CHAPTER III

EXCEPTIONS TO THE NON-DISCRIMINATION

PRINCIPLE OF THE WORLD TRADE ORGANIZATION
 3.1 INTRODUCTION

The centrality of the non-discrimination principle in the WTO was expected to usher in
an era of unrestricted trade and economic development. However. like GATT, the WTO
too was not expected to foster completely unrestrained free trade as in certain conditions
countries might chose to retain their discretion in conducting trade with other countries
such as for reasons of national security, public health, protecting their natural resources
or domestic industries from unfair foreign competition etc. Also, free trade cannot be
expected to be fair under all circumstances. especially for a diverse group of countries at
varying levels of economic development ranging from the developed countries of North
America and West Europe to the developing and underdeveloped countries of Africa and
Asia. Non-discrimination among unequals can be unfair and the GA TT/WTO system has
the delicate responsibility of regulating free trade in a fair and equitable manner. Thus to
operationalize fair trade in the WTO trading system and to create a level playing field
between a diverse group of countries some discrimination was made permissible through
exceptions to the principle of non-discrimination which allowed WTO Members to
restrict trade in specific circumstances. The 'exception' provisions provide countries with
the means to deviate from their specific liberalization commitments and thus act as a
safety valve in times of need.

While some exceptions are provided to member states in relation to their domestic
policies, others relate to preferential treatment that they are allowed to grant to other
members under special conditions. Exceptions provided to Members in relation to their
domestic policies can also be referred to as exceptions for 'administered protection' 1 as
the level of protection that can be imposed under them is determined by the executive
branch/administering agencies of the Member nations. These include - a) the 'General
Exceptions' related to non-trade issues like environmental protection, public health.

1
The term 'administered protection· has been borrowed tl·om Robert Baldwin ( 199S), ''Imposing
Multilateral Discipline on Administered Protection·· in Anne Krueger (ed.) The WTO as an International
Organi::ation, Chicago: University or Chicago Press. Baldwin's analysis is limited to administered
protection provided through anti-dumping and countervailing duties. However. this study broadens the
scope or the term ·administered protection· to include the General Exceptions provided under Article XX
of GATT. as they arc also imposed by the administering agencies of WTO Members.

69
 ethics and morals etc. provided under GATT Article XX, b) the rules related to anti-
dumping provided under Article VI of GATT and, c) provisions tor imposing
countervailing duties under Articles VI and XVI of GATT. The other set of exceptions to
the principle of non-discrimination provided under GATT/WTO are the ones which allow
Members to bestow preferential treatment to a selected group of Members under specific
conditions and hence, they can be termed as exceptions for 'preferential treatment'. These
exceptions provide for - a) the formation of RT As under Article XXIV of GATT, the
Enabling Clause of 1979 and under the GATS, and b) discrimination in favour of
developing countries provided in the form of S&D treatment to them. In addition to these
exceptions, WTO Agreements (GATT, GATS and TRIPS) also permit exceptions for the
protection of the national security of the Members under Article XXI of GATT, Article
XIV bis of GATS and Article 73 of TRIPS. 2 However, these exceptions are not covered
by this study as they are considered to be non-negotiable and cannot be compromised in
any circumstance.

This chapter will discuss these exceptions for administered protection and
preferential treatment to the non-discrimination principle of the WTO with a view to
analysing their place in the multilateral trading system. This requires an understanding of
the manner in which they were incorporated into multilateral rules and the rationale
behind their incorporation. This chapter also attempts to study the broad trends and
transformations in the use of these exceptions by Members and the manner in which they
have been invoked so as to enable a better understanding of their effects on the
multilateral trading system.

3.2 EXCEPTIONS FOR ADMINISTERED PROTECTION

Administered protection is defined as '"protection (tariff or non-tariff) resulting from the

application of any one of several statutes that respond to specified market circumstances
or events, usually as determined by an administrative agency. Several such statutes are

2
Article XXI of GATT titled Security F~ceptions, allows Members to relax their MFN and National
Treatment obligations to protect their essential security interests and for the maintenance of international
peace and security. Parallel provisions arc contained in Article XIV his of GATS and Article 73 of TRIPS.

70
permitted under the GATT, including anti-dumping duties, countervailing duties, and
safeguards protection" (Deardorff 2005). Although the term has been generally used to
refer to trade protection granted through anti-dumping duties, countervailing duties and
3
safeguards, here it has been expanded to include the protection provided under the
Article XX of GATT titled 'General Exceptions' along with anti-dumping and
countervailing duties. Protection provided under the WTO safeguard measures are not
covered in this study as they are imposed uniformly on imports of all countries and do not
target the products of a specific country or group of countries like anti-dumping or
countervailing duties. They are generally applied on a non-selective, i.e. MFN basis and
are thus in principle consistent with the principle of non-discrimination (Aggarwal 2007:
24-39).

Exceptions under Article XX deal with the attainment of non-economic objectives

like conservation of natural resources, ensuring the health and safety of human, plant or
animal life, protection of public morals and cultural heritage and they are also
administered by the executive branch or administering agencies of the country granting
the protection. The role of these administering agencies is to ensure that the criteria
established for granting the protection by the legislative agencies of the country are met
(Finger 20 I 0: I). Provisions for anti-dumping and countervailing duties in WTO
Agreements allow Members to address unfairly traded imports and to correct the trade
distortion created by them. The following sub-sections provide a detailed description of
these exceptions to the non-discrimination principle along with an insight into the
problems associated with their operationalization.

3.2.1 GENERAL EXCEPTIONS

Article XX of GATT titled 'General Exceptions' contains provisions that allow WTO
Members to take measures which violate the basic MFN and NT rule of the organization.
if necessary, for the attainment of non-economic objectives. Such objectives include:

3
The pioneering analysis of administered protection from the political economy perspectiYe was done by
Finger, Hall and Nelson (1982). For details see Finger, .1. Michael, H. Kieth Hall and Douglas R. Nelson
( 1982). ·'The Political Economy of Administered Protection" American Economic Review. 72 (3 ): 452-466.

71
 • protection of public morals (XX: a);
• protection of human, animal or plant life or health (XX: b);
• conservation of exhaustible natural resources (XX: g);
• protection of national treasures of artistic, historical or archaeological value (XX:
f);
• prevention of import of goods produced by prison labour (XX: e);
• controlling the trade of goods in short supply or subject to public intervention
(XX: c, i and j); and
• securing compliance with other international agreements that are not inconsistent
with multilateral rules (XX: d and h).

It is important to note here that clause (g) of Article XX which deals with the protection
of the environment does not explicitly mention the word 'environment' and yet lays
down a fairly wide scope for addressing all kinds of issues for the protection of the
environment as well as natural resources.

Article XIV of GATS runs parallel toGA TT Article XX as it allows Members to

restrict the trade in services to address morals and ethics, health and public policy
concerns. Two essential conditions have been laid down t()r invoking these exceptions in
the chapeau of GATT Article XX as well as GATS Article XIV which specify that they-
a) should not be applied in a manner in which they become a means of arbitrary or
unjustifiable discrimination between countries, and b) should not be a disguised
restriction on international trade. These conditions reinforce the non-discrimination
principle even while allowing for the imposition of trade restrictions by the WTO
Members. They are very important as they have been laid down to prevent the misuse of
the General Exceptions 4 by protectionist interests and to ensure that they are invoked
only for the genuine reasons specified in the sub-clauses.

4
The term General Exceptions in capital case refers to the exceptions provided under GATT Article XX
and GATS Article XIV.

72
 The General Exceptions are also supplemented by the Agreement on Sanitary and
Phytosanitary Measures (SPS Agreement) aimed at ensuring food safety and animal and
plant health and safety and the Agreement on Technical Barriers to Trade (TBT
Agreement) which deals with the technical regulations and standards laid down for. inter
alia, the protection of human animal or plant lite or health. These two agreements are
aimed at ensuring that health and safety or technical standards are not used as a pretext
for trade protectionism. Article 2 of the SPS Agreement allows countries to set their own
standards for maintaining plant and animal health and safety provided they are based on
science and do not arbitrarily or unjustifiably discriminate between countries where
similar conditions prevail. Similarly paragraph 5 of the preamble of the TBT Agreement
clearly states the desire of the WTO Members to ensure that "technical regulations and
standards, including packaging. marking and labelling requirements, and procedures for
assessment of conformity with technical regulations and standards do not create
unnecessary obstacles to international trade ...

The inspiration behind GATT Article XX was Article 43 of the draft charter of
the proposed International Trade Organization which was approved in Geneva in August
194 7 at the second preparatory session for the UN Conference for Trade and
Employment (Havana Conference) of 194 7-48. The first draft charter of the ITO
proposed in December 1945 by the British and the US permitted these exceptions
unconditionally. So in 1946 several countries suggested that cetiain conditions should be
attached to these exceptions to guard against "indirect protection". So they readily agreed
to the British proposal to insert the following condition in the preamble - that the trade
measures under the exception provisions should not be "applied in such a manner as to
constitute a means of arbitrary discrimination between countries where the same
conditions prevail, or a disguised restriction on international trade" (GATT Doc. No.
E/PC/T/C.II/50 1946: 7 and Charnovitz I 991: 40-4 I). Exactly similar language was used
in the International Convention for the Abolition of lmpoti and Expoti Prohibitions and
Restrictions of I 927 to ensure that the environmental and health exemptions permitted
under Article 4.4 of the Convention were used for genuine reasons. While the term
'arbitrary discrimination' was used only for foreign countries in the 192 7 Convention in

73
the draft ITO charter it was not limited to only foreign countries. This suggests that it was
aimed at incorporating the non-discrimination as well as the national treatment rule
(Charnovitz I 99 I: 40-4 I).

The most widely used sub-clauses of GATT Article XX are the ones related to
public health and the conservation of environment contained in clauses (b) and (g) of
Article XX. A11icle XX (b) initially required the existence of •·correspond ing safeguards
under similar conditions" in the imp011ing country. However, this part was removed on
the suggestion of Chile, Czechoslovakia, France. New Zealand and the US after which
this provision read as "necessary to protect human, animal or plant life or health (GATT
Doc. No. E/PC/T/C.6/55/Rev. I I 947: 45-47 and Irwin, Mavroidis and Sykes 2008: 164).
Article XX (g) was initially formulated to cover only export restrictions and the term
'exhaustible natural resources' was widely understood to include non-living resources
like raw materials, metals and minerals as plants and animals were not considered to be
exhaustible. There was also a significant debate on whether fisheries and wild life could
be labeled as 'exhaustible natural resources' as initially they were considered to be
covered under the exceptions related to commodity rules, as specified under Article 70
5
(I) ( d) of the Havana Charter. However, with the subsequent reconsideration and
deletion of the explicit reference to fisheries in the exceptions related to commodity rules
it was accepted that "fisheries and wildlife were in fact covered by the language
conservation of exhaustible natural resources'' (Charnovitz 1991: 42-43 ). The other
provisions related to the protection of public morals, national and archeological treasures.
prison labour and control of the trade of goods in short supply were also considered
important and were present in the Havana Charter but they did not generate as much
debate and discussion as the clauses related to the protection of exhaustible natural
resources and human, plant and animal life and health.

5
Article 70 (I) (d) of the Havana Charter read as: ·'The provisions of this chapter shall not apply to any
inter-governmental agreement relating solely to the conservation of lisheries resources. migratory birds or
wild animals, provided that such agreement is not used to accomplish results inconsistent with the
objectives of this Chapter or the purpose and objectives set forth in Article I and is given full publicity in
accordance with the provisions of paragraph I (c) of Article 60: if the Organization linds, upon complaint
by a non-participating Member, that the interests of that Member are seriously prejudiced by the agreement,
the agreement shall become subject to such provisions ofthis Chapter as the Organization may prescribe."

74
 The exception for the protection of public morals has been invoked only once in a
dispute between the United States and Antigua and Barbuda, initiated in 2003. The panel
and Appellate Body reports issued in this dispute were not very et1ective in specifying
the manner in which this exception should be used (See Chapter Five). The other
exception clauses have not been invoked by WTO l'vfembers and thus have not received
much attention from scholars and practitioners of international trade. Nevertheless. like
the exception provisions related to environment and health they are also stated in rather
broad terms and are loosely worded. Members are not required to seek approval or to
notify the WTO before invoking them. If a measure is found to be discriminatory and
detrimental to the interests of a WTO Member it is up to them to bring up the issue with
the Member applying them. If the applying Member defends the measure under the WTO
exception provisions. the only option available for the affected Member is recourse to the
dispute settlement mechanism of the organization. There have been many WTO disputes
which involved an investigation into \Vhether the provisions of Article XX are applicable
in specific instances (Hoekman & Kostecki 2001: 339). These disputes exposed the
ambiguities and loopholes present in the exception provisions through their detailed
examination and analyses. Some of the important disputes involving the application of
these exceptions are examined in Chapter Five.

In its Preamble, the Agreement Establishing the WTO. also known as the
Marrakesh Agreement, clearly states that its signatories will conduct their relations in the
field of trade and economic endeavour "with a view to raising standards of living.
ensuring full employment and a large and steadily gro\\ing volume of real income and
effective demand, and expanding the production of trade in goods and services." They
also agree to make ·'optimal use of the world's resources in accordance with the objective
of sustainable development, seeking both to protect and preserve the environment and to
enhance the means for doing so in a manner consistent with their needs and concerns at
6
different levels of economic development." Thus sustainable development and
protection and preservation of the environment are enshrined in the preamble of the

''Agreement Establishing the World Trade Organization

75
Agreement Establishing the WTO and go hand in hand with its objective to reduce trade
barriers and eliminate discriminatory treatment in international trade relations.

However, the relationship between trade on one hand and environment and public
health on the other is complex and multi-faceted and divergent views exist about the
inter-linking of these issue areas. Environmentalists view trade restrictions as the
appropriate means to castigate non-compliance with international environmental
standards and as a means of imposing such standards where there are none. They are
concerned about the so-called 'race to the bottom· or the possibility that. in response to
the competitive advantage that is gained as a result of lower environmental standards in
some countries, a greater share of jobs and trade will shift to countries with lower
domestic environmental standards. This will put downward pressure on environmental
standards in countries that presently have higher levels of environmental protection
(Trebilcock and Howse 2005: 308). This view is supported by the developed countries
which generally have higher standards of environmental protection. On the other hand.
developing countries, which generally have lower environmental standards, fear that if
environmentally unfriendly production methods become grounds for restricting trade,
then the door will be open for protectionist abuse. Similar concerns have been raised
about the interface between trade and public health policies.

In fact it is widely believed that there exists an inherent contradiction between

promoting an open and non-discriminatory liberal trading system and preserving the
environment and promoting sustainable development because while the rationale for
environmental protection is to make discrimination between goods and services
mandatory, the rationale for WTO rules for trade liberalization is to avoid any
discrimination as far as imports are concerned (Sampson 2000: 18). This contradiction
became more apparent after the failure of the Seattle Ministerial of the WTO held in 1999
which was expected to launch a new and comprehensive round of multilateral trade
negotiations covering a wide range of subjects like investment. competition policy,
transparency in government procurement, trade facilitation, trade and labour standards
and trade and environment. The meeting ended in a deadlock due to lack of an agreement

76
between the developed and developing nations on a number of issues. Prominent among
these were apprehensions related to the inclusion of non-trade issues within the WTO
agenda.

The other view is that trade and environment are related and dependent on one
another in the most fundamental manner as any economic activity derives its inputs (such
as metals, minerals, agricultural products etc) from the environment. And after these
inputs have been processed and utilized by human beings they go back to the
environment in the form of economic waste. Trade, in turn. can also not remain
unaffected by the environment in the contemporary world as more and more people have
started using green or environment friendly goods due to which producers and exporters
pay special attention towards meeting the demand tor such products. As the overall trend
towards globalization and increased economic activity since the second half of the
twentieth century has resulted in a massive depletion of the exhaustible natural resources
and has led to considerable environmental damage, the need for having a strong system
of rules for the protection of the environment at the national as well as international level
is now of existential importance.

It is also necessary to ensure that fu11her economic activity is conducted keeping

in view the development needs of not just the present but also the future generations. But
since most national governments ·'answer too directly to their national industries and try
to protect them against 'costly' environmental demands, it is very likely that even after
environmental rules are in place governments and industry will look to scuttle them.
Trade rules forbidding certain kinds of environmental regulations may be one way to do
so" (UNEP 2000: 2). Thus, even though WTO is primarily a trade organization, it does
not completely disregard the larger concerns related to environment, health etc. and tries
to address them in a manner compatible with its free trade objectives.

Trade liberalization cannot be an end in itself. The broad idea behind the
incorporation of Article XX exceptions is to harmonize the trade objectives of the WTO
with the larger non-trade concerns of sustainable development. However, the concerns of

77
developing countries about the protectionist abuse of these exceptions are also valid.
Former UN Secretary General Kofi Annan expressing his doubts over the linking of trade
and non-trade issues said that, "It is hardly surprising if developing countries suspect that
arguments for using trade policy to advance various good causes are really yet another
form of disguised protectionism ... The United Nations and its Specialized Agencies are
charged with advancing the cause of development, the environment, human rights and
labour. .. What is needed is not new shackles for world trade, but greater determination
by governments to tackle social and political issues directly ... and to give the institutions
that exist for that purpose the funds and the authority that they need" (Kofi Annan,
November 1999). Thus, it is clear that the relationship between trade and non-trade issues
like environment, health and labour is complex, important and has multiple dimensions.
However, as the WTO Director General Pascal Lamy said on the occasion of the World
Environment Day on 51h June 20 I 0 ·'trade opening has much to contribute to the
protection of the environment." He asserted that the ··wTO is about much more than
trade opening" and reiterated the sustainable development goals of the organization
embedded in the preamble of the Marrakesh Agreement and various WTO Agreements
(Pascal Lamy, June 20 I 0).

3.2.2 ANTI-DUMPING

Dumping or exporting a product at less than its ·normal value· is not considered to be
incompatible with multilateral trade rules and is thus not prohibited per se by the
GA TT/WTO system. However. action can be taken against dumping when it results in
'material injury' to the domestic industry of the importing country. Once a causal link
between the act of dumping and material injury to domestic industry is established. anti-
dumping duties can be imposed by the importing country. Article VI of GATT provides
for the imposition of anti-dumping duties to offset the impact of dumping. The
Agreement on Implementation a/Article VI o/the GATT or the Anti-Dumping Agreement
(ADA) clarifies and expands GATT Article VI and governs the application of anti-
dumping duties. It lays down the procedures for the initiation of an anti-dumping

78
investigation and the determination and subsequent imposition of anti-dumping duties by
the domestic agencies of the WTO Members.

Anti-dumping duties are essentially aimed at protecting domestic producers from

unfair and predatory import competition. Article 2 ofthe ADA defines 'dumping' as the
introduction of a product "into the commerce of an importing country at less than its
normal value, if the price of the product exported from one country to another is less than
the comparable price, in the ordinary course of trade, for the like product when destined
for consumption in the expmting country" (Article VI GATT). 'Normal value' is defined
as the price, 'in the ordinary course of trade', of a 'like product' when destined for
consumption in the exporting country. A 'like product' is ''a product which is identical
and alike in all respects to the product under consideration, or in the absence of such a
product another product, which although not alike in all respects, has characteristics
closely resembling those of the product under consideration" (Articles 2.1 and 2.6 of the
ADA). If a comparable domestic price of the like product is not available then the price
of the exported product should be less than ''the highest comparable price for the like
product for export to any third country in the ordinary course of trade" or the "cost of
production of the product in the country of origin plus a reasonable addition for selling
cost and profit" (Article VI GATT). The determination of these parameters in an anti-
dumping investigation is not simple and the domestic investigating agencies have a lot of
discretion in determining the 'like product' and the establishment of price in the 'ordinary
course of business'. The construction of the normal value and comparison of the export
and domestic price is also a complicated exercise which requires complex cost
calculations and exchange rate calculations which are often influenced by exchange rate
fluctuations. Each of these calculations provide further scope tor arbitrariness to the
domestic agencies of a country (Debroy & Chakraborty 2006: 16-17).

The most impottant condition for the imposition of anti-dumping duties is the
establishment of a causal link between the dumped product and material injury or threat
of material injury to the domestic industry of the importing country on the basis of
positive evidence and objective examination of the volume of dumped products and their

79
 effect on the price in the domestic market (Article 3 ADA). Without the establishment of
such a causal link the WTO does not allow the imposition of anti-dumping duties as it
does not prohibit dumping per se. The exact amount of the anti-dumping duty to be
imposed is calculated on the basis of the margin of dumping which is calculated on the
basis of a "comparison of the weighted average normal value with a weighted average of
prices of all comparable export transactions or by a comparison of normal value and
export prices on a transaction-to-transaction basis" (Article 2.4.2 ADA). This is the most
important and contentious aspect of the imposition of anti-dumping duties and has been
the subject of a significant number of anti-dumping disputes between WTO Members.
The method adopted by the developed countries like the US and the European
Communities for the calculation of the dumping margin by ignoring or 'zeroing' the
negative margin has been at the centre of most ofthese disputes (See Chapter Five).

The ADA also provides rules for the collection of the anti-dumping duties under
different assessment systems so as to ensure that anti-dumping duties in excess of the
margin of dumping are not collected. These duties are imposed for a certain period of
time after which they have to be reviewed periodically on the basis of the continuing
7
need for the imposition of the anti-dumping duties or price undertakings. A ·sunset'
clause on anti-dumping measures is provided under Article 11 of the ADA which
stipulates that anti-dumping duties will expire after five years from the date of their
imposition, unless they are revalidated through a fresh review. Article 15 of the ADA
stipulates that ·'special regard must be given by developed country Members to the
special situation of developing country Members when considering the application of
anti-dumping measures." It also calls for the exploration of possible constructive
remedies before imposing anti-dumping duties which could affect the interests of the
developing countries. However, despite these provisions the conduct of sunset reviews
has been disputed by WTO Members and the products of developing countries are
considered to be easy targets for the developed countries for the imposition of anti-

7
As per Article 8.1 of the ADA, a price undertaking is a ··voluntary undertaking by any exporter to revise
its prices or to cease exports to the area in question at dumped prices so that the authorities arc satisfied that
the injurious effect of dumping is eliminated."

80
 dumping duties as they are generally labour intensive and thus relatively cheaper than the
like products of the developed countries (Erixon 2006: 66).

The economic rationale behind dumping is based on price discrimination between

markets. A firm having some control over prices and operating in two separate markets
may find it advantageous to discriminate in its price formation in favour of foreign
consumers in order to maximize profits. The wording of the WTO rules specifically
targets this rationale. Price discrimination across markets will also occur whenever the
demand for a product is more elastic in the export markets than in the domestic markets.
A typology of the various business motivations for dumping is given in Table I
(Hoekman & Kostecki 200 I: 3 I 8- I 9).

Table I: Motivations for Dumping

Type of Dumping Objectives ofthe Exporting Firm

Sporadic or random dumping No deliberate intention to dump

Price discrimination Maximize profits given differences in demand across
markets
Cyclical Cover at least variable costs and maintain capacity
during periods of slack demand
Defensive Minimize losses due to excess capacity
Scale economies Price below cost initially with expectation of re-couping
investment outlays (fixed costs) over time as sales
expand
Market-creating To establish a new product as the market leader
Head-on To attack a dominant supplier in an export market
Predatory To establish a monopoly in an export market

Source: Hockman & Kostecki 200 I.

Of all the motives for dumping listed in Table I, predation is the only motive
which is potentially detrimental to the welfare of the importing country. A foreign firm
can deliberately price products low enough to drive existing domestic firms out of
business and establish a monopoly. Once established, the monopolist can more than
recover its losses by exploiting its market power. However for predation to work the
monopolist must not only eliminate domestic competition but also prohibit the entry of
new competitors. For this it should either have a global monopoly or convince the

81
importing country to impose restrictions on the entry of other firms. As this is not very
probable in most of the cases instances of predatory dumping are not commonly found.
Predation was the original rationale for the AD legislation passed by the United States in
1916. However after the Second World War instances of successful predatory dumping
were rarely found (Hockman and Kostecki 200 I: 32 I).

The early advocates of anti-dumping considered it to be a means of restricting

imports. According to Jacob Viner. the first charges of dumping were levelled as early as
the sixteenth and the seventeenth century against England, as it was the first country to
begin large scale production after the Industrial Revolution. However, the first systematic
law on dumping did not emerge till 1904 when Canada introduced amendments into its
Customs Tariff Act of 1897 to levy a special administrative duty on under-valued
products. This special duty was to be determined by customs officials and was to be
calculated on the basis of the difference between the '"exp011 price or the actual selling
price" of the imported product and the "fair market value" of a product which was ·'of a
class or kind made or produced in Canada" (Finger I 991: 1-4). It was not necessary to
demonstrate the presence or threat of material injury to the domestic industry as this duty
was primarily aimed at checking the cheap imports of steel from the US which were
usurping the Canadian market due to their low price advantage and thus affecting the
interests ofthe Canadian steel producers.

Though the Canadian authorities had the option of raising the tariff on steel
instead of introducing such an administrative duty, they decided to opt for the latter to
retain some selectivity over protection as it was feared that an increase on steel tariffs
would trigger an increase in the tariffs on other products as well. It was effective for
some time, as it immediately resulted in an increase in the price of steel imports from the
US. The Canadian example was soon followed by New Zealand. Australia, South Africa.
US and Great Britain as it provided an effective way of granting selective protection to
deal with foreign competition or monopolistic practices and at the same time avoiding an
across the board tariff increase (Finger I 99 I: 6-9). While all these countries enacted anti-
dumping laws similar to the Canadian regulation, the US adopted a different approach as

82
the US Revenue Act of 1916 (also known as the Anti-Dumping Act of 1916) was initially
an extension of the anti-trust statute, viz. the Clayton Anti-Trust Act of 1914. in which
dumping, with the ''intent of destroying or injuring a US industry" was labelled as a
criminal offence inviting enormous fines and punitive action.g As it was very difficult to
ascertain the intent behind the price determination of an imported product, this
requirement was altered in the US Anti-Dumping Act of 1921 to the finding of injury or
threat of injury (Macrory 2005: 493).

During the preparatory negotiations at the time of the drafting of the Havana
Charter, dumping was not really considered to be an unfair trade practice and was also
excluded from the list of restrictive trade practices that were to be eliminated by the
proposed ITO. In fact it was envisaged as an instrument of protection as it was felt that
·'where necessary members desiring to promote industrial development should have or
should be afforded reasonable freedom to employ protective measures so that an adequate
portion of the local markets may be assured to the commodities concerned." At the same
time it was also felt that "since an unwise use of protective measures by any country for
the purpose of promoting industrial development places an undue burden on the economy
of that country and imposes unwarranted measures on international trade, it is desirable
that countries promoting development should not make immoderate use of such
protective measures" (GATT Doc. No. E/PC/T/33 1946: 8). So the main intention behind
the inclusion of anti-dumping rules in the Havana Charter and GATT was to ·'prevent
overzealous enforcement of anti-dumping laws that would restrict fairly priced as well as
dumped imports" (Macrory 2005: 494). Responses to dumping, rather than dumping
itself was the main issue. Thus specific and strict conditions were imposed on the use of
anti-dumping and detailed discussions were held on the technical aspects of the
imposition of anti-dumping such as proof of injury. calculation of normal selling price,
cost of production and margin of dumping (UN Doc. No. E/PC/T/C.III48 1946: 1-17).

8
The 1916 Act was later challenged successfully under the WTO by the EC and Japan. For details see
Chapter Five.

83
 Article 34 of the Havana Charter, allowed the imposition of an anti-dumping duty
on products which were introduced in another country's territory at less than the price at
normal value. On similar lines Article VI of GATT 194 7 was formulated to provide for
the imposition of anti-dumping duties, though it was not very much used in the initial
years of GATT. It was only in the decade of the 1960s and after that the use of anti-
dumping measures became common and by the 1970s and 1980s they were being used by
a wide range of countries for protecting their domestic products and markets from foreign
imports (Finger and Fung 1993: 2-7). In the Kennedy Round of GATT it was felt
necessary to discipline the use of anti-dumping measures with additional and more
detailed substantive and procedural rules as it was felt that they were used by countries to
restrict trade. This resulted in the formulation of the Agreement on Implementation of
Article VI of GATT in 1967 which was further streamlined by the Anti-Dumping Code
formulated at the end of the Tokyo round in 1979.

These agreements elaborated upon the meagre anti-dumping provisions of GATT

and introduced important conditions like finding of injury to domestic industry for the
imposition of AD measures, fair comparison between the domestic and export price etc.
and introduced time limits for the conduct of AD investigations. They also called for the
establishment of a Committee on Anti-Dumping Practices to oversee the operation of the
multilateral rules on anti-dumping. However, both the 1967 Agreement as well as the
Tokyo round Anti-Dumping Code were not very successful in disciplining the use of
anti-dumping measures by GATT Contracting Parties as they were optional agreements
and were binding only upon countries which agreed to sign them (Macrory 2005: 494-
496). Thus the formulation and adoption of the ADA during the conclusion of the
Uruguay Round was a significant development as it brought the use of anti-dumping
measures by all the WTO Members under multilateral disciplines. It incorporated most of
the provisions of the 1979 AD Code and further elaborated upon its rules such as those
related to calculation of dumping margin, factors that had to be considered while making
the injury analysis etc.

84
 Though the WTO ADA was a significant improvement upon the 1967 agreement
and the 1979 Anti-Dumping Code, yet it was not completely free from problems and
ambiguities which have gradually come to the fore with the increased use of its
provisions and the initiation of a large number of anti-dumping disputes by the WTO
Members. Several procedural problems have been associated with the use of the WTO
ADA provisions such as determination of like products, determination of price in the
ordinary course of business, construction of normal value. comparison of export price and
domestic price, determination of margin of dumping, problems related to voluntary price
undertakings, circumvention of duties etc. (Debroy 2006: 16-18). Most of the procedural
problems associated with the WTO ADA provisions stem primarily from the discretion
and arbitrariness that is granted to the investigating authorities in determining the key
variables like normal value, like product. comparison of export price and sales price.
determination of margin of dumping etc. These key variables have been defined in the
ADA in a very broad and general manner that can be manipulated to make anti-dumping
(AD) measures a blatantly protectionist instrument.

After the establishment of the WTO, its Members have made extensive use of
anti-dumping provisions as 119 AD measures were imposed in 1995, the very first year
of the operation of the WTO and the ADA. Thereafter the number of AD impositions has
steadily increased and reached a high of 224 in the year 2003. From 2004 onwards. there
has been a gradual decrease in the imposition of AD measures to 137 impositions in
2009. Developed countries like the US and the EC have traditionally been the dominant
users of anti-dumping measures and continued to be their largest users in the WTO
regime also (WTO website, Anti-Dumping Measures: Reporting Member vs Exporting
Country 0110111995 - 30/06/20 I 0). Developing countries have been specially impacted
by the widespread use of such measures as most of them were used by developed
countries to deny market access opportunities to the products of developing countries.

However, this trend has altered significantly after 2000, as developing countries
like India, China, Argentina and Brazil emerged as the largest users of AD measures
together accounting for more than one-third (around 35 per cent) of the anti-dumping

85
measures imposed by WTO Members. Developing countries also continue to be the
dominant targets of most of the anti-dumping measures with China and Korea at the top
of the list. Among the developed countries Japan and the US have been the biggest
targets of anti-dumping (WTO website, Anti-Dumping Measures: Reporting Member vs
Exporting Country 01/01/1995 - 30/06/2010). As the use of anti-dumping by WTO
Members grew, countries started taking up the imposition of such measures by foreign
governments for adjudication in national and international fora. The WTO Dispute
Settlement System has ruled on a number of such anti-dumping and countervailing cases
which have been discussed in Chapter Five ofthis study.

The rampant use of anti-dumping by developing as well as developed countries

has raised questions about the economic rationale behind the imposition of anti-dumping
measures. It has been often contended that the WTO ADA promises to punish
international price discrimination if it causes injury to the importing country. However.
Aradhna Aggarwal (2007: 29-30) points out that the ADA does not define the basic
principles and conditions under which price discrimination would constitute an unfair
trade practice and thus would be punishable. Hence it ends up by penalising all
international price discrimination even when it is a perfectly normal commercial practice.
The critics of anti-dumping also claim that AD is an ·'inferior instrument to address
foreign market closure as it does not deal with the source of the problem. i.e. the
government policies that artificially segment markets or allow this to occur. An AD duty
may put pressure on affected firms to abolish such business practices but it does so in a
very indirect manner" (Hoekman & Kostecki 200 I: 323).

Developing countries consider anti-dumping duties as a powerful weapon in the

hands of developed countries for denying the access to their markets. This claim appears
validated by the fact that in the initial years ofthe functioning of the GATT/WTO regime
developed countries were the dominant users of anti-dumping measures which mostly
targeted the products of developing countries. But as mentioned earlier. in recent years
some developing countries have also proved to be prolific users of the anti-dumping
provisions for protecting the interests of their domestic industries. However, a large

86
majority of developing as well as least-developed countries are still mostly the target of
anti-dumping impositions by developed countries. Studies have (Gallaway et al. 1999:
211-244) demonstrated that anti-dumping actions entail substantial welfare costs tor both
developing as well as developed countries. However, while developed countries are in a
position to bear these costs the developing countries may experience a substantial
reversal ofthe gains accruing from trade liberalization (Aggarwal 2007: 5).

Thus, anti-dumping has been considered to be an easy substitute for the traditional
barriers to trade like tariffs by both developed as well as developing countries. Their
extensive use raises serious questions about the sanctity of the non-discrimination
principle ofthe WTO as well as the process of multilateral trade liberalization. Hence it is
absolutely essential that the anti-dumping provisions of the WTO are used in a manner
that ensures the removal of all possibility of their misuse and to ensure that they are used
only to counter injurious dumping by the WTO Members and do not serve as
protectionist instruments.

3.2.3 COUNTERVAILING DUTIES

Subsidies are provided by governments to their domestic industry with a view to

safeguarding their interests and also for enhancing their competitiveness vis-a-vis foreign
producers. They favour production in the country granting them at the expense of
production in other countries for foreign or for domestic markets. and in doing so
introduce distortions in international trade (Balassa 1989: I). So. the GA TT/WTO system
condemns subsidization and imposes disciplines on the use of subsidies by WTO
Members. To offset the impact of subsidies the WTO provides for the use of
countervailing duties. Articles VI and XVI of GATT limit the use of subsidies by WTO
Members and provide for the levy of countervailing duties (CVD) to offset their impact.
The Agreement on Subsidies and Countervailing Measures (SCM Agreement) further
clarifies these provisions and specifies the procedure and manner in which countervailing
duties can be imposed by Members.

87
 The SCM Agreement defines a subsidy as a financial contribution made by a
government or public body within the territory of a WTO member where (WTO
Analytical Index 2007: 751-753):

• a government practice involves an actual or potential direct transfer of funds of

funds and liabilities

• government revenue that is otherwise due is foregone or not collected

• government provides goods or services other than general infrastructure or

purchases goods

• government funds a private body to carry out a function which would normally be
vested in the government
• any other form of price suppot1 is granted or benefit ts conferred directly or
indirectly by the government

Subsidies are of two broad types based on their targeted beneficiaries - a) domestic
subsidy or production subsidy granted to the domestic industry in the process of
production, and b) export subsidy given to exporters for the purpose of boosting exports.
On the basis of permissibility they can be classified as- a) prohibited subsidies. and h)
9
actionable subsidies. Prohibited subsidies are those which are i) contingent on expot1
production, viz., export subsidies, and ii) which are provided to the domestic industry for
using domestic raw materials or intermediate products in preference to imported goods.
viz., import substitution subsidy (Das 1998: 45-46). Actionable subsidies are the ones
which result in demonstrable adverse effects on another country. They can be in the form
of export subsidies which hurt the interests of the domestic industry of the importing
country or hurt the rival exports competing with them in a foreign market or they can be
in the form of domestic subsidies which hut1 the foreign exporters competing with their
products in their domestic market. In either case. if the complaining country is unable to
demonstrate the adverse effects of the subsidized products then the subsidy is permissible

9
There was a third category called non-actionable subsidies which consisted of the government assistance
given for small-scale industries, research and development of disadvantaged regions and environmental
purposes. However it was valid only f(lr a period of tive years and was not extended after 31 December
1999.

88
otherwise it will have to be withdrawn or its adverse effect will have to be removed by
the imposition of countervailing duties (Anti-Dumping, Subsidies, Safeguards: WTO
Website).

The SCM Agreement regulates the actions that countries can take to counter the
effects of subsidies. Detailed rules have been laid down for deciding whether a product is
being subsidized, whether imports of subsidized products are causing injury to the
domestic industry, for initiating and conducting investigations, and for the
implementation and duration (normally five years) of countervailing measures.
Countervailing duty can be imposed only after it is established that injury to domestic
industry is being caused by the subsidized imports. The Agreement also contains
provisions under which a country can invoke the organization's dispute settlement
procedures to seek the withdrawal of the subsidy or the removal of its adverse effects.
Both prohibited and actionable subsidies can be challenged through the WTO dispute
settlement procedures where they are decided under an accelerated timetable. If the panel
findings show that they are prohibited subsidies or they have an adverse effect on the
importing country the subsidy must be withdrawn or its adverse effects must be removed
immediately. The affected country can also take up the matter in the Committee on
Subsidies and Countervailing Measures (Das 1998: 45-46).

Apart from the SCM Agreement, the WTO Agreement on Agriculture (AoA) also
contains provisions for regulating the domestic and export subsidies granted by WTO
Members to agricultural products. With regard to domestic subsidies, the AoA
commitments are expressed in terms of the 'Aggregate Measure of Support' (AMS)
which refers to the "annual support, expressed in monetary terms, provided for non-
exempted product-specific and non-product-specific subsidies" (Bagwell, Bermann and
Mavroidis 20 I 0: 77). Different reduction commitments have been set for developed and
developing countries as the former were supposed to reduce the total AMS by 20 per cent
(taking 1986-88 as the base period) between 1995 to 2000, while the later had to reduce it
by 13 per cent between 1995 to 2004. Export subsidies are absolutely prohibited by the
AoA unless they are specified in a Member's Schedule of Commitments. Reduction

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commitments for export subsidies were set both in terms of monetary value as well as
quantity of output. Developed countries had to reduce the value of their subsidized
products by 36 per cent and 21 per cent by quantity by 2000, while the corresponding
figures for developing countries were 24 per cent and 14 per cent by 2004. Certain
exemptions were made tor allowing direct payments to farmers tor products whose
production was to be reduced, government support programmes to encourage agriculture
in developing countries and a de minim us level of support. which was 5 per cent of the
value of production in developed countries and I 0 per cent for developing countries. were
exempted for certain non-product-specific and product-specific subsidies (Agriculture:
Fairer Market for Farmers, WTO Website). 10 A breach of these provisions can result in
the imposition of countervailing duties by the affected countries as per the provisions of
the SCM Agreement or can be challenged in the WTO DSS.

During the preparatory meetings of the Havana Conference the talks on

countervailing measures were held along with the talks on anti-dumping. Though use of
subsidies was considered to be a protective measure for promoting the domestic industry
of a country they were permitted as long they were granted in accordance with the
multilateral disciplines imposed upon them. However, in a situation where subsidization
caused injury to the industry of another country, especially the ones importing the
subsidized product, it was felt that the ''same punitive and protective measures as had
been suggested concerning dumping should be applicable" (UN Doc. E/PC/T/C.ll/48
1946: 4). Thus countervailing measures were allowed to be imposed upon the grant of
subsidies if they resulted in injury to the domestic industry of other countries, even if the
subsidies in question were permissible as per the multilateral disciplines (UN Doc. No.
11
E/PC/T/C.II/48 1946: 3). These measures were permitted under Article VI of GATT
which was later elaborated and supplemented by additional rules formulated in the Tokyo
Round and the Uruguay Round of GATT negotiations.

10
A traffic light approach has been adopted with regard to the commitments made by countries wherein
subsidies which distort trade arc termed as ·amber box· subsidies and arc required to be reduced as per
WTO disciplines; amber box subsidies which arc also required to reduce production arc termed as ·blue
box· subsidies and subsidies which do not distort trade and arc thus not required to he reduced arc termed
as ·green box· subsidies (The Boxes: WTO Website).
II This GATT provision was parallel to Article 34 or the lfm·ana Charter or the proposed ITO.

90
 The decade of the 1960s and 1970s saw an increased use of non-tariff barriers by
countries as they had already committed to reduce their tariff levels substantially under
successive GATT Rounds. Thus countervailing and anti-dumping duties were considered
to be important instruments of protection and were widely used by countries to avoid
import competition. This brought attention towards the need for having stricter
disciplines on the use of these measures as a result of vvhich the Subsidies Code was
negotiated in the Tokyo Round which ended in 1979. Detailed rules and conditions were
laid down to ensure that countervailing duties were imposed only when the grant of
subsidies resulted in causing injury to the domestic industry of the importing country and
not to protect "inefficient production at the expense of competitive industries'' (Clarke
and Horlick 2005: 683). The Subsidies Code also contained substantial disciplines on the
use of subsidies and prohibited the use of export subsidies as they were said to have a
distorting effect on international trade. However, this Code was not binding upon all
GATT Contracting Parties and its membership was optional and thus it was binding only
upon countries which chose to sign and ratify it. Thus the problems associated with the
use of countervailing measures were not resolved until the conclusion of the GATT
Uruguay Round in which the WTO Agreement on Subsidies and Countervailing
Measures which carried fmiher and streamlined the provisions of the Subsidies Code and
was binding upon all WTO Members.

Subsidies play a very important role in the economic development of developing

countries as well as in the transformation of centrally planned economies to market
economies. Thus the SCM Agreement as well as the AoA contain more favourable
special provisions for them. The SCM Agreement exempts developing and least-
developed countries with less than $1,000 per capita Gross National Product (GNP) from
the reduction commitments on export subsidies, until they reach the level of export
competitiveness. 12 Other developing countries were given until the end of 2002 to get rid
oftheir export subsidies. 13 Least-developed countries (LDCs) were required to eliminate

12
Defined as a stage \Vhcn the export of a particular product of that country accounts for 3.25% of the
world export of that product (Article 27.6 of the SCM Agreement).
u Under procedures adopted in November 200 I at the Doha Ministerial Conference. the SCM Committee
could grant annual extensions to some developing countries. subject to an annual rc\·icw o!' transparency

91
import-substitution subsidies by 2003 while for other developing countries the deadline
was 2000. For transition economies, prohibited subsidies had to be phased out by 2002
(Agreement on Subsidies and Countervailing Measures, WTO Website).

Developing countries also receive preferential treatment if their expot1s are

subject to countervailing duty investigations. For example, ''certain subsidies related to
developing country Members' privatization programmes are not actionable multilaterally"
(Agreement on Subsidies and Countervailing Measures, WTO Website). Also the
countervailing investigations against exporters from developing countries are to be
terminated if the level of subsidies given to the volume of imports coming from them is
very small. In case of a product originating from an LDC having a per capita GNP of less
than US$ I 000 per annum, there is de minimus provision which says that no
countervailing duty will be imposed if the subsidy on the product does not exceed 3 per
cent of its value. For developing countries this limit is 2 per cent. The volume of
subsidized imports below which a countervailing investigation is required to be
terminated in respect of a product originating in a developing country is 4 per cent
(Article 27.10 and 27.11 ofthe SCM Agreement).

Despite these special provtstons the pattern of use of countervailing measures

presents an altogether different picture. Majority of these measures have been imposed by
developed countries against developing countries. The United States and the EC have
been the largest users with 62 and 25 countervailing measures imposed between 1995 and
20 I 0 respectively. India and China have been the targets of most of these measures as 30
and 21 countervailing measures were imposed against them between 1995 and 2010,
respectively (WTO Website, CV Measures: Reporting Members vs Exporting Country).
Also the types of subsidies which have been placed under the non-actionable category are

and standstill obligations. The 19 developing countries benefiting ti·om the extended transition period \\·ere
Antigua and Barbuda, Barbados, Belize, Costa Rica, Dominica. Dominican Republic. El Sah·ador. Fiji.
Grenada, Guatemala, Jamaica. Jordan. Mauritius. Panama. Papua New Guinea. St. Lucia. St. Kitts and
Nevis, St. Vincent and the Grenadines, and Uruguay. In July 2007, the General Council adopted a decision
to continue procedures for the extension of the transition period lix the elimination of export subsidy
programmes of these developing countries. This decision enabled the SCM Committee to continue to grant
extensions of the transition period until the end of 2013, with a final phase out period o!'two years. which
shall end no later than 31 December 2015.

92
the ones which are commonly used in developed countries such as subsidies for research.
regional development and environmental protection, whereas subsidies generally granted
by developing countries tor promoting industrialization and development have been
excluded from this category. There are also procedural and technical problems that are
encountered by countries while conducting countervailing investigations such as
determination of specificity of the subsidy, calculation of benefit accruing to the recipient
of subsidies, determination of material injury or adverse effects to the domestic industry
of the importing country etc. The calculation of all these variables is a highly complex
and technical process and entails enormous costs. Countries involved in countervailing
investigations are required to collect and analyse a lot of information on the subsidy
practices of other countries which is especially difficult for developing and less
developed countries.

However, the overall number of countervailing measures imposed by WTO

Members has varied over the years. While at the time of the establishment of the WTO
the number of countervailing measures was nineteen, it decreased drastically in the next
two years and came down to only three in 1997. From 1998 there was an increase in the
use of countervailing measures which continued till 2001 and 2002 when fourteen
countervailing measures were imposed by WTO Members. This was again followed by a
decreasing trend which continued till 2008. This time the number of CVD measures went
down from the previous high of fourteen to only eleven, after which once again the
decreasing trend set in. In 2010 the number of countervailing measures imposed by WTO
Members was only four. Thus the overall use of countervailing measures has gone
through cycles of increase and decrease. An important thing to note here is that the
highest number of measures in a single year has gone down after every cycle from
nineteen in 1995 to fourteen in 200 I and 2001 to eleven in 2008 (WTO Website, CV
Measures: Reporting Members versus Exporting Country).

Despite this declining trend, it is important to take stock of the disciplines

imposed on the use of subsidies with a view to further streamline the procedures
prescribed for imposing countervailing duties as well to ensure that these procedures do

93
not prevent the developing countries from providing the necessary support to their
fledgling industries. It is also important to make sure that the provisions of the SCM
Agreement are not used by developed countries to protect and promote their already
flourishing domestic industries.

3.3 EXCEPTIONS FOR PREFERENTIAL TREATMENT

The WTO exceptions to the non-discrimination principle which allow Members to

bestow preferential treatment to a selected group of Members under specific conditions
are- discrimination in favour of developing countries provided in the form of special and
differential treatment to them and the formation of RT As. The special and differential
provisions of WTO Agreements give special rights to developing countries which
provide developed countries with the opportunity of treating developing countries more
favourably than other WTO Members. Members can also enter into a regional integration
agreement through which they can grant more favourable conditions of trade to other
parties of the agreement. Both these exceptions are prominent exceptions to the WTO's
non-discrimination rule, yet they have been allowed under certain specific and pre-
determined conditions and thus have been the subject of intense debate and discussion.
The following sub-sections provide a brief overview of these provisions and the discourse
associated with them.

3.3.1 SPECIAL AND DIFFERENTIAL TREATMENT FOR DEVELOPING

COUNTRIES

As mentioned earlier the WTO has a diverse group of Members which are at
various stages of economic development and treating all of them in the same manner
might be unfair to the developing and less developed countries. Thus the WTO
Agreements contain special rules for the developing and less developed countries in the
form of special and differential treatment (S&DT) provisions which confers upon them
special rights and privileges with the objective of assisting them in integrating themselves
within the multilateral trading system in a smooth and efficient manner. The WTO
provides for S&D treatment to developing countries through 145 provisions spread across

94
the different WTO Agreements like the GATT, GATS, TRIPS, the WTO Dispute
Settlement Understanding and various Ministerial Decisions. Most of these S&D
provisions were adopted at the time of the conclusion of the Uruguay Round. Of the
I 45 provisions, I 07 were adopted at the conclusion of the Uruguay Round and 22 apply
to least-developed country Members only (WTO Doc. No. WT/COMTD/W/77 2000: 3).
These provisions have been classified by the WTO Secretariat in the following manner.
They are broadly related to: i) increasing the trade opportunities of developing country
Members, ii) safeguarding the interests of developing country Members, iii) flexibility of
commitments, actions and use of policy instruments, iv) transitional time periods, v)
technical assistance, vi) special provisions for LDCs (WTO Doc. No. WT/COMTD/W/77
2000: 3-6). The main legal provisions related to S&D treatment contained in the major
WTO Agreements are:

• Agreement Establishing the WTO- The preamble to this Agreement recognizes

the need for positive efforts designed to ensure that developing and less developed
countries secure a share in the growth in international trade in accordance with
their needs of economic development. It also cites raising standards of living,
ensuring full employment and a large and steadily growing volume of real income
and effective demand as one ofthe objectives of the organization.
• General Agreement on Tariffs and Trade- At1icle XVIII of GATT recognizes
that it may be necessary for the economic development of developing and less
developed country Members to take protective or other measures for restricting
their imports and that these measures are justified as far as they facilitate the
objectives of the WTO. Thus it enables such countries to (a) maintain sufficient
flexibility in their tariff structure to be able to grant the tariff protection required
for the establishment of a particular industry and (b) apply quantitative
restrictions for balance of payments purposes in a manner which takes full
account of the continued high level of demand for imports likely to be generated
by their programmes of economic development. The Decision on Safeguard
action for Development Purposes and the Declaration on Trade Measures Taken
for Balance-of-payments Purposes both of 28 November I 979, and the

95
 Understanding on the Balance-of Payments Provisions of the GATT 1994 further
expand and clarify these provisions. Part IV of GATT includes provisions on the
concept of non-reciprocal preferential treatment for developing countries, i.e.
when developed countries grant trade concessions to developing countries they
should not expect the developing countries to make matching ofters in return.
However, developing countries claim that Part IV does not have much practical
value as it does not contain any obligations for developed countries (WTO
Website: Work on Special and Differential Provisions).
• The Enabling Clause of 1979 - The Decision on Differential and More
Favourable Treatment, Reciprocity and Fuller Participation of Developinx
Countries also known as the Enabling Clause was adopted under GATT in 1979.
It forms the legal basis for the Generalized System of Preferences under which,
developed countries offer non-reciprocal preferential treatment (such as zero or
low duties on imports) to products originating in developing countries.
Preference-giving countries unilaterally determine which countries and which
products are included in their schemes. It also provides tor the formation of
regional arrangements among developing countries and for the Global System of
Trade Preferences (GSTP), under which a number of developing countries
exchange trade concessions among themselves (WTO Website: Work on Special
and Differential Provisions).
• Agreement on Agriculture - Article VI: 2 of the AoA exempts investment
subsidies and agricultural input subsidies granted by developing countries from
domestic support reduction commitments. According to Article VI: 4 of the AoA.
I 0 per cent of the total product and non-product specific domestic support given
by developing countries, as compared to 5 per cent tor other countries, is
excluded from the calculation of the Current Total Aggregate Measure of Support
(AMS). A higher budgetary outlay of 76 and 88 per cent for export subsidies is
provided for developing countries as compared to 64 and 79 per cent for other
countries under Article IX: 2 of the AoA. Article XV titled ·'Special &
Differential treatment" gives greater flexibility to developing countries tor
fulfilling their commitments in the form of a longer time period of I 0 years while

96
 exempting LDCs from undertaking reduction commitments at all. It also reiterates
the decision to provide concessions to developing countries in the Schedule of
concessions and commitments. Article XVI calls for taking the necessary steps to
implement the Decision on Measures Concerning the Possible Negative Effects of
the Reform Programme on Least-Developed and Net Food-Importing Countries.
• Agreement on Sanitary and Phyto-sanitary Measures- Article IX calls for the
provision of technical assistance to developing countries in ful fi II ing their sanitary
and phyto-sanitary commitments along with maintaining and expanding their
market access opportunities. Article X titled "Special and Differential Treatment"
instructs the WTO Members to keep in mind the special needs of developing and
least-developed countries while formulating their sanitary and phyto-sanitary
requirements and giving them longer periods for compliance and specified time-
limited exceptions, upon request to them so as to ensure that developing and
least-developed countries are able to comply with the provisions of the SPS
Agreement. Article XIV allows developing countries to delay the application of
the SPS Agreement by two years and LDCs by five years, in cases where they
lack technical expertise, infrastructure or resources for such application.
• Agreement on Technical Barriers to Trade - Article II: 12 and Article V: 9
provide for a reasonable period of time between the publication of technical
regulations and their enforcement so as to allow sufficient developing country
Members to adapt their products or methods of production to the technical
regulations. Article XI of the TBT Agreement deals with ·'Technical Assistance to
Other Members" and stipulates that Members shall advise and provide technical
assistance on mutually agreed terms to developing countries regarding the
implementation of and adherence to technical standards, establishment of
standardizing and regulatory bodies and other institutions and legal framework to
enable them to fulfil their obligations under the TBT Agreement. In doing so
special priority is to be given to the needs of the LDCs. Article XII titled "Special
and Differential Treatment of Developing Country Members" lays down a
number of ways in which WTO Members could assist and enable the developing
countries to comply with the provisions of the WTO TBT Agreement and ensure

97
 that technical standards and regulations should not become an obstacle to the
trade of developing and least-developed countries.
• General Agreement on Trade in Services - At1icle IV of GATS talks about
strengthening the domestic services competitiveness of developing countries
through access to technology and improving their access to information networks.
Article XII allows developing countries and countries in transition to restrict trade
in services for reasons of balance-of-payment difficulties (WTO Website: Work
on Special and Differential Provisions).
• Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) - Article 65 of this agreement provides developing countries with a
longer transitional period of five years, as compared to one year for other
Members, to implement the provisions contained in this agreement. Article 66
provides a ten year period to the LDCs for implementing this agreement. Article
67 directs other WTO Members to provide technical and financial assistance to
developing and least-developed countries in formulating their laws and
regulations for the protection of intellectual property rights and to prevent their
abuse (WTO Website: Work on Special and Differential Provisions).
• Agreement on Trade Related Investment Measures (TRIMS)- Article VI of
this Agreement allows the developing country Members to deviate from their
national treatment and quantitative restriction obligations related to investment
measures to deal with their balance of payments problems. Article V: 2 provides
developing countries with a longer period of five years, which can be further
extended on request, to eliminate all trade related investment measures which are
not in consonance with this agreement.
• Understanding on Rules and Procedures Governing the Settlement of
Disputes (DSU) -Article IV: I 0 of the DSU calls for the consideration of the
special needs and of the developing countries during the consultations held prior
to the establishment of a dispute panel. The period of consultation could be
extended under Article XII: I0 of the DSU if the consultations involved measures
taken by a developing country. Developed countries are also required to give
sufficient time to the developing countries for preparing and presenting their

98
 arguments. At the time of the establishment of the panel, one of the panel lists is
required to be a developing country Member, as per Article VIII: I 0. if the dispute
is between a developed and a developing country. The panel while deciding upon
a dispute involving a developing country has to clearly indicate the manner in
which the special and differential treatment had been provided to the concerned
developing country under the disputed agreement which were disputed (DSU
A11icle XII: II). At the time of surveillance and implementation of DSB rulings
Members are required to keep in view the interests of the developing countries
which have been subjected to the DSB ruling (DSU Article XXI: 2) and while
considering the appropriate action to implement the DSB ruling attention should
be paid to their impact on the developing countries involved in the dispute (DSU
Article XXI: 8). The WTO Secretariat is also directed to provide legal advice and
assistance to developing countries upon request (DSU Article XXVIII: 2). With
regard to LDCs, Article XXIV ofthe DSU prescribes that particular consideration
should be given to their needs and requirements at all stages of the dispute
settlement process. Members have been advised to exercise due restraint in
matters concerning LDCs, especially in asking for compensation or seeking
permission to suspend the concessions or obligations against them (DSU Article
XXIV: 2).

Apart from the legal provisions mentioned above action in favour of developing
countries can also be taken in the form of 'waivers' from WTO rules in accordance with
procedures set out in the Agreement Establishing the WTO. For example, the June 1999
General Council Decision on Waiver regarding Prefi'rential Tariff Treatment for Least-
Developed Countries allows developing country members to grant preferential tariff
treatment to products of least developed countries (Work on Special and Differential
Provisions: WTO Website).

These provisions had not been envisaged at the time of the formation of the ITO
Charter and GATT 1947 as reduction of tariff harriers and not economic development
was the dominant issue at that time. The war ravaged countries which came together at

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Bretton Woods and Havana after the Second World War were more interested in bringing
down tariff barriers and enhancing trade cooperation among the countries. At the same
time most ofthe developing countries were either still under colonial rule or were newly
independent and hence were not in a position to demand special and differential treatment
from the developed countries. It was only in 1964 at the time of the birth of the United
Nations Conference on Trade and Development (UNCTAD) that the developing and the
least developed nations came together for the first time on an international platform to
assert their position in the international system and demand for special rights and
privileges to meet their special development needs. This resulted in the inclusion of Part
VI of GATT which consisted of three Articles on Trade and Development. But these
Articles were not enforceable and were more in the nature of '·best endeavour··
undertakings which were not really taken seriously as far as their implementation was
concerned.

In 1979, towards the end ofthe Tokyo Round ofGATT negotiations a completely
new and better framework was adopted in the form of the 1979 Decision on Differential
and More Favourable Treatment, Reciprocity and Fuller Participation of Developing
Countries which was also known as the Enabling Clause. Under this clause the rights and
obligations of developing countries were clearly codified and the Generalized Scheme of
Preferences, under which developed countries granted non-reciprocal preferential
treatment to developing countries, was given legal cover. It also provided for the
formation of free trade agreements between developing countries for the exchange of
trade concessions among themselves.

By the end of the Uruguay Round the S&D provisions of the Enabling Clause
were incorporated and well entrenched in most of the WTO Agreements such as GATS.
TRIPS and various other agreements, through which the developing countries had
assumed a much higher level of commitment from the developed countries.
Simultaneously they have also undertaken greater obligations within the multilateral
trading system as some countries among them are gradually moving up on the ladder of
economic growth and development (Keck and Low 2004: 3-l 0). They are also playing an

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increasingly important role in the ongoing Doha Round negotiations which has been
termed as the Development Round as it is centred on the requirements and interests of
developing countries and securing their share in the growth ofworld trade commensurate
with their development needs.

In 2000, the WTO Secretariat along with the Committee on Trade and
Development attempted to compile all the S&DT provisions of the WTO so as to assess
their use and implementation by developing and developed countries (WTO Doc. No.
WT/COMTD/W/77 2000). This was helpful in determining whether the developed
countries had actually implemented the various S&DT provisions incorporated in the
WTO Agreements and whether the developing countries had actually benefited from
them. The note prepared by the Secretariat in this regard suggested that while some of the
S&DT provisions had been utilized by the WTO Members such as through the various
GSP Schemes adopted by the developed countries and through the provision of technical
assistance and cooperation given to developing and least-developed countries. Some
countries have derived benefits from the use of these provisions and have made an
attempt to assert special and differential treatment as their "acquired political right"
(Keck and Low 2004: 6).

However, it cannot be said conclusively that the use of S&DT provisions by WTO
Members have resulted in decisively altering the economic position of the developing
countries. Most of these provisions have remained largely unused or have not been used
adequately so as to enhance the share of the developing countries substantially. The
integration of the LDCs in the world economy has also not been achieved as their
economic conditions remain more or less the same as they were before the incorporation
ofS&DT in the WTO.

Though S&D treatment of developing countries still remains a valid concept fault
lines have developed in the form of concerns related to 'graduation'. i.e. the definition of
which countries quality for special and differential treatment. The idea for the concept of
graduation is enshrined in Paragraph 7 of the Enabling Clause which states that less-

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developed country Members of the WTO "expect that their capacity to make
contributions or negotiated concessions or take other mutually agreed action under the
provisions and procedures ofthe General Agreement would improve with the progressive
development of their economies and improvement in their trade situation and would
accordingly expect to participate more fully in the framework of rights and obligations
under the General Agreement." This was part of the bargain that gave developing
countries formal legal cover in respect of trade preferences under GSP, S&D in non-tariff
measure agreements, regional trade agreements among developing countries, and the
designation of a separate category of LDCs (Keck and Low 2004: 9).

Arguments are now being raised for agreement on a specified set of graduation
criteria, like those that are implicit in the United Nations definition of least-developed
countries. However, this might give rise to a specific set of problems as Keck and Low
(2004: 9-1 0) point towards the difficulties that might arise into transforming '·a
historically politicized notion such as graduation into a precise policy outcome, especially
if it has to be applied in binary terms across the entire legal edifice of the WTO." The
most basic problem with regard to establishing a set of graduation criteria is the lack of a
commonly agreed definition of developing countries among WTO Members. Secondly,
many fast developing countries are reluctant to give up their developing country status as
it will mean loss of special concessions and privileges and commitment to stricter
liberalization standards which are not viewed as being suppot1ive of their development.
For example, Mexico and Korea are unwilling to be designated as a developed country
despite joining the OECD (Organization for Economic Co-operation and Development)
which is a developed country organization with high-income economies as members.
Third, the concept of graduation also leads us to the necessity of responding to the reality
that 'one size does not fit all'. The process of graduation of developing countries out of
their access to pat1icular S&D provisions must be gradual. provision-specific and driven
by detailed analysis of development needs. The establishment of procedures under which
developing countries are given the opportunity on a continuing basis to explain in clear
developmental terms why they need access to particular S&D provisions is bound to be
highly politicized and difficult. It would be a delicate and potentially time-consuming

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exercise that would need to be well discussed and debated by the WTO Members and
should be started at the earliest opportunity (Keck and Low 2004: 9-1 0).

3.3.2 REGIONAL TRADE AGREEMENTS

"Regional Trade Agreements can be defined as groupings of countries which are formed
with the objective of reducing barriers to trade between member countries. These
groupings or unions may be concluded between countries not necessarily belonging to the
same geographical region" (Pal 2004: 2). Depending upon their level of integration,
RTAs can be broadly divided into five categories: Preferential trade agreements in which
countries lower trade barriers among the members themselves; free trade agreements in
which all trade barriers in the flow of goods and services are removed among the
members but each member retains its own tariff barriers with the rest of the world:
Customs Union (CU) in which there is free trade among the members as well as a
common external set of tariffs with the rest of the world; Common Market which is a
customs union characterized by tl·ee movement of labour and capital along with the free
movement of goods and services; and; Economic Union which has a common market as
well as harmonization of fiscal and monetary policies among members (Pal 2004: 2).

The WTO permits the t(:mnation of RTAs under three sets of rules - a) Article
XXIV of GATT, b) the Enabling Clause of 1979 and, under the c) General Agreement on
Trade in Services.

a) GATT Article XXIV - Paragraphs 4 to I 0 of GATT Article XXIV provides for the
formation and operation of Customs Union and Free Trade Areas covering trade in
goods. Three basic conditions have been laid down which should be fulfilled by all
RTAs for them to be WTO legal. They are:
• The purpose of a customs union or free trade area should be to facilitate trade
between the constituent areas and not to raise barriers to trade for other countries
not involved in the CU/FTA. Thus the members of a CU/FTA should ensure that
their duties and restrictive regulations of commerce with non CU/FT A members

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 should not be higher or more restrictive than the duties or regulations applicable
before the formation of the CU/FT A. They should also ensure that uniform duties
and regulations are maintained within the territories of each of the members of the
CU/FTA.
• Duties and other restrictive regulations are eliminated with respect to substantially
all trade between the members of the CU/FT A or at least with respect to
substantially all the trade in products originating in such territories.
• Any interim agreement leading to the formation of a CU or FT A should include a
plan and schedule for the formation of such a CU/FT A within a reasonable length
of time. Since implementation of C U/FT As usually takes place over a long period
of time this provision safeguards from the danger of long periods of time being
used as a pretext for introducing discriminatory practices.
b) The Enabling Clause- The Decision on Differential and More Favourable Treatment.
Reciprocity and Fuller Participation of Developing Countries better known as the
Enabling Clause was adopted under GATT in 1979. It provides for the formation of
regional or global arrangements among less-developed country Members for the
mutual reduction or elimination of tariffs and non-tariff measures on products
imported from one another. However, certain conditions have been laid down which
say that "differential and more favourable treatment provided under this clause shall
be designed to facilitate and promote the trade of developing countries and not to
create undue difficulties for the trade of any other WTO Member. It also stipulates
that ''developed countries do not expect reciprocity for commitments made by them in
trade negotiations to reduce or remove tariffs and other barriers to the trade of
developing countries, i.e., developed countries do not expect developing countries to
make contributions which are inconsistent with their individual development.
financial and trade needs" (WTO Document No. L/4903 1979: 3).
c) General Agreement on Trade in Services - The earlier economies were primarily
manufacturing economies as the services sector did not have a significant presence in
them but contemporary economies are largely driven by the service sector. Thus
Article V of GATS which is similar to GATT Article XXIV lays down provisions for

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 the regionalization of trade in services. for both developed as well as developing
countries. It also exempts the integration of labour markets from the MFN treatment.

The provisions for allowing the formation of RT As and customs unions were also present
in the Havana Charter as well as GATT 1947. Article 44 of the Charter allowed for the
formation of "voluntary agreements. of closer integration between the economies of the
countries parties to such agreements" which were formed to "facilitate trade between the
parties and not to raise barriers to the trade of other Member countries with such parties."
This provision also featured prominently in the Anglo-American negotiations that were
held for the formulation of the GATT. The Americans were not very supportive of the
idea of allowing preferential agreements but the British insisted upon it as they wanted to
continue their ties with their former colonies through Imperial Preferences. Thus a
"grandfather clause'' was included in GATT to continue the preferential treatment given
by the British to her colonies and dominions as long as the preference margins were not
raised.

At the same time the formation of Customs Unions and Free Trade Areas was
permitted on the fulfilment of three conditions: tariffs for countries not included in such
arrangements were not "on the whole" higher than those earlier in effect: tariff barriers
were eliminated on "substantially all trade" among the countries that were part of such
arrangements, and; these arrangements were completed over a reasonable period of time
(Pomfret 1997: 71-75). The inclusion of this divergence fi·om non-discrimination was
looked upon with mixed feelings at that time. While on the one hand it was seen as
securing a small window for safeguarding the economic ties of some countries with their
preferred trading partners, on the other hand it was seen as a powerful exception which
could undo the progress made by the incorporation of non-discrimination as the basic
norm ofthe new multilateral trading arrangement.

Thus GATT as well as the WTO has allowed and at times also facilitated the
proliferation of RTAs for a long time. This phenomenon gained momentum especially in
the early 1990s due to the doubts and apprehensions related to the successful conclusion

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ofthe Uruguay Round. Some 474 RTAs have been notified to the GATT/WTO up to .July
2010. Of these, 351 RTAs were notified under Article XXIV of GATT, 31 under the
Enabling Clause and 92 under Article V of GATS. 283 agreements were in force till July
2010. The unabated growth of RT As in an era of multilateral free trade represented by the
WTO has resulted in growing concerns among trade scholars and practitioners regarding
the parallel growth of two apparently antithetical phenomena - multilateralism and
regionalism. The contemporary debate and discussion between these two schools of
thought has being going on at the intellectual as well as policy levels.

The standard argument against preferential arrangements goes back to Adam

Smith and David Ricardo. In his celebrated work The Principles of Political Economy
and Ta·wtion ( 1917: 405-407) Ricardo refers to the apprehensions expressed by Adam
Smith about the adoption of a binding treaty which restricts the freedom of a country to
trade with any other country so as to buy a product from its most efficient producer. He
then goes on to elaborate upon the disadvantages that an importing country would face
after signing such a treaty which would "bind her to purchase a commodity from (the
preferred country) at the natural price of that commodity in (the preferred country) when
she might have brought it at the much lower natural price of some other country. It
occasions then a disadvantageous distribution of the general capital, which falls chiefly
on the country bound by its treaty to buy in the least productive market." He also
contended that such a preferential treaty would not be advantageous even for the
preferred country "unless the monopoly of the foreign market be in the hands of an
exclusive company", otherwise the seller will be ·'prevented by the competition of his
own countrymen from selling his goods above their natural price" (p. 407).

Jacob Viner in his book The Customs Union Issue ( 1950) introduced the terms
·•trade creation" and ''trade diversion" to examine why many free traders and
protectionists agreed on the desirability of PTAs. He questioned the prevalent wisdom in
his time that the formation of a customs union was always welfare increasing as it
resulted in 'trade creation' by increasing the exchange of goods among the countries
which enter into a customs union or any other preferential trading arrangement. He

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demonstrated that this was not always true and that in some instances, the formation of a
customs union resulted in diverting trade from the more efficient producers of countries
which are not a part of such a union. This had the effect of reducing the overall welfare of
the countries participating in the customs union, as well as countries not participating in
the customs union from which trade is diverted (Pal 2004: 5). Viner concluded that free
traders who supported PTAs probably had trade-creating customs unions in mind while
protectionists who supported them expected them to be trade diverting. The ambiguity of
the outcome in the Vinerian analysis led economists to conduct studies for examining
whether a specific union would be largely trade creating or trade diverting (Panagariya
2010).

Bhagwati and Panagariya ( 1996) argue that '·trade diversion is more likely to
dominate trade creation in most situations." According to them, ··when trade is
multilateral, i.e., when countries import from and export to the members of an RTA as
we11 as outside countries trade diversion is inevitable. Also if members of the RTA are
small in relation to the outside world, very little trade creation will take place. As a result.
under these conditions, trade diversion is likely to be the more dominant effect" (cited in
Pal 2004: 6).

Some economists have suggested that we need not worry about trade diversion
and that beneficial effects will prevail if PT As are undertaken with ·'natural integration
partners". The initial proponents of this idea were Paul Wonnacott and Mark Lutz ( 1989)
who asserted that "trade creation is likely to be great and trade diversion small if the
prospective members of an FTA are natural trading partners", that is, they were
geographically proximate and had a very high volume of trade among each other
(Bhagwati, 2008: 56). This hypothesis was extensively criticized and rejected by
Bhagwati and Panagariya ( 1999, 33-10 I) as they demonstrated that. ceteris paribus, a
preferential agreement with a proximate country could be more harmful than a distant
one and pointed at the fa11acies ofthe volume of trade criterion.

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 Bagwell and Staiger (200 1: 319-320) ra1se a pertinent question about the
compatibility of RTAs with multilateral liberalization - once the principle of non-
discrimination is adopted, can exceptions to this principle be granted for the creation of
preferential agreements without compromising the performance of the multilateral
system? They present a framework for understanding and interpreting reciprocity and
non-discrimination and believe that the introduction of PTAs complicates the way in
which externalities are transmitted across countries. and in such an environment the
principle of reciprocity can no longer deliver efficient multilateral outcomes for its
member governments. They rely on the 'natural trading partners' hypothesis when they
argue that the efficiency of a multilateral system based on reciprocity can be preserved
when a preferential agreement is allowed only if the member countries are 'natural
integration partners' which seek to integrate fully by forming a customs union. They also
admit that their analysis may define the political economy of trade policy too narrowly to
reflect broader non-economic objectives of a state government like military security or
political stability for entering into PT As.

Bergsten ( 1997: 2) talks about two significant concerns about the adverse effects
of RT As. The first concern stems from the fact that RT As divert the attention of countries
from multilateral trade as they become increasingly involved in regional initiatives. The
resources of national governments in terms of administrative staff, officials. experts and
time are limited which if spent more on regional trading arrangements stall the evolution
of multilateral trade and threaten its vitality. For example, the United States before the
1980s gave over riding priority to global trade and refused to participate in regional
initiatives but after 1980s when it started pursuing global liberalization and regional
initiatives simultaneously, its attention was diverted more towards the latter which
resulted in bilateral FT As with Israel and Canada culminating into NAFT A (North
American Free Trade Agreement), promotion of FT A in Asia via APEC (Asia Pacific
Economic Co-operation) and in the western hemisphere via FTA ofthe Americas.

The other adverse impact of RT As, according to Bergsten ( 1997: 2). can be of a
geopolitical nature wherein the creation of trade groupings or trade blocs with diverse

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and conflicting commercial interests may result in pitting them against each other, which
in the worst case may lead to trade wars. History provides evidence of such instances like
bitter animosity between The Imperial Preferences led by UK and the closed economic
zone created in Central Europe by Nazi Germany in 1930. This argument is not very
popular among contemporary critics of regional trade but they do say that .. extensive and
intensive regional ties may lead to irritation and even conflicts that range beyond
economics to broader spheres of international relations" (Bergsten 1997: 2).

The proponents of regional trade give a completely eli fferent set of arguments to
establish the compatibility of RT As with the multilateral trading system. First. they
believe that removing barriers to trade between a small group of countries has important
demonstration effects for trade liberalization at the global level. It accustoms the officials.
traders and governments to the liberalization process and thus increases the probability of
their moving to the multilateral platform (Bergsten 1997: 3). Second. RTAs are more
manageable than multilateral negotiations because they involve small numbers and as the
members are more homogenous decision-making is more efficient. International
cooperation is easier among a limited number of countries with one or two large players
providing leadership at the regional level. (Sampson and Woolcock 2003: 286).

Third, the relatively small and underdeveloped countries are more comfortable
with the idea of opening up their domestic markets to a limited number of countries. As
large firms in such countries lose their monopolistic quiet life with the dismantling of
protective tariffs and are forced to compete in a larger market, sudden exposure on a
global scale may have serious adverse consequences tor their fledgling economies.
Fourth, regional economic integration has had positive effects in the political and social
spheres and has been instrumental in ending bitter rivalries and traditional hostilities
among long standing enemy nations. For example, the creation of the European Union
made another war between France and Germany impossible, the Common Market of the
South American Southern Cone (MERCOSUR) has ended the historic rivalry between
Argentina and Brazil which had acquired nuclear overtones and APEC has resulted in

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anchoring USA as a stabilizing force in Asia forging institutional links between previous
antagonists like Japan, China and the rest of East Asia (Bergsten 1997: 3).

Sykes and Schwartz ( 1996: 49-51) recogntze the relevance of GATT Article
XXIV for the formation of FTAs, as it allows trade liberalizing preferences so long as
they apply across the board to most of the trade between the pat1ies to the FT A. The
authors believe that the "substantially all" requirement was designed to balance the
potential gains from preferences in the face of the free rider problem with the costs that
can result from trade diversion and the frustration of expectations. Thus. according to
them, Article XXIV strikes a fairly sensible balance between the need to overcome the
free rider problem on the one hand, and the need to ensure that the global community as a
whole does not suffer from preferential arrangements on the other.

Horn and Mavroidis (200 I: 267-268) examine more recent strands in the literature
on PT As and their analysis suggests that MFN may increase welfare by preventing the
formation of PTAs that only serve to exploit monopoly power. Baldwin and Seghezza
(2007) examine the tariff line data of 23 large trading nations to find an answer to the
building block/stumbling block question and conclude that regionalism is neither a
building nor a stumbling block. Rather political economy factors - the strength of
sectoral vested interests - produce forces that simultaneously influence the selection of
MFN and PTA tariffs.

However, the question still remains, to use Bhagwati's terminology, whether

RTAs are 'building blocks' or 'stumbling blocks' of the multilateral trading system
represented by the WTO? Bergsten ( 1997: 3) suggests that the analyses of most RT As,
especially the European Union (EU), conclude that trade creation has dominated trade
diversion. But these results are not foolproof and it cannot be said with cet1ainty that
future RTAs will have similar results. Past experience with regard to regional and
multilateral trade liberalization tells us that both these processes have progressed
simultaneously and have at times undermined and at times reinforced each other. The
inter-relation between regional and multilateral trade liberalization depends on the

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management of the process by the key countries involved. If they seek constructive
synergy between the two, then historical record (in the case of EU) suggests that they can
achieve it. If they wish to pursue one at the expense of the other, then again. the outcome
in the earlier era reveals that it is also possible (Bergsten 1997: 3 ).

The debate continues and till now there are no clear cut answers to ascertain the
implications of PTAs for the non-discrimination principle and multilateral trade
liberalization. What is required is to monitor the growth of RTAs with a view to ensure
that regional integration efforts do not undercut the process of multilateral trade
liberalization. The Committee on Regional Trade Agreements of the WTO has been set
up to perform this task. It examines individual regional agreements and considers the
systemic implications of the agreements for the multilateral trading system and the
relationship between them. The working of the committee will be analysed and examined
in detail in the Chapter Four.

3.4 CONCLUSION

It can be said that the incorporation of various exceptions to non-discrimination is not a

new phenomenon as GATT and WTO were never viewed as ushering in an era of
unrestricted trade and commerce. Countries were always free to deviate from non-
discrimination if it was necessary for post-war reconstruction or to take into account their
non-trade concerns. In fact it can be said that the incorporation of these exceptions was
necessary for the acceptance of the overall principle of non-discrimination itself as it
would have been very difficult for countries to accept an unconditional and full adoption
ofMFN and NT without any window of respite to deal with the aftermath ofthe war or to
address their non-trade concerns. Despite being contradictory to the fundamental
principles of GATT and WTO these exceptions to non-discrimination play an important
role in furthering the basic objectives of the organization. They promote the cause of
economic and sustainable development which is the ultimate objective of the
organization. By bringing in the notion of fairness of trade they also help in creating a
level playing field between a diverse group of countries.

Ill
 Most of the exceptions have evolved and expanded over a period of time and are
now being increasingly used by developed as well as the developing countries. Though
they have been streamlined and improved upon in the successive rounds of GATT
negotiations as well as at the time of the formation of the WTO, yet it cannot be claimed
that they are completely free from any weaknesses or loopholes. In fact the increasing use
of anti-dumping measures and the phenomenal growth in the number of RTAs in recent
years have alarmed scholars as well as trade practitioners who are now concerned about
the adverse effects of the wide use of exceptions to non-discrimination on the attainment
of the basic goal of economic development and trade liberalization.

Thus it is important to monitor their implementation closely with a v1ew to

ensuring that they are used for the specific purposes for which they were incorporated. It
is also imperative to assess and evaluate the overall impact of the use of exceptions to the
non-discrimination principle so as to make sure that despite their growing use and
popularity they remain "exceptions" to the basic rule of non-discrimination and do not
become the new rules of the multilateral trading system. Such an assessment must begin
with an examination of the manner in which the WTO itself has responded to the growing
popularity of the exception provisions among its Members. Two significant responses of
the WTO can be identified- first, is the establishment of various committees to examine
the exception provisions as well as monitor their use by the Members. Secondly. the
disputes pertaining to the use of the exception provisions which have ansen among
Members have been brought before the Dispute Settlement Mechanism of the
organization. The rulings and judgements made in these cases can be considered to be the
judicial response of the WTO to the use of exceptions. The next two chapters are an
attempt to examine these two responses of the WTO to the use of the exceptions to non-
discrimination with a view to evaluating their effectiveness in fllliher improving upon the
exception provisions and in checking their abuse by protectionist interest groups.

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