Legal Environment of International Business

IBS 850

The World Trade Organization

Chapter 2

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 Learning Objectives
After reading this chapter you will understand:
• The rules governing international trade
• How the WTO was established and its purpose
• The fundamental rules of the WTO
• Exceptions to the fundamental WTO rules
• Tariffs and non-tariff barriers
• Trade in services v. trade in goods
• IP protection provided by the WTO
• WTO dispute settlement system
• Achievements and challenges of the WTO
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 Rules Governing International Trade
• Post WWII, the general belief among supporters of
multilateral trading systems was that Open Markets and
Full Competition would be the best assurance against
further large scale hostilities
• First the International Trade Organization (ITO) was
proposed, then the General Agreement on Tariffs and
Trade (GATT) was signed as the basis for international
trading system until formation of WTO in 1995
• GATT Roles:
• Develop a code of rules governing trade relations (among
participating countries)
• Provide a forum to discuss trade issues and disputes
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 GATT and WTO
• Collection of agreements
– Does NOT require free trade, but has rules for freer trade
among members
• No supra national enforcement mechanism
– Voluntary commitment of members
– Dispute resolution mechanism
– Economic leverage– members can retaliate against rule-
breakers
• “rounds” – major negotiating sessions
– E.g. Uruguay Round ending 1993
• GATT Replaced by World Trade Organization (WTO) which
came into effect in Jan 1, 1995
• Expanded to include Services,
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IP, improved dispute resolution
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 Establishment of WTO
• Came into effect Jan. 1, 1995 with 100 countries as signatories
• Today, WTO has 164 members; representing 98% of global trade
• WTO is an umbrella agreement, incorporating numerous
agreements in 5 major areas:
– Trade in goods
– Trade in services
– Intellectual (IP) protection
– Dispute settlement
– Member trade policy review
• New members must adopt the entire “bundle of agreements” to
become a WTO member
• See www.wto.org

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 Fundamental Rules of GATT/WTO
Tariffs and the Binding Concessions Rule
– A Tariff or Custom Duty is a charge or a tax imposed by
a government on a good being imported into a country
– Tariffs – considered major trade barriers when GATT
was negotiated, so countries were encouraged to
lower specific tariffs;
– Once a WTO country lowers a tariff, it is bound – the
country cannot increase the tariff above that level –
“Binding Concessions Rule”
– WTO Video (Tariffs):
https://www.youtube.com/watch?v=HF7wbKXCyxM
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 Fundamental Rules of GATT/WTO
General Elimination of Quantitative Restrictions
(Quotas)
• Quantitative restrictions, or Quotas, are limits
on the quantity of a product that may be
imported or exported
• WTO members cannot maintain quantitative
restrictions on imported goods (only tariffs are
permitted)
• Some exceptions (e.g. Canadian Dairy industry)
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 Fundamental Rules of GATT/WTO
Most-Favoured-Nation (MFN) rule
– Tariffs must be applied equally to all member
countries
• If a lower tariff is negotiated between two GATT/WTO
countries, it must be available to all other member
countries
• Case example: EC Bananas case - box 2.1 (p. 34)

– WTO Video (MFN):

https://www.youtube.com/watch?v=lZZxArfeol8
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 Fundamental Rules of GATT/WTO
• Exceptions to Most Favoured Nation (MFN) Rule
– Developing countries
• Developed countries can give preferential tariffs to developing
countries without having to extend the same rates to all
members – “Generalized System of Preferences”
– Free trade areas and customs unions
• Free trade area – 2 or more countries agree to remove all
duties among them, but can have different tariffs for other
countries; each country sets own external tariffs
• Customs union – similar, but countries also agree on common
external tariffs ( tariff for imports from other countries)
• Allowed if they are trade creating

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 Fundamental Rules of GATT/WTO
National Treatment Rule
– Once a good or service is legally present in a
country, it must be treated like a domestic good or
service
• Same tax, same regulatory treatment
• If an imported product and a domestic product are
physically similar, used in the same way, compete with
each other, or are substitutable for each other, then
they are like. Thus, the imported product should be
treated same as the domestic product.

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 Fair Competition
• Fundamental WTO Rules like MFN and National
Treatment are meant to ensure fair
competition.
• Rules on Dumping and Subsidies are meant to
counter-act unfair trading practices.
– These actions/rules are exceptions to the WTO
principles in order to:
• Protect domestic industry from dumping
• counter-act subsidies
• Impose safeguards ( to counter- act import surges)
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 Dumping
• Dumping = selling a product at a lower price in a foreign
market than in the home market
• WTO Anti-Dumping Agreement
– Allows governments to act against dumping (by imposing
tariffs or duties) where there is genuine or material injury to
the domestic industry
– 3 elements must be present to justify anti-dumping action:
1. Demonstration that dumping is taking place (proof that the product
is being sold at less than the normal price in the home market)
2. Calculation of the extent of the dumping
3. Demonstration that dumping is causing or threatening to cause
injury to to the competing domestic industry
– Detailed investigation
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 Dumping
• If Dumping is proven following the
investigation, the importing country may
impose an extra duty on the product to bring
the price closer to the normal value – “anti-
dumping duty”
• Removes the injury to the domestic country
• Must inform WTO
• Disputes - WTO dispute settlement procedure

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 Dumping
• For discussion – Box 2.2 p. 38 – is it dumping?
– Brazilian company makes sandals, sells them in
Brazil for $15, in Canada for $25; Canadian made
sandals sell in Canada for $30.
– Same sandals; sold in Canada for $ 13.

• Dumping example (US perspective):

https://www.youtube.com/watch?v=Uhx_6Kz
dpTY

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 Subsidies & Countervailing Measures
• Subsidy = any financial or commercial benefit given to
a producer, manufacturer or grower by government or
public body
– E.g. money, tax break, providing goods or services

• Countries are permitted to take actions against

subsidies – with countervailing measures/duties
– WTO Agreement on Subsidies and Countervailing Measures
– To offset the effect of subsidies, the importing country can
raise tariffs on the subsidized product

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 Subsidies & Countervailing Measures
• Countervailing duties are permitted:
– After a detailed investigation
• Is the product being subsidized?
• Is the subsidy causing injury to the domestic industry?
– For 5 years
– Note: subsidies are allowed in developing countries and
countries in transition
– Note: difference between subsidies for exported goods v.
subsidized industries (domestic markets)
• In Canada, Special Import Measures Act (SIMA) is the
domestic law reflecting the WTO Agreement on anti-
dumping, subsidies, countervailing measures
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 Dumping and Subsidies
Examples/Resources
• Examples
– Canada – US Softwood Lumber disputes
• https://www.international.gc.ca/controls-controles/soft
wood-bois_oeuvre/background-generalites.aspx?lang=
eng
• Globe & Mail video
https://www.youtube.com/watch?v=Z0s5yEf0AmI
• Canadian International Trade Tribunal (CITT)
website:
• https://citt-tcce.gc.ca/en/home.html
• CITT FAQs on dumping and subsidizing:
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• https://citt-tcce.gc.ca/en/collections/anti-dumping-inju
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 Safeguards
• Members may temporarily restrict imports of a product
– If domestic industry is threatened/injured by a surge in imports
• An increase in imports – absolute or relative
• Industries/ companies can request that government take safeguard
action ( same with dumping and subsidies)
• Serious injury
– Government initiates Investigation – open to the public, report
to WTO
– Safeguards must be applied only to the extent necessary to
prevent/remedy serious injury; not targeted to a specific
country
• E.g. quota—for all imports of a particular good, allocated among
exporting countries
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 Safeguards
• Up to 4 years; additional 4 years if necessary and
industry is adjusting
• Exporting country – can seek compensation through
consultation, can retaliate
• Developing countries
– Some protection
– Importing country can only apply safeguard if developing
country supplies a set percentage of total imports
– E.g. agriculture
• E.g. Canadian Steel
– https://www.canada.ca/en/department-finance/news/2019
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 WTO Exceptions
General Exceptions
• Members may suspend preferential treatment to
trade partners under certain exceptions to the WTO
rules:
– Protection of public morals
– Protection of human, animal, plan life or health
– Protection of national treasures
– Conservation of natural resources
• See examples: Box 2.3 Asbestos case; Box 2.4
Shrimp-Sea Turtle case
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 WTO Exceptions
Process and Production Methods
• Refers to the way a product is made
• WTO Members may set criteria for the way
products are produced (within certain criteria)
• E.g. Box 2.4 – Shrimp – Sea Turtle case

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 WTO Exceptions
International Product Standards
• Governments may make trade-related rules (regarding product
standards) to protect human, animal, plant life/health, IF the
rules:
– Do not discriminate against imports
– Are not disguised as protectionist measures
• Two specific agreements:
1. Sanitary and Phytosanitary Measures Agreement
– Scientifically based measures allowed to protect public health
– Precautionary principle allows countries to take action before there is complete
scientific proof
– Areas of food safety, plant and animal protection
– E.g. Outbreak of BSE (Mad Cow disease) and bans of tainted meat (UK, Canada,
US)
2. Agreement on Technical Barriers to Trade
2024-01-14 • E.g. Box 2.5 (p.44) Hormone-treated beef
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 WTO Exceptions
• Security Exceptions
– Members may deviate from obligations to protect security interests
– Intended to protect in times of war, national emergencies
– Arguably used by US in 2018 to impose tariffs on steel and aluminum
due to national security; led to retaliation by Canada, Mexico and EU
• Regional Trade Agreements
– Intend to create preferential treatment among members
– Acceptable as long as they are trade creating (facilitating)
– Free Trade Agreements; Customs Unions
• Special Treatment for Developing Countries
– Greater allowance on domestic subsidies for economic development
– Preferential tariff treatment to imports from development countries

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 Non-tariff barriers
• Import licensing
• Valuation of goods at customs
• Pre-shipment inspections
• Rules of origin
• Investment measures

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 WTO Rules on Trade in Services
• General Agreement on Trade in Services (GATS)
– Covers internationally traded services
• Includes banking, telecom, tourism, professions
• Excludes government services
– Once a country allows foreign competition in a service, Most
Favoured Nation (MFN) rule applies
• Equal opportunities for service providers from all other WTO countries
– National treatment rule applies
• Also, must treat imported services like domestic
– Binding concessions rule applies
• Once a country has agreed to allow access for a particular sector,
country is bound by that commitment (can’t restrict later)

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 WTO Protection of Intellectual Property

• Intellectual property (IP) – “creations of the mind”

– Industrial property (Trademarks, Patents, designs)
– Copyright (Literary and artistic works)
• Agreement on Trade-related Aspects of Intellectual
Property Rights ( TRIPS)
– Brings IP protection under common international rules
– Minimum levels of protection by member countries
– National treatment rules apply
– MFN treatment applies

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 Trade Policy Reviews
• Goal is transparency (openness) of trade
policy
– Members must inform WTO of laws, policies etc.
– WTO conducts regular reviews of each member’s
trade policies – Trade Policy Review Body; peer
reviews

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 Dispute Settlement in the WTO
• Goal: resolution of disputes between member
nations (when one member country claims
that another has breached an obligation under
a WTO agreement)
– Not rule-making body (only applies existing rules
to fact scenarios in order to settle disputes)
– Settlement of disputes is responsibility of the
Dispute Settlement Body (DSB)

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 Dispute Settlement in the WTO
Process: Figure 2.2 (p. 52)
• First, consultation between countries; if no resolution,
panel is formed by DSB
• Panels- 3-5 experts from different countries
– Apply the evidence to the relevant WTO rules, decide
whether there is a breach of an obligation; Report
• Report goes to DSB – DSB may adopt or reject (but only if
there is a consensus among all members)
• Appeal- to Appellate Body; limited to issues of law ; can
uphold, reverse or modify; sends report to DSB (DSB can
adopt or reject (if consensus))
• Implementation; Compliance
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 Dispute settlement in the WTO
• Compliance phase does not always produce timely
implementation of DSB rulings, because:
– deadlines for implementation are often extended; leeway
allowed
– Countries are free to settle their disputes, even after rulings;
settlements may be contrary to WTO rules
• Failure to comply
– negotiations for compensation to complaining country
– if no agreement, request permission to impose limited
trade sanctions
• Not always practical, not a complete legal system;
however still considered to be effective international
dispute settlement mechanism
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