MODULE 1

Syllabus:
1. Development of international law: ancient, medieval, modern
2. Structure & Characteristics of international trade
3. International Business & globalization
4. Free Trade & Fair Trade
5. Trade Theories

Globalisation has dramatically re-shaped the markets and has changed the way business is being
done. One has to keep pace with the customer’s requirement and has to bring in services and
products as per global standards. International trade has become a vital component of
development strategy, which can be used as an effective instrument of economic growth

Establishment of institutions like World Trade Organization has ushered a new era of global
economic co-operation reflecting the widespread desire to operate in a more open multilateral
trading system. Participation in international trade has become necessity for all countries and as
well as companies for growth. Thus it becomes important for professionals to acquire knowledge
and skill to help work in international companies and in global environment.

Globalization is the process of international integration arising from the interchange of world
views, products, ideas and mutual sharing, and other aspects of culture. Advances in transportation,
such as the steam locomotive, steamship, jet engine, container ships, and in telecommunications
infrastructure, including the rise of the telegraph and its modern offspring, the internet, and mobile
phones, have been major factors in globalization, generating further interdependence of economic
and cultural activities. The concept of globalization is a very recent term, only establishing its
current meaning in the 1970s, which 'emerged from the intersection of four interrelated sets of
"communities of practice": academics, journalists, publishers/editors, and librarians.

In 2000, the International Monetary Fund(IMF) identified four basic aspects of globalization:
Trade and transactions , capital and investment movements, migration and movement of people,
and the dissemination of knowledge. Further, environmental challenges such as global warming ,
cross-boundary water and air pollution and overfishing of the ocean are linked with globalization.
Globalizing processes affect and are affected by business and work organization, economics,
Socio-cultural resources, and the natural environment.
 Drivers of International Business (Circular Chart)

Benefits of International Business

High living standards. Increased socio-economic welfare

Wider market. Reduced effects of business cycles.
Reduced risks Large scale economies
Potential untapped market Opportunity to domestic business
Division of labor & specialization Economic growth of the world at large
Optimum & proper utilization of world resources. Cultural transformation

Modes of Entering International Markets

Exporting (Indirect, Direct, Intra corporate Transfers Licensing Franchising)

Special Modes, Foreign Direct Investment , With Alliances , Merger & Acquisitions

HISTORY: 18th century

International trade has a rich history starting with barter system being replaced by Mercantilism in
the 16th and 17th Centuries. The 18th Century saw the shift towards liberalism. It was in this
period that Adam Smith, the father of Economics wrote the famous book ‘The Wealth of Nations’
in 1776 where in he defined the importance of specialization in production and brought
International trade under the said scope. David Ricardo developed the Comparative advantage
principle, which stands true even today.
All these economic thoughts and principles have influenced the international trade policies of each
country. Though in the last few centuries, countries have entered into several pacts to move
towards free trade where the countries do not impose tariffs in terms of import duties and allow
trading of goods and services to go on freely.

19th Century

The 19th century beginning saw the move towards professionalism, which petered down by end
of the century. Around 1913, the countries in the west say extensive move towards economic
liberty where in quantitative restrictions were done away with and customs duties were reduced
across countries. All currencies were freely convertible into Gold, which was the international
monetary currency of exchange. Establishing business anywhere and finding employment was
easy and one can say that trade was really free between countries around this period.

World War 1

The First World War changed the entire course of the world trade and countries built walls around
themselves with wartime controls. Post world war, five years went into dismantling of the wartime
measures and getting back trade to normalcy. But then the economic recession in 1920 changed
the balance of world trade again and many countries saw change of fortunes due to fluctuation of
their currencies and depreciation creating economic pressures on various Governments to adopt
protective mechanisms by adopting to raise customs duties and tariffs.

The need to reduce the pressures of economic conditions and ease international trade between
countries gave rise to the World Economic Conference in May 1927 organized by League of
Nations where in the most important industrial countries participated and led to drawing up of
Multilateral Trade Agreement. This was later followed with General Agreement of Tariffs and
Trade (GATT) in 1947.

However once again depression struck in 1930s disrupting the economies in all countries leading
to rise in import duties to be able to maintain favorable balance of payments and import quotas or
quantity restrictions including import prohibitions and licensing.
Slowly the countries began to grow familiar to the fact that the old school of thoughts were no
longer going to be practical and that they had to keep reviewing their international trade policies
on continuous basis and this interns lead to all countries agreeing to be guided by the international
organizations and trade agreements in terms of international trade.
The theory of international trade and commercial policy is one of the oldest branches of economic
thought. From the ancient Greeks to the present, government officials, intellectuals, and
economists have pondered the determinants of trade between countries, have asked whether trade
bring benefits or harm the nation, and, more importantly, have tried to determine what trade policy
is best for any particular country.

Trade Regulations in the modern Era

The fundamental basis of international trade lies in the fact that countries are endowed by nature
with different elements of productive power. In other words, factor endowments are unevenly
distributed among the countries of the world. This is due to geographic facts, physical features and
climatic differences. Some countries have a monopoly of certain minerals,

e.g. Africa in gold and diamonds and oil resources in Arab countries; other countries are
climatically best suited for the production of certain crops.

Thus, international trade is inevitable when there are marked differences in the countries regarding
materials, natural vegetation, climate, soils and other physical and geographical conditions.
International trade is also affected by several other factors besides the natural or geographical
factors, e.g., stages of economic development, accumulation of capital by a nation and its foreign
investments, technological progress, trade and financial regulations, political affiliations, and so
on.

ARGUMENTS FOR FREE TRADE

Free trade is a market condition in which trade in goods and services between or within countries
flow unhindered by government imposed restrictions. Hence, it propagates a policy of no
restrictions on the movement of goods between countries.
Restrictions to trade include taxes and tariffs, and other non- tariff barriers, such as legislation
and quotas. Adam Smith defines the term ‘free trade’ to denote, “ that system of commercial policy
which draws no distinction between domestic and foreign commodities and therefore, neither
imposes additional burdens on the latter, nor grants any special favors to the former”.
Free trade is a positive, not negative sum game- both partners gain from it. What is gained from
free trade is income, no jobs. Free trade does not create jobs- it creates income by reallocating or
transferring jobs from the lower- productivity to the higher productivity sectors of the economy.
The argument for free trade- at least in the standard theory- is an efficient allocation of resources
argument. Such reallocation increases income by increasing the average productivity of the
nation’s stock of productive resources. Hence, free trade will not necessarily equalize the standard
of living in any two countries, though it will make both countries better off in terms of real income.

APPROACHES TO INTERNATIONAL TRADE LAW

Generally the world is divided based on political ideology, economic, social and cultural
development. However, the international community is mainly divided into three groups while
understanding international relations. These are First, Second and Third World.
Generally, First world consists of Western and Industrialized/Developed countries led by
United States. This group is responsible for the codification and development of international law.
This codification and development takes place in the background of the desire of this group to
maintain status quo. The group has for a long time dominated and controlled international
economic and trade institutions such as IMF, IBRD, GATT etc.

Second World consists of countries which have embraced Socialism or Marxism. They have
different notions on International Law including trade. To achieve this, they have developed
certain principles in International Law such as Equality and Self Determination of Peoples,
Principle of Peaceful Co-existence etc.

Third World/Developing on the other hand consists of the major bulk of countries of the world.

TRADE THEORIES

Trade is also called the exchange of goods economy, is to transfer of the commodities from one
person to another. Sometimes trade is also called in simple terms as commerce or financial
transaction of barter. Where the transfer of the commodities between the persons took place is
called a market. If we throw light on the history of trade, the original form of trade was barter,
where direct exchange of goods and services took place

With the passage of time the barter system was replaced by the money exchange system in which
the commodities are transferred through a medium of exchange such as money.
*Bilateral trade
*multilateral trade

Trade has taken birth with the beginning of human life and shall continue as long as human life
exists on the earth. It enhances the living of standard of living of consumers. Thus we can say that
trade is a very important social activity.

Trade is broadly divided between two types:

*1. Internal or Home or Domestic Trade.
*2. External or Foreign or International Trade.

The exchange of goods across national borders is termed as international trade. Countries differ
widely in terms of the products and services traded. Countries rarely follow the trade structure of
other nations; rather they evolve their own product portfolios and trade patterns for exports and
imports. Besides, nations have marked differences in their vulnerabilities to the upheavals in
exogenous factors.

THEORIES

1. The theory of mercantilism attributes and measures the wealth of a nation by the size of its
accumulated treasures. Accumulated wealth is traditionally measured in terms of gold, as
earlier gold and silver were considered the currency of international trade. Nations should
accumulate financial wealth in the form of gold by encouraging exports and discouraging
imports.

The theory of mercantilism aims at creating trade surplus, which in turn contributes to the
accumulation of a nation’s wealth. Between the sixteenth and nineteenth centuries, European
colonial powers actively pursued international trade to increase their treasury of goods, which were
in turn invested to build a powerful army and infrastructure.

The colonial powers primarily engaged in international trade for the benefit of their respective
mother countries, which treated their colonies as exploitable resources. The first ship of the East
India Company arrived at the port of Surat in 1608 to carry out trade with India and take advantage
of its rich resources of spices, cotton, finest muslin cloth, etc

Other European nations—such as Germany, France, Portugal, Spain, Italy—and the East Asian
nation of Japan also actively set up colonies to exploit the natural and human resources.
* the colonies served as cheap sources for primary commodities, such as raw cotton, grains, spices,
herbs and medicinal plants, tea, coffee, and fruits, both for consumption and also as raw material
for industries. Thus, the policy of mercantilism greatly assisted and benefited the colonial powers
in accumulating wealth.

2. THEORY OF ABSOLUTE ADVANTAGE OF INTERNATIONAL TRADE

Economist Adam Smith critically evaluated mercantilist trade policies in his seminal book An
Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776. Smith posited
that the wealth of a nation does not lie in building huge stockpiles of gold and silver in its treasury,
but the real wealth of a nation is measured by the level of improvement in the quality of living of
its citizens, as reflected by the per capita income.

Smith emphasized productivity and advocated free trade as a means of increasing global efficiency.
As per his formulation, a country’s standards of living can be enhanced by international trade with
other countries either by importing goods not produced by it or by producing large quantities of
goods through specialization and exporting the surplus.

An absolute advantage refers to the ability of a country to produce a good more efficiently and
cost-effectively than any other country. It is the maxim of every prudent master of a family, never
to make at home what it will cost him more to make than to buy. The tailor does not attempt to
make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make
his own clothes, but employs a tailor.

Thus, instead of producing all products, each country should specialize in producing those goods
that it can produce more efficiently.
*i. Repetitive production of a product, which increases the skills of the labour force.
*ii. Switching production from one produce to another to save labour time.
*iii. Long product runs to provide incentives to develop more effective work methods over a period
of time

The theory of absolute advantage is based on Adam Smith’s doctrine of laissez faire that means
‘let make freely’. When specifically applied to international trade, it refers to ‘freedom of
enterprise’ and ‘freedom of commerce’.
Therefore, the government should not intervene in the economic life of a nation or in its trade
relations among nations, in the form of tariffs or other trade restrictions, which would be
counterproductive.
3. THEORY OF COMPARITIVE ADVANTAGE OF INTERNATIONAL TRADE

In Principles of Political Economy and Taxation, David Ricardo (1817) promulgated the theory of
comparative advantage, wherein a country benefits from international trade even if it is less
efficient than other nations in the production of two commodities.
*Comparative advantage may be defined as the inability of a nation to produce a good more
efficiently than other nations, but its ability to produce that good more efficiently compared to the
other good

Therefore, a country should specialize in the production and export of a commodity in which the
absolute disadvantage is less than that of another commodity or in other words, the country has
got a comparative advantage in terms of more production efficiency.
*To illustrate the concept, let us assume a situation where the UK requires 10 units of resources
for producing one tonne of tea and 5 units for one tonne of rice whereas India requires 5 units of
resources for producing one tonne of tea and 4 units for one tonne of rice . In this case, India is
more efficient in producing both tea and rice. Thus, India has absolute advantage in the production
of both the products.

How to measure Comparative Advantage?

The Balassa Index is often used as a useful tool to measure revealed comparative advantage (RCA)
that measures the relative trade performance of individual countries in particular commodities.

4. FACTOR ENDOWMENT THEORY OF INTERNATIONAL TRADE

The earlier theories of absolute and comparative advantage provided little insight into the of
products in which a country can have an advantage. Heckscher (1919) and Bertil Ohhn (1933)
developed a theory to explain the reasons for differences in relative commodity prices and
competitive advantage between two nations.

According to this theory, a nation will export the commodity whose production requires intensive
use of the nation’s relatively abundant and cheap factors and import the commodity whose
production requires intensive use of the nation’s scarce and expensive factors.
Thus, a country with an abundance of cheap labour would export labour-intensive products and
import capital-intensive goods and vice versa. It suggests that the patterns of trade are determined
by factor endowment rather than productivity.
The theory suggests three types of relationships, which are discussed here:
*(i) Land-Labour Relationship:
*(ii) Labour-Capital Relationship:
*(iii) Technological Complexities:

The Liontief Paradox:

Wassily Leontief carried out an empirical test of the Heckscher-Ohlin Model in 1951 to find out
whether or not the US, which has abundant capital resources, exports capital-intensive goods and
imports labour-intensive goods. He found that the US exported more labour-intensive commodities
and imported more capital-intensive products, which was contrary to the results of Heckscher-
Ohlin Model of factor endowment.

According to the factor endowment theory, a country with a relatively cheaper cost of labour would
export labour-intensive products, while a country where the labour is scarce and capital is
relatively abundant would export capital-intensive goods.

5. COUNTRY SIMILARITY THEORY OF INTERATIONAL TRADE

As per the Heckscher-Ohlin theory of factor endowment, trade should take place among countries
that have greater differences in their factor endowments. Therefore, developed countries having
manufactured goods and developing countries producing primary products should be natural trade
partners.

Principles of the theory:

i. If two countries have similar demand patterns, then their consumers would demand the same
goods with similar degrees of quality and sophistication. This phenomenon is also known as
preference similarity. Such a similarity leads to enhanced trade between the two developed
countries.
ii. The demand patterns in countries with a higher level of per capita income are similar to those
of other countries with similar income levels, as their residents would demand more sophisticated,
high quality, ‘luxury’ consumer goods, whereas those in countries with lower per capita income
would demand low quality, cheaper consumer goods as a part of their ‘necessity’.
iii. Since most products are developed on the demand patterns in the home market, other countries
with similar demand patterns due to cultural or economic similarity would be their natural trade
partners.
iv. Countries with the proximity of geographical locations would also have greater trade compared
to the distant ones. This can also be explained by various types of similarities, such as cultural and
economic, besides the cost of transportation. The country similarity theory goes beyond cost
comparisons. Therefore, it is also used in international marketing.

6. NEW TRADE THEORY OF INTERNATIONAL TRADE

Countries do not necessarily trade only to benefit from their differences but they also trade so as
to increase their returns, which in turn enable them to benefit from specialization. International
trade enables a firm to increase its output due to its specialization by providing a much larger
market those results in enhancing its efficiency.

7. INTERNATIONAL PRODUCT LIFE CYCLE THEORY

International markets tend to follow a cyclical pattern due to a variety of factors over a period of
time, which explains the shifting of markets as well as the location of production. The level of
innovation and technology, resources, size of market, and competitive structure influence trade
patterns.

In case the innovating country has a large market size, as in case of the US, India, China, etc., it
can support mass production for domestic sales. This mass market also facilitates the producers
based in these countries to achieve cost-efficiency, which enables them to become internationally
competitive.

8. THEORY OF COMPETITIVE ADVANTAGE

As propounded by Michael Porter in The Competitive Advantage of Nations, the theory of

competitive advantage concentrates on a firm’s home country environment as the main source of
competencies and innovations. The model is often referred to as the diamond model.

Assessing Country Competitiveness:

In order to facilitate the quantifiable assessment of competitiveness, the World Economic Forum
has developed the Global Competitiveness Index. It presents a quantified framework aimed to
measure the set of institutions, policies, and factors that set the sustainable current and medium-
term levels of economic prosperity.
*The US was ranked as the most competitive economy in the world, followed by Switzerland,
Denmark, Sweden, Singapore, Finland, and Germany whereas China and India were ranked at
30th and 50th positions, respectively.

India has made remarkable progress in improving its global competitiveness during the recent
years. The rapid rise in the share of the working age population for the last 20 years would add to
favourable demographics to India’s competitiveness.
However, to benefit from this India will have to find ways to bring its masses of young people into
the workforce, by spending on education and improving the quality of its educational institutions
so as to enhance the productivity of its young.

Moreover, the country still has to take effective measures to deal with its bureaucratic red-tape,
illiteracy, and infrastructure bottlenecks, especially road, rail, seaports and airports, and electricity,
among others, so as to boost its global competitiveness.
 MODULE 2

Syllabus for mid-sems

1. Nature & Characteristics of International Trade institutions

2. Bretton Woods: Conference & Outcomes
3. Role & Contribution of IMF
4. Regional Financial Crises
5. Role, Constituents, structure, Functioning of IBRD
6. Lending instruments of the World Bank
7. IFC
8. MIGA

International Trade not only governs the economic relations between the states, but also regulates
the conduct of states, international organizations, individuals and non-state entities dealing with
trade and commerce.

Definition

Int. Trade is all about the economic activity of buying and selling where the transaction crosses a
border or cross-border Sale of Goods. However, cross-border exchanges are not only limited to
Sale of Goods but also movement of services, Capital and Labor etc.

General Issues: Tariff Regulations, Cross-border transactions including movement of services,

Capital and Labor, Subsidies, and Anti-Dumping.
International Trade law is developed and regulated by various institutions with specific objectives
of combating the aforementioned general issues. These institutions include ITO, GATT and WTO.

Bretton Woods Conference

“The economic health of every country is a proper matter of concern to all its neighbors, near and
far.” U.S. President Franklin D. Roosevelt at the opening of Bretton Woods

What Was Bretton Woods?

In the aftermath of WWII (in Europe) The United Nations Monetary and Financial Conference
commonly known as Bretton Woods conference, was a gathering of 730 delegates from all 44
Allied nations. Main goal was to regulate the international monetary and financial situation.
The Bretton Woods Conference of 1944 recognized the need for a comparable international
institution for trade (the later proposed International Trade Organization (ITO)) with the
International Monetary Fund and the World Bank. Probably because Bretton Woods was attended
only by representatives of finance ministries and not by representatives of trade ministries, an
agreement covering trade was not negotiated there.

In early December 1945, the United States invited its war-time allies to enter into negotiations to
conclude a multilateral agreement for the reciprocal reduction of tariffs on trade in goods. In July
1945 the United States Congress had granted President Harry S. Truman the authority to negotiate
and conclude such an agreement. At the proposal of the United States, the United Nations
Economic and Social Committee adopted a resolution, in February 1946, calling for a conference
to draft a charter for an International Trade Organization (ITO).

A Preparatory Committee was established in February 1946, and met for the first time in London
in October 1946 to work on the charter of an international organization for trade; the work was
continued from April to November 1947.

At the same time, the negotiations on the General Agreement on Tariffs and Trade (GATT) in
Geneva advanced well and by October 1947 an agreement was reached: on October 30, 1947 eight
of the twenty-three countries that had negotiated the GATT signed the "Protocol of Provisional
Application of the General Agreement on Tariffs and Trade".

In March 1948, the negotiations on the ITO Charter were successfully completed in Havana. The
Charter provided for the establishment of the ITO, and set out the basic rules for international trade
and other international economic matters.

The ITO Charter, however, never entered into force; while repeatedly submitted to the US
Congress, it was never approved. The most usual argument against the new organization was that
it would be involved into internal economic issues. On December 6, 1950 President Truman
announced that he would no longer seek Congressional approval of the ITO Charter.

In the absence of an international organization for trade, countries turned, from the early fifties, to
the only existing multilateral international institution for trade, the "GATT 1947" to handle
problems concerning their trade relations. Therefore, the GATT would over the years "transform
itself" into a de facto international organization. It was contemplated that the GATT would be
applied for several years until the ITO came into force.

However, since the ITO was never brought into being, the GATT gradually became the focus for
international governmental cooperation on trade matters. Seven rounds of negotiations occurred
under GATT before the eighth round - the Uruguay Round - concluded in 1994 with the
establishment of the World Trade Organisation (WTO) as the GATT's replacement. The GATT
principles and agreements were adopted by the WTO, which was charged with administering and
extending them.

ITO preparatory work

The economy of pre World War II was dominated by US and its major trading partners. This
process took place in the form of bilateral agreements between them. The US in order to secure
more open markets offered its own tariff cuts. Subsequent to World War II, diverse measures were
adopted to liberalize trade between various nations to ensure close economic co-operation between
them.

Hence, the wartime scenario made the groundwork for the concept of liberalization of international
trade. This was by and large initiated by the United States of America. However, the major obstacle
towards achieving this objective was the existence of multifarious trade barriers. This in turn called
for a universal set of regulations, which would be applicable to all the nations. In order to
necessitate an overall international progress in the economic order, it was necessary that a
substantial improvement be achieved in three major domains i.e., investment, trade and exchange
policy.

After several rounds of discussions between the United States of America, the United Kingdom
and Canada in the Bretton Wood Conference, it was agreed that the world economy would be
organized around three institutions’:

• International Monetary Fund

• The International Bank for Reconstruction and Development or the World Bank
• International Trade Organization

International Monetary Fund was formulated to look after the short-term problems relating to
international liquidity and International Bank for Reconstruction and Development to take care of
international investments. Likewise International Trade Organization was to take care of the
‘actual’ trade relationship.

However, the International Trade Organization never came to see the light of the day. This was
due to the non-ratification of the agreement relating to International Trade Organization or ITO,
especially by United States, to which 53 states were signatories. Although the failure of
establishing the ITO was a major setback to the international trade, its contribution to the
movement on international trade regulation cannot be overlooked. The establishment of the ITO
brought into existence the ITO Charter which laid down the foundations not only for GATT but
also for the present WTO Agreement.

The resultant impact of the ITO was that even after its failure to take off as an organization, the
ITO Charter was used to formulate GATT. This started when some of the participants at the
London Conference on Trade and Employment recommended that the tariff negotiation be
initiated in the Charter at Geneva. Those regulations, which were required to protect the integrity
of the trade and concessions, were included and those relating to employment investment etc were
disregarded.

GATT was thus established, on a temporary basis to break down trade barriers in the form of tariffs,
quotas, preferential trade agreements between countries, etc., to make the flow of commodities
and capital, less restricted by national government influence. It is for its temporary nature that a
signatory to the agreement is known as a Contracting Party, since it is not an organization. Hence,
the origin of GATT traces back to 1947, which governed most of the world’s trade in goods for
almost, half a century.

It was the foremost step towards liberalization of global trade. Its importance may be highlighted
as a multilateral agreement, which facilitated liberalization of trade by reducing tariffs, opening
markets and framing rules for free and fair trade. The original signatories to GATT in 1947 were
23 nations.

The GATT 1947 covered only trade in goods. It is pertinent to note that GATT 1947, unlike GATT
1994, did not cover trade in Trade in Services, Agriculture, Textile and Apparel. This Agreement
could also not justify the inclusion of intellectual property rights regime within its ambit and
neither did it regulate the foreign investment that is incidental to the free movement of goods.
 International Institutions

• Supra-national
• Multi-lateral Agreements
• Inter-governmental
• Non-governmental

WHAT ARE INTERNATIONAL FINANCIAL INSTITUTIONS

• World Bank Group (WBG)

• International Bank for Reconstruction and Development (IBRD)
• International Development Association (IDA) International Finance Corporation (IFC)
• Multilateral Investment Guarantee Agency (MIGA)
International Centre for Settlement of Investment Disputes (ICSID)
• International Monetary Fund (IMF)
• Regional development banks, such as: African Development Bank (AFDB)
Asian Development Bank (ADB)
• Inter-American Development Bank (IADB) Bank of the South
European Bank for Reconstruction and Development (EBRD)
• Other regional financial institutions e.g. European Investment Bank (EIB)
• Export Credit Agencies of individual country governments, such as:
• US Export Import Bank (EXIM)
• Japan External Trade Organization
• Hermes Kreditversicherungs (Germany)

Common Goal: to reduce global poverty and improve living conditions and standards;
to support sustainable economic, social and institutional development; and
to promote regional cooperation and integration.

International Monetary Fund (IMF)

• working to foster global monetary cooperation,

• secure financial stability,
• facilitate international trade,
• promote high employment and sustainable economic growth, and
• reduce poverty around the world.
The IMF works to foster global growth and economic stability. It provides policy advice and
financing to members in economic difficulties and also works with developing nations to help
them achieve macroeconomic stability and reduce poverty.

With its global membership of 189 countries, the IMF is uniquely placed to help member
governments take advantage of the opportunities—and manage the challenges—posed by
globalization. The IMF tracks global economic trends and performance, alerts its member
countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes
on know-how to governments on how to tackle economic difficulties.

Historical Background of the IMF Policies & Activities

Great Depression of the 1930s & Breakdown in International Monetary Cooperation

Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply
raising barriers to foreign trade, devaluing their currencies to compete against each other for export
markets, and curtailing their citizens' freedom to hold foreign exchange. These attempts proved to
be self-defeating. World trade declined sharply and employment and living standards plummeted
in many countries.

IMF was formed through the Bretton woods Agreement

The IMF was conceived in July 1944, when representatives of 44 countries meeting in the town of
Bretton Woods, New Hampshire, agreed on a framework for international economic cooperation,
to be established after the Second World War. They believed that such a framework was necessary
to avoid a repetition of the disastrous economic policies that had contributed to the Great
Depression.

The IMF came into formal existence in December 1945, when its first 29 member countries signed
its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became
the first country to borrow from the IMF.

The IMF's membership began to expand in the late 1950s and during the 1960s as many African
countries became independent and applied for membership. But the Cold War limited the Fund's
membership, with most countries in the Soviet sphere of influence not joining.

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates
pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance
of payments, and only with the IMF's agreement. This par value system—also known as the
Bretton Woods system—prevailed until 1971, when the U.S. government suspended the
convertibility of the dollar into gold.
 The End of Bretton Woods system (1972–81) :

The system dissolved between 1968-1973.

Since the collapse of the Bretton Woods system, IMF members have been free to choose any form
of exchange arrangement they wish.

In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the
dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960s within
the parity established at Bretton Woods, this crisis marked the breakdown of the system. An
attempt to revive the fixed exchange rates failed, and by March 1973 the major currencies began
to float against each other.

Since the collapse of the Bretton Woods system, IMF members have been free to choose any form
of exchange arrangement they wish (except pegging their currency to gold): allowing the currency
to float freely, pegging it to another currency or a basket of currencies, adopting the currency of
another country, participating in a currency bloc, or forming part of a monetary union.

IMF Becoming a Universal Institution

• The fall of the Berlin wall in 1989

• Expansion to fulfill responsibilities
• Soviet Block Transition
• Debt relief for poor countries

The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the
IMF to become a (nearly) universal institution. In three years, membership increased from 152
countries to 172, the most rapid increase since the influx of African members in the 1960s.

In order to fulfill its new responsibilities, the IMF's staff expanded by nearly 30 percent in six
years. The Executive Board increased from 22 seats to 24 to accommodate Directors from Russia
and Switzerland, and some existing Directors saw their constituencies expand by several countries.

The IMF played a central role in helping the countries of the former Soviet bloc transition from
central planning to market-driven economies. This kind of economic transformation had never
before been attempted, and sometimes the process was less than smooth. For most of the 1990s,
these countries worked closely with the IMF, benefiting from its policy advice, technical assistance,
and financial support.
By the end of the decade, most economies in transition had successfully graduated to market
economy status after several years of intense reforms, with many joining the European Union in
2004.

Debt relief for poor countries

During the 1990s, the IMF worked closely with the World Bank to alleviate the debt burdens of
poor countries. The Initiative for Heavily Indebted Poor Countries was launched in 1996, with the
aim of ensuring that no poor country faces a debt burden it cannot manage. In 2005, to help
accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC
Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).

IMF Organization

IMF is an organization of 189 countries. Their primary purpose is to preserve the stability of the
international monetary system. Helps the governments of these countries manage economic
difficulties and benefit from opportunities of globalization

Key IMF Activities

The IMF supports its membership by providing:

• policy advice to governments and central banks based on analysis of economic trends and
cross-country experiences;
• research, statistics, forecasts, and analysis based on tracking of global, regional, and
individual economies and markets;
• loans to help countries overcome economic difficulties;
• concessional loans to help fight poverty in developing countries; and
• technical assistance and training to help countries improve the management of their
economies

IMF Functions

i. to ensure the stability of the international monetary and financial system.

ii. It helps resolve crises, and works with its member countries to promote growth and
alleviate poverty.
 iii. Economic and Financial Surveillance :

The IMF promotes economic stability and global growth by encouraging countries to adopt sound
economic and financial policies. To do this, it regularly monitors global, regional, and national
economic developments.

iv. Technical Assistance and Training:

IMF offers technical assistance and training to help member countries strengthen their capacity to
design and implement effective policies. Technical assistance is offered in several areas, including
fiscal policy, monetary and exchange rate policies, banking and financial system supervision and
regulation, and statistics.

v. IMF Lending:

In the event that member countries experience difficulties financing their balance of payments, the
IMF is also a fund that can be tapped to facilitate recovery.

vi. Research and Data : Supporting all three of these activities is the IMFs economic and
financial research and statistics.

Objectives of IMF

I. To promote international monetary cooperation

II. To facilitate the expansion and balanced growth of International Trade

III. To promote exchange rate stability

IV. To make its resources available to its members who are experiencing BOP problems

V. To establish a multilateral system of payments

Conditionality

• IMF lends to its member countries, ensuring that, members are pursuing policies that will
improve external payment problems.

• Commitment to implement corrective measures.

• To repay in a timely manner

 Membership

I. The IMF currently has a near-global membership of 189 countries.

To become a member, a country must apply and then be accepted by a majority of the existing
members.

III. Upon joining, each member of the IMF is assigned a quota, based broadly on its relative size
in the world economy

Subscriptions

A members quota subscription determines the maximum amount of financial resources the
member is obliged to provide to the IMF. A member must pay its subscription in full upon joining
the IMF: up to 25 percent must be paid in the IMFs own currency, called Special Drawing Rights
(SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling),
while the rest is paid in the members own currency.

Voting power

The quota largely determines a members voting power in IMF decisions. Each IMF member has
250 basic votes plus one additional vote for each SDR 100,000 of quota.

Access to financing. The amount of financing a member can obtain from the IMF (its access limit)
is based on its quota. Under Stand-By and Extended Arrangements, which are types of loans, a
member can borrow up to 200 percent of its quota annually and 600 percent cumulatively.

Governance Structure

The Board of Governors is the highest decision-making body of the IMF. It consists of one
governor and one alternate governor for each member country. The governor is appointed by the
member country and is usually the minister of finance or the head of the central bank. While the
Board of Governors has delegated most of its powers to the IMFs Executive Board,

it retains the right to approve quota increases, special drawing right (SDR) allocations, the
admittance of new members, compulsory withdrawal of members, and amendments to the Articles
of Agreement and By-Laws. It also elects or appoints executive directors. The Boards of
Governors of the IMF and the World Bank Group normally meet once a year.

Ministerial Committees:
The IMF Board of Governors is advised by two ministerial committees, the International Monetary
and Financial Committee (IMFC) and the Development Committee. The IMFC has 24 members,
drawn from the pool of 188 governors.

The Executive Board: The IMFs 24-member Executive Board takes care of the daily business of
the IMF. Together, these 24 board members represent all 188 countries.

Finances

Quotas: The IMFs resources come mainly from the money that countries pay as their capital
subscription when they become members. Quotas broadly reflect the size of each members
economy: the larger a country’s economy in terms of output and the larger and more variable its
trade, the larger its quota tends to be. They also help determine how much countries can borrow
from the IMF and their share in allocations of special drawing rights or SDRs (the reserve currency
created by the IMF in 1969).

Gold: The IMF holds a relatively large amount of gold among its assets, for reasons of financial
soundness, also to meet unforeseen contingencies. The IMF holds 103.4 million ounces (3,217
metric tons) of gold, worth about $83 billion as, making it the third-largest official holder of gold
in the world
 International Bank for Reconstruction and Development

Established in 1944 as the original institution of the World Bank Group, IBRD is structured like a
cooperative that is owned and operated for the benefit of its 189 member countries. The World
Bank is an international financial institution that provides long term capital assistance to
developing countries for capital programmes. The World Bank has a goal of reducing poverty. By
law, all of its decisions must be guided by a commitment to promote foreign investment,
international trade and facilitate capital investment.

The World
Bank
Group

World Other
Bank organizations

1.IFC
IBRD IDA 2. MIGA
3. ICSID

The World Bank is one of five institutions created at the Bretton Woods Conference in 1944..
Although both are based in Washington, D.C., the World Bank is, by custom, headed by an
American, while the IMF is led by a European. Until 1967 the bank undertook a relatively low
level of lending.

From 1989, World Bank policy changed in response to criticism from many groups. Environmental
groups and NGOs were incorporated in the lending of the bank in order to mitigate the effects of
the past that prompted such harsh criticism. Bank projects "include" green concerns.

Functions of IBRD

• To assist in the reconstruction & development of its member countries.

• To promote private foreign investment.
• To promote balanced growth of international trade.
• To bring about a smooth transition from a war time economy to peace time economy.

IBRD aims to reduce poverty in middle-income and creditworthy poorer countries by promoting
sustainable development through loans, guarantees, risk management products, and analytical and
advisory services.
 Membership

All countries which are members of IMF are members of World bank. A country holding the
membership of bank must subscribe to the charter of the bank. If a country resigns its membership,
it is required to pay back all loans granted to it through interest on due date. Each member of the
world bank has a capital subscription which is similar to but not identical with its quota in the fund.
The member’s subscription also measures roughly its voting power, but again the smaller nations
have a slightly higher vote.

Activities by IBRD

• Basic education and health services

• Safety needs
• Infrastructure development
• Environment protection
• Private sector development
• Governance and investment climate
• Technical assistance

Organization Structure

The president

The president of the Bank, elected by the executive directors, is also their chairman, although he
is not entitled to a vote, except in case of an equal division. Subject to their general direction, the
president is responsible for the conduct of the ordinary business of the Bank. Action on Bank loans
is initiated by the president and the staff of the Bank. The amount, terms, and conditions of a loan
are recommended by the president to the executive directors, and the loan is made if his
recommendation is approved by them.

Board of Governors

All powers of the Bank are vested in its Board of Governors, composed of one governor and one
alternate from each member state. Ministers of Finance, central bank presidents, or persons of
comparable status usually represent member states on the Bank's Board of Governors. The board
meets annually. The Bank is organized somewhat like a corporation. According to an agreed-upon
formula, member countries subscribe to shares of the Bank's capital stock. Each governor is
entitled to cast 250 votes plus 1 vote for each share of capital stock subscribed by his country
Executive directors

The Executive Directors make up the Boards of Directors of the World Bank. They normally meet
at least twice a week to oversee the Bank's business, including approval of loans and guarantees,
new policies, the administrative budget, country assistance strategies and borrowing and financial
decisions

The Bank's Board of Governors has delegated most of its authority to 24 executive directors.
According to the Articles of Agreement, each of the five largest shareholders—the United States,
Japan, Germany, France and the United Kingdom—appoints one executive director. The other
countries are grouped in 19 constituencies, each represented by an executive director who is
elected by a group of countries. The number of countries each of these 19 directors represents
varies widely.

For example, the executive directors for China, the Russian Federation, and Saudi Arabia represent
one country each, while one director speaks for 24 Francophone African countries and another
director represents 22 mainly English-speaking African countries.

Operations of the World Bank

Purposes

• To assist in bringing about a smooth transition from wartime to peaceful economies,

• To promote economic development that benefits poor people in developing countries.
• Loans are provided to developing countries to help reduce poverty and to finance investments
that contribute to economic growth.

Investments include roads, power plants, schools, and irrigation networks, as well as activities like
agricultural extension services, training for teachers, and nutrition improvement programs for
children and pregnant women.

Some World Bank loans finance changes in the structure of countries' economies to make them
more stable, efficient, and market oriented.

The World Bank also provides technical assistance to help governments make specific sectors of
their economies more efficient and more relevant to national development goals.

What are the biggest global challenges for IBRD?

• Population growth
• Elimination of global poverty
• Global life expectancy
• Aid to education
 Financing of IBRD

At its establishment, the IBRD had an authorized capital of US$ 10 billion. IBRD raises most of
its funds on the world's financial markets. It has become one of the most established borrowers
since issuing its first bond in 1947 to finance the reconstruction of Europe after World War Two.
Investors see IBRD bonds as a safe and profitable place to put their money and their cash finances
projects in middle-income countries. IBRD became a major player on the international capital
markets by developing modern debt products,

opening new markets for debt issuance, and by building up a broad investor base around the world
of pension funds, insurance companies, central banks, and individuals. The World Bank's
borrowing requirements are primarily determined by its lending activities for development projects.
As World Bank lending has changed over time, so has its annual borrowing program. In 1998 for
example, IBRD borrowing peaked at $28 billion with the Asian financial crisis. It is now projected
to borrow between $10 to 15 billion a year.

IBRD raises funds on capital markets

Donors give money to IDA for the world’s poorest countries, with additional money coming from
repayments and from the Bank’s earnings.
 International Finance Corporation

• IFC is the largest global development institution focused exclusively on the private sector –
the global leader in private sector development finance

• Create opportunity for people – to escape poverty and improve their lives

• Invest, advise, mobilize capital, and manage assets – providing solutions for an inclusive and
sustainable world

STRUCTURE

• Owned by 184 member countries

• IFC is the main driver of private sector development in the World Bank Group
• Collaborates with other members of the group, including the World Bank (IBRD and IDA,
MIGA and the International Centre for Settlement of Investment Disputes)
• Global: Headquartered in Washington, D.C.
• Launched in 1956: 12 years after the Bretton Woods Conference created the World Bank to
finance post-WWII reconstruction and development by lending to governments
• Original mandate: supporting development by encouraging private investment (a new part of
the global economic agenda)
• 1980s: IFC coins the term “emerging markets”

Today: IFC is the world’s largest multilateral institution exclusively focused on private sector
development, widely seen as an essential source of job creation, growth, and poverty reduction

PURPOSE: to catalyze inclusive and sustainable growth through:

• Promoting open and competitive markets in developing countries

• Supporting companies and other private sector partners where there is a gap
• Helping to generate productive jobs and deliver essential services to the underserved
• Catalyzing and mobilizing other sources of finance for private enterprise development

IFC offers development impact solutions through firm-level interventions (direct investments,
advisory services, and IFC Asset Management Company), standard-setting, and business enabling
environment work.
Five areas of Strategic Focus

i. Frontier Markets
• Only 1/3 of the world's poorest live in low-income countries
• Most live in middle-income countries
• So IFC focuses on frontier markets: the poorest countries as well as less-developed regions of
middle-income countries, and fragile and conflict-affected situations

ii. Private Infrastructure

• Power, transport, water, telecommunications
• Health and education
• Building food security by strengthening the food supply chain
• Public-private partnerships are critical in all

iii. Developing Local Financial Markets

• Focusing on the key drivers of job creation: micro, small, and medium enterprises
• Expanding role in trade finance
• Local currency transactions
• Financing women entrepreneurs

iv. Climate Change

• Part of broader commitment to ensuring environmental and social sustainability
• Renewable energy
• Sustainable energy finance
• Building clients' climate-smart business models
• IFC is the world’s largest financier of renewable energy and energy efficiency projects

v. Long-Term Partnerships
• IFC builds long-term relationships with firms in emerging markets
• Using the full range of products and services
• Assisting their cross-border growth

IFC’s Three Businesses

• Investment Services: Loans, Equity, Trade finance, Syndications, Securitized finance,

Blended finance
• Advisory Services: Access to finance, Sustainable Business, Investment Climate, Public-
Private Partnerships
• IFC Asset Management: Wholly owned subsidiary of IFC, Private equity fund manager,
Invests third-party capital alongside IFC.
 Multi lateral Investment Guarantee Agency

MIGA was created in 1988 as a member

• of the World Bank Group to promote private foreign direct investment into developing
countries
• to support economic growth, reduce poverty, and improve people’s lives
• to provide Non commercial risk insurance (guarantees) for investors and lenders
• to provide Investment dispute mediation
• to provide Technical assistance to help countries attract and retain FDI
• to provide Online information on investment opportunities and operating conditions in
developing countries.

Strategic Priorities

• Focusing on sustainable development

• Opening up difficult or frontier markets, especially in conflict-affected countries
• Supporting investments in Africa and the world’s poorest countries
• Supporting complex projects
• Promoting cross-border investments between developing countries

Types of Investments Covered

• Equity
• Shareholder loans
• Loan guarantees
• Loans from financial institutions
• Non-shareholder loans
• Non-equity direct investment

…other forms of investment such as technical assistance and management contracts, asset
securitizations, capital market bond issues, leasing, services, franchising and licensing
agreements, may also be eligible for coverage.
 Eligibility Requirements

Eligible investments: Cross-border from one member country (developed or developing) into
another developing member country. Primarily “greenfield” investments if an existing investment,
must have high developmental impact

Greenfield investments: A form of foreign direct investment where a parent company starts a
new venture in a foreign country by constructing new operational facilities from the ground up. In
addition to building new facilities, most parent companies also create new long-term jobs in the
foreign country by hiring new employees.

Terms of coverage

Amount of coverage

• MIGA can typically arrange cover for all amounts, either on its own books or through
co/reinsurance
• No minimum amount for guarantee or size of investment
• Amounts can include interest principal for debt and future retained earnings for equity
• Equity covered up to 90% and debt up to 99%

Tenor

• Minimum 1 year, up to 20 years; investor decides on the duration of a guarantee

• Investor can cancel the contract after the 3rd anniversary

Pricing

• Premium rates are decided on a per project basis and vary by country, sector, transaction
and the type of risk insured
• Premiums are paid annually or semi-annually and are calculated as a percentage rate
applied to the amount of coverage
 MIGA’s Coverage

• Inconvertibility and Transfer Restriction

• Expropriation
• War and Civil Disturbance
• Breach of Contract
• Non-Honoring of Sovereign Financial Obligations

Political Risks Covered by MIGA

• Inconvertibility and Transfer Restriction

• Protects against losses arising from inability to
• convert local currency into foreign exchange within the host country
• transfer funds out of the host country
• In case of convertibility restrictions, MIGA’s compensation is based on official rate of
exchange at the Date of Loss
• Currency depreciation and devaluation not covered
• Non-discriminatory regulatory measures not covered, unless such measures have a
confiscatory effect
• Breach of Contract
• Protects against loss arising from breach or repudiation of a project agreement (e.g., in
infrastructure and power projects)
• Project agreement must be entered between the Host Government on the one hand and
Guarantee Holder and/or Project Enterprise (for Equity investments only) on the other
hand

• Expropriation
• Protects against losses arising from:
➢ Nationalization and confiscation
➢ Creeping expropriation (a series of acts that are expropriatory taken in sum, e.g. gradual
changes in tax regime)
➢ Expropriation of funds (e.g., “account freeze”)
➢ Expropriation also if the Project Enterprise
a. is deprived of a substantial benefit
b. constituting a fundamental right (e.g., under a Project Agreement)
c. essential to its overall financial viability (normally this implies insolvency or
impending insolvency of the Project Enterprise)

• War and Civil Disturbance: Three forms of coverage (Loss of Assets, Temporary Loss of
Income (for equity), Permanent Loss of Use) Loss has to be a direct and immediate result
 of acts of war, revolution, rebellion, insurrection, coup d’état, civil war, civil commotion,
riots
• Act of sabotage or terrorism can also be covered
• Acts must pursue a broad political or ideological object
• Non-Honoring of Sovereign Financial Obligations
• For unconditional financial payment obligations or guarantees of the Host Government
• Examples:
• Host Government unconditionally guarantees repayment of loan by Project Enterprise
• Host Government assumes unconditional obligation to inject equity or other funding on
demand or at date certain

Not Eligible: Host Government issues performance guarantee relating to power purchase
agreement (guarantee not unconditional)

War and Civil Disturbance

• Temporary Loss of Income (Equity Investments)

• Short-term business interruption coverage not offered on a stand-alone basis, but added to
the WCD coverage upon request

Compensation based on

• lost business income,

• unavoidable continuing expenses and
• extraordinary expenses to resume operations

MIGA covers “denial of justice” risks:

• Failure to pay on a valid arbitral award or judgment by a state court rendered against host
government or
• No recourse to judicial or arbitral forum by the investor or Project Enterprise
• May cover obligations of sub-sovereigns and SOEs, subject to certain restrictions

Breach of Contract Coverage of SOEs

• New guidelines permit coverage of contracts with an SOE (State-Owned Enterprise) where:
• It is controlled by the Host Government or its political subdivision
• It performs a public service or fulfills a governmental function (like a utility) and
 • Either:
• The Host Government, as a matter of law, is responsible for its financial liabilities or
• It is creditworthy on a stand-alone basis
• In some cases where the contract is with an SOE that does not meet these criteria, MIGA
has the option of covering a Host Government guarantee in Breach of Contract.

Non-Honoring of Sovereign Financial Obligations

Eligibility Requirements

i. Sovereign Financial Obligation must be associated with an eligible investment project

with measurable developmental impacts Central governments obligations are eligible
(e.g., guarantee issued by MoF)
ii. Sub-sovereign obligations (i.e., provincial or municipal governments) eligible on a
case-by-case basis Guarantees issued by an SOE not eligible

MIGA’s Underwriting Process

Investor • Marketing & Origination

• Preliminary Application

MIGA (1-3 months) • Definitive Application (Determines eligibility)

• Early Screening Project Review Meeting (“ESM”)-chaired by
the Director of Operations Group (More detailed analysis of a
project depending on the type of project Starts underwriting
process)
• Underwriting and host country approval
➢ Developmental impact
➢ Environmental, Social review
➢ Pricing and reinsurance
➢ Economic financial viability, country risk
➢ World Bank Group policy
• Project Review Committee (“PRC”)-Track “A” projects
(complex/high risk)
• Final Approval Meeting (“FAM”)-Track “B” projects
(simpler/low risk)
Investor and MIGA • Sign contract of guarantee
• Monitoring, evaluation, contract maintenance
 MIGA’s Claims Track Record

Since its inception, MIGA has issued $36 billion of guarantees, in support of 791 projects in 109
of its member countries. The Agency has also supported multiple programs at regional and global
levels in member countries. MIGA has successfully facilitated the settlement of disputes in all
currency transfer/inconvertibility issues and since inception has paid claims in 8 cases:

i. Afghanistan ($575 for war and civil disturbance in FY11) – (paid by MIGA Administered
Trust Fund)
ii. Indonesia ($15 million for expropriation in FY00)
iii. Nepal ($144,600 for war and civil disturbance in FY05)
iv. Argentina ($558,311 for expropriation in FY05)
v. Kenya ($491,100 for war and civil disturbance in FY09)
vi. Madagascar ($12,824 for war and civil disturbance in FY09)
vii. In fiscal 2015 MIGA paid three claims for losses incurred from war and civil disturbance
events, in Burkina Faso, Central African Republic, and Mali.

Why Investors Choose MIGA

• Expertise in complex projects and in challenging environments

• Credit enhancement
• Longer tenors (up to 15-20 years)
• World Bank Group “umbrella” of deterrence
• Track record in dispute resolutions
• Mobilization of reinsurance capacity
• Best practices in environmental and social management
• Prompt claims payment
• Access to World Bank Group expertise and resources
 MODULE 3
Syllabus:

1. WTO-Need for Establishment & Functioning

2. Institutional Structure of WTO & GATT
3. Dispute Resolution under WTO
4. Pillars of GATT:
a. MFN Treatment
b. National Treatment
c. Tariff Bindings
d. Non Tariff Barriers
e. Rule of Origin (PDF)
f. Market Access
g. Free Trade Agreements
5. Exceptions under GATT (PDF)

GATT and WTO: Establishment, Structure, Functions

The General Agreement on Trade and Tariffs (GATT) was enacted as an attempt to reduce the
number of tariffs and trade barriers and to foster international trade in the years following World
War II. It was signed in 1947 by over 100 countries and has served the international community
for decades. Under the auspices of GATT there have been numerous rounds of trade negotiations
on a variety of issues.

Beginning in 1986, the Uruguay Round negotiations included the areas of tariffs, services and
intellectual property.

Over seven years of negotiations, the GATT agreements evolved into their current state. The
Uruguay Round concluded in 1994 with numerous agreements to reduce trade barriers and institute
more enforceable world trade rules. One of the major results of the Uruguay Round was the
creation of the World Trade Organization (WTO), which officially began operations on January 1,
1995.

The WTO is a multilateral organization with the mandate

• to establish enforceable trade rules,
• to act as a dispute settlement body and
• to provide a forum for further negotiations into reducing trade barriers.
There are 164 WTO member countries and observer countries.
 From GATT to WTO

GATT was working very efficiently but powerful members of GATT decided to replace it with
some global level regulating and governing authority. This became the reason for creation of WTO.
This happened for various reasons. First of all, GATT was applicable only on trading of
merchandised goods. But WTO covers trading of services and Intellectual properties along with
the merchandised goods. GATT was highly bureaucratic structure, on the other hand WTO is faster
in implementation of international agreements and WTO enjoys more authority while resolving
the disputes between member countries.

Beyond the above mentioned operational and practical reasons, various symbolic and
philosophical reasons also participated in replacement of GATT with WTO. GATT was actually
just a set of instructions and rules, with no organizational or institutional foundation. There was
no central body to regulate the functioning of GATT and its member countries. On the other hand
WTO is a permanent full-fledged international institution with its own independent secretariat.

Moreover, GATT agreements were subject to the willingness of member countries to implement
it. It was quite possible that one or more member countries refused to implement the signed
agreements simply due to various miscellaneous local reasons and no one was there to account
their responsibility of implementation. But commitments of WTO are permanent and reliable.
 Dispute Settlement Under WTO & GATT

Once the international obligations and rights and duties of member states have been defined, the
question emerges how they should be enforced especially in the arena of international trade.
In the Havana Charter, the concept of balancing the rights and duties was incorporated by
providing compensatory adjustment. Once the ITO failed, similar provisions were incorporated
in Articles XXII and XXIII of GATT, 1947.

The GATT, 1947 did not conceive of a specific procedure or provision for settlement of disputes.
However, the GATT over the years resolved many disputes and evolved a number of
interpretations and interpretative techniques to make the GATT functional. The GATT contracting
parties acting jointly under Articles XXV:I along with other provisions exercised the functions of
a tribunal.

Article XXII of GATT, 1947: Consultation

(1) Each contracting party shall accord sympathetic consideration to, and shall afford adequate
opportunity for consultation regarding, such representations as may be made by another
contracting party with respect to any matter affecting the operation of this Agreement.

(2) The CONTRACTING PARTIES may, at the request of a contracting party, consult with any
contracting party or parties in respect of any matter for which it has not been possible to find a
satisfactory solution through consultation.

Article XXIII: Nullification or Impairment

If any contracting party should consider that any benefit accruing to it directly or indirectly under
this Agreement is being nullified or impaired or that the attainment of any objective of the
Agreement is being impeded as the result of

(a) the failure of another contracting party to carry out its obligations under this Agreement, or
(b) the application by another contracting party of any measure, whether or not it conflicts with
the provisions of this Agreement, or
(c) the existence of any other situation,

the contracting party may, with a view to the satisfactory adjustment of the matter, make written
representations or proposals to the other contracting party or parties which it considers to be
concerned. Any contracting party thus approached shall give sympathetic consideration to the
representations or proposals made to it.
 Article XXV: Joint Action by the Contracting Parties

(1) Representatives of the contracting parties shall meet from time to time for the purpose of giving
effect to those provisions of this Agreement which involve joint action and, generally, with a view
to facilitating the operation and furthering the objectives of this Agreement. Wherever reference
is made in this Agreement to the contracting parties acting jointly they are designated as the
CONTRACTING PARTIES.

Rule based system has been introduced in the WTO into the Dispute Settlement Understanding
The DSU confers compulsory jurisdiction on the Dispute Settlement Body (DSB) for the purposes
of resolving Disputes.
The interpretative role of WTO is clear in Article 3(2) of the DSU, which provides that the system
serves to “clarify the provisions of the WTO Agreements in accordance with the customary rules
of interpretation of public international law”.

General Provisions (Article 3)

Members affirm their adherence to the principles for the management of disputes applied under
Articles XXII and XXIII of GATT 1947 as modified by the DSU.
The dispute settlement system of the WTO is a central element in providing security and
predictability to the multilateral trading system. The Members recognize that it serves to preserve
the rights and obligations of Members under the covered agreements.

Recommendations or rulings made by the DSB shall be aimed at achieving a satisfactory

settlement of the matter in accordance with the rights and obligations under this Understanding
and under the covered agreements. In cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment.
This means that there is normally a presumption that a breach of the rules has an adverse impact
on other Members parties to that covered agreement, and in such cases, it shall be up to the Member
against whom the complaint has been brought to rebut the charge.

Consultations (Article 4)
An international trade dispute settlement normally commences with consultation between the
member nations of the WTO under Article XXII of GATT, 1994.
Each Member undertakes to accord sympathetic consideration to and afford adequate opportunity
for consultation regarding any representations made by another Member concerning measures
affecting the operation of any covered agreement taken within the territory of the former.
If a request for consultations is made pursuant to a covered agreement, the Member to which the
request is made shall, unless otherwise mutually agreed, reply to the request within 10 days after
the date of its receipt and shall enter into consultations in good faith within a period of no more
than 30 days after the date of receipt of the request, with a view to reaching a mutually satisfactory
solution.

If the Member does not respond within 10 days after the date of receipt of the request, or does not
enter into consultations within a period of no more than 30 days, or a period otherwise mutually
agreed, after the date of receipt of the request, then the Member that requested the holding of
consultations may proceed directly to request the establishment of a panel.

All such requests for consultations shall be notified to the DSB and the relevant Councils and
Committees by the Member which requests consultations.
Any request for consultations shall be submitted in writing and shall give the reasons for the
request, including identification of the measures at issue and an indication of the legal basis for
the complaint.

Consultations shall be confidential, and without prejudice to the rights of any Member in any
further proceedings.
If the consultations fail to settle a dispute within 60 days after the date of receipt of the request for
consultations, the complaining party may request the establishment of a panel.
The complaining party may request a panel during the 60-day period if the consulting parties
jointly consider that consultations have failed to settle the dispute.
In cases of urgency, including those which concern perishable goods, Members shall enter into
consultations within a period of no more than 10 days after the date of receipt of the request.
If the consultations have failed to settle the dispute within a period of 20 days after the date of
receipt of the request, the complaining party may request the establishment of a panel.

Good Offices, Conciliation and Mediation (Article 5)

Good offices, conciliation and mediation are procedures that are undertaken voluntarily if the
parties to the dispute so agree.
Good offices, conciliation or mediation may be requested at any time by any party to a dispute.
Once procedures for good offices, conciliation or mediation are terminated, a complaining party
may then proceed with a request for the establishment of a panel.

When good offices, conciliation or mediation are entered into within 60 days after the date of
receipt of a request for consultations, the complaining party must allow a period of 60 days after
the date of receipt of the request for consultations before requesting the establishment of a panel.
The complaining party may request the establishment of a panel during the 60-day period if the
parties to the dispute jointly consider that the good offices, conciliation or mediation process has
failed to settle the dispute.

The Director-General may, acting in an ex officio capacity, offer good offices, conciliation or
mediation with the view to assisting Members to settle a dispute. If the parties to a dispute agree,
procedures for good offices, conciliation or mediation may continue while the panel process
proceeds.

Establishment of Panels (Article 6):

If the complaining party so requests, a panel shall be established at the latest at the DSB meeting
following that at which the request first appears as an item on the DSB's agenda, unless at that
meeting the DSB decides by consensus not to establish a panel.

The request for the establishment of a panel shall be made in writing. It shall indicate whether
consultations were held, identify the specific measures at issue and provide a brief summary of the
legal basis of the complaint sufficient to present the problem clearly.
In case the applicant requests the establishment of a panel with other than standard terms of
reference, the written request shall include the proposed text of special terms of reference.

Terms of Reference of Panels (Article 7)

Panels shall have the following terms of reference unless the parties to the dispute agree otherwise
within 20 days from the establishment of the panel:
Panels shall address the relevant provisions in any covered agreement or agreements cited by the
parties to the dispute.
In establishing a panel, the DSB may authorize its Chairman to draw up the terms of reference of
the panel in consultation with the parties to the dispute.
The terms of reference thus drawn up shall be circulated to all Members.
The terms of reference are important for two reasons:
First, terms of reference fulfill an important due process objective – they give the parties and third
parties sufficient information concerning the claims at issue in the dispute in order to allow them
an opportunity to respondent to the complaint’s case;
Second, terms of reference establish the jurisdiction of the panel by defining the precise claims at
issue in the dispute.
A panel therefore may consider only those claims that it has the authority to consider under its
terms of reference.
A panel cannot assume jurisdiction that it does not have.

Composition of Panels (Article 8)

Panels shall be composed of well-qualified governmental and/or non-governmental individuals,

including persons who have served on or presented a case to a panel, served as a representative of
a Member or of a contracting party to GATT 1947 or as a representative to the Council or
Committee of any covered agreement or its predecessor agreement, or in the Secretariat, taught or
published on international trade law or policy, or served as a senior trade policy official of a
Member.
Panel members should be selected with a view to ensuring the independence of the members, a
sufficiently diverse background and a wide spectrum of experience.
Citizens of Members whose governments are parties to the dispute or third parties as defined in
paragraph 2 of Article 10 shall not serve on a panel concerned with that dispute, unless the parties
to the dispute agree otherwise.

Procedures for Multiple Complainants (Article 9)

Where more than one Member requests the establishment of a panel related to the same matter, a
single panel may be established to examine these complaints taking into account the rights of all
Members concerned. A single panel should be established to examine such complaints whenever
feasible.
The single panel shall organize its examination and present its findings to the DSB in such manner
that the rights which the parties to the dispute would have enjoyed had separate panels examined
the complaints are in no way impaired.
The written submissions by each of the complainants shall be made available to the other
complainants, and each complainant shall have the right to be present when any one of the other
complainants presents its views to the panel.
If more than one panel is established to examine the complaints related to the same matter, to the
greatest extent possible the same persons shall serve as panelists on each of the separate panels
and the timetable for the panel process in such disputes shall be harmonized.

Article 10: Third Parties

Article 11: Function of Panels
 Article 12: Panel Procedures
Article 13: Right to Seek Information
Article 14: Confidentiality
Article 15: Interim Review Stage

Article 16: Adoption of Panel Reports

Within 60 days after the date of circulation of a panel report to the Members, the report shall be
adopted at a DSB meeting unless a party to the dispute formally notifies the DSB of its decision
to appeal or the DSB decides by consensus not to adopt the report. If a party has notified its
decision to appeal, the report by the panel shall not be considered for adoption by the DSB until
after completion of the appeal. This adoption procedure is without prejudice to the right of
Members to express their views on a panel report.

Appellate Review and Standing Appellate Body (Article 17)

A standing Appellate Body shall be established by the DSB. The Appellate Body shall hear appeals
from panel cases. It shall be composed of seven persons, three of whom shall serve on any one
case. Persons serving on the Appellate Body shall serve in rotation.

As a general rule, the proceedings shall not exceed 60 days from the date a party to the dispute
formally notifies its decision to appeal to the date the Appellate Body circulates its report.
When the Appellate Body considers that it cannot provide its report within 60 days, it shall inform
the DSB in writing of the reasons for the delay together with an estimate of the period within which
it will submit its report.
In no case shall the proceedings exceed 90 days.

An appeal shall be limited to issues of law covered in the panel report and legal interpretations
developed by the panel.

An Appellate Body report shall be adopted by the DSB and unconditionally accepted by the parties
to the dispute unless the DSB decides by consensus not to adopt the Appellate Body report within
30 days following its circulation to the Members.

Article 18: Communications with the Panel or Appellate Body

(Article 19) Panel and Appellate Body Recommendations
Where a panel or the Appellate Body concludes that a measure is inconsistent with a covered
agreement, it shall recommend that the Member concerned bring the measure into conformity with
that agreement.
In addition to its recommendations, the panel or Appellate Body may suggest ways in which the
Member concerned could implement the recommendations.
In accordance with paragraph 2 of Article 3, in their findings and recommendations, the panel and
Appellate Body cannot add to or diminish the rights and obligations provided in the covered
agreements.

Time-frame for DSB Decisions According to Article 20

unless otherwise agreed to by the parties to the dispute, the period from the date of establishment
of the panel by the DSB until the date the DSB considers the panel or appellate report for adoption
shall as a general rule not exceed nine months where the panel report is not appealed or 12 months
where the report is appealed. Where either the panel or the Appellate Body has acted, pursuant to
paragraph 9 of Article 12 or paragraph 5 of Article 17, to extend the time for providing its report,
the additional time taken shall be added to the above periods.

Surveillance of Implementation of Recommendations and Rulings (Article 21)

At a DSB meeting held within 30 days after the date of adoption of the panel or Appellate Body
report, the Member concerned shall inform the DSB of its intentions in respect of implementation
of the recommendations and rulings of the DSB.

If it is impracticable to comply immediately with the recommendations and rulings, the Member
concerned shall have a reasonable period of time in which to do so.

The reasonable period of time shall be:

(a) the period of time proposed by the Member concerned, provided that such period is approved
by the DSB; or, in the absence of such approval,
(b) a period of time mutually agreed by the parties to the dispute within 45 days after the date of
adoption of the recommendations and rulings; or, in the absence of such agreement,
(c) a period of time determined through binding arbitration within 90 days after the date of
adoption of the recommendations and rulings.
In such arbitration, a guideline for the arbitrator should be that the reasonable period of time to
implement panel or Appellate Body recommendations should not exceed 15 months from the date
of adoption of a panel or Appellate Body report.
 Article 22: Compensation and the Suspension of Concessions

Compensation and the suspension of concessions or other obligations are temporary measures
available in the event that the recommendations and rulings are not implemented within a
reasonable period of time. However, neither compensation nor the suspension of concessions or
other obligations is preferred to full implementation of a recommendation to bring a measure into
conformity with the covered agreements. Compensation is voluntary and, if granted, shall be
consistent with the covered agreements.

Article 23: Strengthening of the Multilateral System

Article 24: Special Procedures Involving Least-Developed Country Members
Article 25: Arbitration

Article 26: Non-Violation Complaints of the Type Described in Paragraph 1(b) of Article
XXIII of GATT 1994

Where the provisions of paragraph 1(b) of Article XXIII of GATT 1994 are applicable to a covered
agreement, a panel or the Appellate Body may only make rulings and recommendations where a
party to the dispute considers that any benefit accruing to it directly or indirectly under the relevant
covered agreement is being nullified or impaired or the attainment of any objective of that
Agreement is being impeded as a result of the application by a Member of any measure, whether
or not it conflicts with the provisions of that Agreement.
 PILLARS OF GATT

a. MFN Treatment
b. National Treatment
c. Tariff Bindings
d. Non Tariff Barriers
e. Rule of Origin
f. Market Access
g. Free Trade Agreements

1. Most-favored-nation (MFN): treating other people equally, Trade without

discrimination

Under the WTO agreements, countries cannot normally discriminate between their trading
partners. Grant someone a special favor (such as a lower customs duty rate for one of their
products) and you have to do the same for all other WTO members. This principle is known as
most-favored-nation (MFN) treatment

The trading system should be:

• without discrimination — a country should not discriminate between its trading partners
(giving them equally “most-favored-nation” or MFN status); and it should not discriminate
between its own and foreign products, services or nationals (giving them “national
treatment”);
• freer — barriers coming down through negotiation;
• predictable — foreign companies, investors and governments should be confident that trade
barriers (including tariffs and non-tariff barriers) should not be raised arbitrarily; tariff rates
and market-opening commitments are “bound” in the WTO;
• more competitive — discouraging “unfair” practices such as export subsidies and dumping
products at below cost to gain market share;
• more beneficial for less developed countries — giving them more time to adjust, greater
flexibility, and special privileges.

It is so important that it is the first article of the GATT, which governs trade in goods.

MFN is also a priority in the GATS (Article 2) and the Agreement on trade related aspects of
Intellectual Property Rights TRIPS (Article 4), although in each agreement the principle is
handled slightly differently. Together, those three agreements cover all three main areas of trade
handled by the WTO.

Some Exceptions to MFN

Countries can set up a free trade agreement that applies only to goods traded within the group —

• discriminating against goods from outside. Or

• they can give developing countries special access to their markets. Or
• a country can raise barriers against products that are considered to be traded unfairly from
specific countries. And in services, countries are allowed, in limited circumstances, to
discriminate.

But the agreements only permit these exceptions under strict conditions. In general, MFN means
that every time a country lowers a trade barrier or opens up a market, it has to do so for the same
goods or services from all its trading partners — whether rich or poor, weak or strong.

Benefits of MFN

a. Increases trade creation and decreases trade diversion.

A country that grants MFN on imports will have its imports provided by the most efficient
supplier if the most efficient supplier is within the group of MFN. Otherwise, that is, if the most
efficient producer is outside the group of MFN and additionally, is charged higher rates of tariffs,
then it is possible that trade would merely be diverted from this most efficient producer to a less
efficient producer within the group of MFN (or with a tariff rate of 0). This leads to economic
costs for the importing country, which can outweigh the gains from free trade.

MFN allows smaller countries, in particular, to participate in the advantages that larger countries
often grant to each other, whereas on their own, smaller countries would often not be powerful
enough to negotiate such advantages by themselves.

b. Granting MFN has domestic benefits

having one set of tariffs for all countries simplifies the rules and makes them more transparent.
Theoretically, if all countries in the world confer MFN status to each other, there will be no need
to establish complex and administratively costly rules of origin to determine which country a
product (that may contain parts from all over the world) must be attributed to for customs
purposes. However, if at least one nation lies outside the MFN alliance, then customs cannot be
done away with.
 c. MFN restrains domestic special interests from obtaining protectionist measures.

For example, butter producers in country A may not be able to lobby for high tariffs on butter to
prevent cheap imports from developing country B, because, as the higher tariffs would apply to
every country, the interests of A's principal ally C might get impaired. As MFN clauses promote
non-discrimination among countries, they also tend to promote the objective of free trade in
general.

2. National treatment: Treating foreigners and locals equally

Imported and locally-produced goods should be treated equally — at least after the foreign goods
have entered the market. The same should apply to foreign and domestic services, and to foreign
and local trademarks, copyrights and patents. This principle of “national treatment” (giving
others the same treatment as one’s own nationals) is also found in all the three main WTO
agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), although once
again the principle is handled slightly differently in each of these.

National treatment only applies once a product, service or item of intellectual property has
entered the market. Therefore, charging customs duty on an import is not a violation of national
treatment even if locally-produced products are not charged an equivalent tax.

3. Free trade Agreements: gradually, through negotiation

Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers
concerned include customs duties (or tariffs) and measures such as import bans or quotas that
restrict quantities selectively. From time to time other issues such as red tape and exchange rate
policies have also been discussed.

Since GATT’s creation in 1947-48 there have been 8 rounds of trade negotiations. A ninth
round, under the Doha Development Agenda, is now underway.

As a result of the negotiations, by the mid-1990s industrial countries’ tariff rates on industrial
goods had fallen steadily to less than 4%.

But by the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to the
new areas such as services and intellectual property.
Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow
countries to introduce changes gradually, through “progressive liberalization”. Developing
countries are usually given longer to fulfil their obligations.

4. Predictability: through binding and transparency

Sometimes, promising not to raise a trade barrier can be as important as lowering one, because
the promise gives businesses a clearer view of their future opportunities. With stability and
predictability, investment is encouraged, jobs are created and consumers can fully enjoy the
benefits of competition — choice and lower prices. The multilateral trading system is an attempt
by governments to make the business environment stable and predictable.

A country can change its bindings, but only after negotiating with its trading partners, which
could mean compensating them for loss of trade.

One of the achievements of the Uruguay Round of multilateral trade talks was to increase the
amount of trade under binding commitments . In agriculture, 100% of products now have bound
tariffs. The result of all this: a substantially higher degree of market security for traders and
investors.

The system tries to improve predictability and stability in other ways as well. One way is to
discourage the use of quotas and other measures used to set limits on quantities of imports —
administering quotas can lead to more red-tape and accusations of unfair play. Another is to
make countries’ trade rules as clear and public (“transparent”) as possible. Many WTO
agreements require governments to disclose their policies and practices publicly within the
country or by notifying the WTO. The regular surveillance of national trade policies through the
Trade Policy Review Mechanism provides a further means of encouraging transparency both
domestically and at the multilateral level.

5. Promoting fair competition

The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate.
The system does allow tariffs and, in limited circumstances, other forms of protection. More
accurately, it is a system of rules dedicated to open, fair and undistorted competition.

The rules on non-discrimination — MFN and national treatment — are designed to secure fair
conditions of trade. So too are those on dumping (exporting at below cost to gain market share)
and subsidies.
The issues are complex, and the rules try to establish what is fair or unfair, and how governments
can respond, in particular by charging additional import duties calculated to compensate for
damage caused by unfair trade.

6. WTO RULES OF ORIGIN

Definition
Rules of origin are the criteria needed to determine the national source of a product. Their
importance is derived from the fact that duties and restrictions in several cases depend upon the
source of imports.
There is wide variation in the practice of governments with regard to the rules of origin. While the
requirement of substantial transformation is universally recognized, some governments apply the
criterion of change of tariff classification, others the ad valorem percentage criterion and yet others
the criterion of manufacturing or processing operation. In a globalizing world it has become even
more important that a degree of harmonization is achieved in these practices of Members in
implementing such a requirement.

Where are rules of origin used?

• to implement measures and instruments of commercial policy such as anti-dumping duties and
safeguard measures;
• to determine whether imported products shall receive most-favoured-nation (MFN) treatment
or preferential treatment;
• for the purpose of trade statistics;
• for the application of labelling and marking requirements; and
• for government procurement.

No specific provision in GATT

GATT has no specific rules governing the determination of the country of origin of goods in
international commerce. Each contracting party was free to determine its own origin rules, and
could even maintain several different rules of origin depending on the purpose of the particular
regulation. The draftsmen of the General Agreement stated that the rules of origin should be left:

“...within the province of each importing country to determine, in accordance with the provisions
of its law, for the purpose of applying the most-favoured-nation provisions (and for other GATT
purposes), whether goods do in fact originate in a particular country”.
 Interest in the harmonization of rules of origin

It is accepted by all countries that harmonization of rules of origin i.e., the definition of rules of
origin that will be applied by all countries and that will be the same whatever the purpose for which
they are applied - would facilitate the flow of international trade. In fact, misuse of rules of origin
may transform them into a trade policy instrument per se instead of just acting as a device to
support a trade policy instrument. Given the variety of rules of origin, however, such
harmonization is a complex exercise.

In 1981, the GATT Secretariat prepared a note on rules of origin and, in November 1982, Ministers
agreed to study the rules of origin used by GATT Contracting Parties. Not much more work was
done on rules of origin until well into the Uruguay Round negotiations. In the late 1980s
developments in three important areas served to focus more attention on the problems posed by
rules of origin:

• Increased number of preferential trading arrangements: an increased use of preferential

trading arrangements, including regional arrangements, with their various rules of origin;

• Increase in the number of origin disputes: Second, an increased number of origin disputes
growing out of quota arrangements such as the Multifibre Arrangement and the “voluntary”
steel export restraints; and

• Increased use of anti-dumping laws: An increased use of anti-dumping laws, and subsequent
claims of circumvention of anti-dumping duties through the use of third country facilities.