International Regulation of Trade

How the World Regulates Trade between Its Countries

Each Sovereign Nation Is a Player

• International trade can be affected by each sovereign governments exercise of its sovereign powers within its own borders

• Each governments primary form of trade regulation depends on how it handles imports of goods as well as services into its borders and exports goods to other countries

• This becomes important when local businesses ordered goods or services from another country

Countries can regulate trade in different ways• Government can bar imports from a particular country

• A government might choose to bar imports of certain categories of goods that are shipped or originated from a particular country

• These kinds of measures are called embargoes – if an embargo applies, the government’s custom services, which inspect imported goods will either prevent the offloading of such goods or impound them once they are offloaded

GovernmentsCan Control Imports by Means of Tariffs and Taxes

• A tariff is essentially a tax levied at the border

• Tariffs might apply to certain categories of goods from particular countries

• This form of taxation is collected at port before the goods are allowed to enter the country

• The additional cost is passed on to the consumer

• Internal taxes take on various forms: they may be imposed surcharges, imposts, and sales taxes

• the addition of each internal taxes may make these goods less competitive especially if they are imposed on goods from a particular country

• If the goods imported from another country are similar to goods available locally the imported goods will be rendered less competitive

Necessity For Trade Law

• Sovereign nations can regulate imports and exports as they please

• If the country looks only to its own selfish interests this will be at the expense of more vibrant commerce

• When this happens it has the effect of closing markets – this results in stymied economic growth in the nations to which the markets are closed

• It also results in trade regulation being used to back political, military, and diplomatic demands as a condition imposed to keep the markets of one nation open to businesses of another nation

World Response to Closed Markets

• Other sovereign nations may take “counter measures” – if products from a particular country are banned that country might retaliate by imposing higher taxes on the goods from the barring country

• A nation whose products have been barred by the government of another nation may impose embargoes on goods which would normally come in from that country

• If practices such as these flourish around the world, trade among nations would be reduced to a rather slow pace

Trade Law Pre-World War II

• Prior to WWII there was very little comprehensive international trade law

• The law that did exist was established mainly by means of bilateral treaties – that is treaties between two countries

• These treaties became known as Friendship, Commerce, and Navigation treaties – FNCs for short

Subjects of “FNC” Treaties

• Entry of natural persons, goods, vessels, and money into other nations territory

• Rights to buy and hold property

• Rights by a foreign national to send money out of one state to another

• The legal protection of each state’s nationals and the nationals’ property in the treaty partner’s state

Bilateral Agreements Gave Rise to Multilateral Trade

• International trade law is the body of bilateral and multilateral treaties that have evolved since World War II (1939 – 1945)

• Those treaties include the General Agreement on Tariffs and Trade (GATT) and General agreement on trade in services (GATS)

• These treaties are the foundation of modern international trade law

• In addition to GATT and GATS, the closely related subject of protecting intellectual property across national borders led to another treaty known as theAgreement on Trade-Related Aspects of Intellectual Property (TRIPS)

Multilateral treaties have transformed the face of

international law• Rather than relying on a patchwork of

FNC agreements the modern multilateral treaties aimed to standardize and regularize transitional trade rules throughout the world

Objectives of Multilateral Treaties

• Expanding export opportunities across national borders

• Expanding import opportunities into national borders

• Resolving transitional trade-restriction disputes among nations short of economic trade war

These Objectives Revolve Around Four Principal Areas

• Have equal access by treaty member nations to mutual markets

• Have transparency in regulation affecting imports and exports

• Have stability in the function of mutual markets

• Have reciprocity in the process of regulating an opening access to each member nation’s markets

Some GATT Provisions are Directly Effective

• This means they may be relied on by individuals (in addition to other signatories) to challenge the actions of a contracting State (i.e., country)

• Those provisions that are directly effective are those that prohibit a State from taking action contrary to the GATT

• Provisions that do not prohibit some action – but require a contracting State to take some positive action – may only be challenged by individuals if the member state adopts implementing legislation authorizing such a challenge

Transparency in International Trade Law

• Individual governments can distort international trade law by the way that they regulate it through their own local laws

• While treaties set the standards for international law as to what countries can do or not do regulating trade at their borders the day today municipal (that is local) law has the most immediate impact on the goods and businesses of other nations in the international trade process

• In order to assure correct functioning of international trade law under the treaties nations, international trade regulators, and private businesses must be able to find and understand the municipal law of each country that governs import and export process at the borders as well as international taxation

Transparency• Is the name of the concept that

states that regulation of international trade by a sovereign nation should be done in a way that is open, accessible, and understandable to other nations, international regulators, and private businesses

To beTransparent There Are Factors the Country Needs to Be Aware of:

• First, Are the trade rules published? Are they published in a format that is accessible to those outside the government? Are they understandable and have the commonly understood meanings of words and concepts that are accessible to private business?

• Second, are the rules – typically statutes – the only source of trade regulation by the country? If not, what are the other sources? Either also written regulations? Are these regulations published? Are there any unwritten practices?

There is More to Transparency!

• For municipal system of trade regulation to be transparent, the trade law of each country must be forthright – it must not attempt to characterize a rule as benign or to disguise it as something it is really not (as a pretext to set up a trade barrier that is unlawful under one of the international treaties governing trade)

Example of Lack of Transparency

• International trade treaties usually require that to qualify as a tariff, a tax on imported goods must be collected before the goods enter the country

• If a country is permitted to characterize as a tariff any revenue-generating measure it enacts, and improper and trade-discriminatory internal taxes could be imposed on imported goods, favoring similar domestic goods whose price will be lower because they are not taxed under the guise of a tariff

There are Other Potential Barriers to International Trade than Tariffs and Taxes

• These are called nontariff trade barriers

• This type of barrier includes municipal government regulation of many areas that are considered part and parcel of the so-called police powers of the national government – the powers to regulate in the interest of public safety, health, welfare, and morals.

• Areas where nontariff trade barriers most often occur are environmental regulation, drug safety regulation, other product safety regulation, consumer protection regulation, and regulations governing that governments process for procuring goods and services relating to governmental function

Example of Nontariff Trade Barriers

• Consider a food product such as genetically altered corn – this is said to be more resistant to disease and pests and to result in higher crop yields. This means genetically altered corn is cheaper to produce and cheaper to include in products that use corn – this gives those who use this type of corn a significant price advantage over competition.

• Food producers in Country A that use genetically altered corn want to expand into the markets of Country B

• Food producers in Country B do not use genetically altered corn.

Continuation of Example of Genetically Altered Corn

• Country B’s food producers are likely to seek help from Country B’s Government to prevent genetically altered corn products from enjoying a competitive edge in the markets of Count B.

• One way Country B might seek to do this is by citing health or safety concerns over genetically modified corn and banning or limiting the importation of products containing this type of corn.

• The WTO has promoted a number of side agreements to GATT by which countries agree to limit their use of such nontariff trade barriers to only those regulations backed by scientific evidence derived from proper studies

Trade Subsidies – What are They ?

• Government support to a domestic trade, industry, or business

• They provide help to the business be on the forces of profit and loss and supply and demand in the marketplace

• They may take the form of grant money from the government to private enterprise, loans from the government, loan guarantees or, sometimes an exemption from taxation

Regulation of Subsidies by International Law

• Agreement on Subsidies and Countervailing Measures – this allows one country to take action against another countries subsidies by first conferring with that country to try and resolve the issue.

• If that doesn’t work, it can provide subsidies of its own to domestic businesses to offset the effect of the of the foreign subsidies or by imposing duties on subsidized exports from the subsidizing nation

• This approach is available only when a specific subsidy actually violates the treaty

Example of Subsidies• State A offers subsidies to all its domestic industries – not just to a

segment of the industry – providing for infrastructure support to all domestic enterprises – these are considered green subsidies, which do not violate the treaties enforced by the WTO nor will they justify another state in imposing any countervailing duty on an export from a subsidizing nation

• By contrast – yellow or actionable subsidies violate WTO-enforced treaties and support countervailing measures in retaliation that, after consultation, would include imposing a duty on subsidized imports or providing subsidies to domestic businesses harmed by the competition from foreign-subsidized product producers

More on Subsidies• Red subsidies are prohibited – such as those directly

supporting only exports from a country to give it competitive advantage in globalized markets with consequences to the subsidizing country similar to those for yellow subsidies.

• These have shorter time frames for consultation in an effort to reach resolution before countervailing measures can be implemented by the injured country.

General Agreement on Life Tariffs and Trade the Fundamental Regulatory Principle

• Nondiscrimination –the GATT treaty prohibits discrimination in trade.

• Discrimination in trade is based on the concept that an importing country treats some products differently from others for purposes of import regulation

• As used in GATT, this means that discrimination occurs in either of two common situations described in the next slide

Common Situations in which Discrimination Occurs

• A product imported from Country A is treated less favorably than a domestic product from Country B under Country B’s municipal import regulations

• A product imported from Country A is treated less favorably than a product imported from country C under Country B’s municipal import regulations

More is Needed!• Simply treating imported products differently from one

nation versus another or treating import less favorably than a domestic product does not mean the government of the country of importation has engaged in trade discrimination

• More is needed to give a reasonable basis for finding trade discrimination – in other words, not all differences in treatment of goods, products, or services constitute the kind of trade discrimination prohibited in international trade law

What is the Key Factor that Indicates Discrimination?

• Under General international trade law – and GATT in particular – the key factor that needs to to be considered to determine whether different treatment equal trade discrimination is the concept of “like products”

• Are the products being compared sufficiently similar to permit a reasonable inference that treating one more or less favorably than the other is unlawful trade discrimination?

• The issue, however is not as simple as “comparing apples and oranges”

Example• Imagine a Japanese society where people tend to consume one major

fruit each day for a snack and would buy whichever is cheaper. If Japan taxed imported oranges higher than Fuji apples, one could argue this might have the effect of driving out the imported oranges altogether to make Fuji apples the fruit of choice for snacks

• To answer such challenges the WTO has developed a test to allow it on a case-by-case, fact-intensive basis to determine whether two products are sufficiently like to justify the inference that if one is treated more favorably than the other, there is trade discrimination

This Test can be Expressed as a Series of

Questions• To the two products have the same physical characteristics? If yes, then that points towards a finding of likeness

• Do the two product share similar ingredients? If yes, then that points to a finding of likeness

• Are the two products manufactured in similar processes? If yes, then it is more probable that the two products are like

• To the two products have the same and uses? Here, we can consider how the consumer views and uses them and even the occasions on which they are used. Again, the more evidence there is that consumers via the product as substitutes for one another the more likely it is that the two products will be found to be like

• Do they compete in the same strata of the marketplace? Is that where the manufacturers are targeting them? The stronger the answer is yes the more likely the two products are like

Specific rules in the General Agreement on Trade in Services that Prohibit Trade Discrimination

• The Most-Favored-Nation status rule or MFN– this rule looks outward – at the country’s borders – and it compares how the country of import treats items from other member countries at its borders.

• The National Treatment (NT) Rule– this rule looks in word – into the importing country’s marketplace – and it compares how the country of import treats its own domestic products, compared to the products of other member countries for purposes of internal taxes

More on MFN and NT

• Before either of these rules can apply in a given scenario, the product fit issue – whether an import and a domestic or two imports – must be shown to be like products.

• If the products are like products, then the importing nations’treatment of both products for purposes of tariffs and/or taxes can be scrutinized under the requirements of either of these rules depending on circumstances

Most-Favored-Nation Rule

• Under the MFN Rule, each WTO member state must apply its tariff rules with nondiscrimination to the products of other member states at its borders. The rule usually goes beyond just tariffs to include any advantage, favor, privilege, or immunity – if the importing state accords any of these two products from another member state, it must accord them to like products of all member states.

National Treatment Rule

• The NT Rule, by contrast, looks at the treatment of imported products in comparison with like domestic products once inside the borders of the importing country.

• At this point, the question is no longer tariffs – the question is principally internal taxes

• The coverage of the nondiscrimination obligation goes be on internal taxes to include all laws, regulations, and requirements that affect the offer process to sell. It includes the sales process, purchase, transportation, distribution, and even the use of the two products

Exceptions to These Rules

• Excepting countervailing measures

• Operations of custom unions (such as the EU)

• Free trade zones

• Regulation in the interest of health, welfare, safety, and national security from the MF and Rule

• The NT Rule has exceptions for certain kinds of government procurement and subsidization of domestic products.