The Rise of Regional Trade Agreements

“Regional trade agreements are a legal and just departure from the principle of “most favoured nation” in the GATT.” Critically assess this statement.

In 1947, various countries signed the General Agreement on Tariffs and Trade (‘GATT’); this was a legal agreement which aimed at diminishing barriers to international trade by abolishing or reducing tariffs, quotas and subventions while conserving important regulations. The purpose of this legal agreement was to boost the economic recovery after World War II through reconstructing and liberalising global trade.

When this agreement was created, there were no regional trade agreements (‘RTAs’) in place. There were some RTAs such as the treaty of UK-France-Cobden-Chevalier in 1870 which applied the most-favoured-nation (‘MFN’) principle but not in the original intended way. However, due to the First World War, this treaty had been terminated.

Recently, there had been an increase in RTAs and bilateral investment agreements (‘BIAs’). The increase number of RTAs and BIAs is one of the main causes of the disagreements of the member of World Trade Organisation’s (WTO). RTAs have many advantages but when considered as a whole, these types of agreements are perceived as destabilising the progress of the multilateral trade structure. However, the main question is to whether RTAs are in fact “legal” and “just” departure from the MFN principle in the GATT.

RTAs are also known as Preferential Trade Agreements (‘PTAs’), Free Trade Agreements (‘FTAs’) or in certain situations, Customs Unions (‘CUs’); these agreements can have a multilateral, trilateral or bilateral structures. Countries enter into RTAs for many various reasons which include security and economic goals.

MFN is a one the principles of the WTO and it has the role to promote the non-discrimination treatment between trading partners. MFN had been highly globalized through the GATT and subsequently through other WTO agreements. The Organisation for Economic Co-operation and Development (‘OECD’) emphasised in the ‘Most-Favoured-Nation Treatment in International Investment Law’ paper that MFN ensures that all the members receive the same treatment and all the parties need to follow the clause; the parties to one treaty provide treatment no less favourable than the treatment they provide under other treaties in parts protected by this principle. This principle has the role of avoiding financial distortions. It is an essential principle as it is the first Article of the GATT, which oversees trade in goods. Further, MFN is covered in the second Article of the General agreement on Trade in Services (‘GATS’) and in the fourth Article of Agreement on Trade-Related Aspects of Intellectual Property Rights (‘TRIPS’); these three Agreements cover all the three main segments of trade controlled by WTO.

In the case Argentina- Financial Services (DS453), the verdicts of the Panel, as modified by the Appellate Body Report, emphasise that the WTO law does not restrict its WTO Members; the WTO law promotes the core notions’ applicable to a non-discrimination analysis, but it also recognises the particularities of certain sectors like the services one for instance.

Although the RTAs had not been a major problem in 1947, article XXIV of GATT was settled to be used as an exemption, especially for the suspension of states; for example, for the dissolution of Norway and Sweden in 1905. Furthermore, the aim was to motivate countries to match the GATT treaty bilaterally, with the aim of promoting the liberalisation of the Word Wide trade. Jacob Viner argues in his book ‘The Customs Union Issue’ that MFN is not a block for CUs, and that actually CUs conform with the MFN principle. Therefore, CU contributes to the process of multiculturalism and the aim of article XXIV had been misleading in the last few years.

As emphasised above, both the MFN principle and the RTAs are concentrating on liberalising the global trade. Further, Article XXIV of GATT was used to promote the complementation of the GATT treaty bilaterally. Therefore, one could argue that RTAs are in fact “legal” and “just” departure from the MFN principle in the GATT.

On the other hand, Jo-Ann Crawford & Robert Fiorentino argues in their paper ‘The Changing Landscape of Regional Trade Agreement’ that 90% of the WTO members are focusing on RTA trade rather than the relationship between MFN and trade. Further, even countries such as Japan (which were previously unwilling to the concept of RTAs) have recently concluded several RTAs. Jagdish Bhagwati emphasised in his book ‘Writing on International Economic’ that once many countries decide to enter into these types of agreements, other countries will not want to be left behind. Therefore, one can argue that the importance of the MFN principle had decreased over time due to the proliferation of RTAs.

Jeffrey Frankel argues in his book ‘Regional Trading Blocs in the World Economic System’ that RTAs also led to a more effective rounds of the GATT- such as the Kennedy or Tokyo Rounds. However, it is very unclear as to whether RTAs encourage or not the development of multilateralism. Gary Sampson argues in his article ‘Compatibility of Regional and Multilateral Trading Agreements Reforming the WTO Process’ that although the WTO is non-discriminatory, the foundations of RTAs are discriminatory; this is mainly because RTAs had been an exemption from MFN obligations in BIAs for a long period of time.

In the period between the two World Wars, RTAs had not been perceived in a negative way.

The main question was to what type of preferential and regional arrangements could be perceived as being exempted from MFN. Initially, the U.S. proposed that only CUs should be perceived as an exemption to the MFN. However, when the International Trade Organisation (‘ITO”) did not receive enough encouragement at a global level, GATT (an interim agreement) had been developed. Article xxiv included the final agreement regarding those RTAs in GATT.

Further, the power of this Article had been weakened based on an outcome of one of the central limitations of the original GATT- the condition of consensus for any action to be taken against any abuses. Thus, only few RTAs received authorisation. One could argue that the place of RTAs within the multilateral structure had been fundamentally unchecked by the time WTO replaced the GATT. Although there have been many recent reforms concerning Article xxiv, this is mainly due to the fact that the Article is concerned mainly with the economic parts of RTAs.

Neither WTO members or GATT contracting parties have ever voiced any concern regarding an RTA to be out of compliance with the obligations of the parties or requested them to renegotiate an agreement. WTO members have not departed from the GATT practice of leaving RTAs – neither approving or condemning their use; however, the approach of the WTO is more regular, promoting the collection and revision of information on these agreements.

Further, GATT’s MFN clause was a standard for any other MFN settled in relations to goods in any succeeding agreement. Its strength lies not only in the fact, that is the most inclusive and widest MFN clause met in some trade agreements but also that this clause has been progressively explained in many decisions of the GATT’s and WTO’s dispute resolution organisations.

Conclusion:

The number of RTAs and BIAs had massively increased over the last period of time. The MFN principle is one of the most essential principles of the WTO and promoted non-discrimination treatment between trading partners. In the WTO system, RTAs are an exception to the general rule of the MFN treatment.

On the other hand, GATT is a legal agreement which aimed at diminishing barriers to international trade RTAs and the MFN principle ensure that the trading parties receive a fair and equal treatment and establish common interests (both economic and non-economic interests). However, 90% of the WTO members are currently focusing on RTA trade rather than the relationship between MFN and trade. Even countries such as Japan (which were previously unwilling to the concept of RTAs) have recently concluded several RTAs. Further, it can be concluded that because of various reasons that have been mentioned above, RTAs are in fact “legal” and “just” departure from the MFN principle in the GATT. Once could argue that RTAs gave MFN clauses its second live.

The purpose of antidumping rules in the WTO

The meaning of anti-dumping can best be understood by first understanding the meaning of dumping. If an entrepreneur sells utensils for three dollars then another trader starts to sell the same products for a price lower than the market price for example 1.5 dollars, the first feels like they have just been ‘dumped’. Dumping is a common practice in global trade. According to the World Trade Organization (WTO), it occurs when a trader exports goods or services at a lower price to the existing market price in the home country. Most governments consider dumping an unfair market competition and have various measures of cushioning their domestic traders from dumping. However, the WTO does not take sides with regards to dumping but instead developed a set of rules and guidelines (‘anti-dumping Agreement) for regulating dumping (Young & Wainio, 2005).

While there are different definitions of dumping, its legal definition., as adopted by the WTO is more precise and allows governments to act against dumping when there is genuine evidence of injury to local traders. Nonetheless, in order to take such actions, the governments are required to satisfy several basic requirements of ensuring that dumping is actually taking place, calculate the difference between the exporters’ price and the price charged by local traders, and prove that the dumping is injuring the local traders (Steenbergen, 1987).

According to Article 6 of the General Agreement on Trade and Tariffs (GATT), countries can take actions against dumping. Article 6 is further clarified by the Anti-dumping agreement and the two set of guidelines complement each other. For instance, through this pair of rules, countries can act in a manner that violates GATT principles of a tariff and not discriminating between trade partners. This implies that typically, anti-dumping rules allow countries to charge extra import duties on products from a country with the aim of bringing the price closer to the domestic market price of the same products.

The first requirement before imposing anti-dumping tariffs on a product is calculating whether there is heavy or light dumping by the foreign trader. There are many ways of conducting this calculation and determining what is termed as ‘normal value’. Ideally, the normal value is the product’s price in an ordinary course of the trade when the product is destined for sale in a foreign market. However, in certain circumstances, it may be impossible to determine the normal value of the product especially when the product is not sold in the domestic market. In such a scenario, the agreement provides alternative methods of determining normal value. That said, the agreement narrows down them to only three methods. The first method is by determining the domestic price of the product in the exporter’s market. If this method cannot be used, governments can resort to two other alternatives namely, identifying the price changed by the exporter in another country or by calculating a combination of the exporter’s cost of production, profit margin as well as other overheads incurred under the ordinary course of trade. If the latter option is used, governments must refer to the agreement on how they should conduct a fair price comparison as well as what would be considered a ‘normal price.’

Identifying what is constitutes an ordinary course of trade is one of the most challenging tasks encountered by governments. In this regard, the Agreement stipulates that one of the easiest ways of determining that the sales are not made under the ordinary course of trade is if the seller sells the product below the cost of production in their domestic market, and the circumstances under which this may be true are defined in Article 2 of the Agreement. For instance, the Agreement states that those prices must be below per unit variable and fixed costs plus selling and administrative costs within an extended time of usually one year and not below six months. Furthermore, substantial quantities of sales must have been made.

It is not only enough to calculate the extent of dumping on the product before imposing a dumping tariff. According to the agreement, governments can only impose anti-dumping measures if it is hurting their domestic economy. Therefore, they must conduct an initial thorough investigation based on the established rules. If the government proves that the duping is hurting the domestic economy, the duping company can raise prices to avoid the anti-dumping tariffs imposed on the product. Meanwhile, the anti-dumping measures must expire after five years unless the imposing government proves that revoking the measures might hurt the economy.

Similarly, if the government establishes that there is an insignificant margin of dumping (mostly below 2% of the domestic prices), they can stop the investigations or revoke the anti-dumping tariffs. The agreement also requires that anti-dumping investigations must end if the volume of dumped products are negligible (i.e. if the volume of the products is less than 3% of total imports of the same product). However, governments can proceed with the investigations if the dumping is conducted by several countries and each country is supplying less than 3% of the imports, cumulatively leading to 7% or more of the imported products. When collecting anti-dumping duties, governments must ensure that they do not collect amounts that exceed the dumping margin for that exporter. For instance, in the case of European Communities vs. the United States (US – Zeroing, EC; DS294) on anti-dumping duties, the dispute panel decided that the Zeroing method applied by the US authorities violated the ADA Art. 9.3 and GATT Art. VI:2 rules because it applied anti-dumping duties that exceeded the exporter’s margins of dumping.

In case there are below cost sales that meet the Agreement’s criteria, they can simply not be included when calculating the normal value but instead, the normal value will be determined using the remaining sales. However, there may be a level of insufficient sales to enable the calculation of home market normal value if the below-cost sales are excluded. Obviously, if the exporting country does not indicate any sales of the product under investigation, normal values cannot be based on such sales and this is well-recognized by the Agreement. However, there is also a possibility that while the exporting market may have recorded some sales within its market, the level of such sales may be too low. Thus, the Agreement recognizes that the seller’s domestic market might have very low sales volume that would make it difficult to compare the export prices and home market.

Before making preliminary and final actions on a dumped product, all member states must report to the Committee on Anti-Dumping Practices to provide details of the cases. All investigations must also be reported to the Committee twice a year and consultation is encouraged whenever a dispute arises among countries. The WTO is also open for dispute resolution of the parties cannot resolve the dispute on their own.

The Agreement also gives guidelines on subsidies and other countervailing measures that are that countries must abide by when imposing anti-dumping rules. First, it is important to note that the main aim of WTO’s anti-dumping rules is to regulate ow countries use subsidies and regulate the actions taken by countries to protect themselves against subsidies. For instance, the WTO’s dispute settlement procedure is available for use when countries want to withdraw the subsidies or eliminate its effects. Alternatively, the country can launch its own investigation and charge extra duty any imported products that are found to be hurting domestic markets.

In conclusion, the WTO anti-dumping rules exist with the aim of facilitating international trade by ensuring a fair market competition between exporters and domestic traders. It gives guidelines on how governments can protect their domestic traders by imposing tariffs in unfairly priced goods while ensuring that the exporter’s right to price their products are not infringed on.

Dig deeper into The Professional Journey of Police with our selection of articles.

Bibliography

Appellate Body Report, United States – Continued Existence and Application of Zeroing

Methodology, WT/DS350/AB/R, adopted 19 February 2009, DSR 2009:III, p. 1291

Steenbergen, J. (1987). Circumvention of Antidumping Duties by Importation of Parts and Materials: Recent EEC Antidumping Rules.

Fordham International Law Journal

Young, L. M., & Wainio, J. (2005). The Antidumping Negotiations: Proposals, Positions and Antidumping Profiles.

I confirm that this is entirely my own work, and I did not receive any help or assistance from anyone at any point during this exam.