Unit 3: Trade Negotiations Chapter Notes | Business Economics for CA Foundation PDF Download

Overview

Introduction

In recent years, there has been a surge in bilateral and multilateral negotiations among various nations on the international stage. India, for instance, has already become part of 19 such agreements and is currently negotiating over two dozen more. Significant events in 2020, such as Britain's departure from the European Union, the new free trade agreement known as the United States-Mexico-Canada Agreement (USMCA), and the ongoing trade war between the US and China, along with the global pandemic, have made trade negotiations a crucial area of study.

Trade negotiations involve not just national governments but also various stakeholders, including interest groups, lobbying organizations, pressure groups, and Non-Governmental Organizations (NGOs), all of whom exert their influence on the process. The positions taken by each negotiating party reflect their underlying agenda and interests. For example, in trade negotiations, one party may push for market access through tariff reductions, while another may advocate for the protection of domestic industries.

Before delving into multilateral trade negotiations and related institutions, it is important to understand the nature of regional and free trade agreements, which are the result of negotiations.

Understanding Regional Trade Agreements (RTAs)

Regional Trade Agreements (RTAs) are essentially pacts among countries aiming to lessen trade barriers, such as tariffs and quotas, to facilitate smoother trade between them. These agreements are not restricted to nations within the same geographical area. An RTA is a treaty that outlines the trade rules for all signatory governments. As of February 1, 2021, there were 339 RTAs in effect.

Different Types of RTAs
Trade negotiations can lead to various types of agreements, which are categorized as follows:

1. Unilateral Trade Agreements

• These agreements involve an importing country offering trade incentives to an exporting country to stimulate economic activities that benefit the exporting country.
• An example is the Generalized System of Preferences (GSP).

2. Bilateral Agreements

• Bilateral agreements establish trade rules between two countries, two blocs, or a bloc and a country.
• These agreements may focus on specific goods, services, or market entry barriers.
• Examples include the EU-South Africa Free Trade Agreement and the ASEAN–India Free Trade Area.

3. Regional Preferential Trade Agreements

• These agreements involve a group of countries reducing trade barriers on a reciprocal and preferential basis for member countries only.
• An example is the Global System of Trade Preferences among Developing Countries (GSTP).

4. Trading Blocs

• A trading bloc consists of countries that have a free trade agreement among themselves and may apply a common external tariff to non-member countries.
• Examples include the Arab League (AL) and the European Free Trade Association (EFTA).

5. Free Trade Areas

• In a free trade area, member countries eliminate all tariff and quota barriers on trade among themselves to enhance the exchange of goods.
• While trade among member states is tariff-free, they maintain their own external tariffs for imports from non-member countries.
• An example is the ASEAN–India Free Trade Area (AIFTA), which came into force on August 1, 2005.

6. Customs Unions

• A customs union involves countries eliminating tariffs on trade among themselves while maintaining a common external tariff for trade with non-member countries.
• This practice, which technically violates the Most Favored Nation (MFN) principle, distinguishes a customs union from a free trade area.
• Examples include the European Union (EU), the Gulf Cooperation Council (GCC), and the Southern Common Market (MERCOSUR).

7. Common Market:

• Common Market takes the concept of a customs union further by allowing the free movement of goods and factors of production such as labor, capital, and other resources. 
• This is achieved by reducing or eliminating internal tariffs on goods and establishing a common set of external tariffs. Member countries also work towards harmonizing certain institutional arrangements and commercial and financial laws and regulations. 
• Additionally, there are common barriers against non-member countries, similar to what is seen in the European Union (EU) and the Association of Southeast Asian Nations (ASEAN).

8. Economic and Monetary Union

• Following the establishment of a common market, the next step is often the formation of some type of monetary union due to the increased need for foreign exchange operations and higher financial and administrative costs for firms operating within the region. In an Economic and Monetary Union, member countries share a common currency, which necessitates a strong convergence of macroeconomic policies. For instance, countries in the European Union have adopted a single currency, the euro.

Since the end of the Second World War, international trade has seen significant growth, largely due to the multilateral trade system. This system is both a political process and a set of political institutions. It is a political process because it relies on negotiations and bargaining among sovereign governments to establish rules governing trade between or among themselves. The political institutions that facilitate trade negotiations and support international trade cooperation by providing the rules have included the former General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).

The General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) focuses on international trade in goods. Its implementation is overseen by the Council for Trade in Goods, comprising representatives from all World Trade Organization (WTO) member countries. The Goods Council includes ten committees addressing specific issues such as agriculture, market access, subsidies, and anti-dumping measures, with participation from all member countries. Additionally, a working party on state trading enterprises and the Information Technology Agreement (ITA) Committee report to the Goods Council.

During the 1980s, GATT became less relevant due to several factors:

• Obsolescence: GATT could not keep up with the rapidly evolving and complex world trade landscape marked by emerging globalization.
• Expansion of International Investments: There was significant growth in international investments that GATT did not address.
• Coverage Gaps: GATT did not cover intellectual property rights or trade in services, which became increasingly important.
• Growth of World Merchandise Trade: The volume of world merchandise trade increased dramatically, surpassing GATT's scope.
• Exploitation of Ambiguities: Ambiguities in the multilateral system could be exploited, undermining its effectiveness.
• Agricultural Trade Liberalization: Efforts to liberalize agricultural trade were unsuccessful.
• Institutional and Dispute Settlement Inadequacies: GATT faced shortcomings in its institutional structure and dispute settlement mechanisms.
• Non-Treaty Status: GATT was not a treaty, meaning its terms were binding only if they did not conflict with a nation's domestic rules.

The Uruguay Round and the Formation of the WTO

By the late 1980s, many countries recognized the need for a formal international organization that was more powerful and comprehensive. The Uruguay Round, which covered virtually every outstanding trade policy issue, brought about the most significant reform of the world’s trading system.

Members established 15 groups to work on limiting restrictions in various areas, including:

• Tariffs and non-tariff barriers
• Tropical products and natural resource products
• Textiles and clothing
• Agriculture
• Safeguards against sudden surges in imports
• Subsidies and countervailing duties
• Trade-related intellectual property restrictions
• Trade-related investment restrictions
• Services

GATT system, dispute settlement procedures, and implementation of NTB Codes from the Tokyo Round, especially on anti-dumping

The Round began in Punta del Este, Uruguay, in September 1986, and was initially scheduled to be completed by December 1990. However, due to significant differences and controversies, particularly over agriculture, consensus was not reached. After seven years of detailed negotiations, the Uruguay Round was completed in December 1993, involving 123 countries. The agreement was signed by most countries on April 15, 1994, and took effect on July 1, 1995. This also marked the establishment of the World Trade Organization (WTO), which became the single institutional framework encompassing the GATT as modified by the Uruguay Round.

Overview of the World Trade Organization (WTO)

The World Trade Organization (WTO) is the sole global body governing trade rules among nations. Central to the WTO are the agreements negotiated and signed by most of the world’s trading countries and ratified by their parliaments. The primary aim is to ensure that trade operates as smoothly, predictably, and freely as possible.

Objectives of the WTO:

• Setting and Enforcing Trade Rules: The WTO establishes and enforces rules for international trade to ensure fairness and consistency.

• Forum for Trade Negotiations: It provides a platform for countries to negotiate and monitor further trade liberalization.

• Resolving Trade Disputes: The organization plays a crucial role in resolving disputes that arise between member countries regarding trade practices.

• Increasing Transparency: The WTO aims to enhance the transparency of its decision-making processes to build trust among member nations.

• Cooperation with International Institutions: It collaborates with other major international economic institutions involved in global economic management.

• Supporting Developing Countries: The WTO helps developing nations fully benefit from the global trading system, ensuring they are not left behind.

The preamble of the Agreement establishing the WTO acknowledges objectives such as raising living standards, ensuring full employment, increasing real income and effective demand, and expanding production and trade in goods and services.

The WTO functions by acting as a forum for trade negotiations, administering trade agreements, reviewing national trade policies, assisting developing countries with trade policy issues through technical assistance and training, and cooperating with other international organizations.

Structure of the WTO:

• Secretariat: The WTO is supported by a Secretariat based in Geneva, led by a Director-General.
• Decision-Making System: The WTO has a three-tier decision-making system.
• Ministerial Conference: This is the top decision-making body, capable of making decisions on all matters under the multilateral trade agreements. It meets at least once every two years.
• General Council: This council meets several times a year in Geneva and also functions as the Trade Policy Review Body and the Dispute Settlement Body.
• Specialized Councils: The Goods Council, Services Council, and Intellectual Property (TRIPS) Council report to the General Council. These councils oversee the implementation of WTO agreements in their specific areas.
• Collaboration with International Organizations: The WTO Secretariat maintains working relationships with nearly 200 international organizations involved in various activities such as statistics, research, standard-setting, and technical assistance and training.
• Specialized Committees and Working Groups: Numerous committees, working groups, and parties address individual agreements and other issues like the environment, development, membership applications, and regional trade agreements.

Introduction WTO Overview:

• The World Trade Organization (WTO) plays a crucial role in global trade, currently accounting for approximately 95% of world trade.
• With 164 members, including 117 developing countries, the WTO ensures that its agreements are ratified by all members' parliaments.
• An additional 24 countries are in the process of negotiating their membership.

Guiding Principles of WTO:

The WTO operates on fundamental principles that underpin the multilateral trading system. These principles include:

1. Trade without Discrimination

• Most-Favoured-Nation (MFN) Treatment:
• Countries are not allowed to discriminate between their trading partners under WTO agreements.
• If a country grants a special favour, such as a lower customs duty rate, to one member, it must extend the same treatment to all other WTO members.
• This principle, known as MFN treatment, is fundamental and is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods.
• MFN treatment is also prioritized in the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), though it is applied slightly differently in each agreement.

Exceptions to MFN Treatment

• While MFN treatment is a core principle, some exceptions are allowed under strict conditions:
• Countries can establish free trade agreements that apply only to goods traded within the group, discriminating against goods from outside.
• Developing countries can be granted special access to markets.
• Countries can impose barriers against products deemed to be unfairly traded from specific countries.
• In the services sector, limited discrimination is permitted under certain circumstances.

2. National Treatment

• Treating Foreign and Local Products Equally:
• Once foreign goods have entered the market, they should be treated equally to locally-produced goods.
• This principle applies not only to goods but also to services, trademarks, copyrights, and patents.
• National treatment, which means giving foreigners the same treatment as nationals, is a key principle in all three main WTO agreements: GATT, GATS, and TRIPS.
• However, the application of this principle varies slightly in each agreement.

Encouraging Development and Economic Reform

• The WTO system plays a role in promoting development, but it is essential for developing countries to have flexibility in implementing the system’s agreements. The agreements also carry forward earlier provisions that allow for special assistance and trade concessions for developing countries.
• A significant majority of WTO members are developing countries and nations transitioning to market economies. During the Uruguay Round, many of these countries independently initiated trade liberalization programs. Moreover, developing countries were more active and influential in the Uruguay Round negotiations compared to previous rounds and continue to be so in the current Doha Development Agenda.
• At the conclusion of the Uruguay Round, developing countries were willing to accept most of the obligations expected of developed countries. However, the agreements provided them with transition periods to adapt to the WTO provisions, especially the least-developed countries. A ministerial decision at the end of the round called for better-off countries to expedite market access commitments for goods exported by least-developed countries and to enhance technical assistance for these countries. Recently, developed countries have also begun allowing duty-free and quota-free imports for nearly all products from least-developed countries. The WTO and its members are still learning and adapting to these processes, and the current Doha Development Agenda addresses the challenges faced by developing countries in implementing the Uruguay Round agreements.

Overview of WTO Agreements

The agreements under the World Trade Organization (WTO) encompass goods, services, intellectual property, and the allowed exceptions. These agreements are commonly referred to as the WTO's trade rules, and the organization is often characterized as "rules-based," meaning it operates on a system of rules. However, it's important to note that these rules are, in fact, agreements negotiated by governments.

Here are some important agreements under the WTO:

• Agreement on Agriculture: This agreement aims to strengthen General Agreement on Tariffs and Trade (GATT) disciplines and enhance agricultural trade. It includes specific and binding commitments made by WTO Member governments in three key areas: market access, domestic support, and export subsidies.
• Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures: This agreement establishes a multilateral framework for planning, adopting, and implementing sanitary and phytosanitary measures. Its goal is to prevent these measures from being used for arbitrary or unjustifiable discrimination or as disguised restraints on international trade, while also minimizing their adverse effects on trade.
• Agreement on Textiles and Clothing: This agreement replaced the Multi-Fibre Arrangement (MFA), which had been in place since 1974 and involved import protection policies. The Agreement on Textiles and Clothing (ATC) stipulates that textile trade should be deregulated and gradually integrated into GATT disciplines over a 10-year transition period.
• Agreement on Technical Barriers to Trade (TBT): The TBT agreement aims to prevent standards and conformity assessment systems from becoming unnecessary trade barriers. It seeks to ensure transparency and harmonization of these standards with international norms. Excessive standards or misuse of standards concerning manufactured goods, as well as safety and environmental regulations, can act as trade barriers.
• Agreement on Trade-Related Investment Measures (TRIMs): This agreement expands the disciplines governing investment measures related to cross-border investments. It specifies that countries receiving foreign investments should not impose investment measures, such as requirements, conditions, and restrictions, that are inconsistent with the principles of national treatment and the general elimination of quantitative restrictions. For instance, local content requirements and trade balancing requirements should not be applied to investing corporations.
• Anti-Dumping Agreement: The Anti-Dumping Agreement aims to tighten and codify disciplines for calculating dumping margins and conducting dumping investigations. Its purpose is to prevent the abuse or misuse of anti-dumping measures to protect domestic industries.
•  The Customs Valuation Agreement establishes rules for more reliable and consistent customs valuation. Its goal is to unify customs valuation systems worldwide by removing arbitrary methods of valuation. 
• The Agreement on Pre-shipment Inspection (PSI) aims to ensure transparency during pre-shipment inspections. In this process, a company chosen by the importing country checks the quality, quantity, price, tariff classification, customs value, and other aspects of goods in the exporting country. This company then provides certificates to the importing country's customs office. The agreement also includes a way to resolve disputes between PSI agencies and exporters.
• The Agreement on Rules of Origin focuses on standardizing rules of origin that apply to all non-preferential trade policies. It also sets out procedures for resolving disputes and establishes a rules of origin committee.
• The Agreement on Import Licensing Procedures is about simplifying administrative processes to ensure fair operations. It aims to make sure that import licensing procedures from different countries do not create barriers to trade.
• The Agreement on Subsidies and Countervailing Measures aims to clarify what subsidies are, reinforce rules based on the type of subsidy, and strengthen procedures for implementing countervailing tariffs.
• The Agreement on Safeguards clarifies the rules and procedures for implementing safeguards. These are emergency measures that can limit imports when there is a sudden increase in the volume of imports.
• The General Agreement on Trade in Services (GATS) outlines the basic obligations related to trade in services, including most-favored-nation treatment and transparency. It lists various service sectors and states that in the sectors where commitments have been made, member countries cannot introduce or maintain market access restrictions that are more severe than those agreed upon during negotiations.
• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) establishes most-favored-nation treatment and national treatment for intellectual property rights, including copyrights, trademarks, geographical indications, industrial designs, patents, integrated circuit layout designs, and undisclosed information. It requires member countries to provide strong protection for intellectual property and to enforce these rights effectively. The agreement also includes procedures for resolving disputes related to its provisions.
• The Trade Policy Review Mechanism (TPRM) outlines the process for periodic reviews of members' trade policies and practices, which are conducted by the Trade Policy Review Body (TPRB).
• Plurilateral Trade Agreements involve negotiations that include several countries with shared interests, rather than all WTO member countries. Not all plurilateral agreements are negotiated within the WTO framework.

The Doha Round

The Doha Round, also known as the Doha Development Agenda, is the ninth round of trade negotiations since World War II. It was officially launched at the World Trade Organization's (WTO) Fourth Ministerial Conference in Doha, Qatar, in November 2001. The primary goal of this round is to bring about significant changes to the international trading system by lowering trade barriers and revising trade rules.

The negotiations cover 20 areas of trade, including:

• Agriculture
• Services trade
• Market access for non-agricultural products (NAMA)
• Trade facilitation
• Environment
• Geographical indications
• Intellectual property issues

Among these topics, agriculture trade has been the most controversial issue in the Doha Agenda.

G20 Economies: Promoting Trade

• The report highlights that while some trade-restrictive measures have been lifted by G20 countries, the overall trend is concerning. Export restrictions lead to shortages, price volatility, and uncertainty. G20 economies need to build on their commitments from the 12th Ministerial Conference and show leadership in keeping markets open and predictable, especially for the supply of food and fertilizers.
• WTO Director-General Ngozi Okonjo-Iweala emphasized the importance of this during her upcoming attendance at the G20 Leaders' Summit in Bali, Indonesia, on November 15-16.
• Despite challenges such as the war in Ukraine, the ongoing effects of the COVID-19 pandemic, high inflation, and monetary tightening by central banks, supply chains have shown resilience overall. However, different industries and regions have been impacted in varying degrees.
• Since 2020, the pace of implementing new export restrictions by WTO members has increased, initially due to the pandemic and later in response to the war in Ukraine and the food crisis. While some export restrictions have been lifted gradually, many still remain in place.
• As of mid-October 2022, WTO members had 52 export restrictions on food, feed, and fertilizers, along with 27 export restrictions on products essential for combating COVID-19. G20 economies maintained a significant portion of these restrictions, with 44% of the export restrictions on food, feed, and fertilizers, and 63% of the pandemic-related export restrictions.
• During the review period, G20 economies introduced 66 new trade-facilitating measures covering trade worth USD 451.8 billion and 47 trade-restrictive measures on goods with a trade coverage of USD 160.1 billion. The stockpile of G20 import restrictions continued to grow, affecting 11.6% of G20 imports by mid-October 2022.
• The initiation of trade remedy investigations by G20 economies declined significantly during the review period, with anti-dumping measures being the most common trade remedy action in terms of initiations and terminations.

Trade Measures and Support Related to COVID-19 by G20 Economies:

• G20 economies have seen a slowdown in the implementation of new COVID-19-related trade measures over the past five months. During this period, there were only four new measures related to goods and one related to services. Additionally, the number of new COVID-19-related support measures aimed at mitigating the social and economic impacts of the pandemic has also declined sharply.
• Since the onset of the pandemic, G20 economies have implemented a total of 201 COVID-19 trade and trade-related measures concerning goods. The majority of these measures (61%) were trade-facilitating, while the remaining 39% were trade-restrictive.
• G20 economies have also been phasing out pandemic-related import and export measures. As of mid-October 2022, 77% of export restrictions had been lifted, with only 17 restrictions still in place. However, despite the decrease in the number of pandemic-related trade restrictions, their trade coverage remains significant, totaling USD 122.0 billion.
• The WTO trade monitoring reports have been prepared by the WTO Secretariat since 2009. G20 members are: Argentina; Australia; Brazil; Canada; China; the European Union; France; Germany; India; Indonesia; Italy; Japan; the Republic of Korea; Mexico; the Russian Federation; Saudi Arabia; South Africa; Türkiye; the United Kingdom; and the United States.