International Trade Law

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This assignment will focus on the actions of two member states of the World Trade Organisation1 (WTO) to determine whether state A is within their right to subsides their shoe industries. The subsidies implemented have three parts; the first created a private law body called ‘Organisation for the Protection of the National Shoemaking Industry’. This body directly limits the number of shoes imported from abroad. Second the private body was funded by state A to provide a number of loans to at least 100 shoe making production companies in the country. Third, previous loans given to the same companies have been written off as a result of the new policy initiated in the state A.

Understandably state B were furious with state A and want countervailing measures brought against state A actions; and as compensation for any loss that may occur will be considering an import duty on state A shoe industry.

The starting point of discussion is what effect will the WTO have on the two states? Or in other words what does it mean to be a member of the WTO?

The WTO is the pinnacle recognition that promotes the understanding that international progression can only be achieved if a fair and free market trade are conducted by member states. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT) which was created in 1947 and operates as a de facto organisation; one of the criticisms of GATT is that it has no law enforcement. The term de facto means ‘on the facts’ there is no law that enforces it whilst the WTO is described as de jure that means ‘by the law’.

GATT was established after the Second World War in Geneva Switzerland and was the first time post war that governments across the border had gathered to negotiate a multilateral agreement on trade. Prior in 1944 Bretton Woods was the start of international economic environment that created the three pillars of international law; International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD) now called World Bank, and International Trade Organisation (ITO)2 .

GATT originated back in 1947 and has ‘Rounds’ that are negotiation meetings that are usual named after the location of the meeting. The eighth Uruguay Round at the Ministerial Conference3 started back in 1986 at Punta Del Uruguay; it finally reached an agreement that not only liberalised international trade further but resulted in the metamorphosis of the GATT 1994 in fully fledged institution, the WTO. The WTO is an umbrella agreement established from GATT 1994 that all members to the GATT must subscribe to the requirements of WTO.

As state A and B are members they must conduct their domestic affairs in accordance. The WTO is a fully fledged mechanism because it has an executive apparatus, legislative apparatus, and a dispute mechanism; these are important to its function. The executive apparatus monitors agreements, administrates negotiations, and implementation; the legislative apparatus makes the agreement implemented into domestic law; and the dispute mechanism provides protection and solves problems.

There are five major requirements that state A and B must subscribe to and assist;

1. Non-discrimination this requirement has two components to deter state; the Most Favoured Nation4 (MFN) rule and National Treatment (NT) policy. Non discrimination appears to be a straightforward concept that one must not discriminate, exclude, or treat differently another member state; however equal treatment cannot always be practical. GATT and WTO have recognised that in order to fulfil their promotion of a multilateral free trade market it must also envisage fairness. Equal treatment may not be fair for those who are poor and vulnerable.

International trade law had to be responsible for making exceptions to the non discrimination rule.

‘This raft of permissible exceptions to the non discrimination in trade law suggest that the trade law system would not be as destructive of, or inconsistent with, the present trade law structure as it might appear5.’

2. Reciprocity this requires the states to do the same to each other; limiting the opportunity of MFN rule and limit unfair advantages. In order for reciprocity to be successful there must be reciprocal gains or it will not materialise fairly. If state A is facing domestic hardship how or why would they have the desire to reciprocate because if trade continues state A will be acting to their detriment; causing loss of employment and economy failure? The WTO has answered these worries by providing exception to the rule in emergency situations.

3. To communicate to each other or through the GATT of any problems.

4. To protect and preserve the environment

5. To enhance the means for protecting and preserving the environment.

The effect the WTO will have on state A implementing subsides can only be answered by referring to the definition of subsidy. The definition of a subsidy is a financial assistance that is paid by a public body or government to support or aid a company that otherwise fail; this assistance distorts trade and creates unfair advantage in a free market. Subsidies create either two equilibriums; a subsidy that increases production will result in lower prices whilst a subsidy that increases demand will tend to result in an increase in price.

Here are examples of types of subsidies;

‘…involves a direct transfer of funds (e.g. grants, loans and equity infusion); potential direct transfer of funds or liabilities (e.g. loan guarantees); government revenue that is otherwise due but is foregone; government provision of goods or services other than general infrastructure; government payments to a funding mechanism; or direction to a private body to carry out of the foregoing functions6…’

The meaning of a ‘financial contribution’ can be seen in WTO cases; the Appellate Body in the US-Tax Treatment for ‘Foreign Sales Corporations7’. In this case the panel identified a ‘normative benchmark’ of comparative between revenues raised and that which would have been raised.

Subsidies are classified as either actionable, non actionable and prohibited; state A have implemented various subsides if the subsidy is prohibited or actionable then they can be subjected to challenge through the dispute resolution mechanism or the domestic countervailing duty. Non actionable subsidies are immune from both the provisions mentioned.

‘…although where a non actionable subsidy is causing serious adverse effects to the domestic industry of a Member State, the subsidies Committee may recommend a modification to the programme8.’

An actionable, prohibited, and non actionable subsidies are stipulated in the Agreement on Subsidise and Countervailing Measures (SCM); this resulted in the Tokyo Round Subsidies Code. Anti dumping and countervailing duties were not administrative within GATT 1994 Article VI so it allowed countries a lot of freedom;

‘By virtue of the Protocol of Provisional Acceptance, domestic laws in existence at the time of the signing of the GATT took precedence over GATT obligations, leaving the US government ‘free to countervail without demonstrable economic justification9.”

The US had to be restricted because they were causing an imbalance within the international forum.

The Tokyo negotiations bring together GATT Articles VI, XVI, and XXIII with SCM; this means that countervailing duties could only be sought on subsidise products that were causing material injury to domestic producers. The main difference in regards to GATT is that it has ‘specific’ subsidy which will only be subject to the agreements provisions, for an example a certain industry.

The SCM agreement stipulates that actionable subsidies mean no member should cause any adverse effects to the interests of other signatories.

‘…injury to domestic industry of any signatory, nullification or impairment of benefits accruing directly or indirectly10…’

In a situation of serious prejudice the burden of proof is on the subsiding member to show that the subsidies do not cause serious prejudice to the complaining member. If State A believes that their subsidy is actionable then they will have to prove that it is not prejudice towards State B. State B may refer this matter to the Dispute Settlement Body (DSB) if they disagree.

Prohibited subsidies are within SCM11; these actions will not be allowed unless they are an exception to the article. If State B believe that State A subsidies are prohibited the first step is to consult all the relevant members12 and inform GATT. In the consultation there should be evidence provided by State B of their beliefs and how they have been affected13. A further consultation will be conducted for State A to clarify facts and see if any resolutions can be made14. However; if the states can not reach any mutual decisions within 30days then the members will have to go to the DSB15.

Once the panel has commenced they may require assistance from the Permanent Group of Experts16 (PGE). The PGE will have the final say without modification by the panel.

If the decision is prohibition the state A will have a limited amount of time to stop all subsidies17 .

If state A do not terminate their activities that are prohibited then state B may have the opportunity to countermeasures by the DSB.

Non-actionable subsidies are subsidies that are not specific within the meaning of Article 2 and meet all the provisions. An example of such subsidy would be research, education, and infrastructure18.

The WTO agreement defends the principle of free trade and the MFN rule in particular however; the agreement allows exceptions to the primary principles. The rule of exceptions can be identified as an advantage to the flexibility of a multilateral organisation however; it does bare some criticisms. An example is with the provision countervailing duties to counteract subsidies. State B is considering balancing the loss of profit through this mechanism19.

Understandably State B is considering import duties on State A as it is a way to mitigate or remove injury to their domestic shoe industry. Countervailing duties represent administrative protection to remedy a situation where on exporting country are engaging in a anti-competitive behaviour or trade distorting discriminating the international price.

Article VI of GATT 1994 governs the general rules on anti dumping and countervailing duties.

”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 export of any merchandise20.’

Anti dumping duties are also within this article which means that they may sometimes interlink and/or have the same actions. They both concentrate on the distortion of trade price21.

GATT 1994 Article VI s6 specifies; that no product should be subjected to anti-dumping and countervailing duties without the exception of; the exemption of exported products from duties or taxes borne by that product when not destined for export is not a countervailing subsidy. The maintenance of price stabilisation systems of products of primary commodities is not countervailing if such systems lead.

GATT 1994 Article VI s1; deals with subsidies in general and provides that members are notify the GATT of any subsidy that affect imports and exports directly or indirectly, and to consult with any parties whose interests are threatened by or are suffering serious prejudice from such subsidy.

State A should have already have contacted GATT 1994 with the changes that have been made. parties recognise that ‘the granting by a contracting party of a subsidy on the export of any product may have harmful effects for other contracting parties both importing and exporting, may cause undue disturbance to their normal commercial interests, and may hinder the achievement of the objectives of this agreement22.

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