Principles of the trading System under WTO

A number of simple and fundamental principles run throughout all of the instruments which, together, make up the multilateral trading system.

Trade without discrimination:

For almost fifty years, key provisions of GATT outlawed discrimination among members and between imported and domestically produced merchandise. The famous “most-favored-nations” (MFN) clause members are bound to grant to the products of other members treatment no less favorable than the accorded to the products of any other country. Thus, no country is to give special trading advantages to another or to discriminate against it: all are on an equal basis and all share the benefits of any move towards lower trade barriers.

There are a number of exceptions to MFN article notably that covering customs unions and free-trade areas. However, most favored nation treatment generally ensures that developing countries and others with little economic leverage are able to benefit freely from the best trading conditions wherever and whenever they are negotiated.

A second form of non-discrimination known as “national treatment” requires that once goods have entered a market, they must be treated no less favorably than the equivalent domestically produced goods.

Apart from the revised GATT several other WTO agreements contain important provisions relating to MFN and national treatment. That on Trade Related Aspects of Intellectual Property Rights (TRIPS) contains, with some exceptions, MFN and national treatment requirements relating to the provision of intellectual property protection by WTO members. The General Agreement on Trade in Services (GATS) requires members to offer MFN treatment to services and service suppliers of other members. However, it permits listed exemptions to the MFN obligation covering specific measures for which WTO members are unable to offer such treatment initially. Where such exemptions are taken, they are to be reviewed after five years and should not be maintained for more than ten years. On the other hand, national treatment only is an obligation where members explicitly undertake to accord it for particular services or service activities. This means that a national treatment is often the result of negotiations among members.

Other WTO agreements with non-discrimination provisions include those on rules of origin, pre-shipment inspection, trade, related investment measures and the application of sanitary and phyto-sanitary measures.

Predictable and Growing Access to Markets:

The multilateral trading system is an attempt by governments to provide investors, employees and consumers with a business environment which encourages trade, investment and job creation as well as choice and low prices in the market place. Such an environment needs to be stable and predictable, particularly if businesses are to invest and thrive.

The existence of secure and predictable market access is largely determined by the use of tariffs, or customs duties. While quotas are generally outlawed, tariffs are legal in the WTO and are commonly used by governments to protect domestic industries and to raise revenues. However, they are subject to disciplines, for instance, that they are not discriminatory among imports and are largely ‘bound’. Binding means that a tariff level for a particular product becomes a commitment by a WTO member and cannot be increased without compensation negotiations with its main trading partners. Thus it can be the case that the extension of a customs union can lead to higher tariffs in some areas for which compensation negotiations are necessary.

Tariff reductions under the Uruguay Round, for the most part phased over five years, will result in a 40% cut in developed countries tariffs on industrial products, from an average of 6.3% to 3.8%, and a jump from 20 to 44% in the value of imported industrial products that receive duty-free treatment in developed countries. At the higher end of the tariff structure, the proportion of imports into developed countries from all sources that encounter tariffs above 15% will decline from 7 to 5 % and from 9 to 5% for imports from developing countries.

The Uruguay Round increased the percentage of bound product lines from 78 to 99% for developed countries, 21to 73% for developing economies and from 73 to 98% for economies in transition results which are providing a substantially higher degree of market security for traders and investors.

The tariff of all non-tariff import restrictions for agricultural products provided a substantial increase in the level of market predictability for agricultural products. More than 30% of agricultural produce had been subject to quotas or import restrictions. Virtually all such measures have now been converted to tariffs which, ,while initially providing substantially the same level of protection as previous non-tariff measures, are being reduced during the six years of implementation of the Uruguay Round agricultural agreement. The market access commitments on agriculture will also eliminate previous import bans on certain products.

While tariffs at the border do not exist for trade in services, there is no less a need for predictable conditions. To meet that need, government undertook an initial set of commitments covering national regulations affecting various service activities. These commitments are, like those for tariffs, contained in binding national schedules and will be extended through further rounds of services negotiations in the future.

Many other WTO agreements seek to ensure that conditions of investment and trade are more predictable by making it very difficult for member governments to change the rules of the game at whim. In almost every policy area which impinges on trading conditions, the scope of members to pursue capricious, discriminatory and protectionist policies is constrained by WTO commitments.

The key to predictable trading conditions is often the transparency of domestic laws, regulations and practices. Many WTO agreements contain transparency provisions which require disclosure at the national level. The regular surveillance of national trade policies through the Trade Policy Review Mechanism provides a further means of encouraging transparency both domestically and at the multilateral level.