Marketing Management and International Trade

Lesson 32. WORLD TRADE ORGANIZATION

Module 8. International marketing

Lesson 32

WORLD TRADE ORGANIZATION

32.1 Introduction

The World Trade Organization (WTO) came into existence on 1/1/1995. After Second World War, General Agreement of Tariffs and Trade (GATT) was established for carrying out international trade. GATT facilitated reduction in tariffs and trade through various rounds of negotiations. The eighth such round was started in 1986 at Uruguay. The negotiations in this round continued for more than eight years and finally GATT which was a legal arrangement was replaced by an international organization called WTO on 1/1/1995. The WTO agreement was signed by 104 member countries, India being one of them.

32.2 Basic Principles of WTO

32.2.1 Non discrimination

This principle stipulates that all member countries should extend same type of treatment to all other countries at par for trade purposes without discrimination. A country cannot extend any kind of favourable treatment to any particular country /ies.

32.2.2 Transparency

This principle states that all WTO member countries are bound to publish their rules and regulations of trade, and are required to provide necessary information to other member countries when asked and to intimate WTO about any changes in trade related policy of their country.

32.2.3 Binding commitments

These represents ceilings on customs tariff rates. A country has to announce this, which can be changed by negotiating with the other countries.

32.2.4 Reciprocity

This principle highlights use of reciprocal action in trade rules e.g. extend, end or removing trade restrictions.

32.2.5 Safety valve

This principle allows countries to restrict trade if it hampers the domestic companies adversely.

32.3 Objectives of WTO

1. Increasing income and therereby living standard of people of the world.
2. Foster Sustainable development.
3. Ensuring development of all the countries particularly least developed and developing countries.
4. Promoting trade among member nations through non discriminatory trade policies.
5. Setup an appropriate trade dispute mechanism.

32.4 Functions of WTO

1. Administering all the trade agreements in right direction.
2. Act as a forum for multilateral trade negotiations.
3. Oversee trade policies to member nations.
4. Resolve trade disputes between member countries.
5. Maintaining cordial relations with other international trade organizations.

There are a number of ways of looking at the WTO. It's an organization for liberalizing trade. It's a forum for governments to negotiate trade agreements. It's a place for them to settle trade disputes. It operates a system of trade rules. Above all, it's a negotiating forum. Essentially the WTO is a place where member governments go to try to sort out the trade problems they face with each other. The first step is to talk. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. The bulk of the WTO's current work comes from the 1986694 negotiations called the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade (GATT). The WTO is currently the host to new negotiations, under the "Doha Development Agenda" launched in 2001.

Where countries have faced trade barriers and wanted them lowered, the negotiations have helped to liberalize trade. It's a set of rules. At its heart are the WTO agreements, negotiated and signed by the bulk of the world's trading nations. These documents provide the legal ground-rules for international commerce. They are essentially contracts, binding governments to keep their trade policies within agreed limits. Although negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives.

The system's overriding purpose is to help trade flow as freely as possible so long as there are no undesirable sideeffects - because this is important for economic development and well-being. That partly means removing obstacles. It also means ensuring that individuals, companies and governments know what the trade rules are around the world, and giving them the confidence that there will be no sudden changes of policy. In other words, the rules have to be "transparent" and predictable. And it helps to settle disputes '" This is a third important side to the WTO's work.

Trade relations often involve conflicting interests. Agreements, including those painstakingly negotiated in the WTO system, often need interpreting. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation. That is the purpose behind the dispute settlement process written into the WTO agreements.

32.5 Principles of WTO

The WTO agreements are lengthy and complex because they are legal texts covering a wide range of activities. They deal with: agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property, and much more. But a number of simple, fundamental principles run throughout all of these documents. These principles are the foundation of the multilateral trading system.

• Most favoured nation (MFN) treatment
• National treatment: treating foreigners and locals equally
• Freer trade: gradually through negotiation
• Predictability: through binding and transparency
• Promoting fair competition
• Encouraging development and economic reform

32.6 WTO Structure

32.6.1 Highest authority

The Ministerial Conference So, the WTO belongs to its members. The countries make their decisions through various councils and committees, whose membership consists of all WTO members. Topmost is the ministerial conference which has to meet at least once every two years. The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements.

32.6.2 Second level

General Council in three guises Day-to-day work in between the ministerial conferences is handled by three bodies:

• The General Council
• The Dispute Settlement Body
• The Trade Policy Review Body

All three are in fact the same - the Agreement Establishing the WTO states they are all the General Council, although they meet under different terms of reference. Again, all three consist of all WTO members. They report to the Ministerial Conference. The General Council acts on behalf of the Ministerial Conference on all WTO affairs. It meets as the Dispute Settlement Body and the Trade Policy Review Body to oversee procedures for settling disputes between members and to analyze members' trade policies.

32.6.3 Third level

Councils for each broad area of trade

Three more councils, each handling a different broad area of trade, report to the General Council:

• The Council for Trade in Goods (Goods Council)
• The Council for Trade in Services (Services Council)
• The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS ouncil)

As their names indicate, the three are responsible for the workings of the WTO agreements dealing with their respective areas of trade. Again they consist of all WTO members. The three also have subsidiary bodies (see below).

Six other bodies report to the General Council. The scope of their coverage is smaller, so they are "committees". But they still consist of all WTO members. They cover issues such as trade and development, the environment, regional trading arrangements, and administrative issues. The Singapore Ministerial Conference in December 1996 decided to create new working groups to look at investment and competition policy, transparency in government procurement, and trade facilitation.

Two more subsidiary bodies dealing with the plurilateral agreements (which are not signed by all WTO members) keep the General Council informed of their activities regularly. The General Council also meets as the Trade Policy Review Body and Dispute Settlement Body.

32.6.4 Fourth level

Down to the nitty-gritty each of the higher level councils has subsidiary bodies. The Goods Council has 11 committees dealing with specific subjects (such as agriculture, market access, subsidies, anti-dumping measures and so on). Again, these consist of all member countries. Also reporting to the Goods Council is the Textiles Monitoring Body, which consists of a chairman and 10 members acting in their personal capacities, and groups dealing with notifications (governments informing the WTO about current and new policies or measures) and state trading enterprises.

The Services Council's subsidiary bodies deal with financial services, domestic regulations, GATS rules and specific commitments. At the General Council level, the Dispute Settlement Body also has two subsidiaries: the dispute settlement "panels" of experts appointed to adjudicate on unresolved disputes, and the Appellate Body that deals with appeals.

All WTO members may participate in all councils, committees, etc, except Appellate Body, Dispute Settlement panels, Textiles Monitoring Body, and plurilateral committees.

32.7 The Agreements

The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries' commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes. They prescribe special treatment for developing countries. They require governments to make their trade policies transparent by notifying the WTO about laws in force and. measures adopted, and through regular reports by the secretariat on countries' trade policies.

These agreements are often called the WTO's trade rules, and the WTO is often described as "rule-based", a system based on rules. But it's important to remember that the rules are actually agreements that governments negotiated.

The agreements for the two largest areas - goods and services - share a common three-part outline, even though the detail is sometimes quite different.

They start with broad principles: the General Agreement on Tariffs and trade (GATT) (for goods), and the General Agreement on Trade in Services (GATS) (The third area, Trade-Related Aspects of Intellectual Property Rights (TRIPS), also falls into this category although at present it has no additional parts.)

Then comes extra agreements and annexes dealing with the special requirements of specific sectors or issues.

Finally, there are the detailed and lengthy schedules (or lists) of commitments made by individual countries allowing specific foreign products or service providers access to their markets. For GATT, these take the form of binding commitments on tariffs for goods in general, and combinations of tariffs and quotas for some agricultural goods. For GATS, the commitments state how much access foreign service providers are allowed for specific sectors, and they include lists of types of services where individual countries say they are not applying the "most nation" principle of non-discrimination.

Underpinning these is dispute settlement, which is based on the agreements and commitments, and trade policy reviews, an exercise in transparency. Much of the Uruguay Round dealt with the first two parts: general principles and principles for specific sectors. At the same time, market access negotiations were possible for industrial goods. Once the principles had been worked out, negotiations could proceed on the commitments for sectors such as agriculture and services.

32.8 Agreement on Agriculture

The important agreements related to agriculture and livestock products including dairy products are: Agreement on Agriculture (AoA) and Sanitary and Phytosanitary (SPS) Agreement. The Agreement on Agriculture (AoA) as a part of the WTO Agreements incorporates obligations and disciplines related to the following three aspects of livestock production: Market access/Tariffication, Domestic Support, Export competition/subsidy.

32.8.1 Market access

On market access, the AoA primarily envisages a tariffs only rule for agricultural products including livestock products. Thus all non-tariff barriers such as quantitative restrictions (QRs) – quotas – import and export-licensing variable levies, minimum import prices and voluntary export restraints are required to be converted into equivalent tariffs. These tariffs are subjected to binding and/or reduction within the implementation period. The base period taken for tariff estimation was 1986-88.

32.8.2 Special safeguard (SSG)

The AoA includes another provision of ‘Special Safeguard (SSG)’ under which members that have tariffied non-tariff measures are entitled to impose additional duty on a product in any year when either the volume of imports exceeds or the price of imports falls below the reference trigger levels.

32.8.3 Dirty tariffication

With dirty tariffication, countries exaggerated their base levels of tariffs. This was done by many developed countries by the selective use of prices for determining tariff equivalents in the based period. According to Ingco (1995), European Union had set its initial tariff bindings at un-weighted average levels of 61 per cent higher than actual tariff equivalents while the United States set its initial binding at 44 per cent above actual levels.

32.8.4 Selective tariff cuts

Under the AoA countries had a great deal of flexibility in deciding how much each agricultural tariff would be cut so average reductions vary by country. The required un-weighted average of 36 per cent tariff reductions with the only constraint being a 15 per cent cut on each tariff left countries with much freedom to decide how to allocate their tariff reductions. This provision opened up the possibility of spreading the reduction commitments rather unevenly across products e.g. reduction was bare minimum for sensitive products. Included in this category for Canada are dairy and poultry products; for Japan, grain and dairy products; and for the US, sugar, peanuts and dairy products.

32.8.5 High tariff protection

Some of the highest tariffs are for dairy products in Japan, EU and US. Japan and the EU maintain rates over 100 per cent on certain dairy products. The out-of-quota tariff rate for the EU is 94 per cent while those for Japan are over 200 per cent. The rates set by Canada exceed 200 per cent and those set by Japan on butter and milk powders are also very high.

32.8.6 Domestic support

The AoA has categorized domestic supports provided by governments to their producers into three categories based on whether they have minimal trade distorting effects or high trade distorting effects. Those measures that are considered to have minimal trade distorting effects, such as ‘green box’, ‘blue box’ and ‘special’ measures are exempted from requirement of reductions. However, other measures that have high trade distorting effects known as ‘amber box’ or total ‘aggregate measurement of support (AMS)’ measures, are subjected to reduction requirements.

32.8.7 Green box measures

‘Green box’ measures have minimal effect on trade and can be used freely. These measures include government services such as research, disease control, infrastructure, extension and buffer stocks for food security purposes, domestic food aid, direct payments to producers, decoupled income support, government assistance in income insurance and income safety net programmes, payment under environmental and regional assistance programmes, payments for relief from natural disasters, assistance to help farmers restructure agriculture, marketing and promotion services.

32.8.8 Blue box measures

‘Blue box’ measures include direct payments to producers to limit production or towards deficiency payments. These measures are more often than not are exploited by the developed countries to safeguard their vested interests.

The other measures which are exempted from reduction requirement includes government assistance to encourage agricultural and rural development in developing countries, agricultural input subsidies provided to low income and resource poor producer in developing countries. These measures can be freely used as per Special and Differential Treatment for Development Countries clause. But due to weak financial position of most of the developing countries, they are not able to take benefit of this provision.

32.8.9 Production subsidy in India

India does not provide any product specific subsidy to any livestock product. Thus milk producers of India do not receive any kind of subsidy. The main non-product-subsidies provided in India are fertilizer subsidy, irrigation subsidy, subsidy on electricity, subsidy on seeds and credit subsidy. As the level of this subsidies are less then the de minimis ten per cent, India is not required to reduce levels of producer subsidies.

Some support measures provided by the government are also exempted from any reduction commitment for developing countries. These measures are subsidies for milch animals, small farmer development assistance and assistance to small holders for easy access to inputs.

Thus it can be seen that, the various domestic support boxes have not been helpful in lowering overall protection levels. The reality is that huge amounts of domestic support will mostly be production limiting and trade distorting. The present structure of domestic support boxes should, therefore, be re-negotiated. Dismantling all domestic support into one box category would eliminate the existing loopholes and bring rationale and structure to the Agreement.

32.8.10 Export subsidies

Export subsidies are provided by a country to make its commodities globally competitive. The AoA has listed six types of export subsidy measures subjected to reduction requirements from the 1986-1990 base period levels. Developing countries are exempted from reduction commitment in respect of export marketing costs, internal and international transport and freight charges.

32.8.11 Indian position on export subsidy

India does not provide any of the export subsidies listed for reduction commitments in the Agreement. The only subsidies available to exporters are in the form of (a) exemption of profits from export sales in income tax (under section 80-HHC) and (b) subsidies on costs of freight, marketing and international and internal transport on export shipments of livestock products.

32.8.12 Consequence of high export subsidy

The extensive use of export subsidies (mainly the EU and the US) in world trade in dairy, meat and poultry products depresses the world market prices and makes the products from all non-subsidizing exporting countries such as India uncompetitive. The size of export subsidies and the high proportion of world trade to which exports subsidies are applied both suggest that there is a need to negotiate complete elimination of export subsidies provided by developed countries during WTO meetings.

32.8.13 Sanitary and phytosanitary measures

The agreement on the application of Sanitary and Phytosanitary Measures (the SPS Agreement) is one of the important agreements of WTO. The SPS Agreement concerns the protection of animal, pant or human health or life from food borne risks and animal and plant carried diseases. The Agreement sets important parameters governing the adoption and implementation of food quality/safety and animal health measures and recognizes the standards, guidelines and recommendations determined by the Codex Alimentarius Commission (CAC) and International Office of Epizootics (OIE) as the minimum basis for international trade in livestock sector, while permitting the members to introduce a level of protection higher than that is recommended by the above mentioned international reference organizations provided it is scientifically justified.

The SPS Agreement provides guidelines to countries on measures to be taken to protect human, animal or plant life or health from the global trade or unsafe food, animal or plant. There are however, some provisions in the Agreement which amount to non-tariff barriers to trade.

Likewise SPS – recognized Codex standards stipulate that quality assurance systems such as HACCP, good hygienic practices should be employed in the entire food chain, including primary production. Although some flexibility has been granted to the developing countries in the primary production, it is in India’s interest to ensure conformity with the HACCP System throughout the chain i.e. from farmer to consumer to enhance image of Indian livestock products.

32.8.14 Codex standards

The WTO has recognizes the standards set by international organizations namely the Codex Alimentarius Commission (CAC) and the International Office of Epizootics (OIE) as reference for food safety and animal health respectively in global trade.

The main focus of Codex standards and guidelines has been quality and food safety for human consumption. Codex standards are expected to be based on science. However, in some cases, this principle has been ignored. Moreover, most standards have been set without considering data from the developing countries. Therefore, the standards set, at times, are very stringent from India’s point of view. Testing facilities for analyzing of all the contaminants, too are not easily available to livestock products’ processors. Codex has MRLs for 10 veterinary drugs residues and is considering MRLs for some more. PFA has not as yet set MRLs for veterinary drugs although it is now considering to do so. Codex is also seriously concerned regarding the microbiological quality of livestock products, and has recommended measures to minimize microbiological contamination. Codex guidelines stipulate that the raw material should be produced in a way, which minimizes bacterial load, growth and contamination. Codex advocates measures to be taken from farmer-to consumer to ensure that livestock products are safe for human consumption.

To achieve this, Codex recommends the application of the Principles of Hazard Analysis and Critical Control Point (HACCP) System. It is expected that application of HACCP system and other codes, guidelines and recommendations would be made mandatory for the international trade in future. The Indian dairy industry must gear to meet the international regulatory requirements and ensure that not only their plants get certified under HACCP system but also their primary production system. Codex is also considering a Code of Practice on Good Animal Feeding. The proposed code includes provisions of application of HACCP in feed manufacturing and of traceability of raw materials and quality defects to processes. The main focus of Codex standards and guidelines has been quality and food safety for human consumption.

32.8.15 OIE standards

The major focus of OIE requirements is animal health related concerns as follows:i) General Provisions: Notification of Animal Diseases, Veterinary Ethics and Certification for International Trade, Import Risk Analysis Import/Export Producers and Risk Analysis for Biologicals for Veterinary Use,Recommendations Applicable to Specific Diseases, Diagnostic Tests for International Trade Purposes: Prescribed and Alternative Diagnostic tests for list A and B Diseases, Collection and Processing of Semen, Epidemiological Surveillance System: Recommendations for Rinderpest, contagious bovine pleuropneumonia, bovine spongiform encephalopathy, Model International Certificates

32.8.16 Consequence of SPS

Taking advantage of SPS provisions, some countries have adopted regulations that include unjustified, stringent SPS measures, which are difficult for most of the developing countries including India to comply with European Union regulations on health rules for the production of milk on maximum levels of Aflatoxin M in milk and on provisional list of countries authorized for export products into EU are some examples.

32.8.17 Impact of WTO agreements on the Indian dairy sector

India’s trade in milk products – both exports and imports – is very much influenced by the policies of WTO. Different kinds of subsidies provided by many developed Countries to their farmers including milk producers distort international dairy market prove to the disadvantageous to milk producers of India. It was expected that the implementation of Agreement on Agriculture (AoA) would substantially reform the trade of agricultural products, but due to high market access barriers it has not happened.

Very high total domestic support is provided by many developed countries to their producers. According to one estimate, it was found producers continue to get nearly half of their earnings from transfers due to governments support. Whereas, Indian milk producers do not enjoy any significant levels of such support.

Export subsidies also continue to be a significant factor in world dairy trade. The quantity of dairy products eligible for export subsidies, even after reduction commitments, is about sixty percent of estimated world trade in all products. Such policies significantly influence the global prices of dairy products.

Many developed countries maintain Tariff barriers in the form of : high ad-valorem duties; specific duties that afford a higher level of protection as compared to ad valorem duties; and special agricultural safeguards. Many developed countries have maintained very high level of tariffs on dairy products, such as Norway (more than 300%), Finland (200-480%), Japan (180 to 500%). Moreover, special agricultural safeguard (SSG) mechanism, designed for import control in cases of surges in imports and decline in world market prices, is being used as an integral part of market management system by many developed countries.

Arbitrarily higher standards for food safety and quality are imposed by many importing countries, encompassing animal health requirements, standards on microbiological quality, environmental contaminants etc. It is difficult for India to meet these standards due to lack of infrastructural facilities. For producing safe milk, it is necessary that milk is produced hygienically and then chilled at low temperature and transported in the quickest possible time for processing.

The subsidies extended by major dairying developed countries depress world prices of dairy products substantially and to levels that make Indian dairy products uncompetitive. While on the one hand, this affects exports of Indian dairy products adversely, on the other, this encourages increased imports of subsidized products damaging domestic industry. Since world trade is distorted by entry barriers such as quotas and subsidies and non tariff barriers such as arbitrarily higher standards for food quality, it is difficult for any emerging country to acquire a major share in the world market. The EU is the world’s largest exporter of dairy products and its use of substantial export subsidies has a depressing effect on world market prices. Practically all milk powder and butter exports as well as a substantial portion of cheese exports by the EU are subsidized. Subsidized exports by the EU and the US alone have a major impact on the global dairy market because they represent a significant proportion of total trade.

Under the Government’s liberalization policy, the dairy sector was de-licensed in June 1991. In April 2001 all quantitative restrictions (QRs) on dairy products were removed. These policy move exposed Indian dairy industry to the highly distorted world markets along with the threat of imported products. This also posed threat of bringing exotic diseases into the country. Accordingly the government, then, amended the Livestock Importation Act, 1898 in July 2001 to allow the import of the livestock products, including milk products, against Sanitary Import Permit after conducting risk analysis, as per the SPS Agreement.

Due to such distortions in world trade and the legislative and infrastructural Problems prevalent in India, It is difficult for her to acquire a significant share in the international market. Particularly for western dairy products like SMP, butter oil etc. The possible road map for export of milk products is directed at indigenous milk products like ghee, khoa, paneer, sweet meats which are popular in one form or the other in South East Asia, Middle East and North Africa, where we have comparative advantage in sailing Indian dairy products and we determine the standards for these products. This group of countries (35 to 40 developing countries) would be able to absorb any surplus milk and milk products, that India export.

32.9 Additional Agreements

Another group of agreements not included in the diagram is also important: the two "plurilateral" agreements not signed by all members: civil aircraft and government procurement.