation under the Article 1: 1 of the GATT is
also permitted with the formation of a free trade area. A free trade area is defined under
Article XXIV: 8 (b) as “a group of two or more customs territories in which duties and
other regulative restrictions are eliminated on substantially all trade between the
constituent territories in products originating in such territories.” Hence, the measure is
justified on the ground that the formation of the free trade area would be unattainable
but for the existence of such a measure.
While the existence of a customs union makes it obligatory vide Article XXIV: 8(a) (ii)
to apply substantially the same duties and regulations of commerce to territories not a

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part of the customs union (commonly known as “third party rights”); the same is not the
case with free trade areas. Free trade areas, hence only establish a standard for internal
trade between members of the free trade area. Trade territories not a part of the FTA are
merely assured that the duties and other regulations of commerce are not higher or more
restrictive than they were prior to the formation of the free trade area.

vi. Preferential Treatment to Developing Countries:

Next, countries may also be exempted from the MFN obligation with the aim to provide
preferential treatment to developing countries. The UNCTAD Special Committee on
Preferences recognized as long as in the year 1970 that preferential treatment granted
under the generalized scheme of preferences was a motivating factor for developing
countries to increase their exports so as to promote industrialization and accelerate
economic growth. Thereafter, the Waiver Decision on the Generalized System of
Preferences was passed in the year 1971 to give effect to the Agreed Conclusions;
which was eventually replaced as a result of the Tokyo Round Negotiations by the 1979
GATT Decision on Differential and More Favorable Treatment, Reciprocity and Fuller
Participation of Developing Countries; commonly known as the “Enabling Clause”.

vii. Enabling Clause: (It means certain trade preference for developing and least
developing nations).
The Enabling Clause authorizes Members to deviate from MFN obligations under
Article 1: 1 of the GATT and accord differential and more favorable treatment to
developing countries, without according the same to other Members. Preferential
treatment may therefore be accorded in accordance with the Generalized System of
Preferences by Members of developed countries to products originated in developing
countries. The Appellate Body in EC- Tariff Preferences ruled that the Enabling Clause
is enacted with a view to enhance the market access to products originating from
developing countries beyond the access granted to like products originating from
products of developed countries. The Enabling Clause, thereby persuades developing
countries to accord “differential and more favorable treatment‟ to developing countries;
keeping in mind that the same is designed to facilitate and promote the trade for

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developing countries and not raise barriers or create undue difficulties for the trade of
other Members; and that it does not constitute an impediment to the reduction or
elimination of tariff and other restrictions to trade on an MFN basis. Lastly, the
differential and more favorable treatment provided to developing countries under the
Enabling Clause shall also be designed or modified to respond positively to the
development, financial and trade needs of the developing country.

QUESTION NO: 2

1. Discuss the importance of ‘National Treatment’ clause in GATT.

2. National Treatment. (6 Marks)

ANSWER:

Introduction

Non-discrimination is a fundamental principle of the World Trade Organization (WTO) and is

embodied in the:

 Most Favored Nation Treatment; and,

 National Treatment.
Article I and Article III of the GATT 1994, deals with Most Favored Nation Principle and
National Treatment Principle respectively. With further development in the scope of these
principles, now these principles not only deal with the trade in goods practices rather now they
also govern the trade in services and trade in IPR.

National treatment is one of the fundamental market access principles of the GATT / WTO
system. It imposes an obligation of like treatment and non-discrimination between domestic
and imported goods. With respect to goods, national treatment means that, once imported
products have cleared customs and applicable tariff or duty has been collected, they must be
treated the same as domestic products. Otherwise, discriminatory treatment could defeat the
tariff concessions granted under Article II of the GATT. The objective of National treatment is
“to protect expectations of the contract in parties as to the competitive relationship between
their products and those of other contracting parties to protect current trade and to create the

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predictability needed to plan future trade”.

National treatment applies to products even whose tariffs are not bound. National treatment is
also a feature of the General Agreement on Trade in Services (GATS) and many other trade
agreements. National treatment obligation is set forth in Article III of the GATT. The basic rule
is that no law, regulation or taxation pattern adversely modifies the conditions of competition
between like imported and domestic products in the domestic market.

Article III:1 contains general principles and informs and provides the context for the rest of
Article III.

In addition, Article III:1 defines the scope of application of Article III to include:

Internal taxes and charges laws regulations and requirements affecting the same come of
transportation, distribution for use of products and internal quantitative regulation requiring the
mixture, processing or use of products in specified prepositions.

The purpose of Article III is to assure that national domestic measures do not subvert the
Article II tariff bindings and limit national protective measures to border controls. Accordingly,
Article III secures “effective equality of opportunity for imported products” to compete with
domestic products. The National treatment obligation is, therefore, a constraint that operates
upon virtually any measure favoring domestic products or disfavoring imported products.

For Example:

In Korea-Beef case, the appellate body considered whether Korea was infringing the national
treatment of obligation by maintaining a dual retail system for marketing beef that can find
sales of imported beef to specialized stores. Korean law created two distinct retail distribution
system for beef. One for domestic true beef and another for imported beef. A large retailer
could sell both domestic and imported beef as long as it maintained separate sale areas.
Retailers selling imported beef were required to display a sign reading “Specialized Imported
Beef Store”.

The Appellate Body, in analyzing whether maintenance of the dual retail system violated
Article III, concluded that formal separation does not, itself necessarily violate the national
treatment obligation. The key inquiry is whether the maintenance of separate retail distribution

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system for domestic and imported products “modify the conditions of competition in the
Korean beef market to the disadvantage of the imported product”. This, in turn, depends upon
the effect of the dual retail system. The Appellate Body noted that effect had been the reduction
of retail outlets for imported beef, both in absolute terms and in comparison, with the number
of retail outlets for domestic beef. This “reduction of competitive opportunity” was not
consistent with the requirements of Article 3 of the GATT.

Effect

The national treatment standard ensures competitive equality and prohibits discriminatory
treatment between domestic and foreign investors and investments. In general, it is irrelevant
whether the discriminatory treatment is prescribed by law (de jure) or exists only in fact (de
facto). The prohibited “treatment” is understood not merely to cover a regulatory measure but
may also include “the manner in which a State concludes an investment contract or exercises its
rights.”

Interpretation of Article III

Art. III:I : General Obligation- It talks about the general obligation of Article III and lays tells
about the concept of NTP that how it works and what the essentials of it.

Article III:2: Internal Taxation- It tells about the non- discriminatory principle through internal
taxation.

Article III:2 – First Sentence (Two-Tier Test)

This part of Article III gives a platform for testing if the action of importing nation is
discriminatory, for testing such action a two-tier test has to be passed to check the consistency of
importing nation with NTP which are:

 If the imported and domestic products are like products- It explains the consistency of
‘Like Product’ essentials with domestic & imported products. And explains a condition if
both domestic and imported products are ‘Like Product.
 If the imported products are taxed in excess of the domestic products.- It explains the
condition when the imported products are taxed excessively compared to like domestic
products.

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Article III:2 – Second Sentence

It has another test of checking if the action of importing country is against NTP or not.
Therefore, if there is no violation of Article III:2, first sentence, and if can still be considered that
there is an infringement of Article III:2, then another three-tier test of the second sentence can be
applied.
Three – Tier test prescribed under Article III:2 of 2nd sentences:
• If the imported and domestic products are directly competitive or substitutive- This
means if domestic and imported products are directly or closely competitive or
substitutive like tea- coffee, roasted- unroasted coffee etc.
• If the domestic and imported products are not similarly taxed or if the imported products
are taxed excessively over domestic product- This means if the importing country is
imposing more taxes on imported products and less tax on domestic products.
• If the importing nation is doing anything which causes protectionism of their domestic
products over imported products- This means a condition when the domestic government
is trying to protect their domestic product by implementing certain rules and regulations
in any manner.

Article III:4 (Internal Laws, Regulations and Requirements Related to Internal Sale,
Transportation, Distribution or Use)-
This article is again providing another platform to test if the importing country is violating any
NTP and if such violation can’t be tested by either of the two tests explained above then, the test
expressed in this article can help to test if any nation is violating NTP.
The test follows three conditions which are:
• The imported and domestic products at issue are like products.
• The measure at issue is a law, regulation, or requirement affecting their internal sale,
offering for sale, purchase, transportation, distribution, or use- It means that if the
importing country is using any of such measures to protect its domestic products by using
its intern power of imposing new rules and regulations etc.

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• The imported products are afforded less favourable treatment than domestic products- It
is a condition when the government is trying to market its domestic product and doing
unfavourable practices in providing less favourable treatment to imported goods.

The importance of the national treatment principle

It is based on the original purpose of the GATT as an agreement to facilitate the reduction of
barriers to international trade in goods. As such, national treatment is significant for two reasons:

 First, national treatment ensures that concessions made by Members in respect of trade
barriers at the border are not nullified by within-border discrimination between imported
and domestically-produced goods, in the form of differential taxation or regulatory
requirements by the government of the importing country.
 Second, national treatment is designed to support trade liberalization, which is desirable
because it is believed to be on the whole beneficial to the participating countries. This is
because the bulk of world trade taken aggregately is in products produced under
competitive conditions.

Significance of the National Treatment Provision

The principle of National Treatment endeavors to prohibit discrimination between domestic and
imported goods and services that are like. In essence, the principle of national treatment seeks
to promote trade liberalization. With this, the principle of national treatment sought to provide
tariff concessions to countries in general as against limiting them to countries that had
negotiated for the same.

Article III of the GATT, 1947 aims and endeavors to achieve the following:

It seeks to promote the conditions of competition between countries.

In the Japan – Alcoholic Beverages Case, the Appellate body held that “the fundamental
purpose of the principle of national treatment is to prevent protectionism in the application of
internal tax and regulatory measures.” National treatment entails to improve the conditions of
competition in the market, and any protectionism afforded to imported production shall directly

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hamper the conditions of competition. Prejudices against goods that are not locally made are
considered to be unfair trade practices; with the principle of national treatment ensuring that
free trade is fair and fair trade is free.

It seeks to ensure that imported goods are not subjected to any discrimination in the country of
importation by way of measures either in the form of internal taxes or internal charges and
laws, regulations and requirements…is not applied in such a manner so as to afford protection
to domestic production. Hence, national treatment ensures that imported goods will be afforded
the same treatment as domestic goods in matters that are under the control of the government.

Exception to NTP

Some specific exceptions which deal with the national treatment principle can be summarized as
follows:

i. Government Procurement (Article III:8A)-

It explains a concept or principle that when government agencies hire or purchase any
imported goods for their benefit or for government purpose, then the domestic
government can give preference to domestic products over imported products, it is also
considered that the purpose of government procurement should only be subjected to
government use and not for commercial utility.

ii. Subsidies to Domestic Producers (Article III:8B)

Governments have the power and can provide subsidies even including subsidies to
domestic manufacturers for aiding those manufacturers from a tax benefit and can impose
some restrictions on the kind of trade or business they can carry for the purpose of
exempting from tax. And such subsidies granted by domestic government are not
considered necessarily be legal by GATT/ WTO members. And also in the Tokyo and
Uruguay Rounds, a provision for the additional subsidy was introduced and now
Subsidies and Countervailing Measures are dealt with SCM Agreement.

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iii. Internal Maximum Price Control Measures (Article III:9)

Price control measures concern measures implemented to control or affect the prices of
imported goods, establish the domestic price of certain products because of price
fluctuation in domestic markets or price instability in a foreign market, or to increase or
preserve tax revenue.

iv. Cinematograph Films (Articles III:10 and IV of the GATT 1994)-

Possibility of giving preferences to products emerging from the national movie industry
can be granted and it will not be covered under NTP. National preferences are governed
by the provisions of Article IV, and the domestic country can impose internal quantitative
regulations in “screen quotas”.

QUESTION NO:3

1. Explain the evolution of World Trade Organization (WTO) as a trading

institution in International Trade.
2. Discuss the organizational structure, objectives, and scope of WTO. **
3. Explain the evolution and development of World Trade Organization.
4. Discuss the historical evolution of emergence of WTO. **
5. Explain the scope and objectives of WTO. **
6. Explain the role of GATT on establishing WTO. ***
7. Explain the role of GATT in establishing WTO. What are the principles of
WTO?
8. GATT (6 Marks)

ANSWER:
INTRODUCTION

The World Trade Organization (WTO) is a multilateral organization that regulates and promotes
international trade. The Evolution of WTO into the General Agreement on Tariffs and Trade
(GATT), which was established in 1947 with the anticipation of being replaced by a United

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Nations (UN) specialized agency known as the International Trade Organization (ITO). It is a
crucial topic in the Economy syllabus for the UPSC Examination.

The only international organization that deals with trade legislation is the World Trade
Organization (WTO). The WTO Accords, which have been negotiated and ratified by the
majority of the world's trading nations and are recognized by their parliaments, are at its heart.
The World Trade Organization is headquartered in Geneva, Switzerland. The organization's
highest decision-making body is the Ministerial Conference, which meets twice a year and is
made up of all member states. The World Trade Organization (WTO) is made up of 164 countries
(160 UN countries, EU, Hong Kong, Macau, and Taiwan).

SIGNIFICANCE/ SCOPE
i. Administers signed documents: It manages international trade agreements that have
been signed, such as the Trade-Related Aspects of Intellectual Property Rights (TRIPS)
Agreement.
ii. Dispute Settlement: It uses its Dispute Settlement Mechanism to resolve disagreements
among its members and to prevent trade wars.
iii. Manages new negotiations: It acts as a platform and coordinator for new global trade
agreements, such as the Doha Round.
iv. Multilateral trading system based on rules: The World Trade Organization (WTO)
assures that global trade is governed by universal rules that are suitable for and
recognized all around the world.
v. Stimulate global growth: Removes trade obstacles, which opens up new markets for the
world's resources, hence encouraging global growth.
vi. A global arbitrator: The World Trade Organization (WTO) acts as a mediator between
warring countries, aiming to bring policies and practices closer together.
vii. Promotes standardization: The World Trade Organization (WTO) and its members
establish standards for trade in commodities, services, and intellectual property (IP)
governance, reducing the gap between the quality produced and the quality demanded.

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OBJECTIVES OF WTO

The WTO has six key objectives:

The six key objectives of the World Trade Organization have been discussed below.

1. to set and enforce rules for international trade,

Establishing and Enforcing Rules for International Trade
The international trading rules by the World Trade Organisation are established under
three separate agreements – rules relating to the international trade in goods; the
agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the
General Agreement on Trade in Services (GATS). The enforcement of rules by the WTO
takes place by way of a multilateral system of disputes settlement in the instances of
violation of trade rules by member countries. The members are obligated under ratified
agreements to honor and abide by the procedures and judgments.

2. to provide a forum for negotiating and monitoring further trade liberalization,

World Trade organization is the global forum for monitoring and negotiating further trade
liberalization. The premise of trade liberalization measures undertaken by WTO is based
on the benefits of member countries to optimally utilize the position of comparative
advantage due to a free and fair-trade regime.

3. to resolve trade disputes,

Trade disputes, before the WTO, usually arise out of deviation from agreements between
member countries. The resolution of such trade disputes does not take place unilaterally
but through a multilateral system involving set rules and procedures before the dispute
settlement body.

4. to increase the transparency of decision-making processes,

The World Trade Organisation attempts to increase transparency in the decision-making
process by way of more participation in the decision-making and consensus rule, in

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particular. The combined effect of such measures helps to develop institutional

transparency.

5. to cooperate with other major international economic institutions involved in global

economic management
The global economic institutions include the World Trade Organisation, the International
Monetary Fund, the United Nations Conference on Trade and Development, and the
World Bank. With the advent of globalization, close cooperation has become necessary
between multilateral institutions. These institutions are functional in the sector of
formulation and implementation of a global economic policy framework. In the absence
of regular consultation and mutual cooperation, policymaking may be disrupted.

6. Safeguarding The Trading Interest of Developing Countries

Stringent regulations are implemented by the WTO to protect the trading interests of
developing countries. It supports such member countries to leverage the capacity for
carrying out the mandates of the organization, managing disputes, and implementing
relevant technical standards.

Other objectives are as follows:

• To improve the standard of living of people in the member countries.

• To ensure full employment and broad increase in effective demand.

• To enlarge production and trade of goods.

• To increase the trade of services

• To ensure optimum utilization of world resources

• To protect the environment

• To accept the concept of sustainable development

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PURPOSE OF WTO
The rules embodied in both the GATT and the WTO serve at least three purposes.

• First, they attempt to protect the interests of small and weak countries against

discriminatory trade practices of large and powerful countries. The WTO’s most
favored-nation and national-treatment articles stipulate that each WTO member must
grant equal market access to all other members and those both domestic and foreign
suppliers must be treated equally.

• Second, the rules require members to limit trade only through tariffs and to provide

market access not less favorable than that specified in their schedules (i.e., the
commitments that they agreed to when they were granted WTO membership or
subsequently).

• Third, the rules are designed to help governments resist lobbying efforts by domestic

interest groups seeking special favors. Although some exceptions to the rules have been
made, their presence and replication in the core WTO agreements were intended to
ensure that the worst excesses would be avoided. By thus bringing greater certainty and
predictability to international markets, it was thought that the WTO would enhance
economic welfare and reduce political tensions.

STRUCTURE OF WTO

The WTO has 164 members, accounting for 98% of world trade. A total of 22 countries are
negotiating membership. Decisions are made by the entire membership. This is typically by
consensus. A majority vote is also possible but it has never been used in the WTO, and was
extremely rare under the WTO’s predecessor, the GATT. The WTO’s agreements have been
ratified in all members’ parliaments.

• The WTO’s top-level decision- making body is the Ministerial Conference, which

meets usually every two years. Below this is the General Council (normally

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ambassadors and heads of delegation based in Geneva but sometimes officials sent from
members’ capitals) which meets several times a year in the Geneva headquarters.

• The General Council also meets as the Trade Policy Review Body and the Dispute

Settlement Body.

• At the next level, the Goods Council, Services Council and Intellectual Property

(TRIPS) Council report to the General Council. Numerous specialized committees,

working groups and working parties deal with the individual agreements and other
areas, such as the environment, development, membership applications and regional
trade agreements.

• The administration of the WTO is conducted by the Secretariat which is headed by the

Director General (DG) appointed by the MC for the tenure of four years. He is assisted
by the four Deputy Directors from different member countries. The annual budget
estimates and financial statement of the WTO are presented by the DG to the CBFA for
review and recommendations for the final approval by the GC.

POWERS AND FUNCTIONS OF WTO

 Implementation of Rules for Review of Trade Policy

The international rules of trade provide stability and assurance and lead to a general
consensus among member countries. The policies are reviewed to ensure that even with

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the ever-changing trading scenarios, the multilateral trading system thrives. It also helps
in the facilitation of a transparent and stable framework for conducting business.

 Forum for Member Countries Discuss Future Strategies

The WTO, as a forum, allows for trade negotiations in the multilateral trading system. In
the absence of trade negotiations, growth may stunt, and issues related to tariff and
dumping may go unaddressed. Further liberalization of trade is also subject to consistent
trade negotiations.

 Implementing and Administering Bilateral and Multilateral Trade Agreements

The bilateral or multilateral trade agreements have to be necessarily ratified by the

parliaments of respective member countries. Unless such ratification comes through, the
non-discriminatory trading system cannot be put into practice. The executed agreements
will ensure that every member is guaranteed to be treated fairly in other members’
markets.

 Trade Dispute Settlement

The dispute settlement by the WTO is concerned with the resolution of trade disputes.
Independent experts of the tribunal interpret the agreements and give out judgment
mentioning the due commitments of the concerned member states. It is encouraged to
settle the disputes by way of consultation among the members as well.

 Optimal Utilization of the World's Resources

Resources across the world can be further optimally utilized by harnessing the trade
capacities of the developing economies. It requires special provisions in the WTO
agreements for the least-developed economies. Such measures may include providing
greater trading opportunities, longer duration to implement commitments, and also
support to build the sue infrastructure.

• Additionally, it is WTO's duty to review and propagate the national trade policies, and

to ensure the coherence and transparency of trade policies through surveillance in global
economic policy making.

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• Another priority of the WTO is the assistance of developing, least-developed and low-

income countries in transition to adjust to WTO rules and disciplines through technical
cooperation and training.

• With a view to achieving greater coherence in global economic policy making, the

WTO shall cooperate, as appropriate, with the international Monetary Fund (IMF) and
with the International Bank for Reconstruction and Development (IBRD) and its
affiliated agencies.

• As globalization proceeds in today's society, the necessity of an International

Organization to manage the trading systems has been of vital importance. As the trade
volume increases, issues such as protectionism, trade barriers, subsidies, violation of
intellectual property arise due to the differences in the trading rules of every nation.

• The World Trade Organization serves as the mediator between the nations when such

problems arise. WTO could be referred to as the product of globalization and also as
one of the most important organizations in today's globalized society.

• The WTO is also a center of economic research and analysis: regular assessments of the

global trade picture in its annual publications and research reports on specific topics are
produced by the organization. Finally, the WTO cooperates closely with the two other
components of the Bretton Woods system, the IMF and the World Bank.

Historical Background, Evolution, Development and Role of GATT in

establishing WTO.

Introduction

The World Trade Organization (WTO) is an intergovernmental organization which regulates

international trade. The WTO officially commenced on 1 January 1995 under the Marrakesh
Agreement, signed by 123 nations on 15 April 1994, replacing the General Agreement on
Tariffs and Trade (GATT), which commenced in 1948. The WTO deals with regulation of trade
between participating countries by providing a framework for negotiating trade agreements and

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a dispute resolution process aimed at enforcing participants' adherence to WTO agreements,

which is signed by representatives of member governments and ratified by their parliaments.
Most of the issues that the WTO focuses on derive from previous trade negotiations, especially
from the Uruguay Round (1986–1994).

History of the World Trade Organization

GATT

The General Agreement on Tariffs and Trade (GATT), signed on Oct. 30, 1947, by 23 countries,
was a legal agreement minimizing barriers to international trade by eliminating or reducing
quotas, tariffs, and subsidies while preserving significant regulations. The GATT was intended
to boost economic recovery after World War II through reconstructing and liberalizing global
trade.

A comparable international institution for trade, named the International Trade Organization
never started as the U.S. and other signatories did not ratify the establishment treaty, and so
GATT slowly became a de facto international organization. The GATT went into effect on Jan.
1, 1948. Since that beginning it has been refined, eventually leading to the creation of the
World Trade Organization (WTO) on January 1, 1995, which absorbed and extended it. By this
time 125 nations were signatories to its agreements, which covered about 90% of global trade.
The Council for Trade in Goods (Goods Council) is responsible for the GATT and consists of
representatives from all WTO member countries. As of September 2019, the council chair is
Uruguayan Ambassador José Luís Cancela Gómez. The council has 10 committees that address
subjects including market access, agriculture, subsidies, and anti-dumping measures.

GATT Negotiations before Uruguay

Seven rounds of negotiations occurred under GATT (1949 to 1979).

 The first real GATT trade rounds (1947 to 1960) concentrated on further reducing
tariffs.
 Then the Kennedy Round in the mid-sixties brought about a GATT anti-dumping
agreement and a section on development.
 The Tokyo Round during the seventies was the first major attempt to tackle trade

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barriers that do not take the form of tariffs, and to improve the system, adopting a series
of agreements on non-tariff barriers, which in some cases interpreted existing GATT
rules, and in others broke entirely new ground. Because these plurilateral agreements
were not accepted by the full GATT membership, they were often informally called
"codes". Several of these codes were amended in the Uruguay Round, and turned into
multilateral commitments accepted by all the WTO members. Only four remained
plurilateral (those on government procurement, bovine meat, civil aircraft and dairy
products), but in 1997 WTO members agreed to terminate the bovine meat and dairy
agreements, leaving only two.
Uruguay Round (1986–1994)

GATT members recognized, well before the 40th anniversary, that the GATT system was
struggling to adapt to a new globalizing world economy. The eighth GATT round, known as
the Uruguay Round, was launched in September 1986 in Punta del Este, Uruguay, in response to
the problems identified in the 1982 Ministerial Declaration (structural deficiencies, spillover
effects of certain countries' policies on world trade that the GATT could not manage, and so on).
It was the largest trade negotiating mandate ever agreed upon: the talks aimed to expand the
trading system into several new areas, including services and intellectual property, as well as
reform trade in the sensitive agricultural and textile sectors; all of the original GATT articles
were up for review.

Marrakesh Agreement:

The Marrakesh Agreement is the last act ending the Uruguay Round and officially establishing
the WTO framework, which was signed on April 15, 1994, during a ministerial meeting in
Marrakesh, Morocco. The GATT is still in effect as the World Trade Organizations’ (WTO)
umbrella convention for goods trade, having been amended as a result of the Uruguay Round
discussions. However, GATT 1994 was not the only legally binding agreement contained in
the Marrakesh Treaty; a long list of roughly 60 agreements, annexes, judgments, and
understandings were accepted.

The agreements are divided into six sections:

i. Agreement Establishing the WTO.

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ii. Multilateral Agreements on Trade in Goods.

iii. General Agreement on Trade in Services
iv. Agreement on Trade-Related Aspects of Intellectual Property Rights
v. Dispute settlement
vi. Governments' trade policies reviews
The Uruguay Round was successful in expanding binding commitments by both rich and
developing countries, as seen by the percentages of tariffs bonded before and after the 1986–
1994 talks, according to the WTO's principle of “tariff ceiling-binding"

Ministerial Conferences

The highest decision-making body of the WTO is the Ministerial Conference, which usually
meets every two years. It brings together all members of the WTO, all of which are countries or
customs unions. The Ministerial Conference can take decisions on all matters under any of the
multilateral trade agreements.

 The inaugural ministerial conference (1996) was held in Singapore. Disagreements

between largely developed and developing economies emerged during this conference
over four issues initiated by this conference, which led to them being collectively
referred to as the "Singapore issues".
 The second ministerial conference (1998) was held in Geneva in Switzerland.
 The third conference (1999) in Seattle, Washington ended in failure, with massive
demonstrations and police and National Guard crowd-control efforts drawing
worldwide attention.
 The fourth ministerial conference (2001) was held in Doha in the Persian Gulf nation of
Qatar. The Doha Development Round was launched at the conference. The conference
also approved the joining of China, which became the 143rd member to join.
 The fifth ministerial conference (2003) was held in Cancún, Mexico, aiming at forging
agreement on the Doha round. An alliance of 22 southern states, the G20 developing
nations (led by India, China, Brazil, ASEAN led by the Philippines), resisted demands
from the North for agreements on the so-called "Singapore issues" and called for an end
to agricultural subsidies within the EU and the US. The talks broke down without
progress.

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 The sixth WTO ministerial conference (2005) was held in 13–18 December 2005 in
Hong Kong. It was considered vital if the four-year-old Doha Development Round
negotiations were to move forward sufficiently to conclude the round in 2006. In this
meeting, countries agreed to phase out all their agricultural export subsidies by the end
of 2013 and terminate any cotton export subsidies by the end of 2006. Further
concessions to developing countries included an agreement to introduce duty-free,
tariff-free access for goods from the Least Developed Countries, following the
everything but Arms initiative of the European Union but with up to 3% of tariff lines
exempted. Other major issues were left for further negotiation to be completed by the
end of 2010.
 The WTO General Council, on 26 May 2009, agreed to hold a seventh WTO ministerial
conference session in Geneva from 30 November-3 December 2009. A statement by
chairman Amb. Mario Matus acknowledged that the prime purpose was to remedy a
breach of protocol requiring two-yearly "regular" meetings, which had lapsed with the
Doha Round failure in 2005, and that the "scaled-down" meeting would not be a
negotiating session, but "emphasis will be on transparency and open discussion rather
than on small group processes and informal negotiating structures". The general theme
for discussion was "The WTO, the Multilateral Trading System and the Current Global
Economic Environment."
Role of GATT in establishing W.T.O.

The main role of GATT in the international trade was regulating the contracting parties to
achieve the purpose of the agreement which were reducing tariffs and other barriers, and to
achieve the liberalization in international trade. The role was reflected in following aspects:
Most-favoured nation
Firstly, GATT established a set of standard to guide the contracting parties to participate in
international trade practices. GATT stipulated several of basic principle to conduct the
contracting parties in international business, such as General MostFavored-Nation Treatment
(Article II), Non-discriminatory Administration of Quantitative Restrictions (Article XIII), and
General Elimination of Quantitative Regulations (Article XI) and so on in the “GATT 1947″.
Every contracting party should obey these basic principles when they were involved in trade
relations, otherwise they would be condemned, even be taken revenge by other parties
Tariff reductions and bindings.

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Secondly, GATT reduced the tariff on the basis of mutual benefit, accelerate the trade
liberalization after the World War II. GATT’s major contribution was to reduce of tariffs by
sponsoring “rounds” of multilateral negotiations.
Reduction of Discrimination in Tariff
Thirdly, GATT reduced the discrimination in tariff and trade which promoted to reduce other
trade barriers. As stated in the Article II: schedule of concession in “GATT 1947″, “Each
contracting party shall accord to the commerce of the other contracting parties’ treatment no
less favorable than that provided for in the appropriate Part of the appropriate Schedule
annexed to this Agreement.” According to this statement, GATT regulate the contracting parties
cannot increase the levels of tariff as their wish, but some countries used other non-tariff
barriers to promote their protectionism.
Providing Benefits to Developing Countries
Fourthly, GATT protected the benefits of the developing countries to a certain extent to
international trade. One of the basic objectives of GATT was that “raising of standards of living
and the progressive development of the economies of all contracting parties, and considering
that the attainment of these objectives is particularly urgent for less-developed contracting
parties.” (GATT 1947) In order to achieve this objective, GATT established some special
measures for less-developed countries, such as provide tariff protect for specific industries,
quotas which are with the purpose of balance of payment. With the increasing number of
developing countries jointed the GATT, there were more concern in the trade position and
benefit of less-developed countries, more over with the developing countries’ flight, so GATT
established some measures for developing countries so that will benefit the less-developed
countries in export-oriented trade.
Court of International Trade.
Finally, GATT acted as the “court of international trade”, by providing a platform for
contracting parties to negotiation and talk to settle disputes in international trade. One of the
objectives of GATT was to settle the disputes between two or more parties. When two or more
parties are involved in the international trade, it is inevitable that without disputes. Some of the
disputes may be solved by the two parties themselves, however, some disputes could not be
solved by themselves, without the help of the third party, and the disputes may be remaining
unresolved for years. So it needed GATT to solve those disputes which could not solve by
parties themselves. Before it was replaced by WTO, in a certain period, GATT had become a
legal mechanism to settle trade disputes among contracting parties, it provided a platform for
contracting parties to settle disputes so that the trade conflicts and disputes can be solved
immediately which would protect the benefit of both parties, and lay the foundation to achieve
the main objective of GATT.
Reasons GATT was replaced by WTO

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GATT was replaced by WTO which is the world’s global leading body in the year of 1995, in
the day when Uruguay round took effect. The purpose why WTO was created was to ensure
that global trade start and go on smoothly, freely, and predictably. In order to ensure that the
global trading go on smoothly, freely, and predictably, WTO creates and embodies the legal
ground rules for global trade among WTO members and also offers a system for international
commerce. The other purpose of WTO was formed was to strengthening the GATT mechanism
of settling trade disputes. Any issue that happens between nations will be bringing up to WTO
to be solved. First case settled by WTO was the issue between US and several other countries
in 1994.
On January 1, 1995, the World Trade Organization was found to replace GATT after the eighth
round of GATT multilateral negotiation. WTO to replace GATT was an inevitability of history.
The replacement of the General Agreement on Tariffs and Trade (GATT) by the WTO
heightened concern among critics because its stronger enforcement powers represent a further
shift in power from citizens and national governments to a global authority run by unelected
bureaucrats. There are such reasons why GATT was replaced WTO.
Firstly, the major weakness of the GATT was provisional arrangement. It was not an effective
international covenant, and it had no real enforcement mechanism. If the bilateral agreement
broke by one of another country, GATT has nothing could be done. There are some rules that
have been set for enforcement by GATT but it has been dysfunction due to the rule did not have
the power to make other countries or parties to follow the rule or agreement set by GATT.
Secondly, the scope on jurisdiction of GATT was limited only in products transaction.
However with development of globalization, the transactions in services and technologies, and
international investments constitute a high proportion of international trade. Since the GATT
only concentrated on the products transaction, there was a gap for GATT to regulate the
transactions in services and technologies and international investments.
Thirdly, there were some limitations in the disputes settlement systems of GATT. According to
the [Link], the major weakness of the disputes settlement systems of GATT was it should
have a positive consensus in the GATT Council to bring the dispute into a panel, and adoption
of the panel report as well.
Fourthly, some rules in GATT were not strict enough, it was hard to execute in real economic
practices. Some contracting parties would construe the rules of GATT in their self interests, and
GATT did not have the necessary means of verification and inspection.
Finally, the historical multilateral rounds of GATT were influenced by the policies of some
larger countries. From the Geneva Round to Uruguay Round, there was national sovereignty
existing in the multilateral negotiation rounds. The multilateral negotiation rounds were
influenced by the Western signatory states, the decision-making right was major handled by the
Western countries, especially United States.

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All in all, these factors make the GATT was replaced by WTO was needs of the times and
follow the tide of development economy.

QUESTION NO: 4

1. Discuss the historical background of UNCTAD. What are its objectives?

2. UNCTAD. ** (6 Marks)
3. Historical Background of UNCTAD (6 Marks)
ANSWER:

The United Nations Conference on Trade and Development (UNCTAD) is the UN’s leading
institution dealing with trade and development. It is a permanent intergovernmental body
established by the United Nations General Assembly in 1964. UNCTAD supports developing
countries to access the benefits of a globalized economy more fairly and effectively. It provides
economic and trade analysis, facilitates consensus-building and offer technical assistance to
help developing countries use trade, investment, finance and technology for inclusive and
sustainable development.

History of UNCTAD

The UNGA called upon for a joint action of developing countries from Asia, Africa and South
America was the Conference on problem of developing countries, held in Cairo in July 1962 to
discuss the international conference within the framework of the UN on all ‘’ vital questions
related to international trade, primary commodity trade and economic relations between
developed and developing countries. Later, in the same year, the UNGA decided to convene a
conference on trade and development, and established a preparatory committee for it, which
eventually lead to the formation of UNCTAD.

Initial Period: the 1960’s and the early 70’s

UNCTAD I
The Historic conference was held from 26 March to 6 June 1964, and attended by the
representatives of 120 countries. There was an agenda of six items which were the following;
 Expansion of International Trade and its significance for economic development
 International Commodity Problems
 Trade in Manufacturers and Semi Manufacturers
 Improvement of invisible trade of developing countries
 Implications of regional economic groupings
 Institutional arrangements to expand international trade.

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UNCTAD II (New Delhi)

Certain points known as the “points of crystalization” were discussed for adoption of concrete
measures in UNCTAD II such as manufacturers, financing, shipping, commodity policy etc.

UNCTAD III (Santiago, 1972)

The basic mission of UNCTAD III was to promote the implementation of the most essential
objectives and commitments of the International Development Strategy for the Second UN
Development Decade.

The period of systematic turbulence, the 1970’s:

UNCTAD IV (1976, Nairobi)
By the time UNCTAD IV took place, the price of the commodities fell down. The conference
was mainly dominated on the discussions for Integrated Programe for Commodities (IPC).

UNCTAD V (1979, Manila)

At UNCTAD V, an attempt was made by the developing countries to initiate wide range
negotiations primarily on the line of the New International Economic Order.

The “second cold war” and the global recession: the 1980’s:
UNCTAD VI (1983, Belgrade)
An attempt was made to revive with “North South Dialogue” to reactivate development in the
south and reinforcing industrial recovery in the industrialized countries.

UNCTAD VII (1987,Geneva)

Constitution of a Common Fund for Commodities and Global System of Trade Preferences

Global Uncertainty: period from mid-1980’s to mid-1990’s:

UNCTAD VIII
Discussed on how to meet the large and growing financial needs of the transition countries
without diverting development resources.

Period of Reform: Mid 1990 Onwards:

UNCTAD IX (1996)
The main theme of UNCTAD IX was the opportunities and dangers that globalization and
liberalization posed for sustainable development. The conference confirmed the responsibility of
each country for its own development and the supremacy of market principle in managing
economies.
UNCTAD X (2000, Bangkok)

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The Conference discussed about various developmental strategies which in major discussed
about economic globalization.

From UNCTAD XI held at Sao Paulo in 2004 onwards, UNCTAD has continued to play a
crucial role in emphasizing development in International Trade and Investment.

Structure of UNCTAD
The Conference
Periodic Sessions held in every 4 years. There have been 15 conferences as of now.

The Trade and Development Board (TDB)

To carry out the functions of conference between sessions, a 55 member TDB was established as
the executive body of the Conference, to take action in implementing Conference decisions and
to ensure overall consistency of UNCTAD’s activities with agreed priorities

UNCTAD Secretariat
The principle activities of the UNCTAD Secretariat is to service the conference, the TDB and the
deliberations of any subsidiary bodies. They are also engaged in technical cooperation and
research.
It consists of four divisions. They are;
 Division on globalization and development strategies
 Division in International Trade in Goods, Services and Commodities
 Division on Investment, Technology and Enterprise Development
 Division for Services Infrastructure for Development and Efficiency.

QUESTION NO: 5
1. Define the term ‘BOUND’ and explain the limitations on tariff bindings.
2. BOUND. ** (6 Marks)

ANSWER:
The World Trade Organisation stands for the removal or reduction of trade barriers. It identifies
two important trade barriers – quota and tariff. Quota is a trade policy tool where a country
stipulates that only a limited quantity of a particular commodity can be imported during a year.

According to WTO, quota is more dangerous than tariff as it restricts the quantity of imports
severely. Hence WTO asks members to remove quota and impose tariff up to a permissible level.

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This permissible maximum level is often referred as bound rate. Bound rate is the maximum rate
of duty (tariff) that can be imposed by the importing country on an imported commodity.

Here, each country commits itself to a ceiling on customs duties (tariff) on a certain number of
products. These rates vary from country to country and commodity to commodity. But no
country can raise duties above the bound rate it has committed, and the rate of customs duty
actually applied may be lower than the bound rate. For a member country like India, the bound
rate will be maximum for the commodities it produces less or in which India is not a prominent
producer. On the other hand, the bound rate will be low if India is a major producer of a
commodity. The purpose of setting such a tactic is to compel countries to reduce tariff and
promote trade. For example, if India is a net importer of a commodity its bound rate will be high.
But India will not impose such a high rate as it will injure the consumers.

The Bound tariff rate is the most-favored-nation tariff rate resulting from negotiations under
the General Agreement on Tariffs and Trade (GATT) and incorporated as an integral component
of a country’s schedule of concessions or commitments to other World Trade
Organization members. If a country raises a tariff to a higher level than its bound rate, those
adversely affected can seek remedy through the dispute settlement process and may obtain the
right to retaliate against an equivalent value of the offending country’s exports or the right to
receive compensation, usually in the form of reduced tariffs on other products they export to the
offending country.

QUESTION NO: 6

Explain what are Tariff and Non-Tariff Barriers to trade between countries of the
world.

ANSWER:
INTRODUCTION
Free trade ruled the world for a long time. It enabled the industrially developed countries to
expand their trade throughout the world and enriched them. But some countries, favored the
strategic protective measures in their national interest by restricting free trade by imposing
trade barriers. The barriers refer to the government policies and measures which obstruct the
free flow of goods and services across national borders. The GATT is intended to reduce the
tariff and non-tariff barriers in the trade in goods. A tariff is a duty or tax imposed by the
government of a country upon the traded commodity as it crosses the national boundaries.

OBJECTIVES
i. To protect domestic industry from foreign competition
ii. To guard against dumping
iii. To promote indigenous research and development

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iv. To conserve the foreign exchange resources of the country

v. To make the balance of payment position more favorable
vi. To curb conspicuous consumption and mobile revenue for the government

TYPES OF TRADE BARRIERS

The trade barriers may be broadly divided into two groups, namely tariff barriers and non-tariff
barriers:
1. Tariff Barriers or Fiscal Controls
2. Non-tariff barriers or Quantitative Restrictions

Tariff barriers or fiscal controls

Tariff is a financial levy imposed by the importing country on goods. This done by countries in
order to protect their domestic industry producing the goods or for any other reason in the
interest of the domestic economy. Tariff is generally regarded as less restrictive than other
methods of protect like quantitative restrictions. Therefore, organizations like the GATT
generally prefer tariff to non-tariff-barriers.

Classification on the basis for quantification of the tariff:

They may have the following three-fold classification:
(a) Specific Duties:
Specific tariff is the fixed amount of money per physical unit or according to the weight
or measurement of the commodity imported or exported. Such duties can be levied on
goods like wheat, rice, fertilizers, cement, sugar, cloth etc. Specific duties are quite easy
to administer, as they do not involve the evaluation of the goods.
The determination of the value of the traded goods may be difficult as there are several
variants of price such as demand price, supply price, market price, contract price, invoice
price, f.o.b, (free on board) price, c.i.f (cost, insurance, freight) price, etc. The resort to
specific duties enables the government to keep out of complexities of prices.
Exception:
However, the specific duties cannot be levied on high valued goods such as diamonds,
jewelry, watches, T.V. sets, motor cars, works of arts like paintings etc. These articles
can be taxed either on the basis of weight, surface area covered or the number of articles.

(b) Ad-Valorem Duties.

‘Ad Valorem’ is the Latin word that means ‘on the value.’ When the duty is levied as a
fixed percentage of the value of the traded commodity, it is called as valorem tariff.

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Such duties are levied on the products the value of which is disproportionately higher
compared to their physical characteristics such as weight or measurement.
These duties are more equitable as the costly goods, generally consumed by the rich,
bear greater burden of duty, while the cheaper goods bought by the poor, bear lesser
burden of tariff.
For instance, if the import of watches is subject to 70 percent ad valorem tariff, a watch
valued at Rs. 1000 will be subject to a duty of Rs. 700 and a watch valued at Rs. 1200
will be subject to a tariff amounting to Rs. 840. The ad valorem duties have an
additional advantage that the international comparison of tariffs, in their case, can be
easily made.

(c) Compound Duties.

When the commodity is subject to both specific and ad-valorem duties, the tariff is
generally referred to as compound duty.

Classification with reference to the purpose they serve:

(a) Revenue Tariff: Sometime the main intention of the government is imposing tariff may
be to obtain revenue.
(b) Protective Tariff: It is intended, primarily, to accord protection to domestic industry
from foreign competition
(c) Retaliatory Tariffs:
If a foreign country has imposed tariffs upon the exports from the home country and the
latter imposes tariffs against the products of the former, the tariffs resorted to by the
home country will be regarded as retaliatory tariffs. The home country, while adopting
this measure, does not either has the object of raising revenues or protecting home
industries but of acting in retaliation.
(d) Countervailing Tariffs:
Countervailing duties may be imposed on certain imports when they have been
subsidized by foreign governments. If the foreign country has been exporting large
quantities of its products in the market of the home country on the strength of export
subsidies, the home country can neutralize the ‘unfair advantage’ enjoyed by foreign
products through imposing duties upon them as they enter the territory of the home
country. The latter has full justification for resorting to these countervailing duties in
order that the unfair advantage given by exports subsidies to the foreign products is offset
and the competition takes place on equal footing between the foreign and home-produced
goods.

(e) Anti-Dumping Duties: Anti-dumping duties are applied to imports which are being
dumped on the domestic market at price either below their cost of production or

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substantially lower than their domestic price. Countervailing and anti-dumping duties are,
generally, penalty duties as an addition to the regular rates.

Classification on the Basis of Discrimination:

If the tariff is influenced by the consideration of discrimination. There can be two types of
tariffs-
(a) Non-Discriminatory Tariff:
If the uniform tariff rates are applicable to all the commodities irrespective of the country of
origin, these are known as non-discriminatory tariffs. It is possible that low rates of tariffs on
certain commodities exist because of commercial agreements with some countries but the
tariff imposing home country extends the same low tariff rates to the commodities of all the
countries.

(b) Discriminatory Tariff:

In case of discriminatory tariff, the varying tariff rates exist for different commodities. The
products originating from favored countries are subject to a lower tariff rate than those of
other countries.

Classification on the basis of origin and destination of goods:

Whether a product is imported or exported can be the basis of tariff. On this basis, the tariffs
can be of the types of:
(a) Import duties.
(b) Exports duties
(c) Transit duties

Tariff barriers may be classified as export duties, import duties and transit duties on the basis
of the origin and destination of the goods crossing the national boundary. Tariff can be levied
both upon exports and imports.
The tariff or duties imposed upon the goods originating in the home country and scheduled for
abroad are called as the export duties. Countries interested in maximizing their exports
generally avoid the use of export duties. Tariffs have, therefore, become synonymous with
import duties.
The import duties or import tariffs are levied upon the goods originating from abroad and
scheduled for the home country.
Sometimes a country may also resort to what is called as a transit duty. It is imposed upon the

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goods originating in the foreign country and scheduled for a third country crossing the
borders of the home country.

Impact or effect of tariff barriers

Tariff affects an economy in different ways. An import duty as tariff levy has the following
effects:
(1) Protective effect:
The tariff may be imposed by the government to protect the home industries from the cut-
throat competition from the foreign produced goods. The higher the tariff, greater may be
the protective effect of tariff. A perfect protective tariff is likely to prohibit completely
the import from abroad.
For instance, an import duty increases the price of the imported goods. The increase in
the price of imports is likely to reduce imports and increase the demand for domestic
goods.

(2) Consumption effect-

The increase in prices resulting from the import duty, usually, reduces the consumption
capacity of the people on that particular good.

(3) Redistribution effect

If the import duty causes an increase in the price of domestically produced goods, at
amounts to redistribution of income between the consumers and producers in favor of the
producers.

(4) Revenue effect

Through tariff duty, revenue of the government increases. The tariff, which is imposed
primarily for generating more revenues for the government is called as the revenue
tariff. In advanced countries, the introduction and diversification of direct taxes has
reduced the importance of tariff as a source of government revenues. But in the less
developed countries, there is still much reliance of the governments on this source of
revenue.

(5) Balance of payment effect:

Tariffs by reducing the volume of imports, may help the country to improve its balance of
payments position.

(6) Price effect:

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In a bid to maintain the previous level of imports to tariff imposing country, if the
exporter reduces the prices, the tariff imposing country is able to get their import at a
cheaper price. They will improve the terms of trade of the country imposing tariff.

(7) Income and employment effect-

The tariff may cause a switch over from spending on foreign goods to spending on
domestic goods. Thus, higher spending within the country may cause an expansion of
domestic income and employment

(8) Competitive effect-

With tariff protection, the domestic industry obtains monopoly power and gets the power
to compete with the foreign companies.

Non-Tariff Barriers (NTBs) Or Quantitative Restrictions

Non-Tariff Barriers (NTBs), which are considered as new-protectionism measures, have grown
considerably since the beginning of 1980s. They fall in two categories:
 The first category includes those which are generally used by developing countries to
prevent foreign exchange outflows, or those which result from their chosen strategy of
economic development. These are mostly traditional NTBs such as import licensing,
import quotas. foreign exchange regulations and canalization of imports.
 The second category of NTBs are those which are mostly used by developed economies
to protect domestic industries which have lost international competitiveness and which
are politically sensitive for governments of these countries. One of the most important
new protectionism measures under this category is the Voluntary Export Restraint (VER).
The NTBs are less transparent, difficult to identify, and their impact on exporting countries is
almost impossible to quantify.

Forms Of NTBs:
There are different forms of NTBs. They are:
(1) Voluntary Export Restraints (VERs)
VERs are bilateral arrangements instituted to restrain the rapid growth of exports of
specific manufactured goods. The recent advances in VEB date from the establishment of
the MFA in the mid-1970s. The VEBs are usually highly discriminatory and in the
importance, case of VEBS fall outside the jurisdiction of GATT Rules

(2) Administrative protection-

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Administered protection encompasses a wide range of bureaucratic government action.

They are
i. Safeguards:
Safeguard actions which under GATT Article XIX enable countries to undertake
temporary restrictions against influxes threatening the viability of domestic
industries, have become a common form of administered protection
ii. Health and product standards:
Several health and product standards under the Agreement of Technical Barriers
to Trade of GATT are imposed by the developed countries and they hinder the
exports of developing countries
iii. Customs procedures: Certain customs procedures of many countries become trade
barriers
iv. Consular formalities:
A number of countries insist on certain consular formalities like certification of
export documents by the respective consulate of the importing country, in the
exporting country.
v. Licensing: Many countries regulate foreign trade by licensing to restrict imports
vi. Government procurement:
These often tend to hinder free trade. The GATT. therefore, formulated an
agreement on government procurement with a view to secure greater international
competition in Government procurement
vii. Environmental protection laws:
The growing concern for environmental protection has led to the extension of
environmental protection regulation to the imports
viii. Foreign exchange regulations:
Foreign Exchange Regulation is an important way of regulating imports in a
number of countries.
ix. Quotas:
They are important means of restricting imports and exports. A quota represents a
ceiling on the volume of imports or exports. Quota regulations are generally
administered by means of licensing

Impact or effect of Non-Tariff Barriers

The non-tariff barriers will also have the following effect: balance of payment effect, price effect:
consumption effect; protective effect: redistribution effect; and revenue effect.

QUESTION NO: 7
Give the background of International Trade in India. **

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ANSWER:
International Trade is the important factor in economic development in any nation. International
trade in India comprises of all imports and exports to and from India. The Ministry of Commerce
and Industry at the level of Central Government has responsibility to manage such operations.
The domestic production reveals on exports and imports of the country. The production
consecutively depends on endowment of factor availability. This leads to relative advantage of
the financial system. Currently, International trade is a crucial part of development strategy and it
can be an effective mechanism of financial growth, job opportunities and poverty reduction in an
economy. According to Traditional Pattern of development, resources are transferred from the
agricultural to the manufacturing sector and then into services.

Historical Background of International Trade in India:

India's foreign trade has had a long history. Due to the development of transport and
communication sectors, its trade saw unforeseen growth. After achieving independence on
August 15, 1947, India too became an independent member of the world trade. Prior to
independence, the policies which were being implemented from export-import point of view
were aimed at deriving maximum profits for the British Empire. But after independence, the
objective of foreign trade became industrial development of the country and improving the
standard of living. Export trade plays an important role in the economic development of a
country. The status of exports in the economy of a country can be understood by the sources for
its development, size and nature. India was once famous for its commercial specialization. But
now, export trade was lagging behind in new state.

International trade in India began in the period of the latter half of the 19th century. The period
1900-1914 saw development in India's foreign trade. The augment in the production of crops as
oilseeds, cotton, jute and tea was mainly due to a thriving export trade. In the First World War,
India's foreign trade decelerated. After post-war period, India's exports increased because
demand for raw materials was increased in all over world and there were elimination of war time
restrictions. The imports also increased to satisfy the restricted demand. Records indicated that
India's foreign trade was rigorously affected by the great depression of 1930s because of
decrement in commodity prices, decline in consumer's purchasing power and unfair trade
policies adopted by the colonial government. During the Second World War, India accomplished
huge export surplus and accumulated substantial amount of real balances. There was a huge
pressure of restricted demand in India during the Second World War. The import requirements
were outsized and export surpluses were lesser at the end of the war. Before independence,
India's foreign trade was associated with a colonial and agricultural economy. Exports consisted
primarily of raw materials and plantation crops, while imports composed of light consumer
merchandise and other manufactures.

India was faced with a number of economic problems after independence. The partition of the
country had left trade in shambles. Food grain and raw material in the country fell below the
required levels and importing these became essential. Trade balance became unfavourable for
India. In 1951, the trade balance of Indian worsened and by the time the second five-year plan
started there was a negative balance of payment. Policies were made to correct this so that
obstacles in the way of exports could be removed. In 1949, an Export Promotion Council was
formed for encouraging exports in the country. The council made the following suggestions:

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1. Removal of taxes on exports

2. Banning of speculation
3. Increasing production in the country.
4. Entering into trade pacts. To make suggestion in export-import related policies, an import
advisory committee and the second export advisory committee was appointed.

In the age of globalisation, India is new entrant to expand international trend. In 1991, the
government initiated some changes in its strategy on trade, foreign Investment, Tariffs and Taxes
under the name of "New Economic Reforms". Indian government mainly concentrated on
reforms on Liberalization, openness, and export sponsorship activity. It is witnessed that foreign
Trade of India has considerably revolutionized export in the Post reforms period. Trade Volume
increased and the composition of exports has undergone several noteworthy changes. In Post -
reform Period, the major provider to export's growth has been the manufacturing sector.

It is summarized that foreign trade has significant function in the fiscal development of any
nation. India has made strong foreign trade policies and reformed these from time to time with
the process of globalisation and liberalization. Since 1991, India's foreign trade considerably
transformed. India's major exports include manufacturing and engineering goods. India has good
trading relations with all developed countries in the world. More than fifty percent of India's total
export trade is with Asia and ASEAN region and about sixty percent of India's total imports is
with the same countries. India's wealth previously was agricultural economy.

India's major requirement use to be food grains and other goods in import with fast
industrialization, the composition of India's imports goods changed and needed chemicals,
fertilizers and machinery which were required to meet the developmental requirements of
country. In the composition of export; country sells agricultural products such as tea, spices, and
other raw materials. However, with the industrialization of the financial system, compositions of
exports changed. Currently, India exports products such as machinery chemicals and marine
products. This may enhance the fiscal condition of India.

QUESTION NO: 8

10. UNCITRAL ** (6 Marks)

ANSWER:

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The United Nations Commission on International Trade Law is the core legal body of the United
Nations system in the field of international trade law. A legal body with universal membership
specializing in commercial law reform worldwide for over 50 years, UNCITRAL's business is
the modernization and harmonization of rules on international business.

The United Nations Commission on International Trade Law (UNCITRAL) was established by
the General Assembly in 1966 (Resolution 2205(XXI) of 17 December 1966). In establishing the
Commission, the General Assembly recognized that disparities in national laws governing
international trade created obstacles to the flow of trade, and it regarded the Commission as the
vehicle by which the United Nations could play a more active role in reducing or removing these
obstacles.

The Commission carries out its work at annual sessions, which are held in alternate years at
United Nations Headquarters in New York and at the Vienna International Centre at Vienna. Each
working group of the Commission typically holds one or two sessions a year, depending on the
subject-matter to be covered; these sessions also alternate between New York and Vienna. In
addition to member States, all States that are not members of the Commission, as well as
interested international organizations, are invited to attend sessions of the Commission and of its
working groups as observers. Observers are permitted to participate in discussions at sessions of
the Commission and its working groups to the same extent as members.

Activities of UNCITRAL

UNCITRAL is
 Coordinating the work of active organizations and encouraging cooperation among them.
 Promoting wider participation in existing international conventions and wider acceptance of
existing model and uniform laws.
 Preparing or promoting the adoption of new international conventions, model laws and uniform
laws and promoting the codification and wider acceptance of international trade terms,
provisions, customs and practice, in collaboration, where appropriate, with the organizations
operating in this field.
 Promoting ways and means of ensuring a uniform interpretation and application of
international conventions and uniform laws in the field of the law of international trade.
 Collecting and disseminating information on national legislation and modern legal
developments, including case law, in the field of the law of international trade.
 Establishing and maintaining a close collaboration with the UN Conference on Trade and
development.  Maintaining liaison with other UN organs and specialized agencies concerned
with international trade.

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