29 Multilateral Agreement on Trade in Goods and Services

Dr. Savita

 

1.  Learning Objective

 

After completing this module, you will be able to:

 

i.   Understand the essence of WTO agreement

ii.  Understand the concept of Multilateral Agreement on trade in Goods and Services

iii. Know about the General Agreement on Trade in Services (GATS) and

iv.  Understand about the General Agreement for Tariffs and Trade (GATT)

 

 

2.  Introduction

 

International business in the form of exporting and importing goods and services takes place under a global system of rules and regulations agreed upon and enforced by national governments and international organizations. The emergence of trading blocs has increased the size of national markets by eliminating trade barriers among member countries. Some blocs, such as the European Union (EU), NAFTA, APEC etc. aim to integrate the member countries into an economic and political entity with common governance institutions as well as coordinated economic policies, including a single currency. The creation of a single large market with minimal restrictions on movement of goods and services has had a major effect on the international business operations of many firms around the globe. The module deals with various agreements on trading of goods and services which have bearing on the internalization of goods and services.

 

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3.  World Trade Organization (WTO)

 

International business is based on the theory of comparative advantage which states that countries should specialize in manufacturing/growing those products in which it has comparative advantage. It will pay the country to produce more of those goods in which it is relatively more efficient and to export these in return of goods in which its absolute advantage is least. The principle of comparative advantage favours free trade for efficient production. However, to protect their domestic industry, countries resort to tariff and non-tariff barriers and restrictions. As such to discipline international trade and encourage free flow of goods and services, General Agreement on Tariffs and Trade (GATT) was agreed in 1947, subsequently replaced by WTO. WTO’s Agreement cover all the original treaty provisions of GATT relating to trade in goods and also cover new areas like trade in services, trade related intellectual property issues and trade related investment measures.

The WTO, which began its operations in 1995, is a successor of GATT. The GATT was a forum where the member countries met from time to time to discuss and solve world trade problems. The WTO differs from GATT in the sense that it is a chartered trade organization. The WTO has a legal status and enjoys privileges/immunities on the same footing as the IMF and the World Bank. 76 Governments became members of the WTO on its first day. The membership of WTO increased to 127 by December 1996. India is one of the founder members of WTO. The WTO is based in Geneva, Switzerland. Its main functions are:

  • To limit harmful trade practices.
  • Acting as a forum for multilateral trade negotiations.
  • Cooperating with other international institutes involved in global policy-making.
  • Overseeing national trade policies.

 

To administer the understanding on rules and procedures governing the settlement of disputes (Dispute Settlement Understanding (DSO)

 

Objective of WTO 

 

The basic objective of WTO is to ensure global free trade and reduction of tariff and non-tariff barriers. The ultimate objective of WTO is to expand production and trade and allow the optimal use of world resources. Its procedures are based on the principles of transparency, predictability and certainty.

 

WTO Agreement 

 

The WTO Agreements cover:

  • Goods (main agreement GATT) e.g. all industrial products, consumer durables etc.
  • Services (main agreement GATTS) e.g. Banking, Insurance, Consultancy etc.
  • Intellectual Property (TRIPS) e.g. Patents, Copyrights, and Trademarks etc.

 

The Agreement establishing the WTO consists of the following which embody the results of the Uruguay Round of the Multilateral Trade Negotiations.

 

4.  MULTILATERAL AGREEMENT ON TRADE IN GOODS 

 

From 1947 to 1994, GATT was the forum for negotiating lower custom duty rates and other trade barriers. The various agreements dealing with different aspects related to trade in goods are

 

1.  Understanding on Balance of Payment Provisions of GATT 

The members imposing restrictions for correcting balance of payment deficits should give preference to price based measures. The various price-based measures can be import surcharges, import deposits or measures which affect the price of imported goods.

 

2.  Agreement on Agriculture 

The Agreement on agriculture seeks to open national markets to international competition by replacing non- tariff measures with normal customs duties. The agreement also seeks to check overproduction by progressively reducing government aids. Moreover, it seeks new disciplines on reduction in subsidies along with the volume of subsidized exports. The Agreement on Agriculture relates to the following:

 

i. Domestic Subsidies: Domestic subsidies fall into two categories viz. the non-product specific subsidies (given for all crops) and product specific subsidies (given for specific crops) for the purpose of calculating total subsidies, both types of subsidies mentioned above must be totaled. The total subsidies should not exceed 10% of the value of total agricultural production in that year.

 

ii. Export Subsidies: WTO members are required to reduce the value of direct export subsidies to a level of 36% below the 1986-90 base period level and their quantity by 21 % over the same period. In developing countries, the reductions are 2/3rds those of developed countries over a ten-year period and there are no reductions for least developed countries.

 

iii. Sanitary and Phytosanitary Measures: These concern food safety, and animal and plant health measures. The agreement lays down procedures and criteria for the assessment of risk and determination of appropriate levels of phytosanitary or sanitary protection.

3.  Agreement on Textiles and Clothing 

The objective of this agreement is to secure the integration of the textiles and clothing sector into the GATT 1994. The integration would take place in four phases. In the first phase, each party from the specific list which accounted for not less than 16% of its total volume of imports in 1990 would be integrated into the GATT products. In the second phase, products which accounted for not less than 17% of 1990 imports would be integrated. In the third phase, beginning 1st January, 2002, products which accounted for not less than 18% would be integrated. All remaining products would be integrated at the end on 1st January, 2005 in the fourth phase. Integration means that trade in tops and yams, made-up textile products, fabrics and clothing will be governed by the rules of GATT. As a part of integration process, all member countries should take actions to improve market access and ensure the application of policies relating to fair and equitable trading conditions.

 

4.  Agreement on Trade Related Aspects of Investment Measures (TRIMs) 

TRIMs calls for the removal of all trade related investment measures within a period of five years. TRIMs requires foreign investment companies to be treated at  par with national companies. The Agreement recognizes that certain investment measures restrict and distort trade. Thus, it requires mandatory notification of all non-confirming TRIMs and their removal within two years for developed countries, five years for developing countries and seven years for least developed countries. The WTO has established a committee on TRIMs which will monitor the implementation of these commitments and report to the council of trade in goods annually.

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The Multinational Agreement on trade in goods has strengthened various rules and disciplines. The most important of these relate  to anti-dumping, subsidies and countervailing measures, safeguards and dispute settlement. Rules  concerning dispute settlement have been made time bound, automotive and judicial in approach.

 

5.  GENERAL AGREEMENT ON TRADE IN SERVICES (GATS) 

 

The General Agreement on Trade in Services (GATS) is the first multilateral agreement to provide legally enforceable rights to trade in all services. It has a built-in commitment to continuous liberalization through periodic negotiations. And it is the world’s first multilateral agreement on investment, since it covers not just cross-border trade but every possible means of supplying a service, including the right to set up a commercial presence in the export market.

 

The GATS has three basic principles: First it covers all services except those provided in the exercise of governmental authority; second, there should be no discrimination in favor of national providers – the national treatment principle; and third, there should be no discrimination between other members of the agreement – the Most Favored Nation (MFN) principle. These are very powerful principles. No tariff or other generalized protection mechanism is applied in services, but the agreement does provide for important exceptions. First, governments can choose the services in which they make market access and national treatment commitments; second, they can limit the degree of market access they provide; and third, they can take exceptions even from the MFN obligation, in principle only for ten years, in order to give more favorable treatment to some countries than to WTO Members in general.

 

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1. Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) 

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The TRIPs Agreement covers seven categories of intellectual property. They are

 

i. Copyright and Related Rights: The rights of authors of literary and artistic works (such as books and other writings, musical compositions, paintings, sculpture, computer programs and films) are protected by copyright, for a minimum period of 50 years after the death of the author. Also protected through copyright and related (sometimes referred to as “neighboring”) rights are the rights of performers (example: Actors, singers and musicians), producers of phonograms (sound recordings) and broadcasting organizations. The main social purpose of protection of copyright and related rights is to encourage and reward creative work.

 

ii. Trademarks: Any sign, or combination of signs, capable of distinguishing the goods or services of one undertaking from those of other undertakings constitute a trademark. The owner of a registered trademark has the executive right to prevent third parties from using identical or similar signs for goods or services. The protection of trademarks stimulates and ensure fair competition. The protection may last indefinitely, provided the sign in question continues to be distinctive.

 

iii. Geographical Indications: This refers to the identity of a good originating in the territory of a member/region/locality where a given quality or reputation is essentially attributed to its geographical origin. Members are required to provide the legal means for interested parties to prevent the use of any indication which misleads the consumer as to the origin of goods.

 

iv. Industrial Designs: Industrial designs are protected for a period of 10 years. The social purpose is to provide protection for the results of investment in the development of new technology, thus giving the incentive and means to finance research and development activities.

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v. Patents: Patents are given for inventions (whether products or processes), in all fields of technology. The invention should be new and capable of industrial application. The patent owners can transfer the patent rights to conclude licensing contracts. The protection for patents is given for a period of 20 years.

 

vi. Integrated Circuits: The Agreement provides protection to layout designs/topographics of integrated circuits for a period of ten years. The protection shall lapse 15 years after creation of the layout design.

 

vii. Trade Secrets: Trade secrets having commercial value shall be protected against breach of confidence. The test data submitted to governments (in order to obtain marketing approval for pharmaceuticals and agricultural chemicals) shall be protected against unfair commercial use.

 

Thus, it can be noted that the intellectual property rights are the rights given to persons over the creations of their minds. They give the creator an exclusive right over the use of his /her creation for a certain period of time.

 

2. Dispute Settlement System 

The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgments by specially appointed independent experts are based on interpretations of the agreements and individual countries’ commitments.

 

The system encourages countries to settle their differences through consultation. Failing that, they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of a ruling by a panel of experts, and the chance to appeal the ruling on legal grounds. Confidence in the system is borne out by the number of cases brought to the WTO – 167 cases by March 1999 compared to some 300 disputes dealt with during the entire life of GATT (1947-94).

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3.  Plurilateral Trade Agreement (PTA) 

The Plurilateral Trade Agreement consists of the following:

  • Agreement on Trade in Civil Aircraft
  • Agreement on Government Procurement
  • International Dairy Agreement
  • International Bovine Meat Agreement.

 

The first agreement was done at Geneva in April 1979. It was subsequently modified, amended and rectified. The latter three agreements were done at Marrakesh on 15 April, 1994.

 

The WTO is a watchdog of international trade. It regularly examines the trade regimes of individual members. The WTO is also a management consultant for world trade. Its economists keep a close watch on the pulse of the global economy. It is a system that promotes fair and undistorted competition. The rules on non-discrimination are designed to secure fair conditions of trade. WTO encourages development and economic reforms as three-quarters of its members are developing countries and countries in the process of economic reform. Thus, it can be said that WTO has helped in creating a strong and prosperous trading system contributing to unprecedented growth.

 

6.  GENERAL AGREEMENT FOR TARIFFS AND TRADE (GATT) 

 

GATT was a multilateral treaty that came into force in January 1948. Its basic aim was to lay down rules for conducting international trade. GATT also provided a forum in which countries could discuss their trade problems and enhance their international trading opportunities.

 

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Trade Negotiations under the GATT 

 

Eight major trade negotiations took place under the GATT auspices. They are

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  • The first round in 1947 (Geneva) – This round saw the creation of GATT.
  • The second round in 1949 (Annecy, France) – The principal emphasis of this round was tariff reduction.
  • The third round in 1951 (Torkquay, England) – The tariff reduction negotiations were continued in this round.
  • The fourth round in 1956 (Geneva).
  • The fifth round in 1960-61 (Geneva, Dillon Round).
  • The sixth round in 1964-67 (Geneva, Kennedy Round).
  • The seventh round in 1973-79 (Geneva, Tokyo Round).
  • The light round in 1986-94 (Uruguay Round).

 

The fourth, fifth, sixth and seventh rounds involved revision of GATT rules and the addition of more countries. The talks of the Uruguay Round were the most ambitious and complex so far. The negotiations covered new areas such as Trade Related Intellectual Property Rights (TRIPs), Trade Related Investment Measures (TRIMs) and Trade in Services and Agriculture.

 

The estimates made by World Bank, OECD and the GATT secretariat show that the income effects of the implementation of the Uruguay Round package will add between 213 and 274 billion US dollar annually to the world income. The largest resources will be in the areas of clothing (60%); agriculture, forestry and fishery products (20%) and processed food and beverages (19%).

 

The important aspects of market access in the Uruguay Round relate to the following.

  • Tariffs: The industrial tariffs were reduced and bound at very low levels (an average of 5%). The developing countries have also been reducing their tariffs. The tariff reductions were to be carried out in six equated annual installments from March 1, 1995.
  • Textiles and Clothing: A major achievement in their area has been the commitment to integrate this sector into a multilateral framework. The ten-year transition period in the textiles agreement will enable countries to devise policies and allow strategic reaction on the part of the industry, in order to reap the greatest benefits from the integration.

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  • Agriculture: On agricultural tariffs, developing countries have the flexibility of indicating maximum ceiling bindings. India had indicated ceiling bindings of 100% on primary products, 150% on processed products and 300% on edible oils. The final act classifies that the operation in the public distribution system will not be affected by the provisions of the agreement.

 

The Uruguay Round had also strengthened multilateral rules and disciplines. The most important of these relate to anti dumping, subsidies and countervailing measures, safeguards and dispute settlement.

 

The Agreement on Trade Related Investment Measures (TRIMs) prohibits investment measures that are inconsistent with national treatment. The developing countries have been given five years and the developed countries are given two years to phase out inconsistent TRIMs.

 

The Agreement on Trade Related Intellectual Property rights (TRIPs) provide norms and standards for:

  • Copyright and related rights.
  • Patents.
  • Trade secrets.
  • Trademarks.
  • Industrial designs.
  • Layout designs of integrated circuits.
  • Protection of undisclosed information.

 

The agreement allowed 1 year for developed countries, 5 years for developing countries and 1 I years for least developed countries to change their laws for implementation of TRIPs. The general agreement on services is a set of multilaterally agreed and legally enforceable rules and disciplines relating to international trade in services. Services include financial services of persons and telecommunications. The GATS requires non- discrimination by governments on the basis of Most Favored Nation (MFN) clause and transparency in the form of publication of laws and regulations relating to services trade.

 

Given its provisional nature and limited field of action, the success of GATT in promoting and securing the liberalization of much of world trade over 47 years is incontestable. The rush of new members during the Uruguay Round demonstrated that the multilateral trading system was recognized as an anchor for development and an instrument of economic and trade reform. A whole corpus of jurisprudence on trade matters evolved under the aegis of GATT. The WTO is in a large measure built upon the strong foundation provided by the GATT.

 

7. Summary: In this module we have learnt about the essence of WTO agreement, the concept of Multilateral Agreement in Goods and Services, the General Agreement on Trade in Services (GATS) and the General Agreement for Tariffs and Trade (GATT). To discipline international trade and encourage free flow of goods and services, General Agreement on Tariffs and Trade (GATT) was agreed in 1947, subsequently replaced by WTO. GATT was a multilateral treaty which was established to lay down rules for conducting international trade. GATT also provided a forum in which countries could discuss their trade problems and enhance their international trading opportunities. WTO’s Agreement cover all the original treaty provisions of GATT relating to trade in goods and also cover new areas like trade in services, trade related intellectual property issues and trade related investment measures. On the other hand, The General Agreement on Trade in Services (GATS) is the first multilateral agreement to provide legally enforceable rights to trade in all services. It is the world’s first multilateral agreement on investment, since it covers not just cross-border trade but every possible means of supplying a service, including the right to set up a commercial presence in the export market.

 

Suggested Readings

  1. Sundharam K.P.M. and Datt Ruddar (2010). Indian Economy, S. Chand & Sons, New Delhi.
  2. Sharan Vyptakesh (2003). International Business: Concept, Environment and Strategy. Pearson Education, New Delhi
  3. Cullen. (2010). International Business. Routledge.
  4. Bennett Roger (2011). International Business. Pearson Education, New Delhi
  5. Paul Justin (2010). Business Environment-Text and Cases. Tata McGraw Hill, New Delhi.
  6. Cherunilam Francis (2010). International Business. Prentice Hall of India Private Limited. New Delhi.
  7. Cherunilam Francis (2013). Global Economy and Business Environment. Himalaya Publishing House, New Delhi.
  8. Levi MauriceD. (2009). International Finance. Routledge.
  9. Conklin David w. (2011). The Global Environment of Business. Sage Publications.
  10. Mithani D M. (2009). Economics of Global Trade and Finance. Himalaya Publishing House New Delhi.
  11. Cherunilam Francis (2011). International Business Environment. Himalaya Publishing House, New Delhi.
  12. Saleem Shaikh (2010). Business Environment. Pearson Education, New Delhi.