Trading into the Future

WTOThe World Trade Organization

2nd editionRevised

March 2001

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A word of caution: the fine print

While every effort has been made to ensure the accuracy of the text in this booklet, it cannot be taken as an official legal interpretation of the agree-ments.

In addition, some simplifications are used in order to keep the text simple and clear. In particular, the words “country” and “nation” are frequentlyused to describe WTO members, whereas a few members are officially “customs territories”, and not necessarily countries in the usual sense of the word(see list of members). The same applies when participants in trade negotiations are called “countries” or “nations”.

Where there is little risk of misunderstanding, the word “member” is dropped from “member countries (nations, governments)”, for example in thedescriptions of the WTO agreements. Naturally, the agreements and commitments do not apply to non-members.

In some parts of the text, GATT is described as an “international organization”. The phrase reflects GATT’s de facto role before the WTO was creat-ed, and it is used simplistically here to help readers understand that role. As the text points out, this role was always ad hoc, without a proper legal foun-dation. International law did not recognize GATT as an organization. For simplicity, the text uses the term “GATT members”. Officially, GATT signatorieswere “contracting parties”.

Abbreviations

PSE Producer subsidy equivalent (agriculture)PSI Pre-shipment inspectionS&D Special and differential treatment (for developing countries)SAARC South Asian Association for Regional CooperationSDR Special Drawing Rights (IMF)SELA Latin American Economic SystemSPS Sanitary and phytosanitary measuresTBT Technical barriers to tradeTMB Textiles Monitoring BodyTPRB Trade Policy Review BodyTPRM Trade Policy Review MechanismTRIMs Trade-related investment measuresTRIPS Trade-related aspects of intellectual property rightsUN United NationsUNCTAD UN Conference on Trade and DevelopmentUNDP UN Development ProgrammeUNEP UN Environment ProgrammeUPOV International Union for the Protection of New Varieties

of PlantsUR Uruguay RoundVER Voluntary export restraintVRA Voluntary restraint agreementWCO World Customs OrganizationWIPO World Intellectual Property OrganizationWTO World Trade Organization

For a comprehensive list of abbreviations and glossary of terms used ininternational trade, see, for example:Walter Goode, Dictionary of Trade Policy Terms, Centre for InternationalEconomic Studies, University of Adelaide, 1997.

This and many other publications on the WTO and trade are available from:WTO Publications, World Trade Organization, Centre William Rappard,Rue de Lausanne 154, CH–(1211 Geneva, Switzerland.Tel (+41–22) 739 52 08 / 739 53 08. Fax: (+41-22) 739 57 92e-mail: publications@wto.org

Some of the abbreviations and acronyms used in the WTO:

ACP African, Caribbean and Pacific Group (Lomé Convention)AD, A-D Anti-dumping measuresAFTA ASEAN Free Trade AreaAMS Aggregate measurement of support (agriculture)APEC Asia-Pacific Economic CooperationASEAN Association of Southeast Asian NationsATC Agreement on Textiles and ClothingCCC (former) Customs Co-operation Council (now WCO)CER [Australia New Zealand] Closer Economic Relations

[Trade Agreement] (also ANCERTA)COMESA Common Market for Eastern and Southern AfricaCTD Committee on Trade and DevelopmentCTE Committee on Trade and EnvironmentCVD Countervailing duty (subsidies)DSB Dispute Settlement BodyDSU Dispute Settlement UnderstandingEC European CommunitiesEFTA European Free Trade AssociationEU European Union (officially European Communities in WTO)FAO Food and Agriculture OrganizationGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGSP Generalized System of PreferencesHS Harmonized Commodity Description and Coding SystemICITO Interim Commission for the International

Trade OrganizationILO International Labour OrganizationIMF International Monetary FundITC International Trade CentreITO International Trade OrganizationMERCOSUR Southern Common MarketMFA Multifibre Arrangement (replaced by ATC)MFN Most-favoured-nationMTN Multilateral trade negotiationsNAFTA North American Free Trade Agreement

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Contents

Chapter 1 – Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41. What is the World Trade Organization? . . . . . . . . . . . . . . . . . . . 42. Principles of the trading system . . . . . . . . . . . . . . . . . . . . . . . . . 53. The case for open trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84. Roots: from Havana to Marrakesh . . . . . . . . . . . . . . . . . . . . . . . 95. The Uruguay Round . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126. WTO and GATT: are they the same? . . . . . . . . . . . . . . . . . . . . . 14

Chapter 2 – The Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151. Overview: a navigational guide . . . . . . . . . . . . . . . . . . . . . . . . . 152. Tariffs: more bindings and closer to zero . . . . . . . . . . . . . . . . . . 163. Agriculture: fairer markets for farmers . . . . . . . . . . . . . . . . . . . . 174. Textiles: back in the mainstream . . . . . . . . . . . . . . . . . . . . . . . . 205. Services: rules for growth and investment . . . . . . . . . . . . . . . . . 216. Intellectual property: protection and enforcement . . . . . . . . . . . 257. Anti-dumping, subsidies, safeguards: contingencies, etc . . . . . . 298. Non-tariff barriers: Technicalities, red tape, etc . . . . . . . . . . . . . 339. Plurilaterals: of minority interest . . . . . . . . . . . . . . . . . . . . . . . . 36

10. Trade policy reviews: ensuring transparency . . . . . . . . . . . . . . . 37

Chapter 3 – Settling disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381. The WTO’s most individual contribution . . . . . . . . . . . . . . . . . . 382. The panel process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413. Case study: the timetable in practice . . . . . . . . . . . . . . . . . . . . . 42

Chapter 4 – Beyond the Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432. Already committed: the built-in agenda . . . . . . . . . . . . . . . . . . . 443. Regionalism: friends or rivals? . . . . . . . . . . . . . . . . . . . . . . . . . . 454. The environment: a new high profile . . . . . . . . . . . . . . . . . . . . . 465. Investment, competition, procurement, simpler procedures . . . . 506. Electronic commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517. Labour standards: not on the agenda . . . . . . . . . . . . . . . . . . . . 51

Chapter 5 – Developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543. WTO technical cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554. Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565. Q&A A declaration of independence . . . . . . . . . . . . . . . . . . . . . 58

Chapter 6 – The Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601. Whose WTO is it anyway? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602. Membership, alliances and bureaucracy . . . . . . . . . . . . . . . . . . 633. The Secretariat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664. Special policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Members and observers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

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1. What is the World TradeOrganization?

The World Trade Organization (WTO) is theonly international body dealing with the rules oftrade between nations. At its heart are the WTOagreements, negotiated and signed by the bulkof the world’s trading nations. These documentsprovide the legal ground-rules for internationalcommerce. They are essentially contracts, bind-ing governments to keep their trade policieswithin agreed limits. Although negotiated andsigned by governments, the goal is to help pro-ducers of goods and services, exporters, andimporters conduct their business.

Three main purposes

The system’s overriding purpose is to helptrade flow as freely as possible — so long asthere are no undesirable side-effects. That partlymeans removing obstacles. It also means ensur-ing that individuals, companies and governmentsknow what the trade rules are around the world,and giving them the confidence that there will beno sudden changes of policy. In other words, therules have to be “transparent” and predictable.

Because the agreements are drafted andsigned by the community of trading nations,often after considerable debate and controversy,one of the WTO’s most important functions is toserve as a forum for trade negotiations.

A third important side to the WTO’s work isdispute settlement. Trade relations often involveconflicting interests. Contracts and agreements,including those painstakingly negotiated in theWTO system, often need interpreting. The mostharmonious way to settle these differences isthrough some neutral procedure based on anagreed legal foundation. That is the purposebehind the dispute settlement process writteninto the WTO agreements.

Born in 1995, but not so young

The WTO began life on 1 January 1995, butits trading system is half a century older. Since1948, the General Agreement on Tariffs andTrade (GATT) had provided the rules for thesystem. The second ministerial meeting, held inGeneva in May 1998, included a celebration ofthe 50th anniversary of the system.

It did not take long for the GeneralAgreement to give birth to an unofficial, de factointernational organization, also known informallyas GATT. Over the years GATT evolved throughseveral rounds of negotiations.

The latest and largest round, was theUruguay Round which lasted from 1986 to 1994and led to the WTO’s creation. Whereas GATThad mainly dealt with trade in goods, the WTOand its agreements now cover trade in services,and in traded inventions, creations and designs(intellectual property).

Chapter 1

Basics

‘[The Uruguay Round] will strengthen theworld economy and lead to more trade,investment, employment and incomegrowth throughout the world.’

Ministerial Declaration,concluding Uruguay Round,

Marrakesh, April 1994

’Multilateral’ trading system ...

... i.e. the system operated by the WTO. Mostnations — including almost all the main tradingnations — are members of the system. But someare not, so “multilateral” is used to describe thesystem instead of “global” or “world”.

In WTO affairs, “multilateral” also contrasts withactions taken regionally or by other smaller groupsof countries. (This is different from the word’s use inother areas of international relations where, forexample, a “multilateral” security arrangement canbe regional.)

Why is it called ’most-favoured’?

The name sounds like a contradiction. It suggests some kind of special treatment forone particular country, but in the WTO it actually means non-discrimination — treat-ing virtually everyone equally.

What happens under the WTO is this. Each member treats all the other membersequally as “most-favoured” trading partners. If a country improves the benefits that itgives to one trading partner, it has to give the same “best” treatment to all the otherWTO members so that they all remain “most-favoured”.

Most-favoured nation (MFN) status did not always mean equal treatment. In the 19thCentury, when a number of early bilateral MFN treaties were signed, being includedamong a country’s “most-favoured” trading partners was like being in an exclusiveclub because only a few countries enjoyed the privilege. Now, when most countriesare in the WTO, the MFN club is no longer exclusive. The MFN principle ensures thateach country treats its over-100 fellow-members equally.

But there are some exceptions ...

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2. Principles of the tradingsystem

The WTO agreements are lengthy and com-plex because they are legal texts covering a widerange of activities. They deal with: agriculture,textiles and clothing, banking, telecommunica-tions, government purchases, industrial stan-dards, food sanitation regulations, intellectualproperty, and much more. But a number of sim-ple, fundamental principles run throughout all ofthese documents. These principles are the foun-dation of the multilateral trading system.

A closer look at these principles:

The principles

The trading system should be ...

• without discrimination — a countryshould not discriminate between itstrading partners (they are all, equally,granted “most-favoured-nation” orMFN status); and it should not discrimi-nate between its own and foreign prod-ucts, services or nationals (they aregiven “national treatment”);

• freer — with barriers coming downthrough negotiation;

• predictable — foreign companies,investors and governments should beconfident that trade barriers (includingtariffs, non-tariff barriers and othermeasures) should not be raised arbitrar-ily; more and more tariff rates and mar-ket-opening commitments are “bound”in the WTO;

• more competitive — by discouraging“unfair” practices such as export subsi-dies and dumping products at belowcost to gain market share;

• more beneficial for less developedcountries — by giving them more timeto adjust, greater flexibility, and specialprivileges.

Trade without discrimination

1. Most-favoured-nation (MFN):treating other people equally

Under the WTO Agreements, countries can-not normally discriminate between their tradingpartners. Grant someone a special favour (suchas a lower customs duty rate for one of theirproducts) and you have to do the same for allother WTO members.

This principle is known as most-favoured-nation (MFN) treatment (see box). It is so impor-tant that it is the first article of the GeneralAgreement on Tariffs and Trade (GATT), whichgoverns trade in goods. MFN is also a priority inthe General Agreement on Trade in Services(GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights(TRIPS) (Article 4), although in each agreementthe principle is handled slightly differently.Together, those three agreements cover all threemain areas of trade handled by the WTO.

Some exceptions are allowed. For example,countries within a region can set up a free tradeagreement that does not apply to goods fromoutside the group. Or a country can raise barriersagainst products from specific countries that areconsidered to be traded unfairly. And in services,countries are allowed, in limited circumstances, todiscriminate. But the agreements only permitthese exceptions under strict conditions. In gene-ral, MFN means that every time a country lowers atrade barrier or opens up a market, it has to do sofor the same goods or services from all its tradingpartners — whether rich or poor, weak or strong.

2. National treatment: Treatingforeigners and locals equally

Imported and locally-produced goodsshould be treated equally — at least after theforeign goods have entered the market. Thesame should apply to foreign and domestic ser-vices, and to foreign and local trademarks, copy-rights and patents. This principle of “nationaltreatment” (giving others the same treatment asone’s own nationals) is also found in all thethree main WTO agreements (Article 3 of GATT,Article 17 of GATS and Article 3 of TRIPS),although once again the principle is handledslightly differently in each of these.

National treatment only applies once aproduct, service or item of intellectual propertyhas entered the market. Therefore, charging cus-toms duty on an import is not a violation ofnational treatment even if locally-producedproducts are not charged an equivalent tax.

Freer trade:gradually, through negotiation

Lowering trade barriers is one of the mostobvious means of encouraging trade. The bar-riers concerned include customs duties (or tariffs)and measures such as import bans or quotasthat restrict quantities selectively. From time totime other issues such as red tape and exchangerate policies have also been discussed.

Since GATT’s creation in 1947-48 therehave been eight rounds of trade negotiations. Atfirst these focused on lowering tariffs (customsduties) on imported goods. As a result of thenegotiations, by the late 1980s industrial coun-tries’ tariff rates on industrial goods had fallensteadily to about 6.3%.

But by the 1980s, the negotiations hadexpanded to cover non-tariff barriers on goods,and to the new areas such as services and intel-lectual property.

Opening markets can be beneficial, but italso requires adjustment. The WTO agreementsallow countries to introduce changes gradually,through “progressive liberalization”. Developingcountries are usually given longer to fulfil theirobligations.

Predictability: through binding

Sometimes, promising not to raise a tradebarrier can be as important as lowering one,because the promise gives businesses a clearerview of their future opportunities. With stabilityand predictability, investment is encouraged,jobs are created and consumers can fully enjoythe benefits of competition — choice and lowerprices. The multilateral trading system is anattempt by governments to make the businessenvironment stable and predictable.

In the WTO, when countries agree to opentheir markets for goods or services, they “bind”their commitments. For goods, these bindingsamount to ceilings on customs tariff rates.Sometimes countries tax imports at rates that arelower than the bound rates. Frequently this is thecase in developing countries. In developed coun-tries the rates actually charged and the boundrates tend to be the same.

A country can change its bindings, but onlyafter negotiating with its trading partners, whichcould mean compensating them for loss of trade.One of the achievements of the Uruguay Roundof multilateral trade talks was to increase theamount of trade under binding commitments(see table). In agriculture, 100% of productsnow have bound tariffs. The result of all this: asubstantially higher degree of market security fortraders and investors.

The system tries to improve predictabilityand stability in other ways as well. One way is todiscourage the use of quotas and other measuresused to set limits on quantities of imports— administering quotas can lead to more red-tape and accusations of unfair play. Another is tomake countries’ trade rules as clear and public(“transparent”) as possible. Many WTO agree-ments require governments to disclose their poli-cies and practices publicly within the country orby notifying the WTO. The regular surveillance ofnational trade policies through the Trade PolicyReview Mechanism provides a further means ofencouraging transparency both domestically andat the multilateral level.

The Uruguay Roundincreased bindings

Percentage, tariffs bound before and afterthe 1986-94 talks

Before After

Developed countries 78 99

Developing countries 21 73

Transition economies 73 98

(These are tariff lines, so percentages are notweighted according to trade volume or value)

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Promoting fair competition

The WTO is sometimes described as a “freetrade” institution, but that is not entirely accu-rate. The system does allow tariffs and, in limitedcircumstances, other forms of protection. Moreaccurately, it is a system of rules dedicated toopen, fair and undistorted competition.

The rules on non-discrimination — MFNand national treatment — are designed tosecure fair conditions of trade. So too are thoseon dumping (exporting at below cost to gainmarket share) and subsidies. The issues are com-

plex, and the rules try to establish what is fair orunfair, and how governments can respond, inparticular by charging additional import dutiescalculated to compensate for damage caused byunfair trade.

Many of the other WTO agreements aim tosupport fair competition: in agriculture, intellec-tual property, services, for example. The agree-ment on government procurement (a “plurilater-al” agreement because it is signed by only a fewWTO members) extends competition rules to pur-chases by thousands of “government” entities inmany countries. And so on.

Encouraging developmentand economic reform

It is widely recognized by economists andtrade experts that the WTO system contributes todevelopment. It is also recognized that the least-developed countries need flexibility in the timethey take to implement the agreements. And theagreements themselves inherit the earlier provi-sions of GATT that allow for special assistanceand trade concessions for developing countries.

Over three quarters of WTO members aredeveloping countries and countries in transitionto market economies. During the seven and ahalf years of the Uruguay Round, over 60 ofthese countries implemented trade liberalizationprogrammes autonomously. At the same time,developing countries and transition economieswere much more active and influential in theUruguay Round negotiations than in any pre-vious round.

This trend effectively killed the notion thatthe trading system existed only for industrializedcountries. It also changed the previous emphasison exempting developing countries from certainGATT provisions and agreements.

At the end of the Uruguay Round, develop-ing countries were prepared to take on most ofthe obligations that are required of developedcountries. But the agreements did give themtransition periods to adjust to the more unfamil-iar and, perhaps, difficult WTO provisions —particularly so for the poorest, “least-developed”countries. A ministerial decision adopted at theend of the round gives least developed countriesextra flexibility in implementing WTO agree-ments. It says better-off countries should accele-rate implementing market access commitmentson goods exported by the least-developed coun-tries, and it seeks increased technical assistancefor them.

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World trade and production have accelerated

Both trade and GDP fell in the late 1920s, before bottoming out in 1932. After WorldWar II, both have risen exponentially, most of the time with trade outpacing GDP.(1950 = 100. Trade and GDP: log scale)

3. The case for open trade

The economic case for an open trading sys-tem based upon multilaterally agreed rules issimple enough and rests largely on commercialcommon sense. But it is also supported by evi-dence: the experience of world trade and eco-nomic growth since the Second World War.Tariffs on industrial products have fallen steeplyand are now close to 4% on average in industri-al countries by 1 January 1999. During the firsttwo decades after the war, world economicgrowth averaged about 5% per year, a high ratethat was partly the result of lower trade barriers.World trade grew even faster, averaging about8% during the period.

The data show a definite statistical linkbetween freer trade and economic growth.Economic theory points to strong reasons for thelink. All countries, including the poorest, haveassets — human, industrial, natural, financial —which they can employ to produce goods andservices for their domestic markets or to competeoverseas. Economics tells us that we can benefitwhen these goods and services are traded.

Simply put, the principle of “comparative advan-tage” says that countries prosper first by takingadvantage of their assets in order to concentrateon what they can produce best, and then bytrading these products for products that othercountries produce best.

Firms do exactly that quite naturally on thedomestic market. But what about the interna-tional market? Most firms recognize that the big-ger the market the greater their potential— they can expand until they are at their mostefficient size, and they can have access to largenumbers of customers.

In other words, liberal trade policies— policies that allow the unrestricted flow ofgoods and services — multiply the rewards thatresult from producing the best products, with thebest design, at the best price.

But success in trade is not static. The abilityto compete well in particular products can shiftfrom company to company when the marketchanges or new technologies make cheaper andbetter products possible. Experience shows thatcompetitiveness can also shift between wholecountries. A country that may have enjoyed anadvantage because of lower labour costs orbecause it had good supplies of some naturalresources, could also become uncompetitive insome goods or services as its economy develops.However, with the stimulus of an open economy,the country can move on to become competitivein some other goods or services. This is normallya gradual process.

When the trading system is allowed tooperate without the constraints of protectionism,firms are encouraged to adapt gradually and in arelatively painless way. They can focus on newproducts, find a new “niche” in their currentarea or expand into new areas.

The alternative is protection against compe-tition from imports, and perpetual governmentsubsidies. That leads to bloated, inefficient com-panies supplying consumers with outdated, unat-tractive products. Ultimately, factories close andjobs are lost despite the protection and subsidies.If other governments around the world pursuethe same policies, markets contract and worldeconomic activity is reduced. One of the objec-tives of the WTO is to prevent such a self-defeat-ing and destructive drift into protectionism.

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Nobel laureate Paul Samuelson was oncechallenged by the mathematician

Stanislaw Ulam to “name me one proposi-tion in all of the social sciences which is

both true and non-trivial.”It took Samuelson several years to findthe answer — comparative advantage.

“That it is logically true need not beargued before a mathematician; that it isnot trivial is attested by the thousands ofimportant and intelligent men who have

never been able to grasp the doctrine forthemselves or to believe it after it was

explained to them.”

The GATT trade rounds

Year Place/ Subjects covered Countriesname

1947 Geneva Tariffs 23

1949 Annecy Tariffs 13

1951 Torquay Tariffs 38

1956 Geneva Tariffs 26

1960-1961 Geneva Tariffs 26(DillonRound)

1964-1967 Geneva Tariffs and anti-dumping measures 62(KennedyRound)

1973-1979 Geneva Tariffs, non-tariff measures, 102(Tokyo “framework” agreementsRound)

1986-1994 Geneva Tariffs, non-tariff measures, 123(Uruguay rules, services, intellectual property,Round) dispute settlement, textiles, agriculture,

creation of WTO, etc

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4. Roots: from Havanato Marrakesh

The WTO’s creation on 1 January 1995marked the biggest reform of international tradesince after the Second World War. It alsobrought to reality — in an updated form — thefailed attempt to create an International TradeOrganization in 1948. Up to 1994, the tradingsystem came under GATT, salvaged from theaborted attempt to create the ITO. GATT helpedestablish a strong and prosperous multilateraltrading system that became more and moreliberal through rounds of trade negotiations.But by the 1980s the system needed a thoroughoverhaul. This led to the Uruguay Round, andultimately to the WTO.

GATT: ’provisional’ for almost halfa century

From 1948 to 1994, the General Agreementon Tariffs and Trade (GATT) provided the rulesfor much of world trade and presided over peri-ods that saw some of the highest growth rates ininternational commerce. It seemed well-estab-lished, but throughout those 47 years, it was aprovisional agreement and organization.

The original intention was to create a thirdinstitution handling international economic co-operation, to join the “Bretton Woods” institu-

tions now known as the World Bank and theInternational Monetary Fund. The complete plan,as envisaged by over 50 countries, was to createan International Trade Organization (ITO) as aspecialized agency of the United Nations. Thedraft ITO Charter was ambitious. It extendedbeyond world trade disciplines, to include ruleson employment, commodity agreements, restric-tive business practices, international investment,and services.

Even before the charter was finallyapproved, 23 of the 50 participants decided in1946 to negotiate to reduce and bind customstariffs. With the Second World War only recentlyended, they wanted to give an early boost totrade liberalization, and to begin to correct thelarge legacy of protectionist measures whichremained in place from the early 1930s.

This first round of negotiations resulted in45,000 tariff concessions affecting $10 billion oftrade, about one fifth of the world’s total. The23 also agreed that they should accept some ofthe trade rules of the draft ITO Charter. This,they believed, should be done swiftly and “provi-sionally” in order to protect the value of the tar-iff concessions they had negotiated. The com-bined package of trade rules and tariffconcessions became known as the GeneralAgreement on Tariffs and Trade. It entered intoforce in January 1948, while the ITO Charter wasstill being negotiated. The 23 became foundingGATT members (officially, “contracting parties”).

Comparative advantage

What did the classicaleconomist DavidRicardo mean when hecoined the term com-parative advantage?

Suppose country A isbetter than country B

at making automobiles, and country B isbetter than country A at making bread.It is obvious (the academics would say“trivial”) that both would benefit ifA specialized in automobiles, B specializedin bread and they traded their products.That is a case of absolute advantage.

But what if a country is bad at makingeverything? Will trade drive all producersout of business? The answer, accordingto Ricardo, is no. The reason is the princi-ple of comparative advantage, arguablythe single most powerful insight ineconomics.

According to the principle of comparativeadvantage, countries A and B still stand tobenefit from trading with each other evenif A is better than B at making everything,both automobiles and bread. If A is muchmore superior at making automobiles andonly slightly superior at making bread,then A should still invest resources inwhat it does best — producing automo-biles — and export the product to B.B should still invest in what it does best— making bread — and export thatproduct to A, even if it is not as efficientas A. Both would still benefit from thetrade. A country does not have to be bestat anything to gain from trade. That iscomparative advantage.

The theory is one of the most widelyaccepted among economists. It is also oneof the most misunderstood among non-economists because it is confused withabsolute advantage. It is often claimed,for example, that some countries have nocomparative advantage in anything. Thatis virtually impossible. Think about it ...

Although the ITO Charter was finally agreedat a UN Conference on Trade and Employment inHavana in March 1948, ratification in somenational legislatures proved impossible. The mostserious opposition was in the US Congress, eventhough the US government had been one of thedriving forces. In 1950, the United States’ gov-ernment announced that it would not seekCongressional ratification of the Havana Charter,and the ITO was effectively dead. Even though itwas provisional, the GATT remained the onlymultilateral instrument governing internationaltrade from 1948 until the WTO was establishedin 1995.

For almost half a century, the GATT’s basiclegal text remained much as it was in 1948.There were additions in the form of “plurilateral”agreements (i.e. with voluntary membership),and efforts to reduce tariffs further continued.Much of this was achieved through a series ofmultilateral negotiations known as “traderounds” — the biggest leaps forward in interna-tional trade liberalization have come throughthese rounds which were held under GATT’s aus-pices.

In the early years, the GATT trade roundsconcentrated on further reducing tariffs. Then,the Kennedy Round in the mid-sixties broughtabout a GATT Anti-Dumping Agreement. TheTokyo Round during the seventies was the firstmajor attempt to tackle trade barriers that donot take the form of tariffs, and to improve thesystem. The eighth, the Uruguay Round of 1986-94, was the latest and most extensive of all. Itled to the WTO and a new set of agreements.

The Tokyo Round:a first try to reform the system

The Tokyo Round lasted from 1973 to1979, with 102 countries participating. It contin-ued GATT’s efforts to progressively reduce tariffs.The results included an average one-third cut incustoms duties in the world’s nine major indus-trial markets, bringing the average tariff onindustrial products down to 4.7%. The tariffreductions, phased in over a period of eightyears, involved an element of “harmonization”— the higher the tariff, the larger the cut, pro-portionally.

In other issues, the Tokyo Round had mixedresults. It failed to come to grips with the funda-mental problems affecting farm trade and alsostopped short of providing a new agreement on“safeguards” (emergency import measures).Nevertheless, a series of agreements on non-tariff barriers did emerge from the negotiations,in some cases interpreting existing GATT rules,in others breaking entirely new ground. In mostcases, only a relatively small number of (mainlyindustrialized) GATT members subscribed tothese agreements and arrangements. Becausethey were not accepted by the full GATT mem-bership, they were often informally called“codes”.

They were not multilateral, but they were abeginning. Several codes were eventuallyamended in the Uruguay Round and turned intomultilateral commitments accepted by all WTOmembers. Only four remained “plurilateral” —those on government procurement, bovine meat,civil aircraft and dairy products. In 1997 WTOmembers agreed to terminate the bovine meatand dairy agreements from the end of the year.

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The Tokyo Round ’codes’

• Subsidies and countervailing measures— interpreting Articles 6, 16 and 23 ofGATT

• Technical barriers to trade — some-times called the Standards Code

• Import licensing procedures• Government procurement• Customs valuation — interpreting

Article 7• Anti-dumping — interpreting Article 6,

replacing the Kennedy Round code• Bovine Meat Arrangement• International Dairy Arrangement• Trade in Civil Aircraft

The trade chiefs

The directors-general of GATT and WTO

• Sir Eric Wyndham White (UK) 1948-68

• Olivier Long (Switzerland) 1968-80

• Arthur Dunkel (Switzerland) 1980-93

• Peter Sutherland (Ireland)GATT 1993-94; WTO 1995

• Renato Ruggiero (Italy) 1995-1999

Trade rounds: progress by package

They are often lengthy — the Uruguay Round took seven and a half years — buttrade rounds can have an advantage. They offer a package approach to trade negoti-ations that can sometimes be more fruitful than negotiations on a single issue.

• The size of the package can mean more benefits because participants can seek andsecure advantages across a wide range of issues.

• In a package, the ability to trade-off different issues can make agreement easier toreach because somewhere in the package there is something for everyone. Thishas political as well as economic implications. Concessions (perhaps in one sector)which are necessary but would otherwise be difficult to defend in domestic politicalterms, can be made more easily in the context of a package because the packagealso contains politically and economically attractive benefits (in other sectors). As aresult, reform in politically-sensitive sectors of world trade can be more feasible inthe context of a global package — reform of agricultural trade was a good exam-ple in the Uruguay Round.

• Developing countries and other less powerful participants have a greater chance ofinfluencing the multilateral system in a trade round than in bilateral relationshipswith major trading nations.

But the wide range of issues that a trade round covers can be both a strength and aweakness, leading to a debate on the effectiveness of multi-sector rounds versussingle-sector negotiations. Recent history is ambiguous. At some stages, the UruguayRound seemed so cumbersome that agreement in every subject by all participatingcountries appeared impossible. Then the round did end successfully in 1993-94, andthis was followed by two years of failure to reach any major agreement in separate,single-sector talks on maritime transport, basic telecommunications and financialservices.

Did this mean that trade rounds were the only route to success? No. In 1997, single-sector talks were concluded successfully in basic telecommunications, informationtechnology equipment and financial services. The debate continues. Whatever theanswer, the reasons are not straightforward. Perhaps success depends on using theright type of negotiation for the particular time and context.

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Did GATT succeed?

GATT was provisional with a limited field ofaction, but its success over 47 years in promot-ing and securing the liberalization of much ofworld trade is incontestable. Continual reduc-tions in tariffs alone helped spur very high ratesof world trade growth during the 1950s and1960s — around 8% a year on average. Andthe momentum of trade liberalization helpedensure that trade growth consistently out-pacedproduction growth throughout the GATT era, ameasure of countries’ increasing ability to tradewith each other and to reap the benefits oftrade. The rush of new members during theUruguay Round demonstrated that the multilat-eral trading system was recognized as an anchorfor development and an instrument of economicand trade reform. But as time passed new prob-lems arose. The Tokyo Round was an attempt totackle some of these but its achievements werelimited. This was a sign of difficult times tocome.

GATT’s success in reducing tariffs to such alow level, combined with a series of economicrecessions in the 1970s and early 1980s, drovegovernments to devise other forms of protectionfor sectors facing increased foreign competition.High rates of unemployment and constant fac-tory closures led governments in Western Europeand North America to seek bilateral market-shar-ing arrangements with competitors and toembark on a subsidies race to maintain theirholds on agricultural trade. Both these changesundermined GATT’s credibility and effectiveness.

The problem was not just a deterioratingtrade policy environment. By the early 1980s theGeneral Agreement was clearly no longer as rele-vant to the realities of world trade as it had beenin the 1940s. For a start, world trade hadbecome far more complex and important than 40years before: the globalization of the world econ-omy was underway, trade in services — not cov-ered by GATT rules — was of major interest tomore and more countries, and internationalinvestment had expanded. The expansion of ser-vices trade was also closely tied to furtherincreases in world merchandise trade. In otherrespects, GATT had been found wanting. Forinstance, in agriculture, loopholes in the multilat-eral system were heavily exploited, and efforts atliberalizing agricultural trade met with little suc-

cess. In the textiles and clothing sector, anexception to GATT’s normal disciplines wasnegotiated in the 1960s and early 1970s, lead-ing to the Multifibre Arrangement. Even GATT’sinstitutional structure and its dispute settlementsystem were giving cause for concern.

These and other factors convinced GATTmembers that a new effort to reinforce andextend the multilateral system should beattempted. That effort resulted in the UruguayRound, the Marrakesh Declaration, and the cre-ation of the WTO.

5. The Uruguay Round

It took seven and a half years, almost twicethe original schedule. By the end, 123 countrieswere taking part. It covered almost all trade,from toothbrushes to pleasure boats, from bank-ing to telecommunications, from the genes ofwild rice to AIDS treatments. It was quite simplythe largest trade negotiation ever, and mostprobably the largest negotiation of any kind inhistory.

At times it seemed doomed to fail. But inthe end, the Uruguay Round brought about thebiggest reform of the world’s trading systemsince GATT was created at the end of the SecondWorld War. And yet, despite its troubledprogress, the Uruguay Round did see some earlyresults. Within only two years, participants hadagreed on a package of cuts in import duties ontropical products — which are mainly exportedby developing countries. They had also revisedthe rules for settling disputes, with some mea-sures implemented on the spot. And they calledfor regular reports on GATT members’ trade poli-cies, a move considered important for makingtrade regimes transparent around the world.

A round to end all rounds?

The seeds of the Uruguay Round were sownin November 1982 at a ministerial meeting ofGATT members in Geneva. Although the minis-ters intended to launch a major new negotiation,the conference stalled on the issue of agricultureand was widely regarded as a failure. In fact, thework programme that the ministers agreedformed the basis for what was to become theUruguay Round negotiating agenda.

Nevertheless, it took four more years ofexploring, clarifying issues and painstaking con-sensus-building, before ministers agreed tolaunch the new round. They did so in September1986, in Punta del Este, Uruguay. They eventual-ly accepted a negotiating agenda which covered

virtually every outstanding trade policy issue. Thetalks were going to extend the trading systeminto several new areas, notably trade in servicesand intellectual property, and to reform trade inthe sensitive sectors of agriculture and textiles.All the original GATT articles were up for review.It was the biggest negotiating mandate on tradeever agreed, and the ministers gave themselvesfour years to complete it.

Two years later, in December 1988, minis-ters met again in Montreal, Canada for whatwas supposed to be an assessment of progressat the round’s half-way point. The purpose wasto clarify the agenda for the remaining twoyears, but the talks ended in a deadlock that wasnot resolved until officials met more quietly inGeneva the following April.

Despite the difficulty, during the Montrealmeeting, ministers did agree a package of earlyresults. These included some concessions onmarket access for tropical products — aimed atassisting developing countries — as well as astreamlined dispute settlement system, and theTrade Policy Review Mechanism which providedfor the first comprehensive, systematic and regu-lar reviews of national trade policies and prac-tices of GATT members. The round was sup-posed to end when ministers met once more inBrussels, in December 1990. But they disagreedon how to reform agricultural trade and decidedto extend the talks. The Uruguay Round enteredits bleakest period.

Despite the poor political outlook, a consid-erable amount of technical work continued, lead-ing to the first draft of a final legal agreement.This draft “Final Act” was compiled by the thenGATT director general, Mr Arthur Dunkel, whochaired the negotiations at officials’ level. It was

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The agendaThe 15 original Uruguay Round subjects

TariffsNon-tariff barriersNatural resource productsTextiles and clothingAgricultureTropical productsGATT articlesTokyo Round codesAnti-dumpingSubsidiesIntellectual propertyInvestment measuresDispute settlementThe GATT systemServices

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put on the table in Geneva in December 1991.The text fulfilled every part of the Punta del Estemandate, with one exception — it did not con-tain the participating countries’ lists of commit-ments for cutting import duties and openingtheir services markets. The draft became thebasis for the final agreement.

For the following two years, the negotia-tions lurched between impending failure, to pre-dictions of imminent success. Several deadlinescame and went. New points of major conflictemerged to join agriculture: services, marketaccess, anti-dumping rules, and the proposedcreation of a new institution. Differencesbetween the United States and EuropeanCommunities (EU) became central to hopes for afinal, successful conclusion.

In November 1992, the US and EU settledmost of their differences on agriculture in a dealknown informally as the “Blair House accord”.By July 1993 the “Quad” (US, EU, Japan andCanada) announced significant progress in nego-tiations on tariffs and related subjects (“market

The Uruguay Round – Key dates

Sep 86 Punta del Este: launch

Dec 88 Montreal: ministerial mid-term review

Apr 89 Geneva: mid-term review completed

Dec 90 Brussels: “closing” ministerial meetingends in deadlock

Dec 91 Geneva: first draft of Final Act completed

Nov 92 Washington: US and EC achieve “BlairHouse” breakthrough on agriculture

Jul 93 Tokyo: Quad achieve market accessbreakthrough at G7 summit

Dec 93 Geneva: most negotiations end (somemarket access talks remain)

Apr 94 Marrakesh: agreements signed

Jan 95 Geneva: WTO created, agreements takeeffect

access”). It took until 15 December 1993 forevery issue to be finally resolved and for negotia-tions on market access for goods and services tobe concluded (although some final touches werecompleted in talks on market access a few weekslater). On 15 April 1994, the deal was signed byministers from most of the 123 participating gov-ernments at a meeting in Marrakesh, Morocco.

The delay had some merits. It allowed somenegotiations to progress further than would havebeen possible in 1990: for example some aspectsof services and intellectual property, and the cre-ation of the WTO itself. But the task had beenimmense, and negotiation-fatigue was felt intrade bureaucracies around the world. The diffi-culty of reaching agreement on a complete pack-age containing almost the entire range of currenttrade issues led some to conclude that a negotia-tion on this scale would never again be possible.Yet, the Uruguay Round agreements containtimetables for new negotiations on a number oftopics. And by 1996, some countries were open-ly calling for a new round early in the next cen-tury. The response was mixed; but theMarrakesh agreement does already include com-mitments to reopen negotiations on a range ofsubjects at the turn of the century. They are nowunderway.

6. WTO and GATT:are they the same?

No. They are different — the WTO is GATTplus a lot more.

Two GATTs

It is probably best to be clear from the startthat the General Agreement on Tariffs and Trade(GATT) was two things: (1) an internationalagreement, i.e. a document setting out the rulesfor conducting international trade, and (2) aninternational organization created later to sup-port the agreement. The text of the agreementcould be compared to law, the organization waslike parliament and the courts combined in a sin-gle body.

As its history shows, the attempt to create afully fledged international trade agency in the1940s failed. But GATT’s drafters agreed thatthey wanted to use the new rules and disciplines,if only provisionally. Then government officialsneeded to meet to discuss issues related to theagreement, and to hold trade negotiations.These needed secretarial support, leading to thecreation of an ad hoc organization — that con-tinued to exist for almost half a century.

GATT, the international agency, no longerexists. It has now been replaced by the WorldTrade Organization.

GATT, the agreement, does still exist, but itis no longer the main set of rules for interna-tional trade. And it has been updated.

What happened? When GATT was createdafter the Second World War, international com-merce was dominated by trade in goods. Sincethen, trade in services — transport, travel, bank-ing, insurance, telecommunications, transport,consultancy and so on — has become muchmore important. So has trade in ideas — inven-tions and designs, and goods and services incor-porating this “intellectual property”.

The General Agreement on Tariffs andTrade always dealt with trade in goods, and itstill does. It has been amended and incorporatedinto the new WTO agreements. The updatedGATT lives alongside the new GeneralAgreement on Trade in Services (GATS) andAgreement on Trade-Related Aspects ofIntellectual Property Rights (TRIPS). The WTObrings the three together within a single organi-zation, a single set of rules and a single systemfor resolving disputes.

In short, the WTO is not a simple extensionof GATT. It is much more.

So, the GATT is dead,long live the GATT!

While GATT no longer exists as an interna-tional organization, the GATT agreement liveson. The old text is now called “GATT 1947”. Theupdated version is called “GATT 1994”.

Moreover, GATT’s key principles have beenadopted by the agreements on services and intel-lectual property. These include non-discrimina-tion, transparency and predictability. As the moremature WTO developed out of GATT, you couldsay that the child is the father of the man.

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The main differences

• GATT was ad hoc and provisional. TheGeneral Agreement was never ratifiedin members’ parliaments, and it con-tained no provisions for the creation ofan organization.The WTO and its agreements are perma-nent. As an international organization,the WTO has a sound legal basisbecause members have ratified theWTO agreements, and the agreementsthemselves describe how the WTO is tofunction.

• The WTO has “members”. GATT had“contracting parties”, underscoring thefact that officially GATT was a legaltext.

• GATT dealt with trade in goods. TheWTO covers services and intellectualproperty as well.

• The WTO dispute settlement system isfaster, more automatic than the oldGATT system. Its rulings cannot beblocked.

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1. Overview:a navigational guide

The WTO Agreements cover goods, servicesand intellectual property. They spell out the prin-ciples of liberalization, and the permitted excep-tions. They include individual countries’ commit-ments to lower customs tariffs and other tradebarriers, and to open and keep open servicesmarkets. They set procedures for settling dis-putes. They prescribe special treatment for devel-oping countries. They require governments tomake their trade policies transparent by notifyingthe WTO about laws in force and measuresadopted, and through regular reports by the sec-retariat on countries’ trade policies.

The table of contents of “The Results of theUruguay Round of Multilateral TradeNegotiations: The Legal Texts” is a daunting listof about 60 agreements, annexes, decisions andunderstandings. In fact, the agreements fall intoa simple structure.

Three-part broad outline

The agreements for the two largest areas oftrade — goods and services — share a commonthree-part outline, even though the detail issometimes quite different.

• They start with broad principles: the GeneralAgreement on Tariffs and Trade (GATT) (forgoods), and the General Agreement on Tradein Services (GATS). (The agreement on Trade-Related Aspects of Intellectual Property Rights(TRIPS) also falls into this category although atpresent it has no additional parts.)

• Then come extra agreements and annexesdealing with the special requirements of spe-cific sectors or issues.

• Finally, there are the detailed and lengthyschedules (or lists) of commitments made byindividual countries allowing specific foreignproducts or service-providers access to theirmarkets. For GATT, these take the form ofbinding commitments on tariffs for goods ingeneral, and combinations of tariffs and quo-tas for some agricultural goods. For GATS, thecommitments state how much access foreignservice providers are allowed for specific sec-tors, and they include lists of types of serviceswhere individual countries say they are notapplying the “most-favoured-nation” principleof non-discrimination.

Much of the Uruguay Round dealt with thefirst two parts: general principles and principlesfor specific sectors. At the same time, marketaccess negotiations were possible for industrialgoods. Once the principles had been worked out,negotiations could proceed on the commitments

Chapter 2

The Agreements

The ’additional details’

These agreements and annexes deal withthe following specific sectors or issues:

For goods (under GATT)

• Agriculture• Health regulations for farm products

(SPS)• Textiles and clothing• Product standards (TBT)• Investment measures• Anti-dumping measures• Customs valuation methods• Preshipment inspection• Rules of origin• Import licensing• Subsidies and counter-measures• Safeguards

For services (the GATS annexes)

• Movement of natural persons• Air transport• Financial services• Shipping• Telecommunications

for sectors such as agriculture and services.Negotiations after the Uruguay Round havefocused largely on market access commitments:financial services, basic telecommunications, andmaritime transportation (under GATS), and infor-mation technology (under GATT).

Additional agreements

Two other groups of agreements notincluded in the diagram are also important: theagreement on trade policy reviews, and the two“plurilateral” agreements not signed by all mem-bers: civil aircraft and government procurement.

In a nutshellThe basic structure of the WTO Agreements

Goods ServicesIntellectual

Disputesproperty

BasicGATT GATS TRIPS

Disputeprinciples settlement

Additional Other goods Servicesdetails agreements annexes

and annexes

Market access Countries’ Countries’commitments schedules schedules

of commitments of commitments(and MFN

exemptions)

’Binding’ tariffs

The market access schedules are not simplyannouncements of tariff rates. They represent com-mitments not to increase tariffs above the listedrates — the rates are “bound”. For developedcountries, the bound rates are generally the ratesactually charged. Most developing countries havebound the rates somewhat higher than the actualrates charged, so the bound rates serve as ceilings.

Countries can break a commitment (i.e. raise a tariffabove the bound rate), but only with difficulty. Todo so they have to negotiate with the countriesmost concerned and that could result in compensa-tion for trading partners’ loss of trade.

2. Tariffs: more bindingsand closer to zero

The bulkiest result of Uruguay Round arethe 22,500 pages listing individual countries’commitments on specific categories of goodsand services. These include commitments to cutand “bind” their customs duty rates on importsof goods. In some cases, tariffs are being cut tozero — with zero rates also committed in 1997on information technology products. There isalso a significant increase in the number of“bound” tariffs — duty rates that are committedin the WTO and are difficult to raise.

Tariff cuts

Developed countries’ tariff cuts are for themost part being phased in over five years from 1January 1995. The result will be a 40% cut intheir tariffs on industrial products, from an aver-age of 6.3% to 3.8%. The value of importedindustrial products that receive duty-free treat-ment in developed countries will jump from 20%to 44%.

There will also be fewer products chargedhigh duty rates. The proportion of imports intodeveloped countries from all sources facing tar-iffs rates of more than 15% will decline from 7%to 5%. The proportion of developing countryexports facing tariffs above 15% in industrialcountries will fall from 9% to 5%.

The Uruguay Round package has now beenimproved. On 26 March 1997, 40 countriesaccounting for more than 92% of world trade in

information technology products, agreed toeliminate import duties and other charges onthese products by 2000 (by 2005 in a handfulof cases). As with other tariff commitments, eachparticipating country is applying its commitmentsequally to exports from all WTO members (i.e. ona most-favoured-nation basis), even from mem-bers that did not make commitments.

More bindings

Developed countries increased the numberof imports whose tariff rates are “bound” (com-mitted and difficult to increase) from 78% ofproduct lines to 99%. For developing countries,the increase was considerable: from 21% to73%. Economies in transition from central plan-ning increased their bindings from 73% to 98%.This all means a substantially higher degree ofmarket security for traders and investors.

And agriculture ...

Tariffs on all agricultural products are nowbound. Almost all import restrictions that did nottake the form of tariffs, such as quotas, havebeen converted to tariffs — a process known as“tariffication”. This has made markets substan-tially more predictable for agriculture. Previouslymore than 30% of agricultural produce hadfaced quotas or import restrictions. At first, theywere converted to tariffs that represented aboutthe same level of protection as the previousrestrictions, but over six years these tariffs aregradually being reduced. The market access com-mitments on agriculture will also eliminate previ-ous import bans on certain products.

The lists also include countries’ commit-ments to reduce domestic support and exportsubsidies for agricultural products.

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What is this agreement called? There is no legallybinding agreement that sets out the targets for tariffreductions (e.g. by what percentage they were to becut as a result of the Uruguay Round).At the end of the Uruguay Round, individual countrieslisted their commitments in schedules annexed toMarrakesh Protocol to the General Agreement onTariffs and Trade 1994. This is the legally bindingagreement for the reduced tariff rates.

Numerical targets for cutting subsidies and protectionThe reductions in agricultural subsidies and protection agreed in the Uruguay Round.

Only the figures for cutting export subsidies appear in the agreement.

Developed countries Developing countries6 years: 1995-2000 10 years: 1995-2004

Tariffsaverage cut

for all agricultural products –36% –24%minimum cut per product –15% –10%

Domestic supporttotal AMS cuts for sectorbase period: 1986-88) –20% –13%

Exportsvalue of subsidies –36% –24%subsidized quantities(base period: 1986-90) –21% –14%

Least developed countries do not have to make commitments to reduce tariffs or sub-sidies.

The base level for tariff cuts was the bound rate before 1 January 1995; or, for unboundtariffs, the actual rate charged in September 1986 when the Uruguay Round began.

The other figures were targets used to calculate countries’ legally-binding “sched-ules” of commitments.

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“Peace” provisions within the agreementaim to reduce the likelihood of disputes or chal-lenges on agricultural subsidies over a period ofnine years.

Market access: ’tariffs only’, please

The new rule for market access in agricul-tural products is “tariffs only”. Before theUruguay Round, some agricultural imports wererestricted by quotas and other non-tariff mea-sures. These have been replaced by tariffs thatprovide more-or-less equivalent levels of protec-tion — if the previous policy meant domesticprices were 75% higher than world prices, thenthe new tariff could be around 75%. (Convertingthe quotas and other types of measures to tariffsin this way was called “tariffication”.)

The package contained more. It ensured thatquantities imported before the agreement tookeffect could continue to be imported, and it guaran-teed that some new quantities were charged dutyrates that were not prohibitive. This was achievedby a system of “tariff-quotas” — lower tariff ratesfor specified quantities, higher (sometimes muchhigher) rates for quantities that exceed the quota.

3. Agriculture:fairer markets for farmers

The original GATT did apply to agriculturaltrade, but it contained loopholes. For example, itallowed countries to use some non-tariff mea-sures such as import quotas, and to subsidize.Agricultural trade became highly distorted, espe-cially with the use of export subsidies whichwould not normally have been allowed for indus-trial products. The Uruguay Round agreement isa significant first step towards order, fair compe-tition and a less distorted sector. It is beingimplemented over a six year period (10 years fordeveloping countries), that began in 1995.1 January 1995 to 31 December 2000.Participants have agreed to initiate negotiationsfor continuing the reform process one yearbefore the end of the implementation period.

What is this agreement called? Most provisions:Agreement on Agriculture. Commitments on tariffs,tariff quotas, domestic supports, export subsidies: inschedules annexed to the Marrakesh Protocol to theGeneral Agreement on Tariffs and Trade 1994. Also:Agreement on the Application of Sanitary andPhytosanitary Measures, and [Ministerial] Decision onMeasures Concerning the Possible Negative Effects ofthe Reform Programme on Least-Developed and NetFood-Importing Developing Countries. (See also:“Modalities for the establishment of specific bindingcommitments under the reform programme”,MTN.GNG/MA/W/24.)

New rules and commitments

The objective of the Agriculture Agreementis to reform trade in the sector and to make poli-cies more market-oriented. This would improvepredictability and security for importing andexporting countries alike.

The new rules and commitments apply to:• market access — various trade restrictions

confronting imports• domestic support — subsidies and other pro-

grammes, including those that raise or guar-antee farmgate prices and farmers’ incomes

• export subsidies and other methods used tomake exports artificially competitive.

The agreement does allow governments tosupport their rural economies, but preferablythrough policies that cause less distortion totrade. It also allows some flexibility in the waycommitments are implemented. Developing coun-tries do not have to cut their subsidies or lowertheir tariffs as much as developed countries, andthey are given extra time to complete their oblig-ations. Special provisions deal with the interestsof countries that rely on imports for their foodsupplies, and the least developed economies.

A tariff-quotaThis is what a tariff-quota might look like

Tariff rate Quota limit

Out-of-quota80%

Import quantity1,000tons

10%Charged 10%

Charged 80%

Imports entering under the tariff-quota (up to 1,000 tons) are generally charged10%. Imports entering outside the tariff-quota are charged 80%. Under the UruguayRound agreement, the 1,000 tons would be based on actual imports in the base peri-od or an agreed “minimum access” formula.

Tariff quotas are also called “tariff-rate quotas”.

In-quota

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What is ’distortion’?

The concept of “distortion” is used a lotwhen agricultural trade is discussed.Essentially, trade is distorted if prices arehigher or lower than normal, and if quan-tities produced, bought, and sold are alsohigher or lower than normal — i.e. thanthe levels that would usually exist in acompetitive market.

For example, import barriers and domesticsubsidies can raise crop prices on a coun-try’s internal market. The higher pricescan encourage over-production, and if thesurplus is to be sold on world markets,where prices are lower, then export subsi-dies have to be paid. When some coun-tries subsidize and others do not, theresult can be that the subsidizing coun-tries are producing considerably morethan they normally would.

Governments usually give three reasonsfor supporting and protecting their farm-ers, even if this distorts agricultural trade:

• to make sure that enough food is pro-duced to meet the country’s needs

• to shield farmers from the effects of theweather and swings in world prices

• to preserve rural society.

But the policies have often been expen-sive, and they have encouraged glutsleading to export subsidy wars. Countrieswith less money for subsidies have suf-fered. In negotiations, some countrieshave argued that trying to meet any ofthese objectives is counter-productive.Others have attempted to find ways ofmeeting the objectives without distortingtrade too much.

The newly committed tariffs and tariff quo-tas, covering all agricultural products, took effectin 1995. Uruguay Round participants agreed thatdeveloped countries would cut the tariffs (thehigher out-of-quota rates in the case of tariff-quotas) by an average of 36%, in equal stepsover six years. Developing countries would make24% cuts over 10 years. Several developingcountries also used the option of offering ceilingtariff rates in cases where duties were not“bound” (i.e. committed under GATT or WTOregulations) before the Uruguay Round. Leastdeveloped countries do not have to cut their tar-iffs. (These figures do not actually appear in theAgriculture Agreement. Participants used themto prepare their schedules — i.e. lists of commit-ments. It is the commitments listed in the sched-ules that are legally binding.)

For products whose non-tariff restrictionshave been converted to tariffs, governments areallowed to take special emergency actions(“safeguards”) in order to prevent swiftly fallingprices or surges in imports from hurting theirfarmers. But the agreement specifies when andhow those emergency actions can be introduced(for example, they cannot be used on importswithin a tariff-quota). Four countries used “spe-cial treatment” provisions to restrict imports of

particularly sensitive products (mainly rice) dur-ing the implementation period, but subject tostrictly defined conditions, including minimumaccess for overseas suppliers. The four are:Japan, Rep. of Korea, and the Philippines forrice; and Israel for sheepmeat, wholemilk pow-der and certain cheeses.

Domestic support:some you can, some you can’t

The main complaint about policies whichsupport domestic prices, or subsidize productionin some other way, is that they encourage over-production. This squeezes out imports or leads toexport subsidies and low-priced dumping onworld markets. The Agriculture Agreement dis-tinguishes between support programmes thatstimulate production directly, and those that areconsidered to have no direct effect.

Domestic policies that do have a directeffect on production and trade have to be cutback. WTO members have calculated how muchsupport of this kind they were providing (usingcalculations known as “total aggregate mea-surement of support” or “Total AMS”) for theagricultural sector per year in the base years of1986-88. Developed countries have agreed toreduce these figures by 20% over six years start-ing in 1995. Developing countries are making13% cuts over 10 years. Least developed coun-tries do not need to make any cuts.

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A separate agreement on food safety andanimal and plant health standards (sanitary andphytosanitary measures) sets out the basic rules.

It allows countries to set their own stan-dards. But it also says regulations must be basedon science. They should be applied only to theextent necessary to protect human, animal orplant life or health. And they should not arbitrar-ily or unjustifiably discriminate between countrieswhere identical or similar conditions prevail.

Member countries are encouraged to useinternational standards, guidelines and recom-mendations where they exist. However, membersmay use measures which result in higher stan-dards if there is scientific justification. They canalso set higher standards based on appropriateassessment of risks so long as the approach isconsistent, not arbitrary.

The agreement still allows countries to usedifferent standards and different methods ofinspecting products. So how can an exportingcountry be sure the practices it applies to itsproducts are acceptable in an importing country?If an exporting country can demonstrate that themeasures it applies on its exports achieve thesame level of health protection as in the import-ing country, then the importing country isexpected to accept the exporting country’s stan-dards and methods.

The agreement includes provisions on con-trol, inspection and approval procedures.Governments must provide advance notice ofnew or changed sanitary and phytosanitary regu-lations, and establish a national enquiry point toprovide information. The agreement comple-ments that on technical barriers to trade.

The least developed and thosedepending on food imports

Under the Agriculture Agreement, WTOmembers have to reduce their subsidized exports.But some countries have been highly dependenton supplies of cheap, subsidized food importedfrom the major industrialized nations. Theyinclude some of the poorest countries, andalthough their farming sectors might receive aboost from higher prices, they might need tempo-rary assistance to make the necessary adjustmentsto deal with higher priced imports, and eventuallyto export. A special ministerial decision sets outobjectives, and certain measures, for the provisionof food aid and aid for agricultural development.It also refers to the possibility of assistance fromthe International Monetary Fund and the WorldBank to finance commercial food imports.

Measures with minimal impact on trade canbe used freely — they are in a “green box”(“green” as in traffic lights). They include gov-ernment services such as research, disease con-trol, infrastructure and food security. They alsoinclude payments made directly to farmers thatdo not stimulate production, such as certainforms of direct income support, assistance tohelp farmers restructure agriculture, and directpayments under environmental and regionalassistance programmes.

Also permitted, are certain direct paymentsto farmers where the farmers are required to limitproduction (sometimes called “blue box” mea-sures), certain government assistance pro-grammes to encourage agricultural and ruraldevelopment in developing countries, and othersupport on a small scale when compared with thetotal value of the product or products supported(5% or less in the case of developed countriesand 10% or less for developing countries).

Export subsidies:limits on spending and quantities

The Agriculture Agreement prohibits exportsubsidies on agricultural products unless the sub-sidies are specified in a member’s lists of com-mitments. Where they are listed, the agreementrequires WTO members to cut both the amountof money they spend on export subsidies and thequantities of exports that receive subsidies.Taking averages for 1986-90 as the base level,developed countries have agreed to cut the valueof export subsidies by 36% over the six yearsstarting in 1995 (24% over 10 years for develop-ing countries). Developed countries have alsoagreed to reduce the quantities of subsidizedexports by 21% over the six years (14% over 10years for developing countries). Least developedcountries do not need to make any cuts.

During the six-year implementation period,developing countries are allowed under certainconditions to use subsidies to reduce the costs ofmarketing and transporting exports.

Regulations for animal and plantproducts: how safe is safe?

Problem: How do you ensure that yourcountry’s consumers are being supplied withfood that is safe to eat — “safe” by the stan-dards you consider appropriate? And at thesame time, how can you ensure that strict healthand safety regulations are not being used as anexcuse for protecting domestic producers?

Whose international standards?

An annex to the Sanitary andPhytosanitary Measures Agreementnames:

• the FAO/WHO Codex AlimentariusCommission: for food

• the International Office of Epizootics:for animal health

• the FAO’s Secretariat of theInternational Plant ProtectionConvention: for plant health.

Governments can add any other interna-tional organizations or agreements whosemembership is open to all WTO members.

Four steps over 10 years

The schedule for freeing textiles and garments products from import quotas (and returning them to GATT rules),and how fast remaining quotas should expand.

The example is based on the commonly-used 6% annual expansion rate of the old Multifibre Arrangement. Inpractice, the rates used under the MFA varied from product to product.

Step Percentage of products to be brought How fast remaining quotasunder GATT should open up,

(including removal of any quotas) if 1994 rate was 6%

Step 1: 1 Jan 1995 16% 6.96%(to 31 Dec 1997) (minimum, taking 1990 imports as base) per year

Step 2: 1 Jan 1998 17% 8.7%(to 31 Dec 2001) per year

Step 3: 1 Jan 2002 18% 11.05%(to 31 Dec 2004) per year

Step 4: 1 Jan 2005 49% No quotas leftFull integration into GATT (maximum)(and final elimination of quotas).Agreement on Textilesand Clothing terminates.

The actual formula for import growth under quotas is: by 0.1 u pre-1995 growth rate in the first step; 0.25 uStep 1 growth rate in the second step; and 0.27 u Step 2 growth rate in the third step.

following consultations, or unilaterally. It is sub-ject to review by the Textiles Monitoring Body.

In any system where quotas are set for indi-vidual exporting countries, exporters might try toget around the quotas by shipping productsthrough third countries or making false declara-tions about the products’ country of origin.The agreement includes provisions to cope withthese cases.

The agreement envisages special treatmentfor certain categories of countries — for exam-ple, new market entrants, small suppliers, andleast-developed countries.

A Textiles Monitoring Body (TMB)supervises the agreement’s implementation. Itconsists of a chairman and 10 members acting intheir personal capacity. It monitors actions takenunder the agreement to ensure that they areconsistent, and it reports to the Council on Tradein Goods which reviews the operation of theagreement before each new step of the integra-tion process. The Textiles Monitoring Body alsodeals with disputes under the Agreement onTextiles and Clothing. If they remain unresolved,the disputes can be brought to the WTO’s regu-lar Dispute Settlement Body. Two dispute caseswhere the core arguments were based on theTextiles and Clothing Agreement have beentaken to the Dispute Settlement Body for exami-nation by a panel. They have subsequently beenappealed.

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4. Textiles:back in the mainstream

Textiles, like agriculture, is one of thehardest-fought issues in the WTO, as it was inthe former GATT system. It is now going throughfundamental change under a 10-year scheduleagreed in the Uruguay Round. The system ofimport quotas that has dominated the tradesince the early 1960s is being phased out.

From 1974 until the end of the UruguayRound, the trade was governed by the MultifibreArrangement (MFA) a framework for bilateralagreements or unilateral actions that establishedquotas limiting imports into countries whosedomestic industries were facing serious damagefrom rapidly increasing imports.

The quotas were the most visible feature.They conflicted with GATT’s general preferencefor customs tariffs instead of measures thatrestrict quantities. They were also exceptions tothe GATT principle of treating all trading partnersequally because they specified how much theimporting country was going to accept from indi-vidual exporting countries.

Since 1995, the WTO’s Agreement onTextiles and Clothing (ATC) has taken over fromthe Mulltifibre Arrangement. By 2005, the sectoris to be fully integrated into normal GATT rules.In particular, the quotas will come to an end,and importing countries will no longer be able todiscriminate between exporters. The Agreementon Textiles and Clothing will itself no longerexist: it is the only WTO agreement that has self-destruction built in.

Integration: returningproducts gradually to GATT rules

Textiles and clothing products are beingreturned to GATT rules over the 10-year period.This is happening gradually, in four steps, toallow time for both importers and exporters toadjust to the new situation. Some of these prod-ucts were previously under quotas. Any quotasthat were in place on 31 December 1994 werecarried over into the new agreement. For prod-ucts which had quotas, the result of integrationinto GATT will be the removal of these quotas.

The agreement states the percentage ofproducts that have to be brought under GATTrules at each step. If any of these products cameunder quotas, then the quotas must be removedat the same time. The percentages are applied to

the importing country’s textiles and clothingtrade levels in 1990. The agreement also says thequantities of imports permitted under the quotasshould grow annually, and that the rate ofexpansion should increase at each stage. Howfast that expansion should be is set out in a for-mula based on the growth rate that existed underthe old Multifibre Arrangement (see table).

Products brought under GATT rules at eachof the first three stages must cover the four maintypes of textiles and clothing: tops and yarns;fabrics; made-up textile products; and clothing.Any other restrictions that did not come underthe Multifibre Arrangement and did not conformwith regular WTO agreements by 1996 have tobe made to conform or phased out by 2005.

If further cases of damage to the industryarise during the transition, the agreement allowsadditional restrictions to be imposed temporarilyunder strict conditions. These “transitional safe-guards” are not the same as the safeguard mea-sures normally allowed under GATT because theycan be applied on imports from specific export-ing countries. But the importing country has toshow that its domestic industry is suffering seri-ous damage or is threatened with serious dam-age. And it has to show that the damage is theresult of two things: increased imports of theproduct in question from all sources, and a sharpand substantial increase from the specific export-ing country. The safeguard restriction can beimplemented either by mutual agreement

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5. Services: rules for growthand investment

The General Agreement on Trade in Services(GATS) is the first ever set of multilateral, legally-enforceable rules covering international trade inservices. It was negotiated in the UruguayRound. Like the agreements on goods, GATSoperates on three levels: the main text contain-ing general principles and obligations; annexesdealing with rules for specific sectors; and indi-vidual countries’ specific commitments to provideaccess to their markets. Unlike in goods, GATShas a fourth special element: lists showing wherecountries are temporarily not applying the“most-favoured-nation” principle of non-discrim-ination. These commitments — like tariffschedules under GATT — are an integral partof the agreement. So are the temporary with-drawals of most-favoured-nation treatment.

A WTO Council for Trade in Services over-sees the operation of the agreement.Negotiations on commitments in four topics havetaken place after the Uruguay Round. A full newservices round will start no later than 2000.

The framework: the GATS articles

GATS’s 29 articles cover all services sectors.They contain the general obligations that allmembers have to apply (see also Principles of thetrading system):

Total coverage

The agreement covers all internationally-traded services. This includes all the differentways of providing an international service —GATS defines four:

Basic principles

• All services are covered by GATS

• Most-favoured-nation treatment applies to allservices, except the one-off temporary exemp-tions

• National treatment applies in the areas wherecommitments are made

• Transparency in regulations, inquiry points

• Regulations have to be objective and reasonable

• International payments: normally unrestricted

• Individual countries’ commitments: negotiatedand bound

• Progressive liberalization: through further negoti-ations

• services supplied from one country to another(e.g. international telephone calls), officiallyknown as “cross-border supply”

• consumers or firms making use of a service inanother country (e.g. tourism), officiallyknown as “consumption abroad”

• a foreign company setting up subsidiaries orbranches to provide services in another coun-try (e.g. foreign banks setting up operations ina country), officially “commercial presence”

• individuals travelling from their own countryto supply services in another (e.g. fashionmodels or consultants), officially “presence ofnatural persons”.

Most-favoured-nation (MFN) treatment

Favour one, favour all. MFN means treatingone’s trading partners equally. Under GATS, if acountry allows foreign competition in a sector,equal opportunities in that sector should be giv-en to service providers from all other WTO mem-bers. (This applies even if the country has madeno specific commitment to provide foreign com-panies access to its markets under the WTO.)

MFN applies to all services, but some spe-cial temporary exemptions have been allowed(see below).

What about national treatment?

National treatment — equal treatment forforeigners and one’s own nationals — is treateddifferently for services. For goods (GATT) andintellectual property (TRIPS) it is a general princi-ple. In GATS it only applies where a country hasmade a specific commitment, and exemptionsare allowed (see below).

Transparency

GATS says governments must publish all rel-evant laws and regulations. Within two years (bythe end of 1997) they have to set up inquirypoints within their bureaucracies. Foreign com-panies and governments can then use theseinquiry points to obtain information about regu-lations in any service sector. And they have tonotify the WTO of any changes in regulationsthat apply to the services that come underspecific commitments.

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International payments and transfers

Once a government has made a commit-ment to open a service sector to foreign competi-tion, it must not normally restrict money beingtransferred out of the country as payment forservices supplied (“current transactions”) in thatsector. The only exception is when there are bal-ance-of-payments difficulties, and even then therestrictions must be temporary and subject toother limits and conditions.

Specific commitments

Individual countries’ commitments to openmarkets in specific sectors — and how openthose markets will be — are the outcome ofnegotiations. The commitments appear in“schedules” that list the sectors being opened,the extent of market access being given in thosesectors (e.g. whether there are any restrictionson foreign ownership), and any limitations onnational treatment (whether some rights grantedto local companies will not be granted to foreigncompanies).

These commitments are “bound”: likebound tariffs, they can only be modified or with-drawn after negotiations with affected countries— which would probably lead to compensation.Because “unbinding” is difficult, the commit-ments are virtually guaranteed conditions for for-eign exporters and importers of services andinvestors in the sector to do business.

Progressive liberalization

The Uruguay Round was only the begin-ning. GATS requires more negotiations, the firstto begin within five years. The goal is to take theliberalization process further by increasing thelevel of commitments in schedules.

The annexes:services are not all the same

International trade in goods is a relativelysimple idea to grasp: a product is transportedfrom one country to another. Trade in services ismuch more diverse. Telephone companies,banks, airlines and accountancy firms providetheir services in quite different ways. The GATSannexes reflect some of the diversity.

Movement of natural persons

This annex deals with negotiations on indi-viduals’ rights to stay temporarily in a country forthe purpose of providing a service. It specifiesthat the agreement does not apply to peopleseeking permanent employment or to conditionsfor obtaining citizenship, permanent residence orpermanent employment.

Regulations: objective and reasonable

Since domestic regulations are the most sig-nificant means of exercising influence or controlover services trade, the agreement says govern-ments should regulate services reasonably,objectively and impartially. When a governmentmakes an administrative decision that affects aservice, it should also provide an impartial meansfor reviewing the decision (for example a tri-bunal).

Recognition

When two (or more) governments haveagreements recognizing each other’s qualifica-tions (for example, the licensing or certificationof service suppliers), GATS says other membersmust also be given a chance to negotiate compa-rable pacts. The recognition of other countries’qualifications must not be discriminatory, and itmust not amount to protectionism in disguise.These recognition agreements have to be noti-fied to the WTO.

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Financial services

Instability in the banking system affects thewhole economy. The financial services annexsays governments have the right to take pruden-tial measures, such as those for the protection ofinvestors, depositors and insurance policy hold-ers, and to ensure the integrity and stability ofthe financial system. It also excludes from theagreement services provided when a governmentexercising its authority over the financial system,for example central banks’ services. Negotiationson specific commitments in financial servicescontinued after the end of the Uruguay Round.They ended in late 1997.

Telecommunications

The telecommunications sector has a dualrole: it is a distinct sector of economic activity;and it is an underlying means of supplying othereconomic activities (for example electronic mon-ey transfers). The annex says governments mustensure that foreign service suppliers are givenaccess to the public telecommunications net-works without discrimination. Negotiations onspecific commitments in telecommunicationsresumed after the end of the Uruguay Round.This led to a new liberalization package agreedin February 1997.

Air transport services

Under this annex, traffic rights and directlyrelated activities are excluded from GATS’s cov-erage. They are handled by other bilateral agree-ments. However, the annex establishes that theGATS will apply to aircraft repair and mainte-nance services, marketing of air transport ser-vices and computer-reservation services.

Countries’ commitments:on market-opening

Each country lists specific commitments onservice sectors and on activities within those sec-tors. The commitments guarantee access to thecountry’s market in the listed sectors, and theyspell out any limitations on market access andnational treatment.

As an example; if a government commitsitself to allow foreign banks to operate in itsdomestic market, that is a market access com-mi