Agricultural Economics II. Popp, József Agricultural Economics II

“GATT” is the acronym of General Agreement on Tariffs and Trade. The GATT is an international agreement concluded in 1947. It contains the rules and obligations that governed trade in goods for almost fifty years between the nations, which signed and ratified it and which were normally called "the Contracting Parties". Until the creation of the WTO in 1995, the GATT provided the legal framework for the bulk of world trade. From 1947 to 1994, Contracting Parties organized eight rounds of negotiations. The longest (1986-1994) and most comprehensive of them was the Uruguay Round, which incorporated negotiations on services and intellectual property. The Contracting Parties concluded the Round by adopting the “Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations”. The Final Act includes the “Marrakesh Agreement Establishing the World Trade Organization” (the “WTO Agreement”). The WTO Agreement is the constitutive agreement which established a new organizational body, the World Trade Organization. Therefore, the WTO came into being in 1995, and though legally distinct from the “GATT”, both are interrelated. The WTO is in charge of administering the Uruguay Round Agreements (WTO, 2010).

1. 15.1. The WTO Agreements

The WTO agreements are the result of the 1986-1994 Uruguay Round negotiations signed at the Marrakesh Ministerial Meeting in April 1994. There are about 60 agreements and Decisions totalling 550 pages. It also included a major revision of the original GATT text. Negotiations since 1994 have produced additional legal texts such as the Information Technology Agreement Services and Accession Protocols. The Final Act of the Uruguay Round was signed in Marrakesh in 1994. It works like a cover note to all WTO Agreements, which are subsequently attached. Next, is the Marrakesh Agreement establishing the World Trade Organization (”the WTO Agreement”), it serves as an umbrella agreement. The WTO Agreement includes provisions on establishment, scope, functions and structure of the WTO. It defines the WTO relationship with other organizations, its secretariat, budget and contributions, legal status, and decision-making and amendment procedures (including special voting procedures). Additionally, it presents information on the definition of original Members, accession, non-application, acceptance, entry into force and deposit, denunciation and final provisions. The WTO Agreement has four Annexes. Annexes 1, 2, and 3 are termed “multilateral Trade Agreements” and Annex 4 is termed ”Plurilateral Trade Agreements” (WTO, 2010).

Annex 1 is divided into three sections:

Annex 1A (The Multilateral Agreements on Trade in Goods);

Annex 1B (General Agreement on Trade in Services); and

Annex 1C (Agreement on Trade-related Aspects of Intellectual Property Rights

1.1. 15.1.1. Objectives of the WTO:

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  raise living standards;
  
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  ensure full employment;
  
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  ensure large and steadily growing volume of real income and effective demand; and expand the production of and trade in, goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development.
  

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  administer trade agreements;
  
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  serve as a forum for trade negotiations;
  
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  settle trade disputes;
  
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  review Member's trade policies;
  
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  assist developing countries with trade policy issues, through technical assistance and training programmes; and cooperate with other international organizations.
  

The Ministerial Conference is the highest decision-making body in the WTO. Its sessions must take place at least once every two years and deals with all matters under the WTO agreements.

1.4. 15.1.4. The General Council

The General Council constitutes the second tier in the WTO Structure. It comprises representatives from all Member countries, usually Ambassadors/Permanent Representatives based in Geneva. It meets regularly (approximately once a month) to adopt decisions, mostly on behalf of the Ministerial Conference when the Conference is not in session. The General Council has authority over the Trade Negotiations Committee (“TNC”), which is in charge of the negotiations mandated by the Doha Development Agenda.

1.5. 15.1.5. The Trade Negotiations Committee

The Trade Negotiations Committee (TNC) was set up by the Doha Ministerial Declaration, which in turn assigned it to create subsidiary negotiating bodies to handle negotiations for different topics, among them the Special Sessions of various Committees that have a mandate to negotiate (such as Agriculture, Trade and Environment, Subsidies, etc.). At present, its chairperson is Mr. Pascal Lamy, the Director-General of the WTO. The TNC reports directly to the General Council.

1.6. 15.1.6. The Councils & Subsidiary Bodies

The Councils can be described as subsidiary bodies to the General Council. They are composed of all WTO Members.

There are three:

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  The Council for Trade in Goods (the “Goods Council”) oversees all the issues related to the Agreements on trade in goods;
  
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  The Council for Trade in Services (the “GATS Council”) oversees all issues related to the GATS Agreement;
  
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  The Council for Trade-Related Aspects of Intellectual Property Rights (the “TRIPS Council”) administers the TRIPS Agreement
  

The WTO is a Member-driven, consensus-based organization. Where consensus is not possible, the WTO Agreement permits voting – a vote being won by a tally of the majority of votes cast, and based on “one country, one vote”.

The WTO Agreement envisages voting in four specific situations:

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   a three-quarters majority of WTO Members can adopt an interpretation of any of a multilateral trade agreements;
   
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   the Ministerial Conference, by a three-quarters majority, can waive an obligation imposed on a Member by a multilateral agreement;
   
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   all Members or a two-thirds majority (depending on the provision of the agreement) can take a decision to amend provisions of the multilateral agreements. However, the amendments only apply to WTO Members that accept them; and
   
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   a two-thirds majority in the Ministerial Conference or the General Council in between conferences can take a decision to admit a new Member.
   

There are two main principles of non-discrimination, the Most Favoured Nation (MFN) and the national treatment principles. The MFN principle prohibits discrimination between imports irrespective of their origin or destination while the national treatment principle prohibits discrimination between imported and locally produced products. Whilst the MFN principle seeks to ensure that a WTO Member does not discriminate between like products originating in or destined for WTO Members, the national treatment principle prohibits a Member from favouring its domestic products over the imported products of other Members (WTO, 2010).

Under GATT, the subject of MFN treatment is goods and under The General Agreement on Trade in Services (GATS) the subjects of is services or service providers, in the context of the TRIPS Agreement, the subject of MFN treatment is “nationals”. For TRIPS, the national treatment principle prohibits treatment of foreign nationals on less favourable terms than that accorded to nationals in the context of the implementation of national or international intellectual property laws or regulations.

3. 15.3. Rules on unfair trade

Increased imports from one country can be caused by changes in consumer preferences or by improvements in the competitiveness of the companies producing the imports vis-à-vis national companies producing like products. However, increasing imports can be cause by “unfair” practices or “unfair” competition. Consequently, WTO Members have retained their right to take protective measures to correct the competitive imbalances created by unfair practices. The rationale behind the idea is not to create additional barriers to trade but rather, to restore, in a targeted manner, “fair” competitive conditions as if the cause of the unfair competition were eliminated. GATT governs the use of anti-dumping measures and also constitutes the basis for the use of countervailing measures (the Anti-dumping Agreement for anti-dumping measures, and the Agreement on Subsidies and Countervailing Measures: SCM Agreement) adopted in the Uruguay Round (WTO, 2010).

3.1. 15.3.1. Anti-dumping measures

The Anti-Dumping Agreement defines dumping as the introduction of a product into the commerce of another country at less than its normal value. Dumping is, in general, a situation of international price discrimination, where the price of a product when sold in the importing country is less than the price of that product in the market of the country exporting the product. In addition to rules governing the determination of dumping, injury, and causal ulink, the Agreement sets forth detailed procedural rules for the initiation and conduct of investigations, and the imposition, duration and review of measures. In the simplest scenario, one can identify dumping by comparing the price of a product in two markets to determine whether there is a difference in prices in those markets. However, the situation is rarely that simple, and in most cases it is necessary to undertake complex analytical steps to determine the appropriate price in the market of the exporting country (the “normal value”) and the appropriate price in the market of the importing country (the “export price”) to be able to make a comparison. The Anti-dumping Agreement explicitly authorize a Member to impose specific anti dumping duties on imports (in addition to import tariffs), when the importing Member demonstrates that dumping is causing or is threatening to cause material injury to a domestic industry, or would materially retard the establishment of a domestic industry.

3.2. 15.3.2. Subsidies & countervailing duties

The Agreement on Subsidies and Countervailing Measures (SCM Agreement) applies to agricultural and industrial products, except for the subsidies exempt under the Agriculture Agreement's “Peace Clause”, which expired at the end of 2003. The SCM Agreement contains the rules on subsidies, while the Agreement on Agriculture contains specific rules governing the use of agricultural subsidies. The term countervailing duty shall be understood to mean a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly or indirectly, upon the manufacture, production or exports of any merchandise. The definition of subsidies under the SCM Agreement contains three elements which must be satisfied in order for a subsidy to exist: a financial contribution; by a government or any public body within the territory of a Member; and which confers a benefit. The disciplines in the agreement only apply to specific subsidies. They can be production or export subsidies.

4. 15.4. Non-discrimination

As you know, non-discrimination is a key concept of the multilateral trading system. It is based on the most favoured-nation clause and national treatment (WTO, 2010).

4.1. 15.4.1. MFN under GATT

The Most Favoured Nation (MFN) principle prohibits discrimination between imports irrespective of their origin or destination and requires each Member to extend to all other Members, treatment no less favourable than it accords to imports from any other country.

4.2. 15.4.2. National treatment under GATT

The national treatment principle constitutes the second component of the non-discrimination pillar, the first being the MFN principle. Like MFN, the national treatment principle applies to trade in goods, trade in services, and trade-related aspects of intellectual property rights. The national treatment principle prohibits a Member from favouring its locally-produced goods (as well as services and intellectual property rights such as patents or copyrights) over the ones imported from other Members.

Three key objectives underpin the national treatment principle. First, the application of laws, regulations, etc. affecting the sale of the imported product should not be discriminatory. If the law (regulations) is the same for both the domestic and the imported product, but is discriminatory in its application, it nevertheless offends this provision because it can be viewed as affording “protection to domestic production”. Second, the charges and internal taxes that Member countries’ products are subjected to should not be “in excess of those applied, directly or indirectly, to like domestic products”. To explicate, an imported product should be charged the same taxes as domestic products. Third, the principle applies to “like products”. What is understood by “like domestic products”? Traditionally, “likeness” is to be determined on a case-by-case analysis, involving but not limited to the following criteria: the properties, nature and quality of the products; the end-uses of the products; consumer tastes and habits, and/or consumers' perception and behaviour in respect of the products; and the tariff classification of the products.

5. 15.5. Tariffs

Tariffs, also called “customs duties” are the most common and widely used barrier to market access for goods. A tariff is a financial charge in the form of a tax, imposed on merchandise imports. Tariffs can also be imposed on exports. Tariffs give a price advantage to similar local goods and raise revenue for governments, as market access is conditional upon the payment of the custom duty. In addition, a tariff can be used to promote a rational allocation of scarce foreign exchange. Tariffs can be specific, ad valorem, or mixed. A specific tariff is an amount based on the weight, volume or quantity of product, for example, US$ 7 per kilo. Ad valorem tariffs refer to the tax levied as a percentage of value, for example, a 7% duty on cars. So the duty on a car worth US$ 7,000.00 would be US$ 490.00. A mixed or compound tariff is the combination of a specific and an ad valorem tariff (WTO, 2010).

5.1. 15.5.1. Negotiations on tariff reduction

The WTO does not prohibit the use of tariffs, however, there is the recognition that they often constitute obstacle to trade, hence there is the obligation on Members to negotiate on tariff reductions. Current negotiations under the Doha Development Agenda focus on the reduction of tariffs in agriculture and non-agricultural market access (NAMA).One result of the Uruguay Round was countries’ commitments to cut tariffs and to “bind” their customs duty rates. A “bound” tariff is a tariff for which there is a legal commitment not to raise it above the bound level. The bound level of the tariff is maximum level of customs duty to be levied on products imported into a Member. Each Member is responsible for negotiating its "bound levels" (maximum levels of tariffs to be collected at the border). The “bound levels” are agreed upon during “market access negotiations”, which are often bilateral but which sometimes are determined by “target levels” or reduction objectives that are to be met by “tariff cuts”. A bound tariff can differ from an applied tariff as a Member can apply a different (lower) tariff than that which it committed to apply as a maximum. Members can apply lower customs duties (“applied tariff level”) but they cannot apply customs duty at a level higher than that in their Schedule of Tariff Concession

5.2. 15.5.2. National tariffs

The word “tariff” also has a second meaning. It sometimes refers to a structured list of products description and their corresponding customs duties. Most “national tariffs” reflect the structure in the Harmonized Commodity Description and Coding System (HS) an international commodity classification system. This comes from the International Convention on the Harmonized Commodity Description and Coding System which entered into force on 1 January 1988 and to which most WTO Members are a party.

5.3. 15.5.3. Other duties and charges

As you studied earlier, the “protection” that may be granted to domestically produced goods vis à vis imported products should consist of “ordinary customs duties”, often referred to as “tariffs”. Other duties and charges (ODCs) may be imposed in addition to the “ordinary customs duty”. In such circumstances, charges can exceed the “bound level” inscribed in the Schedule of Tariff Concessions. However, for ODCs to be applicable, they must be registered in the Schedule and they must not exceed the level recorded in the schedules.

Examples of these ODCs are:

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  import surcharges, i.e. a duty imposed on an imported product in addition to the ordinary custom1s duties;
  
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  security deposits to be made on the importation of goods;
  
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  a statistical tax imposed to finance the collection of statistical information; and
  
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  -a customs fees charged for processing the goods.
  

Members may impose on imported products:

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  any financial charge not in excess of the internal tax imposed on the like domestic product;
  
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  WTO consistent anti-dumping duties; safeguards duties; countervailing duties;
  
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  and  fees or other charges commensurate with services rendered (examples of the above are: consular transactions (such as invoices and certificates), quantitative restrictions, licensing, exchange control, statistical services, documents, documentation, and certification, analysis and inspection, quarantine, sanitation and fumigation. Internal taxes, anti-dumping and countervailing duties, and customs fees imposed in addition to the bound rate must also respect specific rules in GATT).
  

Non-tariff barriers may also restrict market access of goods (WTO, 2010). They include quantitative restrictions (such as quotas) and other non-tariff barriers (for example, lack of transparency of trade regulation, unfair and arbitrary application of trade regulation, customs formalities, technical barriers to trade and government procurement practices).

6.1. 15.6.1. Quantitative restrictions

Quantitative restrictions on imports are a ban on imports (or exports) after a determined quantity (the quota) has entered the territory. Only import duties can be used to regulate goods trade at customs. A WTO Member cannot, as a general rule, impose import or export prohibitions or restrictions in quantities or value on the goods of another Member. The only protective barriers that WTO Members can institute or maintain are “duties, taxes or other charges” compatible with the GATT rules. The general prohibition on quantitative restrictions applies equally to import and export measures.

State trading enterprises (Article XVII) are also prohibited from imposing quantitative restrictions. Quantitative restrictions must be imposed on a non-discriminatory basis. In other words, the Member imposing the quantitative restrictions is not allowed to favour any country over another. This provision focuses on the allocation of quotas between exporting Members and aims to ensure that when imposed, quantitative restrictions do not distort ordinary trade flows. It means that quotas should be applied equally to goods from all origins and their allocations should correspond as closely as possible to the expected market shares that would have existed in the absence of quotas.

One must distinguish between quotas – which are generally prohibited – and tariff-rate quotas (TRQs). TRQs are predetermined quantities of goods which can be imported at a “preferential” rate of customs duty (“in quota Tariff Rate”). Once the TRQ has been filled, one can continue to import the product without limitation – so it is not a quantitative restriction in the sense of GATT, but at a higher tariff rate (“out-of-quota Tariff Rate”). The “out-of-quota Tariff Rate” is generally the MFN rate. In a TRQ, specific quantities of goods may be imported at different tariff levels. TRQs should be applied similarly to products from all origins, but allocations should also respond as closely as possible to the expected markets share that would have existed in the absence of TRQs.

This is what a tariff-quota might look like (Figure 1). Imports entering under the tariff-quota (up to 1,000 tons) are generally charged 10%. Imports entering outside the tariff-quota are charged 80%. Under the Uruguay Round agreement, the 1,000 tons would be based on actual imports in the base period or an agreed “minimum access” formula. Tariff quotas are also called “tariff-rate quotas”.

15.1. ábra - Figure 1: Tariff-Quota

Source: WTO (2010)

6.2. 15.6.2. Specific exceptions

The specific exceptions to the general prohibition against the use of quantitative restrictions are to prevent critical shortage of foodstuffs or other essential products. The exception creates a quasi-general derogation for agricultural policies and measures relating to fishery products constituted the essential provision which led to “special treatment” for agriculture. The “agricultural exception” ended when the WTO Agreement on Agriculture entered into force in 1995. Under the WTO, quantitative restrictions remain possible only on fishery products.

6.3. 15.6.3. Other non-tariff barriers

In addition to customs duties and other charges (tariff barriers), and quantitative restrictions, trade in goods may also be impeded by other non-tariff barriers, such as: (1) technical barriers to trade, which can be divided in to (a) sanitary and phytosanitary measures covered by the Agreement on the Application of Sanitary and Phytosanitary Measures (the “SPS Agreement”) and (b) the general category of technical barriers to trade set out in the Technical Barrier (“TBT”) Agreement; (2) customs formalities and procedures, (3) and government procurement practices. Lack of transparency, unfair and arbitrary application of trade measures, customs formalities and procedures, and other measures or actions such as pre-shipment inspection, marks of origin, and measures relating to transit shipments, as well as other forms of inaction (failure to inform about applicable trade laws, regulations, procedures and practises, timely and accurately) may constitute a barrier to trade.

7. 15.7. Technical regulations and standards

Technical regulations and industrial standards are important, but they may vary from country to country. If the standards are set arbitrarily, they could be used as an excuse for protectionism and can become obstacles to trade. The TBT Agreement tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles to trade. The TBT Agreement recognizes WTO Members' rights to adopt the standards they consider appropriate – for example to protect human, animal or plant life or health, the environment or to meet other consumer interests. It does not prevent Members from taking measures necessary to ensure their standards are met (WTO, 2010).

7.1. 15.7.1. Sanitary and phytosanitary measures

Sanitary (human and animal health) and phytosanitary (plant health) measures can take many forms, such as, requiring products to come from a disease-free area, inspection of products, setting of allowable maximum levels of pesticide residues or permitted use of only certain additives in food. They apply to domestically produced food or local animal and plant diseases, as well as to products coming from other countries. The SPS Agreement entered into force in 1995 goes beyond the general principle of non-discrimination. The SPS Agreement builds on previous GATT rules to restrict the use of unjustified sanitary and phytosanitary measures for the purpose of trade protection and sets out the basic rules for food safety and animal and plant health standards.

It still allows countries to use different standards and different methods of inspecting products. However, it tries to ensure that sovereign rights are not misused for protectionist purposes and do not result in unnecessary barriers to international trade. It also says regulations must be based on science and that they should be applied only to the extent necessary to protect human, animal or plant life or health. Furthermore, SPS measures should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail (Figure 2).

15.2. ábra - Figure 2: TBT and SPS measures relating to the international trade of oranges

Source: WTO (2010)

There are general as well as security exceptions relating to goods, services and intellectual property. For example, Members are allowed to take measures necessary for overriding policy concerns, including the protection of public morals or the protection of human, animal or plant life or health. However, such measures must not lead to arbitrary or unjustifiable discrimination or constitute a disguised restriction to trade. If essential security interests are at stake, GATS Safeguard measures are taken to confront unforeseen circumstances. GATS rules on safeguards allow for the introduction of temporary restrictions to safeguard the balance-of-payments; and a so-called “prudential carve-out” in financial services permits Members to take measures in order, inter alia, to ensure the integrity and stability of their financial system.

8. 15.8. General safeguards

A WTO member may impose a safeguard measure (i.e.), temporarily restrict imports of a product) to protect a domestic industry from an increase in imports of a product which causes or threatens to cause serious injury to the domestic industry. Safeguard measures were always available under the GATT. However, they were infrequently used, and some governments preferred to protect their industries through “grey area” measures (for example, “voluntary” export restraint arrangements on products such as cars, steel and semiconductors)

9. 15.9. Waivers

General exceptions, security exceptions and safeguards are not the only provisions which Members can use to maintain measures inconsistent with the WTO principles. They can also derogate from their obligations where they obtain waivers. A waiver is a permission granted by WTO Members allowing another WTO Member to not comply with its normal commitments. Waivers are time-bound. They have time limits and extensions have to be justified (WTO, 2010).

10. 15.10. Dispute settlement

WTO Members can settle their disputes in four ways: (i) consultation or negotiations; (ii) adjudication by panels and the Appellate Body (in cases where there is an appeal); (iii) arbitration; and (iv) good offices, conciliation and mediation. The dispute settlement system is based on clearly defined rules, with timetables for completing a case. Rulings are first made by a panel and appeals based on points of law are possible. Rulings made by a panel can be appealed to the Appellate Body (WTO, 2010).

11. 15.11. Agreement on Agriculture

The results of the Uruguay Round provide a framework for the long-term reform of agricultural trade and domestic policies. The Agreement on Agriculture reflects the compromises made to satisfy the multiple negotiating interests in the Uruguay Round (WTO, 2010). The new rules and commitments apply to market access, domestic support and export competition. It includes provisions that limit the use of distorting domestic support policies, export subsidies and subjected these limits to reductions. The Agreement on Agriculture does allow governments to support their rural economies, but preferably through policies that cause a minimal or none distortion to trade (Duponcel, 2000).

In 1995, the year that the WTO was established, the first effective rules governing international trade in agriculture and food were introduced. Following the Uruguay Round negotiations, all agricultural products were brought under multilateral trade rules by the WTO’s Agreement on Agriculture. The Agreement is made up of three ”pillars”: market access, export competition and domestic support. All WTO members, except least developed countries (LDCs), were required to make commitments in all these areas in order to liberalise agricultural trade. As can be seen in the box below, developing countries were given a limited element of special and differential treatment (S&DT).

Developing countries do not have to cut their subsidies or lower their tariffs as much as developed countries, and they are given extra time to complete their obligations. Least-developed countries do not have any reduction commitments. Special provisions deal with the interests of countries that rely on imports for their food supplies, and the concerns of least-developed economies. The Agreement on Agriculture also includes a “Peace Clause” which was designed to reduce the likelihood of disputes or challenges on agricultural subsidies over a period of nine years. This provision expired at the end of 2003. The Agreement on Agriculture includes a commitment to continue the reform through new negotiations. These were launched in 2000 and continue as part of the Doha Development Agenda (Table 1).

15.1. táblázat - Table 1: The reductions in agricultural subsidies and protection agreed in the Uruguay Round