Regulation of international trade within the framework of the world trade organization (WTO)

Tariffs provide protection to local industry, for domestic products become relatively cheaper than like imported products after the imposition of tariffs. Differential tariffs can be used to bring about a rational allocation of foreign exchange if it is scarce, for example, high tariffs on luxury goods and low tariffs on industrial machinery.

There are three basic types of tariff:

· Ad valorem, levied as a percentage of the value of the imported product

· Specific, levied on the basis of the quantity of an imported product

· Combined

For example, the ad valorem tariff on a bicycle is 6% and, in addition, $30 specific tariff per bicycle. If the imported value of 5 bicycles is $1,000, the cost of importing the five bicycles will be $1,210.

Earlier, various Members had different systems of tariff classification, which made it difficult for a country to assess the impact of the tariffs of another country on its own export prospects. Now, Members are required to convert their customs tariff to the Harmonized Commodity Description and Coding System (HS). In HS classification, broad categories of products are assigned numbers going from one to two digits. Thereafter, further divisions and subdivisions are made on the basis of the decimal system. For example:

85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles

8501 Electrical motors and generators (excluding generating sets)

8501.10 Motors of an output not exceeding 37.5W

8501.10 10 Synchronous motors of an output not exceeding 18W

8501.10 93 AC (alternating current) Motors

8501.20 Universal AC/DC motors of an output exceeding 37.5 W

Through the addition of numbers on the right, more and more subdivisions can be made, and the products can be further differentiated. In this way, comparison of tariffs among different countries becomes easy.

Binding of tariffs.

The GATT agreement establishes the rule for countries to bind their tariff rates. Implications of tariff binding are that, countries can bind tariffs on some products at particular levels through multilateral or bilateral trade negotiations. A Member normally cannot raise the levels of tariffs beyond the bound levels, but is free to apply the tariff on a product at a level lower than the bound level.

There are two major of approaches of tariff binding – ‘formula approach’ and ‘request-offer approach’:

Formula approach: In the Multilateral Trade Negotiations, this approach is preferred.

· reducing tariffs by a certain percentage over a period of time;

· laying down a peak level beyond which a Member would not apply tariffs on the bound items;

· prescribing an overall reduction of the average tariff level by a certain percentage, with a minimum percentage reduction in each tariff line;

· laying down a minimum percentage of the tariff lines to be covered by binding.

Once the formula is decided, Members work out their charts of reductions, which are examined by other Members and then recorded in the “schedule”.

Request-offer approach: Two countries sit down and each gives its own request list and offer list to the other for tariff reduction. An attempt will be made to achieve reciprocity as far as possible, that is, equalizing the reduction of total customs duty on each side. For example, if the average value of the export of product P from country A to B is US$200,000 and the tariff is proposed to be reduced by 3%, the loss of revenue to B is US$6,000. This would be the measure of the concession which A should made for B. The final results will be applied to all Members of the WTO.

If country A has to decide on the product to be included in the request list to be presented to country B, A would normally choose a product on the following considerations:

· the existing and potential production prospects for this product in A should be good;

· there should be a good demand or high potential of demand for this product in B;

· the tariff on this product in B should be high, adversely affecting the export of A at present.

Similarly, while choosing a product for inclusion in the offer list, A will take the following points into consideration:

· the product should be needed in A;

· the product should be of export interest to B;

· the reduction of the tariff on this item should not have the possibility of damaging the prospects of the firms producing the product in A.

Increase in tariff beyond binding:

If a Member wishes to raise the tariff on a product above the bound level, it has to offer compensatory concession on some other items.

The Member informs the Council for Trade in Goods about its proposal, and the Council authorizes a negotiation for this purpose;

The negotiation will take place specifically with the following members:

· the member with which the tariff binding concession was initially negotiated, that is initial negotiating rights (INR)

· the member having principal supply interest

· the member having the highest ratio of export of the product in question into the modifying Member country compared to its total export of that product

· other members having a significant share in the market of the modifying Member

Negotiation will take place to decide on the products which will be subjected to tariff reduction and the depth of the reduction in order to offer an almost equivalent concession to the proposed withdrawal or modification of the concession in question, and the final results will apply to all Members;

If agreement is not reached, the modifying Member will be free to take the action as proposed by it, and other Members will be free to withdraw substantially equivalent concessions. The withdrawal has to take place within six months of the action of the modifying Member. A notice of withdrawal has to be given and withdrawal can be effected after 30 days of the notice.

Tariff quota:

The quantity of import up to which a lower level of tariff is applied, and beyond that limit of quantity, the normal tariff in the schedule applies. The tariff quotas included in the schedule are binding. For example, the EC provided for an annual tariff quota of 1.5 million tons of duty-free import of newsprint; beyond that quantity, a duty of 7% was applicable.

Preferential tariff: Concessional rates of tariff applied by developed Members to developing countries under GSP and those applied in a free-trade area.

Tariff escalation: The rate of tariff in a country is higher on a product with a higher level of processing than on one with a lower level of processing or on the basic raw material in a product chain.

Tariff escalation has an important implication for the development of industrialization of developing countries. If major developed countries do not apply higher tariffs on products with a higher level of processing, the processing of raw materials in developing countries can be encouraged.

2. Safeguards

Article XIX of GATT 1994 provides for emergency action on imports of particular products, and contains the basic principles upon which the WTO Agreement on Safeguards was negotiated during the Uruguay.

Safeguard measures or escape clause are emergency trade measures taken temporarily by a Member to provide relief to its domestic industry in the situation of its getting hurt from an increase in imports. It is an important exception to the general prohibition of quantitative restraints on imports.

Purpose of safeguard measures is to lighten the burden on the country whose domestic industry is facing acute problems due to imports. Safeguards’ objective is to disperse the burden over all the Members to enable the affected Member to adjust smoothly to the new situation of international competition in that particular product line.

MFN treatment results in the sharing of the benefits of multilateralism, while a Safeguard measure is about sharing the burdens. Taking safeguard measures means withdrawal of concession by raising the tariff on a product above the bound level, or modification of the concession by raising the tariff level for imports beyond a particular value or volume, or the imposition of quantitative restrictions to limit the import of a product.

If the tariff is not bound, or if the applicable tariff is lower than the bound level, a Member is free to raise the tariff (up to the bound in the latter case).

Preconditions:

· Imports of the product should have increased either absolutely or relatively.

· The imports should be to cause or threaten to cause serious injury to domestic producers of like or directly competitive products.

· The increased imports should be the result of unforeseen developments.

· The increased imports should be the effect of the obligations of the Member in GATT 1994, such as the result of a tariff concession given by the Member in respect of that product.

Relative increase: Suppose that the domestic production and import of a product in the past were, respectively 9,000 and 1,000 units, and now, these are, respectively 4,000 and 800 units. Therefore, earlier, the import was 11% of domestic production, and now, it has risen to 20%. This is a case of relative increase, because the actual volume of import has decreased.

Serious injury: There is no specific criteria for serious injury, thus a case-by-case exam is needed. Some guidelines have, however, been provided:

· the rate and amount of the increase in imports of the product, in absolute terms or relative to domestic production;

· the share of the domestic market taken by increased imports;

· changes in the levels of sales, production, productivity, capacity utilization, profits and losses, and employment.

The threat of serious injury means serious injury being clearly imminent on the basis of facts and not merely on allegation, conjecture or remote possibility.

Domestic industry: means all the producers of like or directly competitive products in the country, or at least, those whose collective production of like or directly competitive products forms a major proportion of the total domestic production of those products. Thus, if only a small number of producers having a small share in domestic production have suffered serious injury, the cause of action would not arise.

Procedure for taking safeguard measures:

A competent authority has to be designated to hold investigations on the existence of the preconditions for taking safeguard measures.

Investigation:

A Member has to notify the Committee on Safeguards, and give public notice to all interested parties, that is importers, exporters and others. Public hearings will be conducted so that interested parties are able to present evidence, views and response accordingly.

The competent authority determines whether there has been an increase in the import of the product, whether serious injury or threat of such injury to a domestic industry has been caused, or whether there is a causal linkage between the increased imports and the serious injury or its threat.

Application of safeguard measures:

Once there is a finding of serious injury or threat of serious injury caused by increased imports, the Member has to notify the Committee on Safeguards about it. Before applying or extending a safeguard measure, a Member has to give notice to all those Members that have a substantial export interest in the product and invite them for consultation, such as reviewing the information provided by the Member proposing safeguard action, exchanging views on the proposed measure.

Types of safeguard measures:

· a tariff measure: increase in import duty beyond the bound level, imposition of surcharges or surtaxes, compensatory taxes on the product

· a non-tariff measure: fixing global quotas for import, introducing discretionary licensing, etc

· Provisional measure: When there is a sudden surge of imports, or when the domestic industry needs immediate relief because of a rapidly emerging adverse situation as a result of the increased imports, a Member can take urgently provisional safeguard measures in the form of a tariff increase for a maximum duration of 200 days. The provisional measures should be withdrawn if further investigation finds no evidence of serious injury or there is no link between the imports and such injury.

Special disciplines regarding quantitative restrictions:

When taking quantitative restrictions, a Member has to enter into consultations with the Members having substantial interest in the export of the product and decide on the global quota as well as on the shares of individual Members having substantial interest.

Members having substantial interest: Members having 10% share in the market of the importing Member, or having the highest ratio of exports of the product in question to its total exports.

General discipline in fixing quota and shares: The quantity of imports is not reduced below the average level of imports in the last three representative years for which statistics are available.

The previous representative years exclude from the average the imports of a year which is abnormal for some reason or another. For example, the Panel on EEC-Restrictions on Imports of Apples from Chile (November 1980) considered representative years prior to 1979, left out 1976 as there were some restrictions in that year. Hence, the Panel chose the years 1975, 1977 and 1978.

One effective way of applying quantitative restrictions is to decide on a global quota for imports and then allocate this quota among supplying countries based on their proportions of the total quantity or value of imports of that product in the country during a previous representative period.

Duration of safeguard measure.

General provision: safeguard measure will apply only for the period which is necessary to remedy or prevent serious injury, and to facilitate adjustment of the domestic industry. Moreover, the safeguard measure should be reviewed during the period of application and be liberalized at regular intervals.

Specific limitations: The duration of a provisional measure must not exceed 200 days;

In other cases, the duration will initially be up to four years, but it can be extended to eight years if the competent authority of the Member country has determined that the safeguard measure continues to be necessary and that there is evidence that the domestic industry is adjusting.

The total period of the measure, including the duration of the provisional measure, must not exceed 8 years. A developing country Member can extend the measure for 2 more years, beyond the general limit of 8 years.

Repeated application of measures:

A safeguard measure cannot be applied again to the import of a product for a period of time equal to that during which the measure had previously been applied or half of the earlier duration for developing country Members. But the period of non-application will be at least 2 years. For example, if a Member had applied a safeguard measure on certain basic chemicals and had continued it for 5 years, it cannot again take safeguard measure against these products for at least five years from the date of discontinuance of the initial measure.

A safeguard measure up to 180 days can be applied again if such a measure has not been applied on the product more than twice in the five years immediately preceding the introduction of the measure.

Compensation and retaliation:

When a Member introduces a safeguard measure on a product, it has to enter into consultation with the Members having substantial interest in the export of the product for the purpose of


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