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GATT LAW MEMORANDUM: PRACTICAL APPLICATION OF GATT Essay Example

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GATT LAW MEMORANDUM 8

MEMORANDUM

DEPARTMENT OF TRADE,

REPUBLIC OF PARADISO

TO: The Minister of Trade FROM: The Legal Counsel

By the end of the World War II, USA and a number of other leading countries were interested in developing a set of multilateral economic and political institutions. These institutions could assist in the process of global economic reconstruction including, supporting post war reconstruction, economic stability caused by great depression and to sustain global peace.

General Agreement on Tariff and Trade (GATT) was adopted on provisional and temporary basis, pending the adoption of International Trade Organization (ITO). This however, did not happen because, ITO was never adopted and instead the GATT survived for 48 years until 1995 (Peng, 2010). By then GATT had a membership of 146 countries which accounted for 97% of the world trade. It grew substantially because of reduction in barriers to trade that included reduction in tariffs. GATT members regularly met in what came to be known as intervention rounds such as Uruguay rounds (Bossche, 2005). These rounds primarily focused on negotiating further reductions in tariffs. GATT was successful because it expanded to several countries and gained significant reduction in trade barriers. In 1994, several problems had surfaced in its institution, hence the need for a different institution (Peng, 2010).

In 1995, as part of the package of agreements negotiated at Uruguay round of trade negotiation, the World trade organization (WTO) was established.WTO became the new framework for multilateral trade system. However, GATT is still there as one of the agreements under WTO. The WTO agreements are complex because there are legal procedures covering a wide range of activities.

It was agreed that for non–agricultural products, the tariff reduction agreed upon by the members, shall be implemented in five equal rate reductions unless otherwise specified in a member’s plan. The first reduction is made effective on the date of entry into force of the agreement establishing the WTO. If the participants so wish, they can implement reduction in fewer stages or at an earlier dates than those indicated in the protocol (Schaffer, Agusti, & Earle, 2009).

The first fundamental principle of WTO agreements states that countries should not differentiate between their trading partners. A country that has granted special favors such as lower tariff for one of their products must do the same for all the other WTO members. This principle is commonly referred to as the Most- Favored-Nation (MFN) treatment. This is the first article of the GATT that regulates trade in goods. Under equal treatment, all countries are given access. For instance, when two countries engage in a dialogue and arrive at an agreement, this agreement should be extended to all nations (Jain, Trehan, & Trehan, 2009).

This proposal to raise tariffs on imported white goods from China, Korea and Japan, while reducing the tariffs on white goods from Europe and USA is not compatible with the country’s obligation as a member of WTO. According to the principle of the most favored nation, all member states expects to be treated the same. If a member country lowers the tariffs for a given product to a specific country but does not do the same to others, then the other member countries may retaliate. This is evidenced by the decline of protectionism that traces back to the World War II and it was prompted by the recognition that a world where countries were free to set unilateral tariffs in non cooperative manner carried substantial risk of damaging trade. A classical example of the risk a country will bear if it was allowed to unilaterally set tariffs is an American Tariff Act of 1930.This Act is named after Smootery- Hawley the two senators who supported the motion. They did this despite of the impending retaliation from the other countries. Despite this, the American president signed the Act raising average tariffs on thousands of products. To date in America history, this is the most restrictive tariff ever enacted and retaliations followed immediately from over 40 countries. The immediate action of America was to enact even broader restrictions against imports from numerous countries. The result of this retaliation and counter retaliation was decline in volume of trade by 67% (Levi, 2010). This Act is seen by most Economists and Historians to be the major contributor of World depression of the 1930’s. This policy became commonly known as beggar thy neighbor tariff policy of 1930’s. The effects were felt up to early 1940’s. It was a lesson and the result is that many countries prefer to act in cooperative manner to reduce or increase tariffs (Levi, 2010).

The minister of Paradiso government should not present this proposal as it is, because if he does this and it’s passed by the government, it will have negative effects on their trade volumes.

The minister should instead form a bilateral agreement with USA and Europe. This can give it the mandate to set up a trade agreement that applies only to goods traded within USA, Europe and Paradiso while discriminating against goods from outside. The rates charged to Japan, China & Korea should however be similar to those charged to the other WTO members.

The WTO agreements contribute to development. This is in line with the principle of encouraging development and economic reform. Developing countries need flexibility in the time they implement the WTO agreements. Most of these agreements were inherited from the earlier provisions of GATT that call for unique assistance and trade concessions relating to developing countries. Most of the WTO members include developing countries which are in transition to develop their economies. The developing countries were given the transition period to adjust to the unfamiliar and difficult provisions at the end of Uruguay round (Bossche, 2005). In such a case, a country can change its bindings, but only after negotiating with its trading partners in order to compensate them for loss of trade (Milner, 1998).

Another fundamental principle of WTO is the principle of national treatment where a country gives others the same treatment as one’s own nationals. This means that the imported and locally produced goods are treated equally. The national treatment only applies when a product or good has entered the local market. This therefore implies that custom duties on an import are not a violation of national treatment even though; locally-produced products are not charged an equivalent tax.

The proposal of Paradiso to introduce emergency duty for a sufficient duration to allow their motorcycle industry to recover from the import competition is compatible with country’s obligation as a member of WTO. This is mainly because developing countries like Paradiso tax imports at rates that are lower than the bound rates. Developed countries on the other hand charge actual rates that tend to be the same as bound rates. This gives the developing countries the provision to adjust the rates when they feel threatened by foreign competition. When implementing this policy, Paradiso should ensure that the import duty is only levied at the point of entry, and further understand that the motor industry manufacturers have a maximum of 8 years to adjust the import duty, and should reach a final maximum import duty of not more than 50% (Bossche, 2005).

‘‘Our citrus industry is a very important component of our GDP, and must be protected as much from the perspective of domestic consumption as from the major export revenue considerations. Accordingly we must react swiftly to the recent confirmation of the red-necked orange worm in an orange grove in Pasadena in the Southern Californian region of the USA. I will be moving to ban outright any future exports of oranges and frozen concentrated orangejuice from North and South America to ensure that this pest does not harm the Paradisian citrus industry. This prohibition will stay in place for the next 5 years’’.

This proposal requires a clear understanding of the Sanitary and Phyto-sanitary agreement under the World Trade Organization. Sanitary and Phyto-sanitary agreement is concerned with human and animal safety and plant safety Agreement (SPS Agreement) that forms part of the 1994 Accords that established the WTO, that substituted the GATT.

Sanitary and Phyto-sanitary agreement includes;

  • Safeguarding of living organisms’ life or health within a land from risks originating from entry, establishment, or spread of pest, disease, disease-carrying organisms, or disease-causing organisms,

  • Guarantee of freedom of safety of human or animal life or health within a land from risks originating from additives, harmful substances, contaminants, or disease-causing organisms in foods

  • Safeguarding of human life or health within a territory from risks originating from diseases carried by living organisms, or products thereof, or from entry, establishment, or spread of pests

  • And prevention or reduction of the risks of other damages within an area from the entry, establishment, or spread of pests (Appendix A of WTO-SPS Agreement 1994, Annex A).

The economic rationale for involving governments in establishing this policy and implementing checks to prevent or control the introduction and spread of invasive pests can be found in the economic concepts of public services (goods) and externalities
(Fidler, 2005). An externality happens when the action or inaction of one party affects another party in a positive or negative manner without the party responsible for the action or inaction being rewarded if the impact is positive or charged if the impact is negative. In support of this, a negative externality may occur when imported goods are delivered accompanied by invasive pests or diseases, which may decrease domestic output and/or increase production costs. In such a case, the exporting country is not made to stand the cost of damages to the importing country. Usually where the market mechanisms alone fail to check or correct such negative externalities, governments become justified in providing regulations (policies) that will prevent entry or reduce the risks of the threat involved (Fidler, 2005).

The dire need for a government to protect its citizens and environment against imported externalities (such as invasive pests) is recognized and embraced by the WTO Agreement, which promotes increased trade among member countries. So this proposal is compliant with GATT/WTO Agreement.

References

Bossche, P. V. (2005). The Law and Policy of the World Trade Organization. New York: Cambridge University Press.

Fidler, D. P. (2005). International Law and Infectious Diseases. New York: Oxford University Press.

Jain, T., Trehan, M., & Trehan, R. (2009). Business Environment. Delhi: V.K (India) Enterprises.

Levi, M. D. (2010). International Finance. New York: Taylor & Francis e- Library.

Milner, C. (1998). The World Economy, Global Trade Policy 1998. Oxford: Blackwell Publishers LTD.

Peng, M. W. (2010). Global Business. Mason: South-Western Centage Learning.

Schaffer, R., Agusti, F., & Earle, B. (2009). International Business Law And It’s Environment. Mason: South-Western Centage Learning