Worked example 16 — Applying MFN, national treatment and tariff bindings to five measures

The WTO agreements are lengthy and complex because they are legal texts covering a wide range of activities — 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, and those principles are the foundation of the multilateral trading system.

An examiner does not want the agreements. They want the principles, correctly stated, with their exceptions — and, in a good paper, applied. This example applies them.

Most-favoured-nation treatment. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour, such as a lower customs duty rate for one of their products, and you have to do the same for all other WTO members. Its standing is shown by its placement: MFN is so important that it is the first article of GATT, which governs trade in goods, and it is also a priority in GATS Article 2 and TRIPS Article 4, though handled slightly differently in each.

National treatment. Imported and locally produced goods should be treated equally at least after the foreign goods have entered the market. The same applies to foreign and domestic services, and to foreign and local trade marks, copyrights and patents. The principle of giving others the same treatment as one's own nationals is found in all three main agreements — GATT Article 3, GATS Article 17 and TRIPS Article 3.

The limit that decides most problems. National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally produced products are not charged an equivalent tax.

Hold the division in the head as two questions:

| Principle | Compares | Operates | The test question | |---|---|---|---| | MFN | one foreign country against another | at the border and beyond | Is this favour available to every member? | | National treatment | foreign against domestic | inside the market, after entry | Is the imported good treated worse than the like domestic good? |

A tariff is lawful; a discriminatory internal tax is not.

These matter as much as the rule and an examiner asks for them by name. Countries can set up a free trade agreement that applies only to goods traded within the group, discriminating against goods from outside; they can give developing countries special access to their markets; a country can raise barriers against products that are considered to be traded unfairly from specific countries; and in services, countries are allowed in limited circumstances to discriminate. But the agreements only permit these exceptions under strict conditions; in general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners.

Note where that first exception leads. It is the exception that lets SAARC, every regional bloc and every bilateral trade agreement exist at all. Every regional trade grouping is, formally, a permitted departure from MFN — which is the connection between the WTO chapter and the groupings chapter.

This is the principle students most under-rate, and its logic is well put: sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities; with stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition.

How binding works. When countries agree to open their markets for goods or services, they bind their commitments. For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports at rates that are lower than the bound rates — frequently the case in developing countries — while in developed countries the rates actually charged and the bound rates tend to be the same. A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade.

The gap between bound and applied is the policy space. A country that has bound a tariff at 100 per cent but applies 15 may raise the applied rate to 100 without breaching anything. The binding is a ceiling, not a fixed price.

The Uruguay Round greatly increased the share of trade under bindings:

| Group | Tariff lines bound, before → after | |---|---| | Developed countries | 78 → 99 per cent | | Developing countries | 21 → 73 per cent | | Transition economies | 73 → 98 per cent | | Agriculture | 100 per cent of products now have bound tariffs |

The result is a substantially higher degree of market security for traders and investors.

The measures and the countries below are invented for this exercise. They describe no real measure and no real proceeding.

Measure 1. Country A reduces its customs duty on imported bicycles from 20 per cent to 5 per cent, but only for bicycles originating in Country B.

Analysis. This is a special favour — a lower customs duty rate for one partner's product. Under MFN it must be extended to bicycles from every other member. The measure is prima facie an MFN problem unless it falls inside an exception: a free trade agreement covering A and B, or special access granted to B as a developing country. National treatment is not engaged at all, because the comparison is between two foreigners, not between a foreigner and a local. MFN, not national treatment.

Measure 2. Country A charges a 20 per cent customs duty on imported bicycles from every member equally, and no equivalent tax on bicycles made at home.

Analysis. Lawful. National treatment only applies once a product has entered the market, and charging customs duty on an import is not a violation of national treatment even if locally produced products are not charged an equivalent tax. MFN is satisfied because every member is charged the same. This is the single most commonly mis-answered fact pattern on the topic.

Measure 3. Country A charges the same 20 per cent duty at the border on all imported bicycles, and then levies an internal sales tax of 12 per cent on imported bicycles and 4 per cent on domestic ones.

Analysis. The tariff survives, for the reason in Measure 2. The internal tax does not: it operates after entry, and it treats the imported good worse than the like domestic good. National treatment, not MFN — every foreign country is treated alike, so there is no MFN issue at all. The comparison that matters is foreign against domestic.

Measure 4. Country A has bound its bicycle tariff at 40 per cent and currently applies 15 per cent. It raises the applied rate to 35 per cent, for all members equally.

Analysis. No breach. The binding is a ceiling of 40, and 35 is below it. Applied rates lower than bound rates are frequently the case in developing countries, and moving within the gap requires no negotiation. Had A gone to 45 per cent it would have had to change its binding, which requires negotiation with trading partners and possibly compensation for loss of trade. This is the practical meaning of policy space.

Measure 5. Country A finds that bicycles from Country C are being sold in A below cost, and imposes an additional duty on those bicycles alone, calculated to compensate for the damage.

Analysis. Discriminatory on its face — but it falls within the exception permitting a country to raise barriers against products that are considered to be traded unfairly from specific countries. Dumping is exporting at below cost to gain market share, and the rules on dumping and on subsidies are designed to secure fair conditions of trade; the rules try to establish what is fair or unfair and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade. The exception is available only under strict conditions.

Quote this one in full, because it is the sentence that separates a considered answer from a slogan: the WTO is sometimes described as a free trade institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition.

Measures 2 and 4 are the proof. A 20 per cent tariff and a rise from 15 to 35 per cent are both perfectly lawful. What the system forbids is discrimination and unfairness, not protection as such.

And notice the comparison worth drawing. Dumping — exporting at below cost to gain market share, remedied by an additional import duty compensating for the damage — is the same mischief as predatory pricing under section 4 of the Competition Act, defined there as the sale of goods or provision of services at a price below the cost of production with a view to reduce competition or eliminate competitors. The mischief is identical; only the forum differs — a competition regulator inside the market, a trade remedy at the border. That single comparison connects Module 1 to Module 4 and is worth making in any answer on either.

Freer trade, gradually, through negotiation. Lowering trade barriers is one of the most obvious means of encouraging trade; the barriers concerned include customs duties or tariffs and measures such as import bans or quotas that restrict quantities selectively, and from time to time other issues such as red tape and exchange rate policies have also been discussed. Since GATT's creation in 1947-48 there have been eight rounds of trade negotiations, with a ninth under the Doha Development Agenda. By the mid-1990s industrial countries' tariff rates on industrial goods had fallen steadily to less than 4 per cent, and by the 1980s the negotiations had expanded to cover non-tariff barriers on goods and the new areas of services and intellectual property. Opening markets can be beneficial but also requires adjustment, so the agreements allow countries to introduce changes gradually through progressive liberalization, developing countries usually being given longer to fulfil their obligations.

Transparency. The system discourages the use of quotas and other measures limiting quantities of imports, since administering quotas can lead to more red tape and accusations of unfair play; and it works to make countries' trade rules as clear and public as possible, many agreements requiring governments to disclose their policies and practices publicly or by notifying the WTO. 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.

Notice the preference for tariffs over quotas running through all of this — the same preference that produced tariffication in the Agreement on Agriculture, and the same sequence India followed after 1991 in worked example 15.

Development. Over three quarters of WTO members are developing countries and countries in transition to market economies. During the seven and a half years of the Uruguay Round, over 60 of these countries implemented trade liberalization programmes autonomously, and developing countries were much more active and influential in that round than in any previous one. At its end they were prepared to take on most of the obligations required of developed countries, but were given transition periods to adjust, especially the least-developed countries. A ministerial decision says better-off countries should accelerate implementing market access commitments on goods exported by the least-developed countries and seeks increased technical assistance for them, and more recently developed countries have started to allow duty-free and quota-free imports for almost all products from least-developed countries.

Two threads from other chapters land here.

The AMS argument. India's product-specific Aggregate Measurement of Support is negative: for eighteen major commodities the product-specific support during the base period was minus US$18.11 billion, or minus 26.1 per cent of the value of crop-sector output. The negative product-specific support shows that various controls on domestic as well as external trade kept domestic prices of major crops below world prices. India was not subsidising its farmers in the WTO's sense; the net effect of movement restrictions, compulsory levies and trade controls was to tax them. That argument is made inside the development principle of step 6 — that India's support measures are development and food-security measures rather than trade-distorting subsidies.

The domestic hierarchy that implements all of this. Indian trade measures are made under the Foreign Trade (Development and Regulation) Act 1992, section 3 of which empowers the Central Government by Order published in the Official Gazette to make provision for the development and regulation of foreign trade by facilitating imports and increasing exports, and also for prohibiting, restricting or otherwise regulating the import or export of goods. The hierarchy runs Act → Rules and Orders → Foreign Trade Policy (notification under section 5) → Handbook of Procedures (public notice by the Director General), and the importability or exportability of a particular item is governed by the policy as on the date of import or export, the Bill of Lading and Shipping Bill being the key documents for deciding that date.

So a WTO obligation reaches an Indian trader through four instruments, only the first of which is a statute — which is why so much of this law is subordinate legislation, and why the arguments that succeed against it are procedural rather than substantive.

The five measures are invented. The principles, the exceptions, the binding percentages and the round history are sourced and may be quoted.

1. Three agreements, three fields: GATT goods, GATS services, TRIPS intellectual property.
2. MFN — no discrimination between trading partners; GATT Art. 1, GATS Art. 2, TRIPS Art. 4. Exceptions: free trade areas, special access for developing countries, measures against unfairly traded products, and limited cases in services, all under strict conditions.
3. National treatment — equal treatment once the goods have entered the market; GATT Art. 3, GATS Art. 17, TRIPS Art. 3. A customs duty is not a breach, even with no equivalent domestic tax; a discriminatory internal tax is.
4. Bindings are ceilings. Applied rates may sit below them, and often do in developing countries; changing a binding needs negotiation and possibly compensation. Uruguay Round: developed 78 → 99, developing 21 → 73, transition 73 → 98 per cent of lines; agriculture 100 per cent bound.
5. The WTO is not a free trade institution — it is a system of rules dedicated to open, fair and undistorted competition. Dumping = exporting below cost to gain market share, remedied by a compensating duty; compare predatory pricing under s. 4 of the Competition Act.