Growth in International Markets

Assignment 1: Individual Research and Short Paper—Growth in International Markets

Once a company has identified a market favorable in terms of profit and market share potential, growth prospects and planning begin to evolve.

For this assignment, you will use the University online library resources and Internet resources to compare the risks of further expansion in an existing market with the risks of expanding into a new market.

1. Select an MNC that has decided to further expand into the U.S. and address the following questions:

Did the company have to consider the same risks as companies entering into a new market? Present a comparative analysis of the risks. Identify some of the risks a company expanding further would need to consider.Are the growth considerations and strategies of expansion similar to those related to entering a new market?What economic incentives do municipalities offer for companies planning on investing? Are there any constraints the company needs to consider?

2. Select a U.S. company that has decided to further grow in an existing international market, then address the following questions:

What type of regulatory considerations does the company need to investigate prior to expansion? Are the regulatory considerations similar to those of entering into a new market?What type of benefits would a company avail when deciding on further expansion into the market?

Write a 4-page paper in Word format. Apply current APA standards for writing to your work.

 By Wednesday, May 29, 2013, submit your assignment

  

Assignment 2: Course Project Task 4—

Legal

and

Economic

Risks of Expansion( Ikea- USA)

In this assignment, you will investigate your chosen MNC’s expansion activities in existing markets. Concentrate your study on the regulatory concerns that need to be addressed while expanding.

Carry out individual research using the University online library resources and Internet resources. Then, discuss the following in your group. Support your conclusions with examples.

Discuss the impact of the following factors on your chosen MNC:

1. Taxation issues
2. Distinguish U.S. GAAP versus IFRS
3. Political
4. Foreign exchange

LegalEconomicPricingProduct regulations

5. Corporate governance

PoliciesIssuesOrganizational structure

By Thursday, May 30, 2013. submit your assignment.   

CHAPTER 8: National Lawmaking Powers and the Regulation of U.S. Trade

The U.S. Constitution provides for a separation of powers between the executive and legislative branches of government. In the field of international economic affairs, however, the roles of Congress and the president are not clearly defined. We know that Congress has the authority to impose duties, to regulate commerce with foreign nations, to punish offenses against the law of nations, and to declare war. But what of the president? The Constitution tells us that the president appoints ambassadors, negotiates with foreign nations, and is the commander-in-chief of the armed forces. The president also makes treaties, although only with the advice and consent of the Senate.

Even this cursory reading of the Constitution suggests that most of the authority to regulate U.S. commerce and trade with foreign countries rests with Congress and not with the president. Most scholars would agree. After all, the Constitution tells us that Congress “regulates” commerce with foreign nations, while the president merely “negotiates.” In practice, it is not so simple. The system of checks and balances between the two branches has taken well over 200 years to develop. One established principle of American government is that Congress, within limits set out by decisions of the Supreme Court interpreting the Constitution, has the authority to delegate aspects of its legislative authority to the executive branch. Congress can enact a statute setting forth the goals to be accomplished and the means by which to achieve them and then authorize the president to carry them out. It can authorize the creation of a regulatory agency and provide funding for its work. As long as the president and the executive branch agencies are complying with the will of Congress, they are acting with the full force of law and usually with a large measure of congressional backing. This applies to the regulation of commerce with foreign nations and the establishment of U.S. trade policies.

In this chapter, we begin by exploring the basic concepts of the separation of powers in a modern context. We will examine congressional power over foreign commerce and foreign relations, the “inherent” authority of the president as chief executive, and delegations of power from Congress to the president. We will see the difference between “treaties” and lesser “executive agreements,” both of which are used to implement the trade policies of the nation. We will also see how Congress has enacted statutes giving the president the authority to negotiate foreign trade agreements, including “fast track” trade authority.

The chapter then traces the history of American trade laws from the protectionist days of the Smoot-Hawley Tariff Act of 1930, which raised tariffs on imported goods to historic highs, to the free trade mentality that gave birth to the World Trade Organization in 1995. Finally, we will look at the issue of federal–state relations and see the limits placed on state power when it comes to international affairs. This material provides an important background for later chapters.

THE SEPARATION OF POWERS

At the time the Constitution was drafted, people were greatly concerned with how foreign commerce would be regulated. During this period of U.S. history, each state was interested primarily in its own economic well-being. States imposed regulations on commerce to protect their own local industries, their ports, and their agricultural interests.

To ensure that states would not erect barriers to commerce between them and to guarantee a source of revenue to the federal government in the form of import duties, the drafters of the Constitution placed the power to regulate international commerce in the hands of the federal government. The drafters believed, for example, that economic disintegration could result if states were free to tax exports or if states located along the seacoast could tax imports passing through to states located inland. Moreover, they wanted the United States to be able to deal with foreign nations from a position of political strength and unity. The framers of the Constitution understood that trade relations with foreign nations could not be handled successfully by each state on its own, but only by a strong federal government that could speak for the economic and political interests of the nation as a whole.

The Executive–Legislative Debate

Today, the concept that the power over both foreign affairs and foreign trade rests with the federal government arouses little controversy. Considerable debate has arisen, however, over how the Constitution divides that power between Congress and the president. Indeed, in recent years, both branches of government have sought greater control over international affairs.

One argument in favor of a strong executive branch is that the nation must “speak with one voice” in international affairs. If each senator or representative, perhaps motivated by the local interests of her own constituents, attempted to negotiate agreements with foreign nations on matters such as tariff reductions, trade in agriculture or semiconductors, provisions for military assistance, or even nuclear disarmament, the process would be encumbered by local interests and would be ineffective and potentially disastrous.

The 1970s saw a shift in the balance of power between Congress and the president. Congress began to exercise greater oversight and control over the president’s conduct of foreign affairs. Congress and the American people were largely unhappy with the president’s use of troops in an unpopular and undeclared war in Vietnam. Abuses of government and political power came to light during the Watergate investigations, leading to the resignation of President Nixon. As a result, Congress began to view the executive branch with suspicion and mistrust.

During the following two decades, Congress continued to keep watch over the presidency and to assert itself through legislation. Then, following the terrorist attacks on the United States in 2001, the balance of power shifted again. With the president’s political party controlling Congress and the nation gripped by fear of more terrorist attacks, from anthrax to radioactive bombs, new laws were enacted that gave tremendous power to the president and the executive branch. These laws restructured the government and gave sweeping authority to law enforcement and intelligence agencies to deal with terrorists.

Of course, the relationship between the president and Congress depends on which political party is in power in Congress. After the Republican Party lost control of Congress in President Bush’s second term, constitutional scholars and a large segment of the American public viewed the president’s powers with more suspicion and constitutional scrutiny.

Legislative Power

Article I of the Constitution confers “all legislative powers” on Congress, including the power “to regulate commerce with foreign nations, and among the several states” (Section 8, clause 3). In addition, Congress has broad power to pass domestic laws, raise and support armies, provide and maintain a navy, declare war, appropriate monies, and levy and collect taxes. The Senate has the authority to give advice and consent to the president in making treaties with foreign nations and to approve treaties by a two-thirds vote.

Considering these powers as a whole, the U.S. Supreme Court has consistently held that Congress has wideranging constitutional power to establish overall economic and trade policy for the United States and to put it into effect through legislation. Congress has recognized, however, that the day-to-day conduct of trade relations with foreign nations is often best accomplished through a strong executive branch. As a result, Congress has delegated authority to the president to carry out the trade policies set by statute.

Presidential or Executive Power

Article II of the Constitution confers executive power on the president. The executive power is not clearly specified, and many court decisions interpret what the Constitution meant to confer. However, both courts and legal scholars have said that the president has greater and wider-reaching power over foreign affairs than over domestic policy. One of the most famous statements about the power of the president over foreign affairs is found in United States v. Curtiss-Wright Export Co., 299 U.S. 304 (1936).

Not only, as we have shown, is the federal power over external affairs in origin and essential character different from that over internal affairs, but participation in the exercise of the power is significantly limited. In this vast external realm, with its important, complicated, delicate and manifold problems, the President alone has the power to speak or listen as a representative of the nation. He makes treaties with the advice and consent of the Senate; but he alone negotiates. Into the field of negotiation the Senate cannot intrude; and Congress itself is powerless to invade it. As Marshall said in his great argument of March 7, 1800, in the House of Representatives, “The President is the sole organ of the nation in its external relations, and its sole representative with foreign nations.” … It is quite apparent that if, in the maintenance of our international relations, embarrassment—perhaps serious embarrassment—is to be avoided and success for our aims achieved, congressional legislation which is to be made effective through negotiation and inquiry within the international field must often accord to the President a degree of discretion and freedom from statutory restriction which would not be admissible were domestic affairs alone involved. Moreover, he, not Congress, has the better opportunity of knowing the conditions which prevail in foreign countries, and especially is this true in time of war. He has his confidential sources of information. He has his agents in the form of diplomatic, consular and other officials. Secrecy in respect of information gathered by them may be highly necessary, and the premature disclosure of it productive of harmful results.

The president’s powers over foreign affairs are derived from (1) inherent executive power, including the power to conduct foreign affairs, appoint ambassadors, receive foreign ambassadors, and act as commander-in-chief of the armed forces; (2) the treaty power; and (3) powers delegated by Congress. Each of these is addressed here in turn, to provide a better understanding of the interplay between the president and Congress in setting trade policies and carrying out trade relations with foreign countries.

Inherent Presidential Power and Its Limitations.

The president’s inherent executive powers are those that are either expressly granted to the president in the Constitution or found to be there by judicial interpretation. These may be powers necessary to conduct foreign affairs, to appoint ambassadors, to receive foreign ambassadors, or to act as commander-in-chief of the armed forces. The president may only rely on these inherent powers when Congress has not passed a law directing otherwise. If Congress has passed a statute on a subject, the president’s inherent power does not grant “license” to violate that law. Many controversies arise when Congress has failed to address an issue through legislation, and the president acts to “fill the void” by dealing with the issue alone, without the consent of Congress. To this day, one of the most frequently cited cases on the president’s inherent power is Youngstown Sheet & Tube v. Sawyer. In this case, President Truman had relied on his inherent power as chief executive, and as commander-in-chief of the armed forces, to force the continued operation of the nation’s steel mills during the Korean War in the face of a threatened labor strike. Pay particular attention to Justice Jackson’s concurring opinion.

Youngstown Sheet & Tube v. Sawyer

343 U.S. 579 (1952) United States Supreme Court

BACKGROUND AND FACTS

In the early 1950s, the United States was at war in Korea as part of a United Nations “police action.” American steelworkers were threatening to strike over wages and collective bargaining disagreements with steel companies. The president made every attempt to intervene and to help the parties negotiate an agreement. A strike would have disrupted the supply of steel, leading to a possible shortage of steel during the war effort and an increase in prices in all products made of steel. Despite all efforts, the parties were unable to reach agreement. Just before the steelworkers were to go on strike, President Truman ordered Secretary of Commerce Charles Sawyer to seize the steel mills and keep them in operation. The president based his authority for doing so on Article II of the Constitution and on his power as commander in chief of the armed forces. A district court granted the request of the steel companies for a temporary injunction against the president’s order, the Court of Appeals agreed, and the secretary of commerce appealed to the Supreme Court.

DECISION MR. JUSTICE BLACK DELIVERED THE OPINION OF THE COURT

* * *

The President’s power, if any, to issue the order must stem either from an act of Congress or from the Constitution itself. There is no statute that expressly authorizes the President to take possession of property as he did here. Nor is there any act of Congress to which our attention has been directed from which such a power can fairly be implied. Indeed, we do not understand the Government to rely on statutory authorization for this seizure. There are two statutes which do authorize the President to take both personal and real property under certain conditions [the Selective Service Act and the Defense Production Act]. However, the Government admits that these conditions were not met and that the President’s order was not rooted in either of the statutes. The Government refers to the seizure provisions of one of these statutes (§ 201 (b) of the Defense Production Act) as “much too cumbersome, involved, and time-consuming for the crisis which was at hand.”

Moreover, the use of the seizure technique to solve labor disputes in order to prevent work stoppages was not only unauthorized by any congressional enactment; prior to this controversy, Congress had refused to adopt that method of settling labor disputes. When the Taft-Hartley Act was under consideration in 1947, Congress rejected an amendment which would have authorized such governmental seizures in cases of emergency. Apparently it was thought that the technique of seizure, like that of compulsory arbitration, would interfere with the process of collective bargaining. * * *

The order cannot properly be sustained as an exercise of the President’s military power as Commander in Chief of the Armed Forces. The Government attempts to do so by citing a number of cases upholding broad powers in military commanders engaged in day-to-day fighting in a theater of war. Such cases need not concern us here. Even though “theater of war” be an expanding concept, we cannot with faithfulness to our constitutional system hold that the Commander in Chief of the Armed Forces has the ultimate power as such to take possession of private property in order to keep labor disputes from stopping production. This is a job for the Nation’s lawmakers, not for its military authorities.

Nor can the seizure order be sustained because of the several constitutional provisions that grant executive power to the President. In the framework of our Constitution, the President’s power to see that the laws are faithfully executed refutes the idea that he is to be a lawmaker. The Constitution limits his functions in the lawmaking process to the recommending of laws he thinks wise and the vetoing of laws he thinks bad. And the Constitution is neither silent nor equivocal about who shall make laws which the President is to execute. The first section of the first article says that “All legislative Powers herein granted shall be vested in a Congress of the United States. * * * “After granting many powers to the Congress, Article I goes on to provide that Congress may “make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”

The President’s order does not direct that a congressional policy be executed in a manner prescribed by Congress—it directs that a presidential policy be executed in a manner prescribed by the President. * * * The power of Congress to adopt such public policies as those proclaimed by the order is beyond question. It can authorize the taking of private property for public use. It can make laws regulating the relationships between employers and employees, prescribing rules designed to settle labor disputes, and fixing wages and working conditions in certain fields of our economy. The Constitution did not subject this law-making power of Congress to presidential or military supervision or control.* * *

The Founders of this Nation entrusted the law making power to the Congress alone in both good and bad times. It would do no good to recall the historical events, the fears of power and the hopes for freedom that lay behind their choice. Such a review would but confirm our holding that this seizure order cannot stand.

The judgment of the District Court is affirmed.

MR. JUSTICE JACKSON, CONCURRING IN THE JUDGMENT AND OPINION OF THE COURT

* * *

When the President acts pursuant to an express or implied authorization of Congress, his authority is at its maximum, for it includes all that he possesses in his own right plus all that Congress can delegate. In these circumstances, and in these only, may he be said (for what it may be worth), to personify the federal sovereignty. If his act is held unconstitutional under these circumstances, it usually means that the Federal Government as an undivided whole lacks power. A seizure executed by the President pursuant to an Act of Congress would be supported by the strongest of presumptions and the widest latitude of judicial interpretation, and the burden of persuasion would rest heavily upon any who might attack it.

When the President acts in absence of either a congressional grant or denial of authority, he can only rely upon his own independent powers, but there is a zone of twilight in which he and Congress may have concurrent authority, or in which its distribution is uncertain. Therefore, congressional inertia, indifference or quiescence may sometimes, at least as a practical matter, enable, if not invite, measures on independent presidential responsibility. In this area, any actual test of power is likely to depend on the imperatives of events and contemporary imponderables rather than on abstract theories of law.

When the President takes measures incompatible with the expressed or implied will of Congress, his power is at its lowest ebb, for then he can rely only upon his own constitutional powers minus any constitutional powers of Congress over the matter. Courts can sustain exclusive Presidential control in such a case only by disabling the Congress from acting upon the subject. Presidential claim to a power at once so conclusive and preclusive must be scrutinized with caution, for what is at stake is the equilibrium established by our constitutional system. * * *

Into which of these classifications does this executive seizure of the steel industry fit? It is eliminated from the first by admission, for it is conceded that no congressional authorization exists for this seizure. That takes away also the support of the many precedents and declarations which were made in relation, and must be confined, to this category. * * *

Can it then be defended under flexible tests available to the second category? It seems clearly eliminated from that class because Congress has not left seizure of private property an open field but has covered it by three statutory policies inconsistent with this seizure.* * *

The clause on which the Government next relies is that “The President shall be Commander in Chief of the Army and Navy of the United States. * * *” These cryptic words have given rise to some of the most persistent controversies in our constitutional history. Of course, they imply something more than an empty title. But just what authority goes with the name has plagued Presidential advisers who would not waive or narrow it by nonassertion yet cannot say where it begins or ends. It undoubtedly puts the Nation’s armed forces under Presidential command. Hence, this loose appellation is sometimes advanced as support for any Presidential action, internal or external, involving use of force, the idea being that it vests power to do anything, anywhere, that can be done with an army or navy.

There are indications that the Constitution did not contemplate that the title Commander-in-Chief of the Army and Navy will constitute him also Commander-in-Chief of the country, its industries and its inhabitants. He has no monopoly of “war powers,” whatever they are. While Congress cannot deprive the President of the command of the army and navy, only Congress can provide him an army or navy to command. It is also empowered to make rules for the “Government and Regulation of land and naval forces,” by which it may to some unknown extent impinge upon even command functions.

That military powers of the Commander-in-Chief were not to supersede representative government of internal affairs seems obvious from the Constitution and from elementary American history. Time out of mind, and even now in many parts of the world, a military commander can seize private housing to shelter his troops. Not so, however, in the United States, for the Third Amendment says, “No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.” Thus, even in war time, his seizure of needed military housing must be authorized by Congress. It also was expressly left to Congress to “provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions. * * * “ Such a limitation on the command power, written at a time when the militia rather than a standing army was contemplated as the military weapon of the Republic, underscores the Constitution’s policy that Congress, not the Executive, should control utilization of the war power as an instrument of domestic policy. Congress, fulfilling that function, has authorized the President to use the army to enforce certain civil rights. On the other hand, Congress has forbidden him to use the army for the purpose of executing general laws except when expressly authorized by the Constitution or by Act of Congress. * * *

We should not use this occasion to circumscribe, much less to contract, the lawful role of the President as Commander-in-Chief. I should indulge the widest latitude of interpretation to sustain his exclusive function to command the instruments of national force, at least when turned against the outside world for the security of our society. But, when it is turned inward, not because of rebellion but because of a lawful economic struggle between industry and labor, it should have no such indulgence. His command power is not such an absolute as might be implied from that office in a militaristic system but is subject to limitations consistent with a constitutional Republic whose law and policy-making branch is a representative Congress. The purpose of lodging dual titles in one man was to insure that the civilian would control the military, not to enable the military to subordinate the presidential office. No penance would ever expiate the sin against free government of holding that a President can escape control of executive powers by law through assuming his military role. What the power of command may include I do not try to envision, but I think it is not a military prerogative, without support of law, to seize persons or property because they are important or even essential for the military and naval establishment.

In view of the ease, expedition and safely with which Congress can grant and has granted large emergency powers, certainly ample to embrace this crisis, I am quite unimpressed with the argument that we should affirm possession of them without statute. Such power either has no beginning or it has no end. If it exists, it need submit to no legal restraint. I am not alarmed that it would plunge us straightway into dictatorship, but it is at least a step in that wrong direction.

Decision. The lower court’s injunction against the president’s action was upheld. The president was not acting pursuant to an act of Congress, nor could the seizure of private property during wartime be justified on the basis of his inherent power as president or as commander in chief.

Comment. The concurring opinion by Justice Jackson is one of the most frequently cited opinions in American constitutional history regarding presidential powers. Justice Robert Jackson was America’s chief prosecutor of Nazi war criminals at the Nuremberg Trials. Where, as in this case, the president’s action is in contradiction to acts of Congress, the president’s power is at its “lowest ebb.” This case was cited in recent opinions discussing President George W. Bush’s actions during the war on terror.

Case Questions

1. On what grounds did Justice Black reject President Truman’s seizure order?

2. How did Justice Jackson characterize the sources of presidential power?

3. Considering that the United States was engaged in a brutal war in Korea, and that steel was needed for the war effort, do you agree with this decision (three justices dissented)? If the Court had permitted the seizure of a private business in this case, could that have led to a “slippery slope” and ultimately future seizures on somewhat lesser grounds?

Since 2001, the war on terror has raised new issues regarding the limits on presidential power. After the attacks on the United States in that year, Congress issued a joint resolution authorizing the president to “use all necessary and appropriate force against those nations, organizations, or persons he determines planned, authorized, committed or aided” the attacks of September 11, 2001. President Bush then issued an executive order establishing military commissions at Guantanamo to try military detainees captured during the war on terror. The commissions were not authorized by any act of Congress. Under the commissions’ rules, the accused and his or her attorney were not permitted to know the evidence used against them, some sessions were held in private without the accused being present, and there was no limit on the type of evidence that could be presented. Many commentators viewed the actions of President Bush in establishing these military commissions, without the express authority of Congress, as the greatest constitutional challenge to the separation of powers since President Nixon’s actions during the Watergate era, or perhaps even since the American Civil War.

In 2001, Salim Hamdan was captured by the U.S. military in Afghanistan. He had been a driver for Osama bin Laden but was unconnected to the terrorist acts or to hostilities in Afghanistan or Iraq. Hamdan was vaguely charged with conspiracy “to commit offenses triable by military commission.” He maintained that the commissions had been established in violation of both the U.S. Code of Military Justice and the Geneva Convention.

In Hamdan v. Rumsfeld, 126 S.Ct. 2749 (2006), the Supreme Court agreed and found the establishment of the military commissions to have been an improper exercise of presidential authority. In an opinion by Justice Stevens, the court stated that this case did not involve “the need to accommodate exigencies that may sometimes arise in a theater of war.” He noted that this was not a case necessitating the president to respond to an emergency on the battlefield and that there was no reason why the president could not have sought authorization from Congress to establish military tribunals to try terrorists. He concluded his opinion by stating, “It bears emphasizing that Hamdan does not challenge, and we do not today address, the Government’s power to detain him for the duration of active hostilities in order to prevent such harm. But in undertaking to try Hamdan and subject him to criminal punishment, the Executive is bound to comply with the Rule of Law that prevails in this jurisdiction.”

James Madison wrote in 1788 in the Federalist Papers (no. 47) that “The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self appointed, or elective, may justly be pronounced the very definition of tyranny.” This was echoed by Justice Anthony Kennedy in his concurring opinion in Hamdan v. Rumsfeld, where he stated “Trial by military commission raises separation-of-powers concerns of the highest order. Located within a single branch, these courts carry the risk that offenses will be defined, prosecuted, and adjudicated by executive officials without independent review. Concentration of power puts personal liberty in peril of arbitrary action by officials, an incursion the Constitution’s three-part system is designed to avoid. It is imperative, then, that when military tribunals are established, full and proper authority exists for the presidential directive.”

A few months after the Hamdan decision, the Military Commissions Act of 2006 was enacted by Congress and signed by the president. This law set out procedures for the president’s creation of military tribunals to try detainees in the war on terror, and prohibited the detainees from petitioning for release (through a Writ of Habeas Corpus) in the federal courts. In Boumediene v. Bush, 553 US 723 (2008), the Supreme Court held that the statute was unconstitutional because denying the detainees access to the civilian federal courts was an unlawful suspension of the right of habeas corpus guaranteed in the Constitution. Since that time, the federal courts have heard a number of cases involving Guantanamo detainees, upholding the imprisonment of some and setting others free.

THE TREATY POWER

Sovereign governments have been entering into military and trade alliances with one another for thousands of years. As modern nations see the growing need to come to terms with one another on important global issues, these agreements take on an even greater significance. The interdependence of all peoples of the world is expanding. Scientific and technological advances are proceeding more rapidly than ever before. Air and water pollution know no national boundaries. Global warming imperils the entire planet. Toxic waste from one nation is dumped in another. Endangered wildlife slaughtered in one country is sold in another. Illegal drug trafficking, terrorism, and other forms of criminal behavior have taken on multinational dimensions. Products designed and produced in one country cause injuries to consumers in others. All of these problems have one thing in common: Resolving each of them requires the cooperation, understanding, and joint efforts of all nations of the world. In a global economy, in which the economic and financial well-being of all nations is interrelated, economic cooperation thus becomes absolutely necessary.

The primary instrument for implementing foreign political and economic affairs is the international agreement. International agreements include treaties and executive agreements. International agreements are either bilateral (between two nations) or multilateral (between many nations).

According to international law, a treaty is an agreement, contract, or compact between two or more nations (or between a nation and a public international organization, such as the UN), that is recognized and given effect under international or domestic law. In the United States, a treaty is an international agreement negotiated by the president with the “advice and consent” of the Senate, and which has been approved by a two-thirds vote of the Senate. The treaty power of the United States is found in Article II of the Constitution. Treaties can cover almost any subject of mutual concern to nations, from dealing with global warming to eliminating nuclear weapons testing to enhancing the free movement of trade and investment across national borders.

A convention is a treaty on matters of common concern, usually negotiated on a regional or global basis and open to adoption by many nations. Executive agreements, which are made by the president without resort to the formal treaty process in the Senate, are discussed in the next section.

The Domestic Law Effect of U.S. Treaties

Under the Constitution, a treaty is considered the “law of the land.” It is binding on both the federal and state governments with the same force as an act of Congress. Treaties are said to be either self-executing or non-self-executing (also known as executory treaties). The United States is party to both types. In the United States and other countries with written constitutions, a self-executing treaty has a “domestic law effect.” This means that once the treaty has been ratified, no further presidential or legislative action is required for it to become binding law. Self-executing treaties therefore provide individuals with specific rights, which the courts will enforce.

An executory or non-self-executing treaty requires an act of Congress or of the president to give it legal effect. Whether a treaty is self-executing or not depends on the language of the treaty, the history surrounding it, the intent of the president in negotiating it, and the intent of the Senate in approving it.

One self-executing treaty is the Montreal Convention. This international agreement determines the rights and remedies available to those who are injured or whose property is damaged during travel on commercial aircraft. The Montreal Convention also determines the liability and limitations on liability of the airline. On the other hand, treaties that merely express a nation’s desire to cooperate with other nations in achieving broad social, economic, cultural, humanitarian, or political objectives may not be self-executing. The Charter of the United Nations, for example, is a non-self-executing international “pledge” to abide by common values for the betterment of humankind and is generally considered by U.S. courts not to grant enforceable rights to private parties.

The Equal-Dignity Rule.

Self-executing treaties have the same legal effect as statutes passed by both houses of Congress. How, then, do we resolve conflicts between treaties or statutes, the terms of which are inconsistent with one another? In these cases, the rule is that the last in time prevails. A treaty will override an inconsistent prior act of Congress. Similarly, an act of Congress can override an inconsistent prior treaty, provided that Congress had expressed its intention to do so. The rule is easy to understand and is based on the idea that statutes and treaties are of equal dignity, meaning they are of equal legal importance.

An Example of Treaties under U.S. Law: FCN Treaties.

Treaties of friendship, commerce, and navigation (FCN treaties) are important to the business community worldwide and thus provide a good example to see the effect of treaties on U.S. law and U.S. companies. FCN treaties are self-executing bilateral agreements that provide a broad range of protection to foreign nationals doing business in a host country. Although each treaty is different, they all typically state that each country will allow the establishment of foreign branches or subsidiary corporations; the free flow of capital and technology; the equitable and nondiscriminatory treatment of foreign firms, individuals, and products; the right of travel and residence; the payment of just compensation for property taken by the state; the privilege of acquiring and owning real estate; and most-favored-nation trading status for goods.

The self-executing nature of FCN treaties is illustrated in MacNamara v. Korean Air Lines. This case involved a conflict between a federal statute that protects workers against discrimination in employment and the FCN treaty between the United States and Korea that allows foreign firms to give preference in hiring their own foreign nationals for executive, managerial, and technical positions.

MacNamara v. Korean Air Lines

863 F.2d 1135 (1988) United States Court of Appeals (3rd Cir.)

BACKGROUND AND FACTS

MacNamara brought this action against his former employer, Korean Air Lines (KAL), for discrimination under Title VIII of the Civil Rights Act of 1964 and the U.S. Age Discrimination in Employment Act. KAL is a Korean company. MacNamara, an American citizen, was a district sales manager in Philadelphia who had worked for the defendant airline since 1974. In 1982, at age 57, he was dismissed from employment. KAL claimed that his dismissal was part of KAL’s reorganization plan, which included merging the Philadelphia and Atlanta offices into one office located in Washington, D.C. KAL had also dismissed six American managers and replaced them with four Korean citizens. The Korean citizen who replaced MacNamara was 42 years old. After exhausting his administrative remedies, MacNamara filed suit claiming that KAL had discriminated against him on the basis of race, national origin, and age. KAL moved to dismiss on the ground that its conduct was protected by the Treaty of Friendship, Commerce, and Navigation between the United States and Korea. The motion to dismiss was granted and the plaintiff appealed.

CIRCUIT JUDGE STAPLETON

The Korean FCN treaty is one of a series of friendship, commerce and navigation treaties the United States signed with various countries after World War II. Although initially negotiated primarily for the purpose of encouraging American investment abroad, the treaties secured reciprocal rights and thus granted protection to foreign businesses operating in the United States. The specific provision of the Korean FCN treaty relied upon by KAL in this case provides as follows:

Nationals and companies of either party shall be permitted to engage, within the territories of the other party, accountants and other technical experts, executive personnel, attorneys, agents, and other specialists of their choice.

We agree with the Courts of Appeals for the Fifth and Sixth Circuits that Article VIII(l) goes beyond securing the right to be treated the same as domestic companies and that its purpose, in part, is to assure foreign corporations that they may have their business in the host country managed by their own nationals if they so desire. We also agree with the conclusion of the Sixth Circuit Court of Appeals that Article VIII(l) was not intended to provide foreign businesses with shelter from any law applicable to personnel decisions other than those that would logically or pragmatically conflict with the right to select one’s own nationals as managers because of their citizenship. Insofar as Title VII and the ADEA proscribe intentional discrimination on the basis of race, national origin, and age, we perceive no theoretical or practical conflict between them and the right conferred by Article VIII(l). Thus, for example, we believe that a foreign business may not deliberately undertake to reduce the age of its workforce by replacing older Americans with younger foreign nationals. On the other hand, to the extent Title VII and the ADEA proscribe personnel decisions based on citizenship solely because of their disparate impact on older managers, a particular racial group, or persons whose ancestors are not from the foreign country involved, we perceive a potential conflict and conclude that it must be resolved in favor of Article VIII(l).

Having concluded that KAL cannot purposefully discriminate on the basis of age, race, or national origin, we now turn to the most difficult aspect of this case. To this point we have confined our analysis to liability for intentional discrimination. The reach of Title VII and the ADEA, however, extends beyond intentionally discriminatory employment policies to those practices fair in form, but discriminatory in operation. Griggs v. Duke Power Co., 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158 (1971). Accordingly, Title VII and ADEA liability can be found where facially neutral employment practices have a discriminatory effect of “disparate impact” on protected groups, without proof that the employer adopted these practices with a discriminatory motive.

The fact that empirical evidence can satisfy the substantive standard of liability would pose a substantial problem in disparate impact litigation for corporations hailing from countries, including perhaps Korea, whose populations are largely homogeneous. Because a company’s requirement that its employees be citizens of the homogeneous country from which it hails means that almost all of its employees will be of the same national origin and race, the statistical disparity between otherwise qualified noncitizens of a particular race and national origin, and citizens of the foreign country’s race and national origin is likely to be substantial. As a result, a foreign business from a country with a homogeneous population, by merely exercising its protected treaty right to prefer its own citizens for management positions, could be held in violation of Title VII. Thus, unlike a disparate treatment case where liability cannot be imposed without an affirmative finding that the employer was not simply exercising its Article VIII(l) right, a disparate impact case can result in liability where the employer did nothing more than exercise that right. For this reason we conclude that disparate impact liability under Title VII and the ADEA for a foreign employer based on its practice of engaging its own nationals as managers cannot be reconciled with Article VIII(l). Accordingly, we hold that such liability may not be imposed.

Decision. The Court of Appeals reversed and remanded for a trial on the question of whether KAL’s discriminatory treatment was intentional. The court ruled that the FCN treaty that authorized foreign employers to engage executives and technical specialists “of their choice” granted a limited exemption to U.S. anti-discrimination laws on the basis of citizenship. Although the treaty does not grant foreign employers a blanket exception to the civil rights laws and employers are liable for intentional discrimination (disparate treatment) on the basis of race, national origin, or age, the treaty permits foreign employers to retain their own nationals in executive and technical positions even where the effect of such personnel decisions is discriminatory and would otherwise subject the employer to disparate impact liability under the law.

Comment. In a U.S. Supreme Court decision relied on by the MacNamara court, Sumitomo v. Avag-liano, 457 U.S. 176 (1982), it was held that the FCN treaty between the United States and Japan did not provide immunity to a Japanese trading company for liability under Title VII of the Civil Rights Act of 1964. In Sumitomo the Court ruled that because the employer was a wholly owned U.S. subsidiary of a Japanese company, incorporated under the laws of the United States, it was not a Japanese company but a U.S. one. Thus, it was not entitled to protection under the treaty.

Case Questions

1. What purposes do FCN treaties serve? What might an FCN treaty’s impact be on foreign investment?

2. Why does the FCN treaty provide that foreign companies are to be allowed to hire their own nationals for management and technical positions?

3. Is there a difference between discrimination on the basis of citizenship and discrimination on the basis of race and national origin? What is the difference between “disparate treatment” and “disparate impact”? How does the court address this difference?

4. What other types of treaties do you think might directly affect international trade, licensing, and investment?

Other self-executing treaties (in the United States) discussed elsewhere in this text include the Hague Convention, the Convention on Contracts for the International Sale of Goods, and the U.N. Convention on Recognition and Enforcement of Foreign Arbitral Awards. Tax treaties are also considered self-executing in that the provisions of these treaties, like those of the others mentioned, need no further legislation to make them a binding source of law in U.S. courts.

EXECUTIVE AGREEMENTS

Executive agreements are international agreements between the president, representing the United States, and a foreign country, entered into without resort to the treaty process. They are binding obligations of the U.S. government and have the effect of law in the United States. Executive agreements are not provided for in the Constitution, as are treaties. Yet, throughout U.S. history, presidents have utilized executive agreements to conduct foreign affairs. For many practical and political reasons, presidents often favor the executive agreement over the treaty. Since World War II, most international agreements of the United States have not been treaties; they have been executive agreements.

There are two types of executive agreements: sole executive agreements and congressional-executive agreements. A sole executive agreement is one that the president can negotiate and put into legal effect on the basis of his inherent authority, without congressional approval. A congressional-executive agreement is based on authority granted by Congress to the president in a joint resolution or statute, or by treaty.

Sole Executive Agreements and the President’s Inherent Power

The president’s authority to enter a sole executive agreement is based on powers inherent in being the chief executive of the nation and commander-in-chief of the armed forces. Sole executive agreements are usually reserved for agreements with foreign countries that do not affect the broad interests of the nation as a whole. Examples include an agreement with a foreign country to lease property for the site of an American embassy, a cease-fire agreement during wartime, or an agreement for scientific cooperation or the exchange of technical information. These could be concluded with a sole executive agreement under the president’s inherent authority. Since 1972, the text of sole executive agreements must be reported to Congress. Most sole executive agreements, such as the one in the following case, Dole v. Carter, are between two countries on specific matters.

Congressional-Executive Agreements and the President’s Delegated Power

In performing its duties, Congress has broad legislative power to establish policy for the nation. It may, within limits, delegate to the president and the executive branch the responsibility to carry out or enforce those laws. When the president acts pursuant to authority from Congress, he is exercising his delegated power.

The Youngstown case, which you just read, contained one of the most famous quotes about presidential powers in all American constitutional history. Justice Jackson, in his dissent, described the effect of delegated power.

Dole v. Carter

444 F. Supp. 1065 (1977) United States District Court (D. Kan.)

BACKGROUND AND FACTS

This action was brought by a U.S. senator against the president to enjoin him from returning the Hungarian coronation regalia to the People’s Republic of Hungary. The Holy Crown of St. Stephen had been held by the Hungarian people as a treasured symbol of their statehood and nationality for nearly 1,000 years. At the close of World War II, it was entrusted to the United States for safekeeping by Hungarian soldiers. In 1977, the governments of the United States and Hungary entered into an agreement returning the crown to Hungary. Many Hungarians living in the United States were opposed to the return of the crown. The plaintiff filed this action seeking an injunction against delivery of the crown to Hungary on the ground that such action was tantamount to a treaty undertaken by the president without the prior advice and consent of the Senate.

DISTRICT JUDGE O’CONNOR

We turn now to the plaintiff’s argument that the agreement to return the coronation regalia to Hungary in and of itself constitutes a treaty which must be ratified by the Senate. It is well established, and even plaintiff admits, that the United States frequently enters into international agreements other than treaties. Indeed, as of January 1, 1972, the United States was a party to 5,306 international agreements, only 947 of which were treaties and 4,359 of which were international agreements other than treaties. These “other agreements” appear to fall into three categories: (1) so-called congressional-executive agreements, executed by the President upon specific authorizing legislation from the Congress; (2) executive agreements pursuant to treaty, executed by the President in accord with specific instructions found in a prior, formal treaty; and (3) executive agreements executed pursuant to the President’s own constitutional authority (hereinafter referred to as “executive agreements”). Defendant contends that his agreement to return the coronation regalia to Hungary falls into the latter category, and the court agrees.

Since the Curtiss-Wright decision, the Supreme Court has twice upheld the validity of an executive agreement made by President Franklin Roosevelt with the Soviet Union. In the Litvinov Agreement, the President recognized and established diplomatic relations with that nation. In addition, for the purpose of bringing about a final settlement of claims and counterclaims between the Soviet Union and the United States, it was agreed that the Soviet Union would take no steps to enforce claims against American nationals, but all such claims were assigned to the United States with the understanding that the Soviet Union would be notified of all amounts realized by the United States. In speaking for the Court in United States v. Belmont, 301 U.S. 324, 57 S.Ct. 758, 81 L.Ed. 1134 (1937), Justice Sutherland, who also authored the majority opinion in Curtiss-Wright … stated:

(A)n international compact, as this was, is not always a treaty which requires the participation of the Senate. There are many such compacts, of which a protocol, a modus vivendi, a postal convention, and agreements like that now under consideration are illustrations.

The United States enters into approximately 200 executive agreements each year, and it has been observed that the constitutional system “could not last a month” if the President sought Senate or congressional consent for every one of them. L. Henkin, Foreign Affairs and the Constitution … Congress itself recognized this fact in passing P.L. 92–403, 1 U.S.C. §112b, requiring the secretary of state to transmit for merely informational purposes the text of all international agreements other than treaties to which the United States becomes a party. The House Committee on Foreign Affairs stated in recommending passage of that statute that while it wished to be apprised of “all agreements of any significance,” “[c]learly the Congress does not want to be inundated with trivia.” 1972 U.S. Code Cong, and Admin. News, p. 3069. While the President’s understanding to return the Hungarian coronation regalia is hardly a “trivial” matter to either the United States or the people of Hungary, the court is yet convinced that the President’s agreement in this regard lacks the magnitude of agreements customarily concluded in treaty form. The President’s agreement here involves no substantial ongoing commitment on the part of the United States, exposes the United States to no appreciable discernible risks, and contemplates American action of an extremely limited duration in time. The plaintiff presented no evidence that agreements of the kind in question here are traditionally concluded only by treaty, either as a matter of American custom or as a matter of international law. Indeed, while the court has not exhaustively examined all possibly pertinent treaties, the court can hardly imagine that any such examination would lend support to the plaintiff’s position. Finally, the agreement here encompasses no substantial reciprocal commitments by the Hungarian government. As a matter of law, the court is therefore persuaded that the President’s agreement to return the Hungarian coronation regalia is not a commitment requiring the advice and consent of the Senate under Article II, Section 2, of the Constitution.

Decision. The plaintiff’s motion for a preliminary injunction was denied. The agreement to return the coronation regalia was found to be not a treaty requiring ratification by the Senate, but a valid executive agreement based on the president’s inherent power.

Case Questions

1. Why did the president use a sole executive agreement resolving this issue with Hungary instead of relying on the treaty power?

2. Was the president’s action required to be authorized by the Congress?

3. What kinds of agreements are usually reserved for treaties, and what kinds are handled through executive agreements?

When the president acts pursuant to an express or implied authorization of Congress, his authority is at its maximum, for it includes all that he possesses in his own right plus all that Congress can delegate. In these circumstances, and in these only, may he be said (for what it may be worth), to personify the federal sovereignty.

If the president enters into an executive agreement with a foreign country pursuant to this delegated authority, the agreement is valid and has the effect of binding law. These agreements are known as congressional-executive agreements, reflecting the dual authority of the legislative and executive branches of government.

Congressional-executive agreements serve much the same purpose as treaties. Their legal nature, however, is different. Unlike treaties, congressional-executive agreements are not described in the Constitution. Their use grew out of the constitutional history of the United States during the present century. For the most part, they were born of the Roosevelt era of the 1930s and 1940s, when the president was seeking new and more flexible ways of dealing with the nation’s economic problems during the Great Depression and World War II. By the close of World War II, the House and Senate had informally agreed with the president to provide a substitute process for approving international agreements—one that would not require a two-thirds vote of approval of the Senate, as do treaties. Instead, they agreed on a substitute process permitting international agreements to be approved either by statute or by joint resolutions of both houses of Congress. Statutes and joint resolutions can pass on a simple majority vote of both houses. Presidents usually prefer the congressional-executive agreement process to the treaty process because it is often easier for them to obtain congressional approval by majority vote of both houses than by a two-thirds vote of one house. (Thus, the legislature and president become partners in forming international agreements—a type of “balance of power.”) Today, congressional-executive agreements, based on the majority vote of both houses of Congress, are recognized as having the same binding legal effect as treaties.

U.S. TRADE AND TARIFF LEGISLATION

The United States has had trade and tariff laws since its founding. In the 1800s, these laws gave little authority to the president other than to collect the tariffs on imported goods according to the tariff rates set by Congress. Today, U.S. trade and tariff laws give far more flexibility and authority to the president to negotiate congressional-executive trade agreements with foreign countries on the basis of objectives set out in the legislation. U.S. trade laws also give the president the authority to prevent foreign unfair trade practices and to retaliate against foreign countries that discriminate against U.S.-made goods or services.

The Smoot-Hawley Tariff Act of 1930

The modern era of trade legislation began with the Smoot-Hawley Tariff Act of 1930 (Smoot-Hawley). Shortly after World War I, partially as a result of isolationist sentiments at home, the United States began to increase tariffs on imported goods. In 1930, the U.S. Congress imposed the highest tariff levels in the nation’s history when it enacted the bill, which was signed by President Herbert Hoover. Under Smoot-Hawley, tariffs on more than one thousand items were increased to levels so high that other nations raised their tariffs in retaliation. Some tariff rates reached nearly 100 percent of the cost of the goods. Economic activity declined precipitously. It is generally accepted today that these high tariffs worldwide exacerbated the Great Depression of the 1930s.

President Franklin Roosevelt recognized the immediate need to reduce tariffs and “liberalize” trade. At that time, however, the president simply did not have the legal authority to take any significant action without congressional approval, and the treaty process was too cumbersome. Roosevelt thus worked with Congress to pass the Reciprocal Trade Agreements Act of 1934, which provided the president with the authority needed to lower tariffs.

The Reciprocal Trade Agreements Act of 1934

Prior to 1934, the president had little or no discretion in setting tariff rates. The Reciprocal Trade Agreements Act of 1934 provided the president with a mechanism not only for lowering U.S. tariffs but for encouraging other countries to lower their rates as well. This act granted the president far more flexible powers to adjust tariffs than under any prior legislation. The president was granted the authority to negotiate tariff reductions on a product-by-product basis with other countries on the basis of reciprocity. The United States would reduce a tariff on a foreign product if the foreign country would reciprocate by lowering its tariffs. An agreement to reduce a tariff to a specified level is known as a tariff concession. If the United States was to lower an existing tariff on an imported product from, say, France, then France would have to make similar concessions on the same or other products coming from the United States.

The 1934 law also introduced what is known as unconditional most-favored-nation (MFN) trade, now commonly referred to as normal trade relations (NTR). It provided that a lower tariff rate negotiated with one nation would automatically be granted to like products imported from all other nations that had signed an MFN agreement with the United States, without any concession being requested from those nations in return. Moreover, if two other nations reached an agreement to lower tariffs on a given product, then that new rate would apply to U.S. products imported into those nations as well. This system served to quicken and expand the process of lowering duties worldwide.

In the following case, Star-Kist Foods, Inc. v. United States, the constitutionality of the tariff-setting process of the Reciprocal Trade Agreements Act was upheld against a charge that it was an unconstitutional delegation of power by Congress to the president.

Star-Kist Foods, Inc. v. United States

275 F.2d 472 (1959) United States Court of Customs and Patent Appeals

BACKGROUND AND FACTS

Star-Kist Foods, a U.S. producer of canned tuna, instituted a lawsuit to protest the assessment of duties made by the collector of customs on imported canned tuna. Duty was assessed on the canned tuna at the rate of 12.5 percent pursuant to a trade agreement with Iceland. Prior to the agreement, the tariff rate had been set by Congress in the Tariff Act of 1930 at 25 percent ad valorem. The trade agreement with Iceland, which resulted in lowering the rate of duty, was executed pursuant to the Reciprocal Trade Agreements Act of 1934. That act authorized the president to enter into foreign trade agreements for the purpose of expanding foreign markets for the products of the United States by affording corresponding market opportunities for foreign products in the United States. To implement an agreement, the president was then authorized to raise or lower any duty previously set by Congress, but not by more than 50 percent. Star-Kist brought this action, contending that the delegations of authority under the 1934 act and the agreement with Iceland were unconstitutional.

JUDGE MARTIN

A constitutional delegation of powers requires that Congress enunciate a policy or objective or give reasons for seeking the aid of the President. In addition the act must specify when the powers conferred may be utilized by establishing a standard or “intelligible principle” which is sufficient to make it clear when action is proper. And because Congress cannot abdicate its legislative function and confer carte blanche authority on the President, it must circumscribe that power in some manner. This means that Congress must tell the President what he can do by prescribing a standard which confines his discretion and which will guarantee that any authorized action he takes will tend to promote rather than flout the legislative purpose. It is not necessary that the guides be precise or mathematical formulae to be satisfactory in a constitutional sense.

In the act before us the congressional policy is pronounced very clearly. The stated objectives are to expand foreign markets for the products of the United States “by regulating the admission of foreign goods into the United States in accordance with the characteristics and needs of various branches of American production so that foreign markets will be made available to those branches of American production which require and are capable of developing such outlets by affording corresponding market opportunities for foreign products in the United States….”

Pursuant to the 1934 act the presidential power can be invoked “whenever he [the President] finds as a fact that any existing duties or other import restrictions of the United States or any foreign country are unduly burdening or restricting the foreign trade of the United States and that the [purpose of the act] will be promoted.”…

Under the provisions of the 1934 act the President by proclamation can modify existing duties and other import restrictions but not by more than 50 percent of the specified duties nor can he place articles upon or take them off the free list. Furthermore, he must accomplish the purposes of the act through the medium of foreign trade agreements with other countries. However, he can suspend the operation of such agreements if he discovers discriminatory treatment of American commerce, and he can terminate, in whole or in part, any proclamation at any time….

In view of the Supreme Court’s recognition of the necessity of flexibility in the laws affecting foreign relations … we are of the opinion that the 1934 act does not grant an unconstitutional delegation of authority to the President.

Decision. The court held in favor of the United States. The congressional delegation of authority under the 1934 statute was constitutional because Congress had provided the president with a sufficiently discernible standard to guide any decisions in carrying out the purposes of the act.

Case Questions

1. What was the constitutional authority for the agreement with Iceland?

2. What was the policy objective of Congress in enacting the Reciprocal Trade Agreements Act noted by the court? How was the president to implement this policy?

3. Why was the congressional delegation of authority constitutional?

More Recent U.S. Trade Legislation

The Reciprocal Trade Agreements Act of 1934 provided the basic system for trade negotiations until 1962. In that year, Congress passed the Trade Expansion Act of 1962, which authorized the president to negotiate across-the-board tariff reductions instead of using the tedious product-by-product system set up in 1934. This law also created the Office of the

United States Trade Representative

, empowered to conduct all trade negotiations with foreign countries and international organizations on behalf of the United States.

The Trade Reform Act of 1974 replaced most provisions of the 1962 law and delegated even more authority to the president. The president was given wide latitude to reduce or eliminate duties (with authority to reduce duties by up to 60 percent and simply end any import duties of less than 5 percent) and to negotiate a reduction of non-tariff barriers during the Tokyo Round.

The Trade Agreements Act of 1979 continued congressional support for expanding free trade by approving the president’s trade agreements to reduce non-tariff barriers.

The Trade and Tariff Act of 1984 authorized the president to negotiate agreements related to high-technology products, trade in services, and barriers to foreign investment. It also authorized the free trade area between the United States and Israel.

The Omnibus Trade and Competitiveness Act of 1988 extended the president’s authority to negotiate trade agreements, including an expansion of the U.S.-Canadian free trade area to include Mexico in the NAFTA. It also gave even broader powers to the president to “pry open” foreign markets that have unfair barriers to the entry of U.S. goods and services (through both negotiations and sanctions).

In addition, Congress has also passed a number of trade agreements dealing with specific issues or affecting U.S. trade with specific world regions. For instance, as we will study in later chapters, Congress has passed the Trade Act of 2002 (which reauthorized an important trade program that promotes imports from developing countries), the Caribbean Basin Economic Recovery Act of 1983, the Andean Trade Program and Drug Eradication Act of 2002, and the African Growth and Opportunity Act of 2000, as well as other important trade laws.

Many of the basic principles and programs established in the 1930s and 1940s are, in a modern form, still in existence today. To this day, every U.S. president has returned to Congress to ask for needed authority to negotiate congressional-executive agreements on trade and investment issues with foreign nations.

TRADE AGREEMENTS

A trade agreement is an agreement between nations on matters involving trade, tariffs, and related issues. The purpose of a trade agreement is to open markets for foreign goods and/or services by reciprocally reducing tariffs and non-tariff barriers (including the establishment of agreed-upon customs rules for imports), and may include rules for resolving trade disputes between the countries party to the agreement. A free trade agreement is a trade agreement in which tariffs and non-tariff barriers are eliminated or reduced significantly, and that often contain additional provisions on matters of mutual concern. For example, a free trade agreement may include provisions on currency exchange, on investment issues, on cross-border transport, on specific industry sectors, or even on matters related to labor and the environment. Trade agreements can be either bilateral or multilateral in scope. Multilateral agreements, such as the General Agreement on Tariffs and Trade (1994) and the Agreement Establishing the World Trade Organization (1994), can include many nations across the globe. Many multilateral agreements encompass a geographical region. These are called regional trade agreements. Two well-known regional trade agreements to which the United States is a party are the North American Free Trade Agreement with Canada and Mexico (1993) and the Central American Free Trade Agreement with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic (2004). Bilateral trade agreements are between two countries. America’s first trade agreement was a bilateral agreement with France in 1778. The United States, like many other countries, is party to hundreds of bilateral agreements. The United States has bilateral free trade agreements with Israel (1985), Jordan (2001), Bahrain (2004), Morocco (2004), Oman (2004), Chile (2004), Singapore (2004), Australia (2005), and Peru (2007). As of this writing (2010), the U.S. Congress was considering approval of trade agreements with Korea, Colombia, and Panama, and others were still in the process of negotiation. According to the U.S. Trade Representative’s office, American exports to countries with which the United States has concluded free trade agreements have grown twice as fast as exports to the rest of the world. However, many people who believe in the multilateral process for opening markets object to the use of regional and bilateral trade agreements because they argue that these only create small trading blocs that put firms from other countries, not party to the agreement, at a trading disadvantage. These people view regional and bilateral agreements as trade restrictive, not trade liberalizing.

The General Agreement on Tariffs and Trade

The most important multilateral trade agreement of the twentieth century was the General Agreement on Tariffs and Trade, or GATT, which was in effect from 1947 through 1994. It reduced tariffs and other barriers to trade through a series of multilateral trade negotiations in which countries made reciprocal tariff concessions to each other, and through the use of dispute panels to resolve trade disputes. In 1995, the original GATT was replaced with a new General Agreement on Tariffs and Trade (GATT 1994, also called the Uruguay Round Agreement), which led to the creation of the World Trade Organization (WTO). GATT 1994 and the WTO are the subjects of the next chapter.

Presidential Authority for GATT Multilateral Trade Negotiations.

GATT succeeded in liberalizing trade in this century because it provided a forum for bringing nations together in multilateral trade negotiations. GATT negotiations are called “rounds.” The most notable GATT rounds were the Dillon Rounds (1950s), the Kennedy Rounds (1960s), the Tokyo Rounds (1970s), the Uruguay Rounds (1980s and 1990s), and the Doha Rounds (2001 to present). Each set of rounds resulted in improvements in the world trading environment. The president has sought congressional approval for trade agreements negotiated under GATT, granted under the statutes listed in the preceding sections.

Trade Promotion Authority

Congressional-executive trade agreements require the approval of Congress in order to be legally binding on the United States. However, a foreign nation might be less willing to enter trade negotiations with the president’s negotiating team if it thought that any agreement might later be rejected by Congress because of domestic political pressures in the United States. Imagine the U.S. government taking years to negotiate trade agreements with dozens of countries, covering thousands of products affecting hundreds of industries—only to have a senator or representative vote against it because it reduced import duties on foreign products that compete with those made by his or her special interests back home. To avoid this, the Trade Reform Act of 1974 set up a fast-track process for approving trade agreements, known as the president’s trade promotion authority. The statute gave the president authority to negotiate trade agreements pursuant to the objectives set out by Congress. During trade negotiations, the president must consult with Congress and notify it of proposed changes to U.S. trade laws. Congress can then comment on the negotiations before there is a final agreement and while there is still time for the president to modify it. At the conclusion of negotiations, Congress must vote by a simple majority to either accept or reject the agreement in its entirety without amendment. This process helped to ensure the passage of trade agreements into U.S. law because it eliminated the possibility that Congress would try to rewrite agreements under pressure from special interests. The fast-track process has been used by every president since 1974 to negotiate many important trade agreements. However, the president’s authority expired in 2007, and at the time of this writing it had not yet been renewed by Congress.

Trade Negotiating Objectives.

Some of the objectives of trade promotion authority have included:

• reducing tariff and non-tariff barriers to trade in goods, agricultural products, and services on a reciprocal basis

• eliminating trade barriers that decrease market opportunities for U.S. exports

• promoting respect for worker rights and the protection of child labor in light of the standards of the International Labor Organization

• considering the impact of trade on the environment and natural resources and promoting adherence to global environmental standards

• ensuring that trade agreements afford small businesses equal access to international markets and expanded export market opportunities

• reducing barriers to foreign investment by U.S. firms

• protecting intellectual property rights

• prohibiting government officials in foreign countries from accepting bribes or engaging in corrupt practices that affect or distort international trade

• ensuring that global rules for furthering trade apply to electronic commerce

Expanded Powers.

Today, the president is authorized not just to reduce duties on products but also to take a wide range of executive actions to deal with the complexities of the modern business world. This authority is in keeping with the modern notion that the president needs increased flexibility in handling matters related to international trade and foreign affairs. For example, the president has authority to negotiate special trade relations with developing countries; negotiate rules for dealing with agricultural trade problems; coordinate international monetary policies; negotiate better mechanisms for protecting copyrights, patents, and trademarks in foreign countries; negotiate a reduction of barriers to trade in high technology; and ensure equal access to foreign high technology by U.S. firms.

In addition, the president has been given broader powers to deal with a range of complex economic problems. For example, the president may take certain authorized measures (tariffs, quotas, and the like) designed to protect U.S. industry from foreign competition under certain well-defined circumstances, such as when U.S. industry is being injured by increased imports of particular foreign products.

The president has also been granted powers by Congress to respond to international emergencies. The International Emergency Economic Powers Act enables the president to block transactions or seize assets of individuals or organizations responsible for terrorism, illegal drug production or drug smuggling, or violations of human rights. These issues are discussed in later chapters.

FEDERAL–STATE RELATIONS

Thus far our discussion has focused on the relation between the executive and legislative branches of the federal government. But the notion of “federalism” also implies that the United States has two levels of government—state and federal. The Constitution has several provisions that touch on the relations between the state and federal governments and that determine a state’s authority to regulate international (as well as interstate) trade. These include the Supremacy Clause, the Import-Export Clause, and the Commerce Clause.

The Supremacy Clause

When a law or regulation of the federal government directly conflicts with those of the state (or local) government, the federal law will still generally prevail when Congress has expressed the intention that the federal law shall prevail or when that intention may be inferred from the legislation or from the circumstances. For example, when Congress enacts a comprehensive scheme of legislation, such as regulations governing commercial aviation, it includes an implication, known as federal preemption, that the federal rule will prevail over an inconsistent state rule. The inconsistent state law will be void to the extent it conflicts with the federal scheme.

Burma, Human Rights, and Federal Preemption

Burma (also called Myanmar) is a poor Asian country, about the size of Texas, with a population of about 48 million. Since 1962, a military dictatorship, or junta, has ruled Burma with an iron hand. Military rule and mismanagement have resulted in widespread poverty; Burmese citizens have an annual per capita income of less than $300. Burma is known for state monopolization of leading industries, a bloated bureaucracy, arbitrary laws and regulations, corruption, an inadequate infrastructure, a shortage of foreign exchange, and disproportionately large military spending at the expense of social programs. For most Western firms, these problems outweigh Burma’s business opportunities.

According to reports from the U.S. State Department and international organizations, the military government uses violence, torture, intimidation, harassment, and fear to remain in power. Harsh prison sentences are handed out, even to foreigners, for unknowingly violating Burmese law. There is no freedom of association or freedom of travel. It is illegal to own or possess an unregistered computer modem, and foreigners entering Burma with a computer are likely to have it confiscated. There are reports of tourists being harassed for taking pictures of men in uniform. U.S. citizens have been detained, arrested, tried, and deported for distributing pro-democracy literature and for visiting the homes and offices of Burmese pro-democracy leaders. In 2007, a crackdown by the military on Buddhist monks and pro-democracy demonstrators resulted in Burma’s worldwide condemnation at the United Nations.

Economic Sanctions against Burma.

In 1996, the Commonwealth of Massachusetts, several major U.S. cities, and Congress sought to ban U.S. business with Burma. Massachusetts passed a law prohibiting all commonwealth and municipal government agencies from buying goods or services from any person or firm that does business in Burma. Congress took a different strategy. The federal statute banned all economic aid to the Burmese government except for humanitarian assistance, denied U.S. entry visas to Burmese citizens, and authorized the president to prohibit “new investment” in Burma if the Burmese government continued its violent suppression of democracy. The powers delegated to the president were specific and directed him to work with other Asian countries to promote democracy in Burma through diplomatic means. In 1997, the president issued an executive order and imposed further restrictions on new investment as Congress had directed. The president’s order was based on both the 1996 statute and the International Emergency Economic Powers Act. Criminal penalties for violations ranged from up to ten years’ imprisonment, up to $500,000 in corporate fines, and up to $250,000 in individual fines.

In Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000), the U.S. Supreme Court struck down the Massachusetts law on the basis of federal preemption. Justice Souter explained why the state law must give way to the federal statute. He noted the difference between the federal and state sanctions. The Massachusetts sanctions were immediate and direct in prohibiting business in Burma. The federal sanctions were more flexible, gradually allowing the president to increase pressure on Burma as needed and to do so through both specific legal and diplomatic means. The court reasoned, “If the Massachusetts law is enforceable the president has less to offer and less economic and diplomatic leverage as a consequence.” Thus, the state law undermined the intended purpose and “natural effect” of the federal act. In deciding that federal law preempted the state statute, the Court repeated that the federal government must “speak with one voice” in foreign policy matters and that Congress had left no room for states or municipalities to become involved.

Many U.S. and European companies—Eddie Bauer, Levi Strauss, Liz Claiborne, Pepsi, and others—have stopped doing business in Burma. Only time will tell whether this economic pressure and international diplomatic efforts aided by U.S. sanctions will help to bring democracy to Burma.

The Import-Export Clause

The Import-Export Clause prohibits the federal government from taxing exports and prohibits the states from taxing either imports or exports. Historically, three reasons prompted such a provision. First, the federal government needed to be able to “speak with one voice” on matters related to foreign affairs. Second, import duties provided an important source of revenue for the federal government. And third, seaboard states were prevented from imposing burdensome regulations and taxes on “in transit” goods that were destined for inland states.

In Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), the U.S. Supreme Court addressed the issue of the state’s power to tax imports. Michelin Tire Corporation imported tires manufactured in France and Nova Scotia, Canada, by Michelin Tires, Ltd. The company maintained a distribution warehouse in Georgia. The state assessed an ad valorem property tax against the tires that were held in inventory. The tax was nondiscriminatory in nature in that the same tax was imposed on all property similarly being held for resale in Georgia. The petitioner filed suit to have the collection of the tax enjoined as unconstitutional under the Import-Export Clause. The Supreme Court ruled that the tax was permitted under the Import-Export Clause because the tax was imposed on all products for the purpose of supporting the cost of public services, the tax was nondiscriminatory, and it did not interfere with the federal government’s regulation of international commerce.

In 1978, the Supreme Court considered the constitutionality of a Washington state tax on stevedoring (the process of loading and unloading cargo on ships). Relying on the Michelin decision, the Court in Department of Revenue of the State of Washington v. Association of Washington Stevedoring Cos., 435 U.S. 734 (1978) held that

the tax does not restrain the ability of the federal government to conduct foreign policy. As a general business tax that applies to virtually all businesses in the state, it has not created any special tariff. The assessments in this case are only upon that business conducted entirely within Washington. No foreign business or vessel is taxed…. The tax merely compensates the state for services and protection extended by Washington to the stevedoring business.

In discussing interstate rivalries, the Court concluded that if it were to strike down the tax, then the state of Washington would be forced to subsidize the commerce of inland consumers. The tax was upheld under the Import-Export Clause.

The Commerce Clause

As discussed earlier in the chapter, the broadest power of the federal government to regulate business activity is derived from Article I, Section 8 of the Constitution. The Commerce Clause vests the federal government with exclusive control over foreign commerce. Conversely, in what is known as the negative implication doctrine, state governments may not enact laws that impose a substantial burden on foreign commerce. Where there is an existing federal law governing some aspect of foreign commerce, a conflicting state statute may be invalid (preempted) under the Supremacy Clause.

The Commerce Clause and Multiple Taxation.

A state’s authority to tax a business engaged in foreign commerce is also determined by whether or not the tax imposed results in multiple taxation. Multiple taxation occurs when the same service or property is subjected to the same or a similar tax by the governmental authorities of more than one nation. The following case, Japan Line, Ltd. v. County of Los Angeles, discusses the problems of multiple taxation.

The purpose of restricting multiple taxation is to strengthen the government’s ability to foster domestic participation in the international marketplace. By not prejudicing foreign companies operating in the United States, this country does not risk retaliation by foreign governments against U.S. firms operating abroad.

State Income Taxation of Multinational Corporations.

The issue of multiple taxation was considered in Barclays Bank PLC v. Franchise Tax Board of California, 512 U.S. 298 (1994). This important case upheld the constitutionality of California’s “unitary” method of assessing income tax on companies in California that are subsidiaries of foreign multinational corporations.

Japan Line, Ltd. v. County of Los Angeles

441 U.S. 434 (1979) United States Supreme Court

BACKGROUND AND FACTS

The state of California imposed an ad valorem property tax on cargo containers owned by Japanese companies and temporarily located in California ports. The containers were used exclusively for transporting goods in international commerce. They were based, registered, and subjected to property taxes in Japan. The containers spent, on average, only three weeks a year in California. Japan Lines contended that the tax was invalid because it subjected the containers to multiple taxation in Japan and the United States. The California Supreme Court upheld the statute and the shipowners appealed.

JUSTICE BLACKMUN

This case presents the question whether a state, consistently with the Commerce Clause of the Constitution, may impose a nondiscriminatory ad valorem property tax on foreign-owned instrumentalities (cargo containers) of international commerce….

In order to prevent multiple taxation of commerce, this Court has required that taxes be apportioned among taxing jurisdictions, so that no instrumentality of commerce is subjected to more than one tax on its full value. The corollary of the apportionment principle, of course, is that no jurisdiction may tax the instrumentality in full. “The rule which permits taxation by two or more states on an apportionment basis precludes taxation of all of the property by the state of the domicile. … Otherwise there would be multiple taxation of interstate operations.” The basis for this Court’s approval of apportioned property taxation, in other words, has been its ability to enforce full apportionment by all potential taxing bodies.

Yet neither this Court nor this Nation can ensure full apportionment when one of the taxing entities is a foreign sovereign. If an instrumentality of commerce is domiciled abroad, the country of domicile may have the right, consistently with the custom of nations, to impose a tax on its full value. If a state should seek to tax the same instrumentality on an apportioned basis, multiple taxation inevitably results. Hence, whereas the fact of apportionment in interstate commerce means that “multiple burdens” logically cannot occur, the same conclusion, as to foreign commerce, logically cannot be drawn. Due to the absence of an authoritative tribunal capable of ensuring that the aggregation of taxes is computed on no more than one full value, a state tax, even though “fairly apportioned” to reflect an instrumentality’s presence within the state, may subject foreign commerce “to the risk of a double tax burden to which [domestic] commerce is not exposed, and which the commerce clause forbids.”

Second, a state tax on the instrumentalities of foreign commerce may impair federal uniformity in an area where federal uniformity is essential. Foreign commerce is preeminently a matter of national concern. “In international relations and with respect to foreign intercourse and trade the people of the United States act through a single government with unified and adequate national power.” Board of Trustees v. United States, 289 U.S. 48 (1933). Although the Constitution, Art. I, § 8, cl. 3, grants Congress power to regulate commerce “with foreign Nations” and “among the several States” in parallel phrases, there is evidence that the Founders intended the scope of the foreign commerce power to be the greater. Cases of this Court, stressing the need for uniformity in treating with other nations, echo this distinction.* * *

A state tax on instrumentalities of foreign commerce may frustrate the achievement of federal uniformity in several ways. If the State imposes an apportioned tax, international disputes over reconciling apportionment formulae may arise. If a novel state tax creates an asymmetry in the international tax structure, foreign nations disadvantaged by the levy may retaliate against American-owned instrumentalities present in their jurisdictions. Such retaliation of necessity would be directed at American transportation equipment in general, not just that of the taxing state, so that the Nation as a whole would suffer….

It is stipulated that American-owned containers are not taxed in Japan. California’s tax thus creates an asymmetry in international maritime taxation operating to Japan’s disadvantage. The risk of retaliation by Japan, under these circumstances, is acute, and such retaliation of necessity would be felt by the Nation as a whole….

We hold the tax, as applied, unconstitutional under the Commerce Clause.

Decision. The Supreme Court reversed, holding that the tax was unconstitutional. The Court ruled that an ad valorem property tax applied to cargo containers used exclusively in foreign commerce violates the Commerce Clause because it resulted in multiple taxation of instrumentalities of foreign commerce.

Case Questions

1. What rule does the Court espouse for the state taxation of cargo containers and other instrumentalities of foreign commerce?

2. How does this case affect taxation by foreign countries?

3. What effect would multiple taxation have on international commerce?

Barclays Bank of California (Barcal), a California banking institution, was a subsidiary of the Barclays Group, a multinational banking enterprise based in the United Kingdom. The Barclays Group included more than 220 corporations doing business in sixty nations. In 1977, Barcal reported taxable income only from its own operations within California. California claimed that Barcal was a member of a multinational “unitary” business and that the entire worldwide income of the unitary business—the income of all of the subsidiaries within the Barclays Group operating anywhere in the world—was taxable in California. Under the unitary method, taxes were assessed on the percentage of worldwide income equal to the average of the proportions of worldwide payroll, property, and sales located in California. Thus, if a multinational corporation had 8 percent of its payroll, 3 percent of its inventory and other property, and 4 percent of its sales in California, the state imposed its tax on 5 percent of the multinational’s total income. (The weight given to each category can vary under different formulas.) California used the unitary method because it believed that under traditional methods of tax accounting, conglomerates had the ability to manipulate transactions between affiliated companies so as to shift income to low-tax jurisdictions (although to guard against such manipulation, transactions between affiliated corporations are generally scrutinized to ensure that they are reported on an “arm’s-length” basis). Barclays claimed that California’s tax resulted in multiple taxation, in violation of the Commerce Clause.

Citing its previous decisions, the U.S. Supreme Court upheld the California tax because seven requirements were met: (1) The tax applied to an activity with a substantial connection to California. (2) The tax was “fairly apportioned.” (3) The tax did not discriminate against interstate commerce. (4) The tax was fairly related to the services provided by the state. (5) The tax did not result in multiple taxation. (6) The tax did not impair the federal government’s ability to “speak with one voice when regulating commercial relations with foreign governments.” (7) Compliance with the formula was not so impossible as to deprive the corporation of due process of law.

Even before this case went to court, foreign corporations doing business in California had objected strongly to the unitary tax. Foreign governments also objected, claiming it violated international law.

In response to this outcry, the state of California in 1986 dropped its unitary tax requirement and substituted a water’s edge election allowing corporations the option of being taxed only on their California income—up to the “water’s edge.” Nevertheless, the case is important because it stands for the principle that unitary taxation is constitutional. It is still used in a few states.

State Restrictions on Exports.

The Commerce Clause prohibits state governments from restricting, taxing, or otherwise imposing undue burdens on exports. In South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82 (1984), the Supreme Court considered a challenge to an Alaska regulation that required that all timber taken from state lands be processed within the state prior to being exported. South-Central was an Alaskan company engaged in purchasing timber and shipping logs overseas. It filed suit claiming that the regulation violated the negative implications of the Commerce Clause. Alaska argued that the Commerce Clause did not apply because the state was acting as a “market-participant” (a vendor of lumber), not as a regulator. The Court agreed with South-Central.

The limit of the market-participant doctrine must be that it allows a State to impose burdens on commerce within the market in which it is a participant, but allows it to go no further. The State may not impose conditions, whether by statute, regulation, or contract, that have a substantial regulatory effect outside of that particular market. … [A]lthough the state may be a participant in the timber market, it is using its leverage in that market to exert a regulatory effect in the processing market, in which it is not a participant.

In addressing the Commerce Clause question directly, the Court also noted, “In light of the substantial attention given by Congress to the subject of export restrictions on unprocessed timber, it would be peculiarly inappropriate to permit state regulation of the subject.”

State Restrictions on Imports.

State government restrictions on imports are severely limited. User fees for the use of port facilities are generally permitted. Also, states may impose restrictions directly related to the protection of the public health and safety. For example, Florida could limit, restrict, or ban the import of fruits or vegetables suspected of carrying a disease that could contaminate the local crop. In one case, however, a labeling and licensing statute was invalidated by the courts even though its alleged purpose was the protection of the public health and safety. Tennessee had enacted a statute calling for the licensing of all persons who deal in foreign meat products in the state and the labeling of all foreign meats sold in the state as being of foreign origin. The court, in Tupman Thurlow Co. v. Moss, 252 F. Supp 641 (M.D. Tenn. 1961), concluded that “The regulation here involved cannot fairly be construed as a consumer protection measure, and if it should be, it would be interdicted by the Commerce Clause because it unreasonably discriminates against foreign products in favor of products of domestic origin.”

FEDERAL AGENCIES AFFECTING TRADE

Thus far, this chapter has discussed the constitutional role of government in regulating international trade. The remainder of the chapter briefly discusses the various agencies and executive branch departments that carry out the functions of government on a daily basis. U.S. government agencies that provide technical and financial assistance for exporters, such as the Small Business Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Commodity Credit Corporation, the Agency for International Development, the Trade and Development Program, the U.S. Department of Agriculture, and others are discussed elsewhere in the text. The role of the Department of Treasury was, in part, addressed earlier in this chapter. The following agencies are primarily concerned with the establishment of trade policy and the handling of trade disputes.

United States Department of Commerce

The U.S. Department of Commerce has broad authority over many international trade issues. The department’s functions include fostering trade and promoting exports of U.S. goods and services (trade promotion), investigating and resolving complaints by U.S. firms that foreign governments are unfairly blocking access to foreign markets (market access), administering U.S. unfair import laws (import administration), issuing export licenses for certain products, developing U.S. international trade statistical information, and many other functions. The International Trade Administration (ITA), housed within the department, performs many of the trade promotion, market access, and import administration functions. Within the ITA, the U.S. Commercial Service maintains a network of offices at home and abroad to assist U.S. firms in developing export opportunities. The U.S. Bureau of Industry and Security regulates the export of sensitive goods and technologies for national security and foreign policy and enforces U.S. export control laws.

United States Department of Homeland Security

The Department of Homeland Security was created as an executive department of the federal government in 2003. Its creation was part of the largest reorganization of the American government in over a halfcentury. The new department brought together many existing government agencies with a common responsibility for protecting the American “homeland.” The department is organized into four directorates: Border and Transportation Security, Emergency Preparedness and Response, Science and Technology, and Information Analysis and Infrastructure Protection. Its primary mission is to prevent terrorist attacks within the United States.

Border and Transportation Security.

This directorate brings together the major border security and transportation security functions of the department. This includes the following agencies: U.S. Customs and Border Protection (CBP), U.S. Immigration and Customs Enforcement (ICE), U.S. Citizenship and Immigration Services, the Transportation Security Administration, the Secret Service, the Federal Emergency Management Agency, and the U.S. Coast Guard. Many of the functions of these handled by the Treasury Department, the Justice Department, and the Transportation Department.

The agency with the greatest impact on our reading is the Bureau of Customs and Border Protection (CBP). This agency brings together many functions of the former U.S. Customs Service, the Border Patrol, and the Immigration and Naturalization Service. Its functions include preventing suspected terrorists from entering the United States; apprehending individuals attempting to enter the United States illegally; stemming the flow of illegal drugs and other contraband; protecting American agricultural and economic interests from imported pests and diseases; preventing the illegal import of goods in violation of U.S. copyright, patent, and trademark laws; enforcing U.S. import and export laws; and collecting import duties.

The Impact of Homeland Security on American Importers and Exporters.

In a free society, the protection of the American homeland from possible terrorist attack or from the smuggling of terrorist weapons requires a balance between maintaining public security and the needs of American companies to move goods swiftly across national borders. Consider that CBP estimates that it takes a team of four inspectors about four hours to search one container. Inspecting every shipment arriving by truck or aircraft and each of the over 6 million ocean containers arriving annually at U.S. ports would be difficult and cause extensive delays at the border. So CBP is implementing several projects to enhance security while speeding delivery of goods. These include advance notice of cargo shipments bound to U.S. ports (the 24-hour rule); foreign inspections of high-risk containers (Container Security Initiative); a CBP program for reviewing security measures in a U.S. importer’s foreign supply-chain security (C-TPAT); and FAST, a special cooperative arrangement between the United States and Canada for the expedited clearance of cross-border trade (Free and Secure Trade). The war on terrorism will have a tremendous effect in the years to come not only on the movement of goods in international trade but also on the entire world of international business.

United States Trade Representative

The United States Trade Representative (USTR) is a cabinet-level post reporting directly to the president. The USTR carries on all bilateral and multilateral trade negotiations on behalf of the United States, serves as the principal adviser on trade matters to the president, represents the United States at all WTO meetings, coordinates the trade agreements program, and coordinates all U.S. trade policies, including those related to agricultural, textile, and commodity trade and unfair trade practices. Much of the responsibility for trade matters once held by the Department of State has been transferred to the USTR.

International Trade Commission

The International Trade Commission (ITC), formerly called the U.S. Tariff Commission, is an independent agency of government created by Congress in 1916. The ITC maintains a highly trained cadre of professional economists and researchers who conduct investigations and prepare extensive reports on matters related to international economics and trade for Congress and the president. The role of the ITC (along with that of the International Trade Administration) in investigating unfair trade practices will be thoroughly discussed in future chapters. Because of the highly political nature of many of the investigations related to the impact of imported goods on U.S. domestic industry, the ITC is a bipartisan agency. The members of the commission are appointed by the president from both political parties and are subject to Senate confirmation.

The U.S. Court of International Trade

The Court of International Trade (CIT) consists of nine judges who hear cases arising from the trade or tariff laws of the United States. Appeals from U.S. Customs and Border Protection regarding duties assessed on imported goods and appeals from decisions of the ITC in unfair import cases are heard by the CIT. Appeals from the CIT go to the Court of Appeals for the Federal Circuit and, where appropriate, to the U.S. Supreme Court.

The court has exclusive jurisdiction over all civil actions commenced against the United States involving (1) revenue from imports or tonnage; (2) tariffs, duties, fees, or other taxes on importation of merchandise for reasons other than the raising of revenue; (3) embargoes or other quantitative restriction of the importation of merchandise for reasons other than the protection of the public health or safety; and (4) administration or enforcement of the customs laws. The court is located in New York City.

CONCLUSION

Many students are surprised at the limited powers granted to the president in the Constitution. The president’s power is not unlimited and is derived from the treaty power (with the advice and consent of the Senate), the power to conduct foreign affairs, the inherent power under Article II as chief executive and as commander-in-chief of the armed forces, and the power delegated to the president to enforce and carry out acts of Congress. As Justice Jackson said in his famous concurring opinion in the Youngstown case, “When the president takes measures incompatible with the expressed or implied will of Congress, his power is at its lowest ebb, for then he can rely only upon his own constitutional powers minus any constitutional powers of Congress over the matter.”

Presidents are given wide latitude in the exercise of their power in foreign affairs, especially during time of war. Virtually every U.S. president in the twentieth century had disputes with Congress over the extent of presidential power. In recent years, President George W. Bush again tested those limits in the war on terror. While this chapter could do no more than describe the separation of powers, we hope that you now have a better understanding of the limits on presidential power.

Presidents rely on delegations of authority from Congress to negotiate foreign trade agreements. This is known as trade promotion authority. As of mid-2010, Congress had not renewed the president’s trade promotion authority. It will be interesting to observe the politics at play in the future as Congress considers this issue.

Chapter Summary

1. U.S. trade law is that body of public law that governs America’s trade relations with foreign countries, including the import and export of goods and services. Trade law is used to implement American trade policies as well as American foreign policy and thus can be used to encourage trade with a political ally or to discourage trade with a potential foe. Using trade policy as a tool of foreign policy can lead to many conflicts.

2. Article I of the Constitution confers “all legislative powers” on Congress, including the power “to regulate commerce with foreign nations, and among the several states.” In addition, Congress has broad power to pass domestic laws, raise and support armies, provide and maintain a navy, declare war, appropriate monies, and levy and collect taxes. The Senate has the authority to give advice and consent to the president in making treaties with foreign nations and to approve treaties by a two-thirds vote.

3. Treaties are binding on both the federal and state governments and have the same force as an act of Congress.

4. The president’s powers are derived from two sources: those powers delegated to the president by Congress, and those “inherent” powers set out in Article II of the Constitution. Inherent powers include the treaty power, the power to appoint ambassadors, the power to receive foreign ambassadors, and the power inherent in being commander-in-chief of the armed forces. Important limits on presidential powers generally, and during time of war in particular, were discussed in Youngstown Sheet & Tube v. Sawyer and Hamdan v. Rumsfeld.

5. The primary instrument for implementing foreign political and economic affairs is the international agreement. International agreements include treaties and executive agreements.

6. Executive agreements are international agreements between the president and a foreign country, entered into without resort to the treaty process. The two types of executive agreements are sole executive agreements (based on the president’s inherent powers) and congressional-executive agreements (based on authority delegated by Congress). Sole executive agreements are usually reserved for agreements with foreign countries that do not affect the broad interests of the nation as a whole. Congressional-executive agreements, based on the majority vote of both houses of Congress, are recognized as having the same binding legal effect as treaties.

7. A trade agreement is an agreement between nations on matters involving trade, tariffs, and related issues. A free trade agreement seeks to eliminate or substantially reduce tariffs and non-tariff barriers and often sets up a mechanism for resolving trade disputes between the countries. Trade agreements can be bilateral, multilateral, or regional.

8. The president’s trade promotion authority is the authority to negotiate trade congressional-executive trade agreements. The North American Free Trade Agreement and many other trade pacts were successfully negotiated under trade promotion authority.

9. The Smoot-Hawley Tariff Act of 1930 placed the highest tariffs on goods in U.S. history. It was one of the causes of the Great Depression.

10. Beginning with the Reciprocal Tariff Act of 1934 and continuing to this day, tariff reductions have been negotiated on a reciprocal basis. Today, tariffs are not a major barrier to trade.

11. In the United States, the role of state or local governments in regulating or interfering with trade relations with foreign countries is very limited. States have no authority to regulate imports or exports of foreign goods or services. In case after case, legislation enacted by state or local governments that restricts trade with foreign countries has been ruled unconstitutional under either the Supremacy Clause or the Commerce Clause of the Constitution.

Key Terms

international trade law 246

inherent executive powers 250

international agreement 254

bilateral 254

multilateral 254

compact 254

convention 254

self-executing treaty 254

non-self-executing treaty 254

equal dignity rule 255

treaties of friendship, commerce, and navigation 255

sole executive agreements 257

congressional-executive agreements 259

most-favored-nation trade 260

normal trade relations 260

trade agreement 262

free trade agreement 262

regional trade agreements 262

multilateral trade negotiations 262

trade promotion authority 263

Supremacy Clause 264

Import-Export Clause 264

Commerce Clause 264

federal preemption 264

multiple taxation 265

Questions and Case Problems

1. Medellin, an 18-year-old Mexican citizen and gang member, was arrested in Texas for the capital murder of two teenage girls. The government of Mexico brought an action against the United States in the International Court of Justice (ICJ) at The Hague on behalf of Medellin and fifty other Mexican nationals held on various charges in the United States, who had never been informed of their right under the Vienna Convention on Consular Relations to notify the Mexican Consulate of their arrest. The UN Charter created the ICJ. In Case Concerning Avena and Other Mexican Nationals (Mex. v. U.S.), 2004 I.C.J. 12 (Judgment of March 31), the ICJ ruled in favor of Mexico and held that their detention was unlawful and that all those being so held were entitled to have their convictions reviewed by state courts in the United States. President Bush, citing his constitutional authority and the need for international comity, then issued a memorandum ordering state courts to comply with the ICJ decision. Is the ICJ decision in Avena an obligation binding on the state and federal courts in the United States? How would you determine if it does or does not have “domestic law effect” in the United States? Are the UN Charter and the Vienna Convention self-executing treaties in the United States? Why is that important to the analysis? The president’s memorandum was an attempt to assure equal treatment for U.S. citizens abroad, cooperate with a foreign government, and honor international law. What is the legal effect of the president’s memorandum? Does it give domestic law effect to the Vienna Convention or the Avena decision? What would it take to implement or give legal effect to a non-self-executing treaty in the United States? See, Medellin v. Texas, 552 U.S. 491(2008).

2. Students interested in examining the relationship between the president and Congress, especially during wartime, are encouraged to read both Justice Stevens’s opinion and Justice Kennedy’s concurrence in Hamdan v. Rumsfeld. In this case, the Court struck down President Bush’s establishment, without the approval of Congress, of military tribunals to try military detainees held at Guantanamo during the war on terror. What is your opinion of the Hamdan decision? Do you think that the president should have sought authorization from Congress before creating these military commissions? Research the Military Commissions Act of 2006. What constitutional objections to the law could be raised by civil libertarians? Why might exceptional powers be needed by the executive branch and the military during time of war?

3. North Carolina, South Carolina, and Georgia produce a large amount of cotton each year. In an effort to protect their farmers from overseas competition, the governors of these three states met and agreed on a uniform “inspection fee” to be imposed on all foreign cotton coming into their states through their ports. They vowed to do their best to get their state legislatures to adopt this fee as law. Would any problem arise with such a fee?

4. The U.S. State Department negotiated directly with European and Japanese steel producers to limit their exports to the United States. This was done because of threats by the president to set import quotas. No foreign government was party to the agreement. Although the president had been granted express authority to limit imports by an act of Congress, this act required that he either hold public hearings through the Tariff Commission about setting import quotas or deal directly with foreign governments about limiting imports. The Consumers Union of U.S., Inc., felt that when Congress gave the president this express power, it preempted any other action by the president. They brought an action against the secretary of state to have the president’s agreement with private steel producers in Europe and Japan declared illegal. What should be the result of such an action? Consumers Union of U.S., Inc. v. Kissinger, 506 F.2d 136 (D.C. Cir. 1974).

5. The Trade Expansion Act of 1962 as amended by the Trade Act of 1974 stated that if the secretary of the treasury finds that an “article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security,” the president is authorized to “take such action … as he deems necessary to adjust the imports of the article … so that [it] will not threaten to impair the national security.” Does this grant of power to the president by Congress allow the president to establish quotas? If importation of foreign oil were determined to be “a threat to national security,” could the president implement a $3-to $4-per-barrel license fee? See Federal Energy Administration v. Algonquin SNG, Inc., 426 U.S. 548 (1976).

6. Future U.S. trade negotiations will focus both on the U.S. trade relationships with the world through the World Trade Organization and on special trade relationships with countries in Latin America. Some leaders of Congress want to use trade negotiations to push Latin American countries to protect worker’s rights, conserve tropical forests, and protect the environment. Such issues may dominate U.S. trade relations for most of this decade. As of today, what is the status of the president’s fast-track authority? What has Congress required of the president in leading current or future U.S. trade negotiations? To what extent has Congress included side issues such as labor rights or the environment? Research the topic and discuss the pros and cons of linking trade relations to these and other social and political side issues.

7. During the 1940s, the U.S. government instituted a price support system for domestic potatoes. In order to protect the potato market from imported Canadian potatoes, the U.S. secretary of state entered into an executive agreement with the Canadian ambassador in which they agreed that Canada would permit the export of potatoes into the United States only if they were to be used for seed and not for food. The agreement was not submitted to or approved by Congress. The Agricultural Act of 1948 permitted the president to restrict potato imports by requesting an investigation by the Tariff Commission and considering its recommendations. Guy W. Capps, Inc., the importer, assured the Canadian exporter that the potatoes were destined for planting, but while they were in transit, they were sold to the A&P grocery store chain for resale. The United States brought suit against Guy Capps for damages. The court entered judgment for Guy Capps and the government appealed. Was the U.S.–Canadian agreement valid under the U.S. Constitution? Was the president acting under his inherent constitutional authority, under power delegated from Congress, or neither? What did Congress say the president could do to restrict agricultural imports? See United States v. Guy W. Capps, Inc., 204 F.2d 655 (4th Cir. 1953).

8. Xerox manufactured parts for copy machines in the United States that were shipped to Mexico for assembly. The copiers were designed for sale exclusively in Latin America. All printing on the machines was in Spanish or Portuguese. The copiers operated on a fifty-cycle electric current unavailable in the United States. The copiers had been transported by a customs bonded warehouse in Houston, Texas, where they were stored pending their sale to Xerox affiliates in Latin America. The copiers had previously been stored in Panama. Under federal law, goods stored in a customs bonded warehouse are under the supervision of the U.S. Customs Service. Goods may be brought into a warehouse without the payment of import duties and stored for up to five years. At any time they may be re-exported duty-free or withdrawn for domestic sale upon the payment of the duty. Harris County and the city of Houston assessed a nondiscriminatory ad valorem personal property tax on the copiers. Xerox claimed that the local tax is preempted by the federal legislation. What did the Court decide? Would it have made any difference whether the goods were needed for domestic use or intended for re-export? See Xerox Corporation v. County of Harris, Texas, 459 U.S. 145 (1982).

9. The state of Tennessee passed legislation requiring that any person selling or offering for sale in the state of Tennessee any meats that are the products of any foreign country must so identify any such product by labeling it “This meat is of foreign origin.” The state law did not require a higher standard of purity and sanitation than that required by the U.S. Department of Agriculture. A New York corporation selling imported meats to customers in Tennessee challenged this state statute in U.S. District Court. The corporation’s sales of imported meat to customers in Tennessee were one-half its volume prior to enactment of the statute. What do you think the legal basis was for this challenge to the Tennessee law? What do you think Tennessee’s argument was for passing the law? What do you think the court decided? See Tupman Thurlow Co. v. Moss, 252 F. Supp. 641 (M.D. Tenn. 1966).

10. The president’s trade promotion authority expired in 2007. What were the issues that led to congressional unwillingness to renew the authority? How has that been resolved? What is the status of the president’s authority today?

Managerial Implications

Your firm, Day-O Shoes, Inc., manufactures deck shoes in the Caribbean island country of Haiti. Haiti is the poorest nation in the Western Hemisphere. Your plant there employs more than 400 workers and has always considered itself a good citizen of both Haiti and the United States. Most of the shoes are imported for sale into the United States, where you maintain a 30 percent share of a competitive market. In 1991, the freely elected President of Haiti is removed from office by military officers who install a dictator of their choice. In response, the President of the United States exercises authority under the International Economic Emergency Powers Act and issues an executive order imposing a complete embargo on trade with Haiti. The Treasury Department’s Office of Foreign Assets Control is charged with enforcing the embargo. Facing the impending embargo, your firm shut down its production operations there one week prior to the date set for the embargo. Feeling some obligation to the unemployed workers, your company’s chief executive ships over ten tons of food and clothing to the people who have lost their jobs.

Believing that the United States is serious about the embargo and that it will remain in effect until the rightful president is returned to Haiti, your firm ships its U.S.-made raw materials, such as rubber soles and leather uppers, from Haiti to your other factory in Costa Rica. However, you soon discover, much to your surprise, that your competitors are continuing to produce and stockpile their shoes in Haiti in the belief that the embargo will soon be lifted. Three months after you cease operations, the U.S. government decides to lift the embargo because it has resulted in the loss of 50,000 Haitian jobs. With no inventory of finished shoes and your raw materials en route to Costa Rica, your firm is unable to fill existing orders. Your competitors are ready to ship their shoes from Haiti immediately.

1. Evaluate the course of action taken by Day-O Shoes. How did Day-O Shoes balance its responsibility under U.S. law to comply with the embargo with its need to remain competitive in the industry? What could it have done differently? Evaluate the ethics of Day-O’s actions.

2. Was Day-O Shoes required to stop producing in Haiti? Were its competitors violating U.S. law by continuing to produce and stockpile their inventories? Were they violating any moral code or even the “spirit of the law” by continuing to produce there? Evaluate the risks taken by the competitors in continuing their operations in Haiti during the embargo.

3. The embargo was intended to put economic pressure on Haiti to encourage political reform. Is the U.S. government saying that the embargo worked too well? Do you think that the embargo was lifted because of its impact on the Haitian workers or on U.S. firms doing business there? Critics argue that the U.S. government’s attempts to use trade policy as a means of conducting foreign policy lead to confusion and uncertainty and are counterproductive. Evaluate this argument.

Ethical Considerations

It is clear that Congress has the authority to require that any trade agreement negotiated by the president take into account environmental and labor issues. At least since 1974, U.S. trade laws have instructed the president to consider foreign worker’s rights and workplace conditions in negotiating trade agreements. One U.S. statute, which fosters U.S. trade with developing countries, contains provisions for labor standards. The 1994 North American Free Trade Agreement contained specific provisions for protecting worker’s rights and the environment. More recently, the Trade Act of 2002 called for countries entering trade agreements with the United States to abide by the “core labor standards” of the International Labour Organization, including the freedom of association, the right to form unions and to bargain collectively, minimum age requirements and limitations on child labor, and a ban on forced labor.

Some U.S. trade agreements also reflect environmental concerns. They do not set environmental standards, but they call for each nation to enforce its own standards and to ensure that environmental protections are not weakened in order to promote foreign trade.

Do you think that the United States should require foreign countries to address worker’s rights and environmental harm in return for trade privileges with the United States? Find out how U.S. trade agreements incorporate concerns over the environment and worker’s rights. What has been the policy of presidential administrations in this regard? What are the competing economic and political issues in domestic politics? Should trade be used to accomplish these political and social objectives? How much focus should be placed on human rights? Why or why not?

(Schaffer 248)

Schaffer, Agusti, Dhooge, Earle. International Business Law and Its Environment, 8th Edition. South-Western, 2011-01-01. .

CHAPTER 9: GATT Law and the World Trade Organization: Basic Principles

Our story of the modern era of international trade relations really begins at the close of World War I. After years of a horrible and costly war in Europe, many Americans wanted little to do with the rest of the world. After the troops came home and the 1920s began, the nation entered a period of political isolationism. Political isolationism led to calls for greater economic protectionism. It was in this climate that President Herbert Hoover called for passage of the U.S. Smoot-Hawley Tariff Act of 1930, an attempt to protect American firms from foreign competition by imposing the highest tariff rates on imported goods in American history. While scholars still argue to this day whether Smoot-Hawley (and the debate that led up to its passage) caused the Great Depression of the 1930s or only exacerbated it, there is no question that other countries responded to punitive American tariffs by imposing high tariff rates of their own. This led to the greatest slowdown of trade and economic activity the world had ever seen. It showed that the world’s economies had become interrelated and that actions taken by one country could affect all countries. Further, it showed what can happen when a powerful nation tries to isolate itself economically and politically from the world solely to protect its own economic interests. It was not until the mid-1930s, during the dark days of the Depression, that the U.S. Congress realized that high tariffs were impeding international trade and economic recovery and that Smoot-Hawley had not been a good idea. With the passage of the U.S. Reciprocal Trade Agreements Act of 1934, the Roosevelt administration had the authority to negotiate trade agreements with foreign countries—country by country and product by product—to reduce tariffs to pre-Smoot-Hawley levels. But it was a slow process, and before it could be completed the nation entered World War II.

By the close of World War II, a very different picture of America’s role in the world had emerged. Unlike the period after World War I, characterized by the failed League of Nations and calls for isolationism, the 1940s were marked by international cooperation and the creation of a host of international organizations, with America at the forefront. Even before the war had ended, the Allied powers had begun planning for a postwar future of economic and political stability. By the close of the war or within a few years afterward, many new international institutions had been created. These included the World Bank, the International Monetary Fund, the General Agreement on

Tariffs

and Trade (GATT), and of course, the United Nations. From the economic and industrial ruin of the Great Depression and World War II came a renewed belief in free trade and a new international approach to dealing with common economic problems. Nations learned that their mutual interests could be best served by policies that encouraged free trade in goods, unfettered by high tariffs and other barriers, and by enacting “liberalized” trade rules.

In 1947, the GATT was created, and the modern global trading system was born. GATT today provides the framework for most multilateral trade negotiations aimed at reducing trade barriers. For sixty years, GATT has functioned to set the rules of international trade and provide a forum for settling international trade disputes. In 1994, a new world trade agreement was reached. The GATT 1994 enhanced the role of international law in regulating trade and created the World Trade Organization (WTO), an international organization charged with administering the GATT world trade system. In this chapter, we will study the global trading rules of the GATT agreements and the WTO, and we will examine the WTO process for settling trade disputes between countries. But first, we will look at some basic principles of trade regulation.

As you read this chapter and those following, keep in mind this note about terminology. Technically speaking, the term “GATT agreement” refers to both the original 1947 GATT and to the 1994 agreements that resulted from the Uruguay Rounds, including the “GATT side agreements” related to specific topics that we will cover in this text. However, as the public becomes increasingly aware of the importance of the WTO, it is becoming common to use the term WTO agreement in referring to the GATT agreements effective after 1994. Do not be confused if you see the terms GATT agreement and WTO agreement used almost interchangeably. Of course, the term WTO, when used alone, refers to the World Trade Organization.

INTRODUCTION TO TRADE REGULATION

Every country establishes its own trade policies according to its own national interests. Trade policies are heavily influenced by domestic politics. Left to its own devices, any nation would want to protect its industries from foreign competitors by erecting a maze of import trade barriers. These might include high tariffs, quotas, or complex regulations designed to keep out foreign goods and services. A trade barrier is any impediment to trade in goods or services. An import trade barrier is any impediment, direct or indirect, to the entrance or sale of imported goods or services existing in the country of importation. Typically, trade barriers are tariffs or taxes on imported goods, or laws, government regulations, or national industrial standards, that make importing or selling foreign-made goods or services more difficult or that make imported goods or services more costly to produce, market, or sell.

All countries have trade barriers. Some are very obvious. When a country imposes a tax or tariff on an imported product, both foreign exporters and importers at home know exactly how much that product will cost. A total or partial ban on importation of certain products is also very obvious. Other trade barriers are not so obvious. For example, in recent years the United States has accused China of artificially manipulating the value of its currency, the yuan (also called the renminbi), so as to undervalue it compared to the dollar. A “cheaper” yuan makes China’s exports relatively less expensive in the United States, while it makes American and other foreign products relatively more expensive for Chinese consumers. The result contributes to the increasing trade imbalance between the two countries.

Virtually every industrial and agricultural sector has been affected by trade disputes. Notable examples are automobiles, steel, semiconductors, agricultural products, cotton and textiles, and lumber. Although the United States is generally considered a “free trade” nation because it has relatively few barriers to imports compared to some other countries, it still has many trade barriers. The United States has accused Japan of having many unfair barriers to the import of U.S.-made products; however, Japan has responded with similar accusations against the United States. The United States has also accused many developing countries of erecting barriers to U.S. goods and services. Even countries such as Canada and the United States, which have many similar interests, have come to blows over trade. Issues have included restrictions on lumber, television advertising of foreign products, and even beer. When nations are unable to resolve these disputes through negotiated agreements, a trade war can erupt.

Reasons for Regulating Imports

Nations impose import trade barriers for many economic and political reasons. Several broad policy reasons prompt the regulation of import or export of goods and services. These include the following:

• Collection of revenue (taxing imports)

• Regulation of import competition (protection of domestic industry, agriculture, or jobs)

• Retaliation against foreign government trade barriers

• Implementation of foreign policy (prohibition on import of goods from a country that violates international norms or is a military adversary)

• Implementation of national economic policies (preservation of foreign exchange; implementation of industrial policy)

• Protection of the national defense (erection of barriers to foreign firms selling defense-related equipment or essential products such as machine tools; protection of strategic national industries such as aerospace or telecommunications)

• Protection of natural resources or of the environment (ban on export of scarce minerals; requirement that imported cars be equipped with antipollution devices; ban on import of tuna caught in fishing nets that trap dolphins)

• Protection of public health, safety, and morals (to stop the spread of human disease; to ensure safety in consumer goods, pharmaceuticals, construction equipment, etc., or to prevent the import of banned obscene materials)

• Protection of plant and animal life (ban on import of disease-carrying fruit or foreign species of wildlife)

• To ensure uniform compliance with common standards and standard-setting codes (compliance with electrical codes, fire codes, standards for automotive transportation or aviation; and other technical codes)

• Protection of local cultural, religious, or ethnic values (limitations on foreign television programming; prohibition of import of religiously offensive materials in fundamentalist Middle Eastern countries; ban on export of artifacts or antiques)

Import trade barriers can take many different forms and are usually classified as either tariff or non-tariff barriers.

Tariffs

The most common device for regulating imports is the tariff or import duty. (Note: These terms are used interchangeably in this text.) A tariff is a tax levied on goods by the country of importation. It is usually computed either as a percentage of value (ad valorem tariffs) or on the basis of physical units (specific or flat tariffs). Goods that are fungible (e.g., crude oil, wheat, or standard-size graded lumber) are usually subject to a specific or flat-rate tariff, while goods that vary in value (e.g., chairs, machinery, or specialized steel) are usually subject to an ad valorem tariff. Tariffs are generally considered to be one of the least restrictive types of trade barriers.

Non-tariff Barriers to Trade

Non-tariff barriers to trade are broadly defined as any impediment to trade other than tariffs. Non-tariff barriers can be direct or indirect. Direct non-tariff barriers include those barriers that specifically limit the import of goods or services, such as embargoes and quotas. Indirect non-tariff barriers, discussed in the next section, are those that on their face seem perfectly neutral and nondiscriminatory against foreign-made products, but that in their actual use and application make it difficult or costly to import foreign-made goods.

Embargoes.

The most restrictive of the direct non-tariff barriers is the embargo. An embargo can be either a complete ban on trade with a certain foreign nation (e.g., the United States embargo on trade with Iraq or North Korea) or a ban on the sale or transfer of specific products (such as ivory) or technology (such as nuclear technology or nuclear materials). The embargo can be on both imports from or exports to that nation. Although a quota is used for economic purposes, an embargo is usually reserved for political purposes. This extraordinary remedy is usually used to implement foreign policy objectives, such as to “punish” another country for some offensive conduct in world affairs. In recent years, the United States has imposed embargoes on Afghanistan (under the Taliban), Cuba, Iran, Iraq (under Saddam Hussein), North Korea, Libya, Nicaragua (under the communist Sandinistas), and a few other countries.

Quotas.

Perhaps the direct non-tariff barrier that most people think of first is the quota. A quota is a quantitative restriction on imports. It can be based either on the value of goods or on quantity (weight, number of pieces, etc.). A quota can also be expressed as a percentage of the domestic market for that product. Quotas can be placed on all goods of a particular kind coming from all countries, a group of countries, or only one country. Thus, a quota to protect U.S. garment manufacturers could limit imports of men’s trousers either to a specified number of pairs of trousers or to a given percentage of the U.S. market for men’s trousers.

Global quotas are imposed by an importing nation on a particular product regardless of its country of origin. They are filled on a first-come, first-serve basis. Bilateral quotas are placed on a particular product on the basis of its country of origin. A zero quota is a complete ban on the import of a product that permits zero quantities to be imported.

Quotas are used either to protect domestic industry from foreign competition or as a tool for implementing a nation’s economic policy of reducing imports. Governments sometimes prefer quotas to tariffs because quotas can work quickly to protect a domestic industry threatened with increased imports of competing goods. A country that experiences a domestic economic crisis caused by excessive imports (such as during a balance-of-payments crisis, when an excessive amount of foreign exchange leaves the country to purchase imported products) can use quotas immediately to restore economic equilibrium.

Because of the ease in administering and applying a quota, it is a more flexible tool for regulating imports than a tariff. It can, therefore, be used to reduce imports on a specific product or commodity to correct short-term market conditions. Also, government policy makers can more easily assess the potential impact of a quota than that of a tariff because no one can predict with absolute certainty what the economic effect of a tariff will be.

Another advantage of quotas is that they can either be applied across the board to all imports from a particular nation or be applied to the products of several nations. These allocated quotas can thus serve important foreign policy objectives because the ability to allocate additional quota rights to certain countries can become a powerful economic incentive in world politics. Quotas have been widely used in regulating trade in textiles and agricultural products, although these will soon be phased out by international agreement.

Quotas also have several disadvantages. First, a costly governmental licensing scheme is necessary to enforce them. Imports may need to be tracked on the basis of their country of origin, requiring complex record keeping. Second, most quotas provide no revenue to the importing nation. Third, quotas are often politically unpopular because they deprive importers and consumers of the ability to make a choice of products in the marketplace. Fourth, the imposition of quotas often can lead to retaliation by foreign governments whose products have been restricted. Fifth, the complex licensing schemes used to enforce quotas are difficult for many foreign exporters to understand, so they may not know what barriers they will face when their goods reach the foreign country. Sixth, and most importantly, quotas interfere with the price mechanism in the marketplace, meaning they affect prices by reducing supply. Firms able to import a product under the quota receive a monopoly profit, which may contribute to considerable price increases to consumers. Indeed, the reduced supply and increased prices attributable to quotas and other restraints on imported products restrict competition and allow the price of competing domestic products to increase correspondingly.

Historically, U.S. presidents have not favored the use of quotas to protect U.S. industry for fear that the foreign nations affected would retaliate, giving rise to trade wars. Import quotas are more likely to be used when increased foreign imports threaten national security. For instance, in the 1980s, quotas were placed on imported machine tools. This quota prompted foreign manufacturers to invest in factories in the United States so they could avoid these restrictions.

Auctioned Quotas.

A quota that is sold to the highest bidder is known as an auctioned quota. One advantage of auctioned quotas is that they allocate import rights by price, rather than by government restrictions on supply. Moreover, auctioned quotas minimize the cost of relief to the economy by transferring the profits gained from owning quota rights from the foreign producer or importer to the country imposing the quota.

Tariff-Rate Quotas.

A tariff-rate quota is not really a quota at all, but a tariff that increases according to the quantity of goods imported. It is a limitation or ceiling on the quantity of goods that may be imported into a country at a given tariff rate. Let us use bedspreads as an example. A country that wants to protect its domestic textile industry might impose a tariff rate of, say, 7 percent on the first 500,000 bedspreads to be imported into the country in a given year; 14 percent on the next 500,000; and an even higher rate, perhaps 25 percent, on all bedspreads imported above 1,000,000 pieces. The use of tariff-rate quotas is quite common worldwide.

Indirect Non-tariff Barriers

Indirect non-tariff barriers include laws, administrative regulations, industrial or commercial practices, and even social and cultural forces that have the effect of limiting or discouraging the sale or purchase of foreign goods or services in a domestic market, regardless of whether they were intended to control imports. All countries have indirect non-tariff barriers of some sort. Many indirect barriers are intended to protect domestic industries from foreign competition. Consider some examples.

To restrict imports, countries may impose monetary and exchange controls on currencies—regulations or laws that limit the amount of foreign currency available to purchase foreign goods. Foreign government procurement policies may encourage government agencies to buy goods and services primarily from domestic suppliers. Foreign administrative regulations can impose technical barriers to trade, including performance standards for products, product specifications, or product safety or environmental engineering standards. Examples might include national standards for electrical appliances, health standards for food or cosmetics, safety standards for industrial and consumer goods, and even automotive emission requirements. Unless foreign suppliers of goods can meet these standards in the same fashion as domestic suppliers, they will be frozen out of the foreign market. The refusal to allow the import of beef containing growth hormones would effectively shut down imports of beef from countries in which virtually all beef produced contains such chemicals. Governmental restrictions on the use of food preservatives, such as those that have been imposed by Japan, are another excellent example of a trade barrier in disguise, because foods without preservatives cannot be transported long distances. Other common examples might include requirements that instruction manuals for consumer goods be written in the language of the importing nation, that only metric sizes appear on the product or packaging, or that imported goods be subject to stringent inspections or fees that are not applicable to domestic products. In recent years, U.S. firms such as L.L. Bean and Lands’ End have made successful inroads into the Japanese catalog business despite restrictive Japanese postal regulations.

The Japanese Large-Scale Retail Stores Law.

Another good example of an indirect non-tariff barrier in Japan was the Japanese Large-Scale Retail Stores Law. This controversial law, now repealed, protected small “mom and pop” retail stores by limiting the location and operations of large retail stores and supermarkets in Japan. Because large retail chains are high-volume purchasers and large U.S. exporters are set up to sell to high-volume buyers, this law had the effect of limiting U.S. imports. Moreover, it perpetuated the vertically integrated distribution system in Japan and allowed large Japanese manufacturers greater control over the distribution of their products, which were sold through many small retail stores. The effect was to strengthen their market position to the exclusion of foreign firms. The problem was exacerbated because of high land prices in Japan that made it costly for foreign companies to obtain suitable real estate for large-scale retail operations. This law was an excellent example of a non-tariff barrier that on its face was completely neutral. It did not discriminate against products because they were of foreign origin, yet it had the effect of limiting access to the Japanese retail market by American and other foreign discount chains.

The Japan Large-Scale Retail Stores Law protected retailers with stores as small as 500 square meters by giving them a voice in determining whether any large stores could come into their locale. The Japanese Ministry of Economy, Trade, and Industry (METI) refused to accept a retailer’s notification that it planned to open a new store unless there was also a document indicating the terms under which local merchants agreed to the large store’s opening. Negotiations between new store owners and local merchants frequently took seven or eight years to reach an accord.

Both domestic and international pressure led to changes in the law and in its application in the 1990s. Effective June 1, 2000, the Japanese legislature abolished this law and replaced it with the Large-Scale Retail Store Location Law. This law provides that approval of large stores will no longer be based on whether there is a competitive need for additional stores in the local market, but rather on the degree to which a new large store would impact the local environment, particularly traffic, noise, parking, and trash removal. The environmental standards will be developed by the Japanese government and implemented by individual municipalities. Although the United States welcomed the abolition of the original law, the manner in which the new law will be implemented at the local level will determine whether it will really afford greater market access for large stores. The law requires public notification by companies applying to open stores over 1,000 square meters, and a review period during which local residents, businesses, local governments, and others can present their views on the environmental impact of the store. Any firm attempting to open a supermarket, department store, or discount store in Japan will almost certainly face bureaucratic hurdles, local regulations for licensing, taxation, employment, and others, and resentment from owners of small stores in the community. Since 2000, large retailers from France, Germany, the United Kingdom, and the United States have all made attempts to enter the Japanese retailing market. American retailers in Japan include Gap, Office Depot, Eddie Bauer, Amazon, Toys “R” Us, and Costco.

Not all stories are successful ones. Wal-Mart entered the Japanese market in 2002 by acquiring a controlling interest in the Japanese retailer Seiyu Ltd., a chain with about four hundred stores. Although it often takes retailers years to reach profitability in a new market, Wal-Mart had an unusually negative experience. After five years in the Japanese market, its Seiyu stores still had increasing losses and employee layoffs, and Seiyu’s stock values were declining.

One French company, Carrefour, the largest of all European retailers, has sold its eight stores in Japan and left the Japanese market after experiencing increasing losses there. Most Western general-merchandise retailers find that they must balance their “volume discounting ethic” with the demands of Japanese consumers for quality and freshness, presented in an atmosphere that fits into Japanese cultural expectations. They also find retailing in Japan to be intensely competitive. Despite these issues, large-scale American and European volume discounters have begun to transform retailing in Japan.

Import Licensing Schemes and Customs Procedures as Trade Barriers.

Some of the most insidious indirect barriers to trade are import licensing schemes and customs procedures. Some governments require importers to apply for permission to import products, subjecting them to many complex and often discriminatory requirements. The licensing is often expensive and time consuming. For instance, an importer may have to make a deposit of foreign exchange in order to get the license, or the license may be based on a discriminatory quota system.

A host of governmental red tape, administered by entrenched bureaucracies, can also cause delays of days or weeks in bringing goods into a country. Import documentation and inspection requirements, for instance, can be so unreasonable that firms cannot comply without incurring delays and unanticipated expense. Bribery and corruption in a foreign government office can stall an importer’s paperwork endlessly. Administrative regulations might be impossible to comply with. For instance, imagine a country that requires all foreign-made jewelry to be marked with the country of origin, but provides no exemption for jewelry too small for engraving. Inspection procedures have also been used to stall shipments. To illustrate, in 1995 the United States accused South Korea of using delaying tactics in the form of “inspections” to hold shipments of U.S.-grown fresh produce on the docks until it rotted. Exporting companies faced with foreign licensing schemes often have to retain local agents and attorneys to advise them on import measures in the foreign market.

Transparency

When a foreign government’s import regulations are not made readily available to the public or are hidden or disguised in bureaucratic rules or practices, the regulations are not transparent. For instance, government procurement policies lack transparency when the requirements for bidding on a project are made available only to select domestic firms. A licensing scheme used to enforce a quota is not transparent when the “rules of the game” are not made known to foreign exporters. When a nation’s import regulations or procedures lack transparency, foreign firms cannot easily gain entrance to its markets. Many trade laws today incorporate transparency by requiring nations to publish all regulations that directly or indirectly affect imports.

Impact of Trade Barriers on Managerial Decisions

In making import-export decisions, the international manager needs to assess the impact of trade barriers on a business strategy. For example, the decision to ship goods into a foreign market, or to license or produce goods there, might be made on the basis of government policies that either restrict or promote trade. To the exporter of manufactured goods, regulations of the importing country may determine whether the firm’s products can be successfully imported and marketed at all. To the importer, regulations may dictate those countries from which the firm may “source” raw materials, purchase machine parts, or locate finished goods. To the service provider, governmental regulations may determine when and on what terms it can successfully enter the banking, insurance, architectural, or engineering market. And to the investor who is considering building a plant, entering into a joint venture, or forming a subsidiary abroad, governmental regulations and trade barriers may indicate how suitable the economic and political climate is for the enterprise.

THE GENERAL AGREEMENT ON TARIFFS AND TRADE

Most nations have come to realize that trade barriers are damaging to the international economy—and ultimately to their own. Moreover, they have realized that if they restrict the products of their trading partners in order to protect one segment or sector of their economy, another sector will suffer.

Consider a few examples. If the United States (or another major steel-consuming nation) restricts the import of foreign-made steel to protect domestic steel producers, it will add to the cost of materials for domestic automakers and other domestic manufacturers that use steel to produce finished products. This will increase the consumer price of products made from foreign steel and render them less competitive with similar foreign-made products.

In one major trade dispute from 1995, the United States and Japan argued over Japanese regulatory and business practices that made it very difficult to sell U.S.-made automobiles in Japan. After negotiations between the two countries failed to resolve differences, the United States threatened to impose punitive tariffs of 100 percent on Japanese luxury automobiles. Of course, such action would have resulted in the loss of many American jobs related to the sale of Japanese luxury cars and would have likely prompted retaliation by Japan against American products.

Similarly, trade barriers that protect one industry sometimes result in foreign retaliation against another industry. For instance, Korea might put strict quotas on U.S. beef imports, but the United States might respond by placing retaliatory tariffs on Samsung appliances or Hyundai cars. Economists and government policymakers are keenly aware that the double-sided sword of protectionism can cut both ways. Therefore, since World War II, most nations have “agreed to agree” on certain established rules for setting tariffs and reducing trade barriers and for resolving their trade disputes.

Even while World War II was being fought, the United States and its allies were charting a course to rebuild and revitalize the world’s economy and to ensure that the economic mistakes of the 1930s would not be repeated. In 1944, the Allied nations met at the Bretton Woods Conference in New Hampshire and established several important international economic institutions, including the International Monetary Fund and the International Bank for Reconstruction and Development, also called the World Bank. At that time, a third specialized organization, the International Trade Organization, was planned to promote and stabilize world trade by reducing tariffs. Shortly thereafter, at international meetings held in the United States and in Geneva, Switzerland, in 1947, an agreement was reached that reduced tariffs and set rules to hold countries to their tariff commitments. The International Trade Organization never materialized; one reason was the lack of support in the U.S. Congress for yet another international organization. However, the 1947 agreement, known as the GATT, has withstood the test of time.

At the end of World War II, most national leaders stressed a more international view of the world’s economy and embraced a policy of trade liberalization. More importantly, they wanted to ensure that the world would never again fall victim to the forces of protectionism that existed in the 1930s. Their efforts to establish new rules for conducting their trade relations resulted in the creation of an international legal system to handle trade matters, complete with laws, dispute-settlement mechanisms, and agreed-upon codes for regulating trade. This system is based on the GATT. GATT has been the most important multilateral trade agreement for liberalizing trade. It reduced tariffs, opened markets, and set rules promoting freer and fairer trade. The original GATT agreement has continued to govern most of the world’s trade in goods since 1947.

Twenty-three nations, including the United States, were the original signatories to GATT in 1947. Although GATT 1947 was never ratified by the U.S. Congress as a treaty, it has consistently been accepted as a binding legal obligation of the United States under international law. Until January 1, 1995, the GATT agreement was administered by The GATT, a multilateral trading organization based in Geneva, Switzerland, and composed of countries that were signatories to the GATT agreement.

In 1994, after nearly a decade of negotiations, a new GATT was adopted that made many changes and additions to the original 1947 agreement. GATT 1994 was a result of the Uruguay Round of multilateral negotiations that had begun in 1986. At the close of the Uruguay Round, the United States implemented the GATT 1994 agreements in the U.S. Uruguay Round Agreements Act, effective in 1995. The United States negotiated and adopted GATT 1994 under “fast-track” negotiating authority as a congressional-executive agreement. The agreement was negotiated over the course of three U.S. presidential administrations and was submitted to Congress by President Clinton. Congress approved the agreement and it became effective on January 1, 1995. As of 2007, 151 nations had signed the GATT agreements.

GATT 1994 establishes rules for regulating trade in goods and services that are broader in scope than those of GATT 1947. It also resulted in the creation of the WTO, which replaced the original GATT organization that had operated for nearly fifty years. Countries that were signatories to GATT 1947 were called contracting parties to reflect that GATT is a contract among nations. Under GATT 1994, signatory nations are called members. See Appendices B and C on the textbook companion site (accessible through www.cengagebrain.com) to view selected provisions of GATT 1994 and GATT 1947.

The GATT Framework

The GATT agreements and the WTO provide an organized global structure to improve the economic, political, and legal climate for trade, investment, and development. Their primary goal is to lower tariffs and remove artificial barriers and restrictions imposed by self-serving national governments. The GATT system includes an international legal system with rules, a mechanism for interpreting those rules, and a procedure for resolving disputes under them.

GATT rules are created by international agreement and become guiding principles of international trade law, upon which a WTO member nation’s own trade regulations are to be based. In theory, the GATT legal system exists side by side with the domestic legal systems of sovereign nations. The GATT/WTO agreements can only work when national legislatures and government agencies choose to comply with GATT’s principles when setting tariffs and regulating imports. For instance, when a nation imposes a tariff or quota on ?A3B2 tlsb?> imported products, it must follow guidelines established by GATT. If it does not follow the GATT principles, the offending nation may suffer economic or political sanctions imposed by other GATT members.

Although absolute enforcement of international law is not possible except through war between nations, international trade law is to some extent enforceable because it is in the best economic and political interests of nations to comply with it. In essence, international trade law serves as a check on the actions of governments that might otherwise severely and unnecessarily restrict the free flow of trade and commerce between nations.

GATT and U.S. Law

The GATT agreement does not provide individual rights and remedies to private parties. It cannot be used by private litigants to assert rights or claims for compensation in lawsuits against the U.S. government or to challenge the legality of a federal statute. For instance, in Suramerica v. U.S., 466 F.2d 660 (Fed. Cir. 1992) the federal appellate court stated, “GATT does not trump domestic legislation.” The U.S. Uruguay Round Agreements Act says “No state law … may be declared invalid … on the ground that the provision or application is inconsistent with any of the Uruguay Round agreements except in an action brought by the United States for the purpose of declaring such law or application invalid.”

The Uruguay Round Agreements Act also states that “No provision of the Uruguay Round agreements … that is inconsistent with any law of the United States shall have effect. Nothing in this Act shall be construed to amend or modify any law of the United States relating to the protection of human … life, the protection of the environment, or worker safety.”

If a private firm or industry in the United States believes that its rights under GATT are being violated by a foreign company or foreign government, it may seek redress either with the appropriate federal administrative agency or before the courts on the basis of a U.S. statute, but not under GATT. Of course, it can also communicate its grievance to the U.S. government, which can, at its discretion, negotiate with the foreign government under GATT rules in an attempt to resolve the trade dispute nation to nation.

GATT Agreements as a Basis for Interpreting U.S. Trade Statutes.

There may be occasions when a U.S. court is called on to interpret a U.S. statute whose wording is ambiguous or unclear. If the subject of the statute is addressed in an international treaty to which the United States is a party, the courts of the United States may look to the treaty for guidance in interpreting the statute. Establishing an important rule for interpreting statutes, the U.S. Supreme Court in Murray v. Schooner Charming Betsy, 6 U.S. 64 (1804) said, “[A]n act of Congress ought never to be construed to violate the law of nations, if any other possible construction remains….” This rule was recently restated by a lower federal court in a case involving U.S. trade statutes and GATT. Timken Co. v. United States, 240 F. Supp. 2d 1228 (Ct. Int’l Trade 2002) involved the dumping of Japanese roller bearings at an unfairly low price in the U.S. market. The plaintiffs argued that the U.S. Department of Commerce’s application and interpretation of the antidumping statute was contrary to the WTO Antidumping Agreement. In deciding the case, the court examined the U.S. statute and stated, “The interaction between international obligations and domestic law is interesting and complex. While an unambiguous statute will prevail over a conflicting international obligation, an ambiguous statute should be interpreted so as to avoid conflict with international obligations.” In this way, GATT and other treaties do sometimes influence the judicial interpretation of U.S. statutory law.

Scope and Coverage of GATT 1947

Before examining the major principles of GATT/WTO law, a reader needs to understand generally the scope and coverage of the GATT agreements. The rules of GATT 1947 applied only to trade in goods. Because most of the major trading nations of the world have been members, GATT has controlled more than 80 percent of the world’s trade in goods. GATT 1947 was successful in reducing tariffs and non-tariff barriers to trade worldwide. However, nations encountered many trade issues over which GATT had no responsibility. Trade in services, such as banking or insurance, was specifically excluded from GATT 1947. It also failed to regulate agricultural trade, an area of constant dispute among nations. Trade in textiles and apparel was also not covered because of the politically sensitive nature of these industries. (Trade in textiles and apparel has been regulated by other international agreements between textile-producing and textile-importing nations.) Because GATT 1947 only dealt with trade in goods, it did little or nothing to protect intellectual property rights, such as copyrights and trademarks. GATT 1947 also did not regulate the use of restrictions on foreign investment that interfered with the free movement of goods. GATT 1947 failed to provide adequate standardized rules for nations to deal with “unfair trade” problems. Finally, the dispute-settlement process set up under GATT 1947, used to resolve trade conflicts between countries, was filled with loopholes and was often ineffective. Many of these deficiencies were remedied in GATT 1994.

Scope and Coverage of GATT 1994

GATT 1994 is much broader in scope and coverage than the original 1947 agreement and addresses many of the latter agreement’s limitations. The two most important agreements included in GATT 1994 are the WTO Final Act Embodying the Uruguay Round of

Multilateral Trade Negotiations

and the WTO Agreement Establishing the World Trade Organization. In addition to the original provisions of GATT 1947, GATT 1994 includes the following multilateral trade agreements on specific issues:

• General Agreement on Tariffs and Trade 1994

• Agreement on Agriculture

• Agreement on the Application of Sanitary and Phytosanitary Measures

• Agreement on Textiles and Clothing

• Agreement on Technical Barriers to Trade

• Agreement on Trade-Related Investment Measures

• Agreement on Implementation of Article VI (Dumping)

• Agreement on Implementation of Article VII (Customs Valuation)

• Agreement on Preshipment Inspection

• Agreement on Rules of Origin

• Agreement on Import Licensing Procedures

• Agreement on Subsidies and Countervailing Measures

• Agreement on Safeguards (Import Relief)

• General Agreement on Trade in Services (GATS)

• Agreement on Trade-Related Aspects of Intellectual Property Rights

• Understanding on Rules and Procedures Governing the Settlement of Disputes

• Trade Policy Review Mechanism

• Understanding on Commitments in Financial Services

• Agreement on Government Procurement, and miscellaneous sectoral trade agreements

• Understanding on Balance-of-Payments

This chapter examines the basic principles of GATT trade and tariff law and the role of the WTO. Most of these principles are applicable to all of the agreements shown above. Later chapters deal with more specific GATT issues, such as those related to agricultural trade, trade in textiles, and trade in services.

THE WORLD TRADE ORGANIZATION

The WTO replaced the original GATT organization in 1995. The WTO is an intergovernmental organization that assists nations in regulating trade in manufactured goods, services (including banking, insurance, tourism, and telecommunications), intellectual property, textiles and clothing, and agricultural products. The role of the WTO is to facilitate international cooperation to open markets, provide a forum for future trade negotiations between members, and provide a forum for the settlement of trade disputes. The WTO has a stature equal to that of the IMF or World Bank and will cooperate with those agencies on economic matters. The WTO’s membership includes those countries that previously belonged to GATT and is now open to other countries, if their membership is accepted by a two-thirds majority vote of the members. As of 2010, 153 signatory nations were members of the WTO.

Organization of the WTO

The organization of the WTO is shown in Exhibit 9.1. The WTO is overseen by the Ministerial Conference, made up of high-ranking representatives from all WTO member countries. They meet at least once every two years to direct the policies, activities, and future direction of the WTO. The Ministerial Conference appoints the WTO Director-General and specifies his duties. The work of the Director-General is supported by the WTO Secretariat staff. Beneath the Ministerial Conference is the WTO General Council, made up of representatives of each nation and responsible for overall supervision of the WTO’s activities. The General Council also oversees the work of the lower councils, which carry out the work of the WTO in specialized areas. As of 2007, the WTO had 625 employees at its headquarters in Geneva, Switzerland, and a budget of 182 million Swiss francs, or about $163 million.

Exhibit 9.1: Structure of the World Trade Organization

The WTO Trade Policy Review Body periodically reviews the trade policies and practices of member countries for transparency and to ensure that member nations adhere to the rules and commitments of GATT. The body is a policy body only and has no enforcement powers. The WTO Council for Trade in Goods oversees the functioning and implementation of the multilateral trade agreements. The WTO Committee on Trade and Development reviews the treatment received by least-developed countries under GATT, considers their special trade problems, and makes recommendations to the General Council for appropriate action.

Decision making by the WTO is by consensus. If the countries cannot agree by consensus, voting is by majority vote, with each member having one vote. (Each EU country also has one vote.) The Ministerial Conference and the General Council have the authority to adopt interpretations of the GATT agreements. For countries that experience extraordinary circumstances, the Conference may grant a temporary waiver of an obligation imposed under GATT by three-fourths vote of the members.

GATT/WTO DISPUTE-SETTLEMENT PROCEDURES

GATT 1994 envisions that one nation will not take unilateral retaliatory action against another nation in a trade dispute, but that the parties will instead rely on GATT dispute-settlement procedures to avert a trade war. GATT’s dispute-settlement procedures are a quasi-judicial process for resolving trade disputes when attempts by the countries involved to reach a settlement become deadlocked. This process is intended to resolve conflicts before “trade wars” erupt. For instance, if nation A imposes a “GATTillegal” quota on nation B’s products, then nation B may file a complaint with GATT. In the meantime, nation B is not supposed to unilaterally retaliate with quotas or tariffs on A’s products and, in fact, needs GATT approval to do so. Only a government can bring a GATT complaint against another government. Complaints are not filed by or against firms or individuals (although, as a practical matter, GATT cases are often brought by nations upon the instigation of private industry).

WTO Dispute-Settlement Procedures

Under GATT 1947, panel decisions were released only to the countries involved to give them another chance to resolve the issue. Panel decisions did not have the force of international or domestic law. Decisions did not acquire legal effect until they were adopted by the GATT Council of Ministers. Under the rules, valid through 1994, panel decisions were effective only if both sides in the dispute agreed to be bound. Either party could “block” or veto a panel’s decision before it was sent to the Council. Many nations chose not to block GATT panel decisions because they did not want to undermine a process for resolving disputes that they might want to use in the future. Furthermore, GATT panel decisions, like WTO decisions today, carried the voice of world opinion and served as an international conscience for determining which trade practices were acceptable and which were not.

Under GATT 1994, the dispute-settlement process has been strengthened and the deficiencies remedied. The WTO is given far more authority in handling trade disputes than the former GATT organization had, and individual countries can no longer block panel decisions from going into force. Among the most important changes are new procedures and timetables to ensure prompt handling of disputes. The following provisions are expressed in the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes, also known as the WTO Dispute-Settlement Understanding (DSU):

• Responsibility for dispute settlement now rests with the WTO’s General Council, which oversees the work of the WTO Dispute Settlement Body. The Dispute Settlement Body appoints panels, adopts panel decisions, and authorizes the withdrawal or suspension of concessions.

• A complaining party can request consultations to seek a solution. If no solution is found within sixty days, the complaining party may request that a panel hear the case. In urgent cases, such as in cases involving perishable goods, members must enter into consultations within ten days, and if they fail to reach agreement within twenty days thereafter, they may request that a panel be convened. The panel will consist of three to five individuals nominated by the Secretariat, but subject to rejection by a party for compelling reasons.

• Other member nations with a “substantial interest” in the case may make written submissions and an oral argument before the panel. More than one member nation may join in bringing a related complaint to a single panel established by the Dispute Settlement Body.

• A panel must make an objective assessment of the facts of the case and determine whether the terms of a GATT agreement have been violated. It may call on experts for advice on scientific and technical matters. All panel deliberations are confidential. The panel must submit a written report to the parties and to other members within six months (three months in urgent cases). Unless the parties file for an appeal to the Appellate Body, the panel’s report will be adopted by the Dispute Settlement Body. However, the Dispute Settlement Body may vote by consensus not to accept the report. Thus, the offending nation in a dispute settlement case can no longer “block” the decision of the panel without a unanimous vote of all members.

• An Appellate Body of three people will hear appeals from a panel case. They may uphold, modify, or reverse a panel decision. People serving on the Appellate Body will be chosen by the Dispute Settlement Body on the basis of their expertise in law and international trade to serve for four-year terms. Other member nations with a substantial interest in the case may file written submissions and appear before the Appellate Body. Appeals are limited to issues of law covered in the panel report and legal interpretations considered by the panel. The appellate report is final unless the Dispute Settlement Body rejects it by consensus vote within thirty days.

• If the panel report finds that the offending party has violated a GATT agreement, the Dispute Settlement Body can recommend ways for the offending party to come into compliance. The offending party has thirty days in which to state how it plans to comply with the panel’s ruling. Compliance must be within a reasonable time. If no immediate solution is available, the offending party can voluntarily make compensatory adjustments to the complaining party as a temporary measure.

• If no settlement is reached or if the trade violation is not removed, the panel may authorize the complaining party to impose a retaliatory trade sanction against the offending party by withdrawing or suspending a concession. The sanction should be imposed on the same type of goods imported from the offending nation or on goods from the same type of industry or economic sector. Sanctions should be in an amount equal to the impact that the GATT violation had on the complaining party. Sanctions are to be temporary and remain in force only until the offending party’s violation is removed.

The following case, WTO Report of the Appellate Body on European Communities—Regime for the Importation, Sale and Distribution of Bananas (1997) involves a long-running trade dispute among the European Community, Latin America, and the United States. It addresses the issue of who may request a WTO panel in a trade dispute.

WTO Reports as Legal Precedent

Do WTO reports carry precedential value for future panels, as judicial decisions do in common-law courts? According to the language of GATT and recent WTO reports, the answer seems to be no. The WTO Report of the Appellate Body on Japan—Taxes on Alcoholic Beverages (1996) addressed the status of a report that had been adopted by the Dispute Settlement Body. It said:

We do not believe that the contracting parties [WTO member nations], in deciding to adopt a panel report, intended that their decision would constitute a definitive interpretation of the provisions of GATT 1947. Nor do we believe that this is contemplated under GATT 1994…. Adopted panel reports can play an important part of the GATT acquis. They are often considered by subsequent panels. They create legitimate expectations among WTO members, and, therefore should be taken into account where they are relevant to any dispute. However, they are not binding….

European Communities—Regime for the Importation, Sale & Distribution of Bananas WT/DS27/AB/R; September 9, 1997

Report of the Appellate Body of the World Trade Organization

BACKGROUND AND FACTS

In recent years, the European Community (EC) has been the world’s largest importer of bananas, accounting for 38 percent of world trade in bananas. In 1991, the EC imported over 3.65 million tons, two-thirds of which was grown in Latin America. Almost 19 percent came from developing countries that were once colonies of Britain, Spain, and France, located in Africa, the Caribbean, and the Pacific (known as ACP countries). Growers in the ACP countries could not compete with the highly efficient non-ACP producers, most of which are in Latin America. In order to encourage the import of ACP-grown bananas and to aid in the development of ACP economies, the EC devised a host of tariff and non-tariff barriers aimed at non-ACP bananas. For example, a complex quota scheme was used permitting only a limited quantity of non-ACP bananas to be imported each year. While licenses to import ACP bananas were granted routinely, only importers who met strict requirements could receive licenses to import Latin American and other non-ACP bananas. Whereas most ACP bananas entered duty free, other bananas had a very substantial tariff rate. Several Latin American countries requested consultations, claiming that the EC regulations violated GATT by discriminating against bananas grown in their countries. The United States joined with the Latin American countries in arguing that they too had a substantial interest in the issue. While the United States was not an exporter of bananas, the U.S. government noted that U.S. companies, such as Chiquita Brands and others, conducted a wholesale trade in bananas amounting to hundreds of millions of dollars a year and would lose market share because of the EC’s actions. The EC maintained that the United States had no grounds for complaining about the EC regulations because it was not a producer and grower. A WTO panel was convened, and its decision was appealed to the WTO Appellate Body.

REPORT OF THE APPELLATE BODY

The EC argues that the Panel infringed Article 3.2 of the Dispute Settlement Understanding (DSU) by finding that the United States has a right to advance claims under the GATT 1994. The EC asserts that, as a general principle, in any system of law, including international law, a claimant must normally have a legal right or interest in the claim it is pursuing…. The EC asserts that the United States has no actual or potential trade interest justifying its claim, since its banana production is minimal, it has never exported bananas, and this situation is unlikely to change due to the climatic and economic conditions in the United States. In the view of the EC, the panel fails to explain how the United States has a potential trade interest in bananas, and production alone does not suffice for a potential trade interest. The EC also contends that the United States has no right protected by WTO law to shield its own internal market from the indirect effects of the EC banana regime….

We agree with the Panel that no provision of the DSU contains any explicit requirement that a member must have a “legal interest” as a prerequisite for requesting a panel. We do not accept that the need for a “legal interest” is implied in the DSU or in any other provision of the WTO Agreement…. [We believe] that a member nation has broad discretion in deciding whether to bring a case against another member nation under the DSU. …

The participants in this appeal have referred to certain judgments of the International Court of Justice and the Permanent Court of International Justice relating to whether there is a requirement, in international law, of a legal interest to bring a case. We do not read any of these judgments as establishing a general rule that in all international litigation, a complaining party must have a “legal interest” in order to bring a case. Nor do these judgments deny the need to consider the question of standing under the dispute settlement provisions of any multilateral treaty, by referring to the terms of that treaty.

We are satisfied that the United States was justified in bringing its claims under the GATT 1994 in this case. The United States is a producer of bananas, and a potential export interest by the United States cannot be excluded. The internal market of the United States of bananas could be affected by the EC banana regime, in particular, by the effects of that regime on world supplies and world prices of bananas. We also agree with the Panel’s statement that: “… with the increased interdependence of the global economy, … member nations have a greater stake in enforcing WTO rules than in the past since any deviation from the negotiated balance of rights and obligations is more likely than ever to affect them, directly or indirectly.”

Accordingly, we believe that a member nation has broad discretion in deciding whether to bring a case against another member under the DSU. The language of Article XXIII: 1 of the GATT 1994 and of the DSU suggests, furthermore, that a member is expected to be largely self-regulating in deciding whether any such action would be “fruitful.”

Decision. The Appellate Body held that the United States could call for the convening of a WTO panel to question EC import barriers even though its exports were not directly affected.

Comment. The United States sought WTO authorization to “suspend concessions” (i.e., impose retaliatory tariffs) on a wide range of EU products, the value of which was equivalent to the nullification or impairment sustained by the United States. In 1999, the Dispute Settlement Body authorized the United States to impose 100 percent ad valorem duties on a list of EU products with an annual trade value of $191.4 million. The range of European products included bath preparations, handbags of plastic, paperboard, lithographs not over twenty years old, cotton bed linens that are printed and do not contain any embroidery or trimming, certain lead-acid batteries, “articles of a kind normally carried in the pocket or handbag, with outer surface of reinforced or laminated plastics,” folding cartons of noncorrugated paper, and electric coffeemakers. In 2001, an agreement was reached to end the trade dispute. The EU restrictions were dismantled, and U.S. tariffs were lifted. The “Banana Wars” were the largest trade war to date with tremendous economic and political ramifications. Current information on this and other trade issues is available from the U.S. Trade Representative’s Website.

Case Questions

1. When may a member bring a complaint against another member of the WTO?

2. What was the basis for the EC’s argument in this case?

This statement is reaffirmed in the actual language of GATT 1994, which states that interpretations of the agreement may only be made by the Ministerial Conference and the General Council. Nevertheless, WTO Appellate Body reports continue to cite prior reports for their precedential value.

In the United States, WTO Panel and Appellate Body decisions are not binding on the courts. However, there are several cases in which the federal courts have cited WTO decisions for their persuasive authority. For example, in Hyundai Electronics Co., Ltd. v. United States, 53 F. Supp. 2d 1334 (Ct. Int’l Trade, 1999), the court stated, “Thus, the WTO panel report does not constitute binding precedential authority for the court. Of course, this is not to imply that a panel report serves no purpose in litigation before the court. To the contrary, a panel’s reasoning, if sound, may be used to inform the court’s decision.” In application, this means that a U.S. court cannot strike down a U.S. law or regulation merely because a WTO decision has ruled that it is in violation of an international agreement. For instance, if a WTO panel rules that a U.S. Department of Energy regulation regarding the sale of imported oil is held to be in violation of GATT’s nondiscrimination provisions, a U.S. court cannot rely on that decision in striking down the regulation. It would be a matter for the U.S. Congress or the executive branch of government, and not the judiciary, to bring that regulation into compliance with a WTO decision.

GATT 1994: MAJOR PRINCIPLES OF TRADE LAW

In addition to member nations’ commitments to consult with each other over trade differences and to resort to dispute settlement, GATT 1994 reinforces five basic principles of international trade law.

1. Multilateral trade negotiations: Nations will meet periodically to reduce tariffs and non-tariff barriers to trade.

2. Predictability of trade opportunities: By committing themselves to specific, negotiated tariff rates, or “tariff bindings,” nations permit exporters and importers to know the highest tariff rate applicable to that product or commodity. This enhances the stability of the world’s trading system.

3. Nondiscrimination and unconditional most-favored-nation trade: Members will not give any import advantage or favor to products coming from one member over the goods of another member.

4. National treatment: Members will not discriminate in favor of domestically produced goods and against imported goods or treat the two differently under their internal tax laws, regulations, and other national laws.

5. Elimination of quotas and other non-tariff barriers: Nations must first “convert” their non-tariff barriers to tariffs (through a process called tariffication) and then engage in negotiations to reduce the tariff rates.

In addition, GATT contains provisions to promote trade with developing nations and special rules allowing the establishment of free trade areas and customs unions. Other special rules allow restrictions on imports when necessary to protect the public health and safety or to protect domestic firms from unfair trade practices or increased levels of imports that might cause serious economic injury to domestic industries.

Multilateral Trade Negotiations

Since 1947, the GATT organization has served to bring member nations together to negotiate tariff reductions and the opening of markets. Under the auspices of GATT, the contracting parties have completed eight major rounds, or multilateral negotiating sessions.

• Geneva, Switzerland, 1947

• Annecy, France, 1948

• Torquay, England, 1950

• Geneva, Switzerland, 1956

• Dillon Round, 1960–1961

• Kennedy Round, 1964–1967

• Tokyo Round, 1973–1979

• Uruguay Round, 1986–1994

• Doha Rounds, 2001-present (incomplete as of 2010)

The Kennedy Round.

In the early rounds, countries negotiated on a product-by-product basis by presenting lists of tariff reductions that they desired from other countries, which submitted requests for concessions that they wanted in return. These rounds resulted in a lowering of ad valorem tariffs from roughly 40 percent in 1945 to approximately 20 percent in 1961. The Kennedy Round, which took place from 1964 to 1967, resulted in even larger across-the-board tariff cuts, particularly in manufactured goods, averaging nearly $40 billion in trade. More than sixty nations participated in the Kennedy Round. During this period, many developing countries joined GATT.

The Tokyo Round.

By the 1970s, GATT’s efforts had proven so successful that tariffs ceased to be the world’s greatest barrier to trade in goods. Indeed, without GATT, decades of bilateral negotiations may have been necessary to achieve the reductions that multilateral negotiations reached within a few years. In the Tokyo Round, more than one hundred participating nations agreed to tariff cuts averaging 34 percent and covering $300 billion in trade, which effectively lowered the average level of tariffs to about 5 percent. In addition, the parties established a number of GATT codes that attempted to remove non-tariff barriers. These codes addressed issues such as subsidies, technical barriers to trade, government procurement rules, customs valuation, and dumping (discussed in later chapters).

The Uruguay Round.

The Uruguay Round negotiations lasted from 1986 to 1994, with 123 countries participating. The negotiations resulted in the creation of the WTO and the adoption of GATT 1994 and sixty major trade agreements affecting goods (including agricultural products, clothing, and textiles) and services. Its tariff and market access negotiations resulted in worldwide tariff cuts averaging 35 to 40 percent on merchandise, farm products, and industrial goods. Tariffs were eliminated in several industry sectors: agricultural equipment, medical equipment, construction equipment, beer, distilled spirits, chemicals, furniture, paper and printed matter, pharmaceuticals, and toys. Tariffs on semiconductors and computers were reduced. In addition to tariff cuts, tariffs were bound, or capped, on most products at the rate effective at the time of the agreement. The round also resulted in broad measures to eliminate non-tariff barriers to trade.

The Doha Round.

The trade rounds that began in 2001 are known as the Doha Round, or the Doha Development Agenda. The focus of these trade negotiations is:

• Assisting the developing countries in implementing the trade rules that came out of the Uruguay Rounds.

• Reaching an agreement to reduce or end agriculture subsidies (domestic price supports and export incentives) by developed countries (an area of disagreement between the rich and poor countries because they encourage cheap exports of farm products from developed to poorer developing countries).

• Freeing trade in services, such as banking and insurance, to better allow these firms to operate globally.

• Reducing high tariffs on products that countries consider “sensitive imports” and generally limiting them to 15 percent. It also eliminates “escalating tariffs” in which higher import duties are imposed on semiprocessed products rather than on raw materials, and higher duties still are imposed on finished products.

• Negotiating a higher level of copyright protection on products with “geographical names,” especially wines, meats, and cheeses such as Champagne, Burgundy, Parma ham, and Feta cheese.

• Trade issues related to investment, government procurement, patent protection, electronic commerce, trade and the environment, foreign investment rules, and other topics.

The world was witness to the failure of two Doha meetings (Seattle, 1999 and Cancun, Mexico, 2003) when televised news reports showed protesters demonstrating against what they perceived as a growing “struggle” of the rich versus the poor, developed versus developing countries, corporations versus consumers and environmentalists, and so on. Indeed, in Cancun, a Korean farmer, the head of the South Korean Federation of Farmers and Fishermen, committed suicide atop a wire barrier in protest over agricultural trade issues. In actuality, the talks failed to reach their goals because of the inability of the rich and poor nations to reach agreement on controversial and highly politically charged trade issues. Agriculture trade and the protection of domestic farmers was one of the main reasons. More recent meetings since that time have been more successful in reaching preliminary agreements.

Tariffication

Tariffication refers to the process by which quotas, licensing schemes, and other non-tariff barriers to trade are “converted” to tariffs. Tariff rates can then be reduced through negotiation and the global economic environment for trade improved. For example, under GATT 1994, quotas on agricultural products will be converted to tariffs and gradually reduced. Tariffication has been a GATT policy since 1947.

Tariff Concessions, Bound Rates, and Tariff Schedules

Article II of GATT calls for member nations to cooperate in lowering tariffs through negotiations. In a tariff concession, one country promises another country or countries not to levy a tariff on imports of a given product at a level higher than agreed upon in return for tariff concessions from those countries. The entire system works on the basis of reciprocity. The negotiators will consider the total economic affect of a concession on their respective countries. For example, if Honduras wants the United States to lower the tariff rate on U.S. imports of Honduran coffee beans, then the United States could request that Honduras reciprocate by lowering duties on, say, U.S.-made medical devices in an amount equivalent to the value of the tariff reduction granted to Honduran coffee. Concessions can be on a single product, by entire product categories, or across the board. The agreed tariff rates are known as tariff bindings because the rates become bound, or capped, at that rate. The bound rate is the tariff rate agreed upon as a result of concessions and may not be increased except in rare cases. If the rate is increased without agreement, the country or countries whose products are affected may request consultations or seek dispute settlement at the WTO. Bound rates are published in each country’s tariff schedules, which are the detailed product-by-product listings of all tariffs for that country. Tariff schedules for the United States are found in the Harmonized Tariff Schedule of the United States (HTSUS).

The case GATT Report on European Economic Community—Import Regime for Bananas (1995) illustrates the importance of countries honoring their tariff rates granted by concession to foreign countries. As the case shows, government and business planners alike rely on access to foreign markets. If an importing nation unexpectedly raises its tariff rate, contrary to its concession, this would cause market disruption and injury to foreign exporters. The GATT Panel ruled that the change in European Economic Community tariff schedules had “nullified and impaired” the rights of foreign banana exporters who should have been able to rely on the existing tariff structure.

European Economic Community—Import Regime for Bananas

34 I.L.M. 177 (1995); Report of the GATT Dispute Settlement Panel (not adopted by the Council)

BACKGROUND AND FACTS

This case was decided in 1995 by a GATT Dispute Settlement Panel prior to GATT 1994 and the creation of the WTO. It resulted from the same “Banana Trade Wars” as a case appearing earlier in this chapter. Since 1963, the European Economic Community (EEC) had negotiated tariff rates with the developing countries that export bananas, and these concessions were bound in the tariff schedules at 20 percent ad valorem. In 1993, the EEC took over banana import regulation from the individual countries. The EEC set up uniform rules on quality, marketing standards, and tariffs. Under the EEC regime, the tariff rates on bananas from the Latin American countries were increased between 20 and 180 percent. A complex licensing scheme was also set up to limit foreign banana traders (e.g., Chiquita, Dole, and Del Monte) access to sell in the EEC. The Latin American countries claimed that the regulations impaired their Article II tariff concessions and violated Article I, MFN principles, and other GATT provisions.

REPORT OF THE PANEL

Article II—Schedules of Concessions: [Central and South American] banana producers had assessed their competitive position on the basis of the bound tariff level. They had made strategic decisions and investments on that basis; they had cultivated substantially more land specifically for this export trade; and they had pursued marketing ties with European importers. The new tariff quota undermined the legitimate expectations upon which these actions were based and severely disrupted the trade conditions upon which these producers had relied, regardless of the actual protective effect of the new regime.

The Panel noted that Article II required that each contracting party “accord to the commerce of the other contracting parties treatment no less favourable than that provided for in the … Schedule of Concessions.” The Panel then considered whether the introduction of a specific tariff for bananas in place of the ad valorem tariff provided for in its Schedule constituted “treatment no less favourable” in terms of Article II…. The Panel consequently found that the new specific tariffs led to the levying of a duty on imports of bananas whose ad valorem equivalent was, either actually or potentially, higher than 20 percent ad valorem….

The Contracting Parties had consistently found that a change from a bound specific to an ad valorem rate was a modification of the concession. A working party examining a proposal by Turkey to modify its tariff structure from specific to ad valorem had stated: “The obligations of contracting parties are established by the rates of duty appearing in the schedules and any change in the rate such as a change from a specific to an ad valorem duty could in some circumstances adversely affect the value of the concessions to other contracting parties. Consequently, any conversion of specific into ad valorem rates of duty can be made only under some procedure for the modification of concessions.” …

Decision. The panel held that the EEC had deprived (also called “nullified and impaired”) the complaining Latin American countries of the benefits to which they were entitled under the bound tariff schedules.

Case Questions

1. Which countries can import bananas to the EU duty free, and why?

2. Which countries object to the change in the consolidated tariff rate on bananas that took effect in 1993?

3. What is the GATT basis for their objections?

NONDISCRIMINATION, MOST FAVORED NATION TRADE, AND

NATIONAL TREATMENT

The principle of nondiscrimination has long been a guiding concept of international economic relations and of trade liberalization. Defined most broadly, non-life, all nations should be treated equally and without discrimination. Nondiscrimination is one of the basic rights of membership in the WTO. It means that every WTO member country must treat the goods and services from all other WTO member countries equally and without discrimination. Simply put, nations should not “play favorites” with each other’s goods or services. The principle of nondiscrimination is embodied in two important principles of international trade law: the principle of unconditional most favored nation trade and the concept of national treatment.

Most Favored Nation Trade

When one country grants “most favored nation” trading status to another country, it is agreeing to accord products imported from that country the most favorable treatment or the lowest tariff rates that it gives to similar products imported from its other MFN trading partners. In the United States, MFN trading status is granted to a foreign country (or “trading partner”) by an act of Congress. According to the GATT agreements, all countries that are members of the WTO should automatically be entitled to MFN trading status with other WTO countries (although in reality this may not be the case—Cuba is a WTO member but as of 2010 had not received MFN trading status from the United States). Although MFN trade has been in use for at least three hundred years, it is now a basic principle of GATT law and is found in Article I of the GATT, which says

With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation … and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation…. Any advantage, favour, privilege, or immunity granted by any other member to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other members.

MFN principles are also applied to trade in services under Article II of the General Agreement on Trade in Services.

With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country.

Unconditional MFN Trade.

Unconditional MFN trade is different from conditional MFN trade. Conditional treatment requires that a trading partner give something in return for a tariff concession. Conditional MFN trade was used by the United States in its first trade pact made in 1778 with France and continued through the end of World War I. Then, the United States found out that conditional MFN trade allowed other countries to discriminate against U.S. exports, and the practice was phased out. MFN trade today is unconditional for all WTO members. Unconditional MFN trade requires that if a nation negotiates a reduced tariff rate on a certain product imported from one WTO member, that rate of duty automatically becomes applicable to like products imported from any and all other WTO members. This means that if nation A negotiates a reduced tariff rate on a particular product imported from WTO nation B, that new rate becomes applicable to like products imported from all WTO member countries. Unconditional treatment is granted because the products from WTO countries are entitled to be treated equally and without discrimination.

MFN treatment for imported goods greatly influences trade flows between nations. If a country’s products do not qualify for MFN tariff rates in an importing nation, then it may not be economically practical to import those products at all. For example, assume that a company desires to import products that originated in nation B into nation A. If nation B’s goods do not qualify for MFN tariff treatment in nation A, then the transaction may not be profitable because of the high tariff rates. For instance, an MFN rate on a particular product might typically be 5 percent of the value of the import. Without MFN treatment, however, the rate on the same goods might be as high as 90 percent on the value of the import. The importer may actually have to find substitute products in some other country that is an MFN trading partner of nation A.

Most people erroneously think that MFN trade is some “special treatment” applied as a favor to products coming from a foreign country. That is not the case. Actually, under WTO rules, most favored nation treatment is the norm. All WTO member countries must apply MFN tariff rates to products being imported from any and all WTO member countries. Any WTO country that denies MFN treatment to products from another WTO country may be subject to losing MFN status itself. In the United States, all countries are entitled to receive MFN tariff treatment unless specifically exempted.

Exceptions to MFN Trading Status.

The WTO agreement includes several exceptions to the MFN requirement. In some special circumstances, countries may impose higher than normal MFN rates on products from certain countries. In other cases they may impose tariff rates lower than the MFN rate. For example, products from some developing countries can be imported into a developed country at tariff rates even lower than the MFN rate, as when the United States or the European Union is trying to encourage imports from Africa or the Caribbean. These are known as “preferential” tariff rates, or “tariff preferences.” Similarly, some countries’ products come into the United States at a rate higher than the MFN rate, as when the United States is restricting trade with a country because of its violations of human rights.

Keep in mind that just because the United States grants MFN trade status to a country, it does not mean that Americans have unrestricted trade with that country. It is possible, as in the case of Syria, that the United States may impose a total embargo on trade with that country for other foreign policy or national security reasons, such as sponsoring terrorism.

Another exception to MFN rules applies to goods traded within free trade areas or common markets. For example, goods traded among the United States, Canada, and Mexico would qualify for better-than-MFN tariff rates, or may pass duty free, under the North American Free Trade Agreement. A similar exception would apply for goods traded within the European Union. Smaller trading blocs exist in Latin America, Africa, and Asia.

It should be pointed out that some leading international economists and supporters of the role of the WTO view regional trading blocs as a threat to further trade liberalization on a global scale. They are concerned that the world will divide into geographic or regional trading blocs and fear that this could become a method of regional protectionism rather than a means of fostering free trade. They encourage the focus of trade liberalization to be through the WTO system.

New Terminology: Normal Trade Relations.

In the United States, the term “most favored nation” is now referred to as normal trade relations, or NTR. This term has replaced the term “most favored nation” in all U.S. laws because Congress considered it to more accurately describe the “normal” tariff treatment for most countries. The term “most favored nation” is still used in international documents and in other countries, however.

NTR Status and Jackson-Vanik: A Remnant of the Cold War

In 1951, at the beginning of the Cold War, the United States passed laws denying MFN/NTR status to communist countries. This applied to China, the Soviet Union, and their satellite communist states in Asia and Eastern Europe. At that time, the Soviet Union was accused of denying its citizens the right to emigrate and particularly denying the right of Russian Jews to emigrate to Israel. In response, Congress passed the Jackson-Vanik Amendment to the Trade Act of 1974, which denied NTR treatment to any country that deprived its citizens the freedom to emigrate. When the Soviet Union collapsed, emigration rights returned to Russian and Eastern Europe. Although the statute is no longer widely used, it is still in effect in 2010. Jackson-Vanik requires the president to review the emigration policies of nonmarket economy countries and to report to Congress on a regular basis. The president is authorized to grant temporary NTR status if it is determined that the country is complying with Jackson-Vanik’s freedom of emigration requirements or if the president finds that NTR status will promote continued advances in the freedom of emigration. NTR status also requires that the United States and the foreign country in question have entered into a bilateral trade agreement on broader issues, including reciprocity of NTR status. Decisions of the president are reviewable by Congress and may be disapproved by a joint resolution of the House and Senate.

As of 2010, the only countries that had not been granted normal trade status by the United States were Cuba and North Korea.

Countries with temporary NTR status can “graduate” to permanent NTR status only if an act of Congress exempts that country from annual review by the president. After the end of the Cold War and the collapse of the Soviet Union in 1989, many of the former republics of the Soviet Union and the formerly communist countries of Eastern Europe and Asia were granted permanent NTR status by the United States. This has normally paved the way for their membership in the WTO. The granting of permanent NTR status is a very politicized process, as Congress considers both the trade and political implications. There have been many calls in Congress for a complete repeal of Jackson-Vanik.

Normalization of U.S. Trade Relations with Russia.

With the collapse of Soviet communism in Russia, the central Asian republics, and in Eastern Europe in the early 1990s, America wanted to assist these countries in their transition to democracy. (Recall that without NTR status, products from these countries would be subject to much higher rates of duty when entering the United States, and many would be rendered prohibitively expensive.) Today, almost all of these formerly communist countries have normal trade status with the United States. For example, the former Soviet republics of Kyrgyzstan, Georgia, Armenia, and Ukraine have received permanent NTR status. However, since 1992 Russia has been granted only temporary NTR status under Jackson-Vanik. As of mid-2010, Russia had not been granted permanent NTR status by Congress. Russia has considered this an insult and a “throwback” to its communist days and believes that Jackson-Vanik is no longer appropriate. It is likely that the United States will grant permanent NTR status to Russia in the near future.

As of 2010, Russia was attempting to complete its membership in the WTO. Membership requires a lengthy negotiating process where the applying country must demonstrate that its markets are sufficiently open to goods, services, and investment from other WTO countries and that they will not be subject to discrimination. Russia has negotiated tariff bindings with WTO members, eliminated many non-tariff barriers to foreign goods, and modified many of its laws to comply with WTO requirements. It eliminated many restrictions on the foreign ownership of Russian service companies, including commercial banks and investment companies, as well as permitting cross-border data processing and credit card services. The final issues to be resolved are Russia’s restrictions on imports of U.S. meats, high tariffs on imports of U.S. automobiles, and Russia’s failure to protect intellectual property rights and to stop the unlawful sale of pirated goods. Nevertheless, it would seem that Russia’s membership in the WTO is certain. A few of the former Soviet republics, including Ukraine and Georgia, and all of the formerly communist countries of Eastern Europe (with the exception of the countries that comprised the former Yugoslavia) have already been granted membership in the WTO.

Normalization of Trade Relations with Vietnam.

The scars of the Vietnam War are taking decades to heal. In 1994, the United States ended the trade embargo with Vietnam, and in 1995 it reestablished diplomatic relations. In 2000, President Clinton became the first U.S. president to visit Vietnam since 1969 and the first ever to visit its capital, Hanoi. Although Vietnam is a socialist country run by a communist government, the signs of American economic capitalism are apparent everywhere. News reports of the president’s trip from the Associated Press and CNN showed Ho Chi Minh City crowded with billboard advertising for Coke, American music blaring from sidewalk cafes, and counterfeit Nike and Calvin Klein products being sold on the streets. Obviously, America has had a tremendous and ongoing impact on Vietnamese popular culture. In 2006, the U.S. Congress granted Vietnam permanent NTR status, and by 2009, total U.S.-Vietnam trade reached over $15 billion. In 2007, Vietnam was admitted to the World Trade Organization. The United States has also normalized trade relations with Cambodia and Laos, Vietnam’s neighbors in Indochina.

Normalization of U.S. Trade Relations with China.

China has been ruled by a communist government since the end of the Chinese civil war in 1949. Although China was an original party to GATT 1947, it withdrew in 1950 as a result of the communist takeover. In 1951, China lost its normal trade status with the United States, resulting in prohibitively high import duties on Chinese goods. In 1978, China began the process of social and economic reform needed to grow its economy. It gradually introduced free market principles to its centrally planned economy, created special economic zones for foreign investors, modernized its laws and legal system, and permitted cultural and other exchange programs and liberalized its emigration programs. From 1974 to 1980, China’s human rights record was watched closely under the Jackson-Vanik Amendment, and after that time China began to receive annual waivers from Jackson-Vanik and temporay NTR status. Throughout the 1990s, U.S. relations with China improved, and Congress granted permanent normal trade status to China, when China was admitted to the WTO in 2001.

The United States and China have strong economic ties, despite many political differences. China has a population of over 1.3 billion people. It represents the largest potential market in the world for U.S. goods and services. There are tremendous opportunities for U.S. exports to China, particularly in electrical equipment, power-generating equipment, aircraft, agriculture, computers, automobiles, financial services, and telecommunications. The United States also relies heavily on Chinese imports. It is sometimes said that U.S. consumers have become “addicted” to inexpensive Chinese products. In 2009, China shipped approximately $1.2 trillion in goods to the world. In that year, China exported $296 billion in goods to the United States and imported $69 billion, leaving the United States with a $227 billion deficit in its trade in goods with China. In 2008 (the latest year available at the time of writing), the United States had a surplus of $6 billion in the sale of commercial services to China. In 2009, the United States was China’s largest export market, and China was the third largest export market for U.S. goods (the third largest if you include China and Hong Kong together). U.S. importers spent more purchasing goods from China than from any other country. More than one-quarter of China’s exports are shipped to the United States. As China is a normal trading partner, China’s products enter the United States with an average 3 percent import duty. If China did not have normal trade status, import duties on many Chinese goods would exceed 70 percent, resulting in a tremendous cost to U.S. consumers, and a likely break in U.S.-Chinese relations, a disruption of world trade patterns, and damage to the global economy. Thus a continued normal trade relation between the two countries is important to both nations and to the world community.

Issues Affecting U.S.-China Trade.

Normalization of trade relations with China has always been linked to U.S. foreign policy. Over the past several decades there have been a number of policy differences between the United States and China involving such issues as human rights, Tibet, the treatment of prisoners, the use of prison labor to manufacture goods for export, China’s policies for controlling population growth, differences over relations with communist North Korea, and differences over the export of nuclear technology, missiles, and other armaments. One memorable event that called China’s trade status into question was the Chinese government’s use of military force in 1989 to stop pro-democracy demonstrations at Tiananmen Square during which student demonstrators were arrested or killed. More recently, China has been accused of engaging in corporate and industrial espionage in the United States in order to obtain scientific, industrial, and trade secrets, and of conducting surveillance of dissidents on the Internet. China also requires by law that Internet search providers submit to government rules on censorship, which blocks pornography and sites considered subversive. Many people, especially those who believe in an open Internet, have found this abhorrent. (Internet access in Hong Kong is unfiltered.)

Certainly the most serious and longest standing dispute between the United States and China is China’s claim to the island of Taiwan, which split from the mainland government in 1949. Taiwan functions as an independent, multiparty democracy with a heavily industrialized capitalist economy. However, China maintains that Taiwan is a “renegade province,” and that the island is part of China. Taiwan held China’s seat at the United Nations until 1971, when it was turned over to the People’s Republic of China on the mainland. In 1979, President Carter transferred official diplomatic recognition of China from Taiwan to the People’s Republic. However, the United States has continued to support a free and independent Taiwan and has been pledged to its military defense for over sixty years. The United States continues this support through the sale of weapons to Taiwan, much to the anger of the mainland Chinese. Although China and Taiwan do not have formal diplomatic relations with each other, in recent years they have greatly increased bilateral trade and investment, initiated regular air flights, and permitted cross-border tourism (although controlled). Within the WTO system, Taiwan is called “Chinese Taipei” or the “Separate Customs Territory of Taiwan.”

Of course, in the last few decades, China has gone through tremendous changes. It opened its centrally planned economy to market influences, attracted foreign investment, made itself a global manufacturing base for export-oriented industries, and has become one of the world’s largest holders of U.S. securities. China has enacted new laws and modern legal codes that are more conducive to attracting international business. Since China’s admission to the WTO in 2001, according the U.S. Trade Representative’s office, China has largely met its commitments to lower tariffs and to reduce many non-tariff barriers. Issues remain over China’s failure to enforce its intellectual property laws, stop the distribution of counterfeit goods, and end internet piracy. The United States is also concerned with China’s tax policies that discriminate against imported goods, China’s subsidies to domestic industry that make it unfairly competitive against foreign firms, Chinese policies that favor state-owned businesses (no doubt related to modern China’s economic roots in socialism), and the lack of transparency in failing to publish China’s technical regulations and product standards in a form readily available to foreign firms.

Despite these improvements in relations, the United States and China have continued to disagree over China’s currency policies. The United States argues that China’s exchange rate policies cause the value of the Chinese yuan to be artificially low compared with other currencies, especially the dollar, which in turn makes China’s exports cheap in foreign markets and imports into China artificially expensive. The U.S. Treasury Department has subtly pressured China to allow the yuan to rise, although economists are split on the issue.

NATIONAL TREATMENT

The national treatment provisions of the GATT are intended to ensure that imported products will not be subjected to discriminatory treatment under the laws of the importing nation. Under

Article III

, imported products must not be regulated, taxed, or otherwise treated differently from domestic goods once they enter a nation’s stream of commerce. GATT Article III:2 provides that imports shall not be subject to internal taxes or charges in excess of those applied to like domestic products.

Article III

1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.

2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

4. The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.

The even broader provisions of Article III:4 state that imported products shall be given “treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations, and requirements affecting their internal sale.” This provision has been interpreted as prohibiting discrimination against imports resulting from a wide range of non-tariff barriers to trade, including discriminatory customs procedures, government procurement policies, and product standards. In the following case, WTO Report on Japan—Taxes on Alcoholic Beverages (1996), the WTO Appellate Body undertook a thorough analysis of the Japan Liquor Tax Law and found that the Japanese tax violated GATT Article III. As you read, look not only for its interpretation of national treatment but also look at the Appellate Body’s reflections on GATT as international law.

GATT AND THE ELIMINATION OF QUOTAS

GATT permits the use of tariffs as the acceptable method of regulating imports, but not quotas or other quantitative restrictions. Since 1947, the agreement has called for countries to give up using quotas. Of course, many countries still utilize them because they are a sure and certain way of keeping out foreign-made goods. The GATT prohibition of quotas is found in Article XI:

No prohibitions or restrictions other than duties, taxes, or other charges, whether made effective through quotas, import or export licenses, or other measures, shall be instituted … on the importation of any product … or on the exportation or sale for export of any product.

Japan—Taxes on Alcoholic Beverages

WT/DS11/AB/R; October 4, 1996

Report of the Appellate Body of the World Trade Organization
BACKGROUND AND FACTS

The Japan Liquor Tax Law, or Shuzeiho, taxes liquors sold in Japan based on the type of beverage. There are ten categories of beverage (the categories are sake, sake compound, shochu, mirin, beer, wine, whiskey/brandy, spirits, liqueurs, and miscellaneous). Shochu is distilled from potatoes, buckwheat, or other grains. Shochu and vodka share many characteristics. However, vodka and other imported liquors fall in categories with a tax rate that is seven or eight times higher than the category for shochu. Foreign spirits account for only 8 percent of the Japanese market, whereas they account for almost 50 percent of the market in other industrialized countries. The United States, the European Union, and Canada called for consultations before the WTO. The panel held that the Japanese tax law violated GATT, and Japan appealed to the Appellate Body.

REPORT OF THE APPELLATE BODY

The WTO Agreement is a treaty—the international equivalent of a contract. It is self-evident that in an exercise of their sovereignty, and in pursuit of their own respective national interests, the Members of the WTO have made a bargain. In exchange for the benefits they expect to derive as Members of the WTO, they have agreed to exercise their sovereignty according to the commitments they have made in the WTO Agreement. One of those commitments is Article III of the GATT 1994, which is entitled National Treatment on Internal Taxation and Regulation.

The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III is to ensure that internal measures not be applied to imported or domestic products so as to afford protection to domestic production. Toward this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products. “[T]he intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the like domestic products once they had been cleared through customs. Otherwise indirect protection could be given. Moreover, it is irrelevant that “the trade effects” of the tax differential between imported and domestic products, as reflected in the volumes of imports, are insignificant or even nonexistent; Article III protects expectations not of any particular trade volume but rather of the equal competitive relationship between imported and domestic products. Members of the WTO are free to pursue their own domestic goals through internal taxation or regulation so long as they do not do so in a way that violates Article III or any of the other commitments they have made in the WTO Agreement….

[I]f imported products are taxed in excess of like domestic products, then that tax measure is inconsistent with Article III…. [We must determine first] whether the taxed imported and domestic products are “like” and, second, whether the taxes applied to the imported products are “in excess of” those applied to the like domestic products. If the imported and domestic products are “like products,” and if the taxes applied to the imported products are “in excess of” those applied to the like domestic products, then the measure is inconsistent with Article III:2.

We agree with the Panel also that the definition of “like products” in Article III:2 should be construed narrowly. How narrowly is a matter that should be determined separately for each tax measure in each case. [A 1970 GATT Report] set out the basic approach for interpreting “like or similar products”:

[T]he interpretation of the term should be examined on a case-by-case basis. This would allow a fair assessment in each case of the different elements that constitute a “similar” product. Some criteria were suggested for determining, on a case-by-case basis, whether a product is “similar”: the product’s end-users in a given market; consumers’ tastes and habits, which change from country to country; the product’s properties, nature and quality.

The concept of “likeness” is a relative one that evokes the image of an accordion. The accordion of “likeness” stretches and squeezes in different places as different provisions of the WTO Agreement are applied. [The definition of “likeness” must be narrowly interpreted.] The Panel determined in this case that shochu and vodka are “like products.”

A uniform tariff classification of products can be relevant in determining what are “like products.” Tariff classification has been used as a criterion for determining “like products” in several previous adopted panel reports…. There are risks in using tariff bindings that are too broad as a measure of product “likeness.” … It is true that there are numerous tariff bindings which are in fact extremely precise with regard to product description and which, therefore, can provide significant guidance as to the identification of “like products.” Clearly enough, these determinations need to be made on a case-by-case basis. However, tariff bindings that include a wide range of products are not a reliable criterion for determining or confirming product “likeness” under Article III:2.

The only remaining issue under the first sentence of Article III:2 is whether the taxes on imported products are “in excess of” those on like domestic products. If so, then the Member that has imposed the tax is not in compliance with Article III. Even the smallest amount of “excess” is too much. The prohibition of discriminatory taxes in Article III is not conditional on a “trade effects test” nor is it qualified by a de minimis standard.

If imported and domestic products are not “like products”… those same products may well be among the broader category of “directly competitive or substitutable products” that fall within the domain of the second sentence of Article III:2. How much broader that category of “directly competitive or substitutable products” may be in any given case is a matter for the Panel to determine based on all the relevant facts in that case. In this case, the Panel emphasized the need to look not only at such matters as physical characteristics, common end-uses, and tariff classifications, but also at the “market place.” This seems appropriate. The GATT 1994 is a commercial agreement, and the WTO is concerned, after all, with markets. It does not seem inappropriate to look at competition in the relevant markets as one among a number of means of identifying the broader category of products that might be described as “directly competitive or substitutable.” Nor does it seem inappropriate to examine elasticity of substitution as one means of examining those relevant markets. In the Panel’s view, the decisive criterion in order to determine whether two products are directly competitive or substitutable is whether they have common end-uses, inter alia, as shown by elasticity of substitution. We agree.

Our interpretation of Article III is faithful to the “customary rules of interpretation of public international law.” WTO rules are reliable, comprehensible and enforceable. WTO rules are not so rigid or so inflexible as not to leave room for reasoned judgements in confronting the endless and ever changing ebb and flow of real facts in real cases in the real world. They will serve the multilateral trading system best if they are interpreted with that in mind. In that way, we will achieve the “security and predictability” sought for the multilateral trading system by the Members of the WTO through the establishment of the dispute settlement system.

Decision. The Japan Liquor Tax Law was found to violate the national treatment provisions of GATT Article III. Shochu is a “like product” and is “directly competitive and substitutable” with other imported spirits. The imported spirits were taxed higher than the shochu. The decision of the panel was upheld and Japan was requested to bring its tax law into compliance with GATT.

Comment. In 1997, the United States was forced to seek binding arbitration when it became apparent that Japan did not intend to bring its liquor tax into WTO compliance within a “reasonable period” as required by WTO rules. The arbitration ruling supported the U.S. position. Japan agreed to revise its tariff system in stages and to eliminate tariffs on all brown spirits (including whiskey and brandy) and on vodka, rum, liqueurs, and gin by April 1, 2002. The U.S. distilled spirits industry reported that, as expected, the change in taxation has increased exports of U.S. distilled spirits to Japan. The United States continues to “monitor” Japan’s compliance.

Case Questions

1. What is the purpose of GATT’s Article III and how is that purpose served?

2. Is it necessary that the complaining party show that a discriminatory tax has a negative effect on trade? Is a remedy possible even where the discrimination has no adverse impact on the sales volume of the imported products?

3. How does a WTO panel determine whether two products are “like products” for purposes of the first sentence of Article III(2) or “directly competitive or substitutable products” that fall within the domain of the second sentence of Article III(2)?

The use of quotas, even where they are permitted by GATT, is subject to the principle of nondiscrimination. GATT Article XIII states that an importing nation may not impose any quantitative restriction on a product unless it imposes the same restriction on all like or similar products coming from all other WTO member nations.

Despite the prohibition on the use of quotas, countries still do use them for many economic and political reasons. Quotas have been used to protect essential industries from foreign competition and to implement national economic policies. They are used by virtually all countries, including (to a lesser extent) the United States. GATT permits the use of quotas to relieve food shortages and to restrict the import of agricultural and fishery products that are subject to governmental price support mechanisms. Quotas are widely used to regulate world trade in textiles and apparel. Quotas are also used as a temporary measure by importing countries facing severe balance-of-payments deficits to preserve needed foreign exchange.

Quantitative Restrictions: The Balance-of-Payments Exception and Developing Countries

From 1947 to this day, the GATT agreements have provided for the special needs of developing countries. One burden that developing countries face is the need for readily acceptable international currency for use in trading in world markets. Historically, many developing countries were agrarian economies, some with only a few “cash crops” that could be sold for export. Others were able to develop basic industries in steel or textiles that provided export revenues. Often this was their only source of scarce foreign exchange, which was needed to purchase essential foreign goods such as medicine, fertilizer, or farm equipment or to repay international debts. After all, dollars, pounds, or yen could be used for trade anywhere on the globe, but usually their local currency could not.

When a nation’s payments of foreign exchange exceed receipts, a balance-of-payments deficit can arise. Both developed and developing countries can face these crises. However, the problem is usually exacerbated in developing countries because their international transactions are usually done with one of the major currencies, not their own. The fastest way to halt the outflow of foreign exchange by local companies is to place quantitative restrictions on imports of goods and service through quotas or licensing schemes. (Tariffs would take much longer to have the same effect.)

Despite GATT’s prohibition of quotas, any nation (including developed nations) may resort to quantitative restrictions in a balance-of-payments crisis. Article XII applies to a developed country “with very low monetary reserves” and allows the use of quantitative restrictions in order to “safeguard its external financial position and its balance-of-payments … necessary to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves.” Article XVIII applies to a developing country that “can only support low standards of living and is in the early stages of development.” For a developing country, the rule is more liberal, allowing the use of quantitative restrictions “in order to safeguard its external financial position and to ensure a level of [foreign exchange] reserves adequate for the implementation of its program of economic development.” In both cases, the restrictions must be temporary and phase out as economic conditions improve and they are no longer required.

GATT 1994 instituted a new requirement that a WTO member must use the least restrictive means possible for correcting a balance-of-payments emergency, preferably a price-based measure, such as a surcharge or tariff increase, rather than a pure quantitative limit on imports. Restrictions should not be targeted at individual products, but should affect the “general level” of all imports to the country. The restrictions must be transparent and the government must publicly announce its timetable for removing them. Justification for the measure must be given to the WTO Balance-of-Payments Committee, and the action is subject to WTO surveillance and periodic review. Exporters who do business in developing countries should pay particular attention to this issue. In the following WTO Panel Report on India—Quantitative Restrictions on Imports of Agricultural, Textile, & Industrial Products, the United States sought to have India remove a complex scheme of import restrictions that had existed for almost fifty years.

India—Quantitative Restrictions on Imports of Agricultural, Textile, & Industrial Products WT/DS90/R (April 6, 1999)

Report of the Panel of the World Trade Organization

BACKGROUND AND FACTS

India is a rapidly developing country of over 1 billion people, one-third of which are under the age of 15. Over 80 percent are of the Hindu religion. Although its per capita GDP is only about $2,500, with almost 25 percent of the population living below the poverty line, during the late 1990s its economy grew at an annual rate of about 6 percent. While its economy is largely agriculture based, it is also strong in the areas of textiles, chemicals, food processing, steel, industrial goods, financial services, technology, and computer software. It has a rapidly growing consumer sector. For the past fifty years, India has placed complex restrictions on the import of agricultural, industrial, and consumer goods from other countries. Goods placed on the “negative list” could only be imported by special license, which was generally only granted to the “actual user,” rather than to firms in the normal chain of distribution. Many goods could only be imported by state agencies. The restrictions were, in many cases, applied arbitrarily and in the discretion of Indian government officials on a case-by-case basis. As a result, it was often impossible to know at any given time what goods might be allowed into the country. In 1997, the United States filed a dispute with the WTO against India requesting that restrictions on 2,714 products be removed. India claimed that without restrictions its foreign exchange would leave the country, upsetting its balance of payments and inhibiting its economic development.

REPORT OF THE PANEL

The United States contended that … persons wishing to import an item on the Negative List had to apply for a license and explain their “justification for import”: the authorities provided no explanation of the criteria for judging applications, and no advance notice of the volume or value of imports to be allowed. In fact, licenses were routinely refused on the basis that the import would compete with a domestic producer. The leading item on the Negative List was consumer goods (including many food items), and for many consumer goods inclusion on the Negative List had amounted to an import ban or close to it.

The United States considered that the restrictiveness of India’s licensing of consumer goods imports was demonstrated by the trade statistics … zero imports for 1995/96, including meat; fish; cereals; malt and starches; preparations of meat or fish; cocoa, chocolate and cocoa preparations; nuts, canned and pickled vegetables and fruits, and fruit juices; wine, beer, spirits and vinegar; leather articles; matting and baskets; carpets; knitted fabrics; clothing; headgear; umbrellas; and furniture. [Imports of hundreds of other products were allowed in only minute quantities for a population of 1 billion.] Thus, in many cases import licensing amounts to an import ban, or close to it.

The United States noted that … the “Actual User condition” ruled out any imports by wholesalers or other intermediaries, and itself was a further quantitative restriction on imports.

* * *

Thus, according to the United States, the generally applicable import licensing process was a complete black box for the importer and for the foreign exporter. No information was provided on the Government’s sectoral priorities with respect to products or on what its views of “merit” might be. All that the United States knew was that the Indian licensing authority generally refused to grant import licences for “restricted” items when it was considered prejudicial to the state’s interest to do so.

The United States added that the broad definition of “consumer goods,” and the fact that some goods were only restricted if they were consumer goods, created considerable confusion, commercial uncertainty and distortion of trade. * * * The 1996 study on Liberalisation of Indian Imports of Consumer Durables by the Export-Import Bank of India had noted that the only two commonly-used consumer durable goods that were freely importable were cameras and nail cutters.

* * *

India said that it needed to use discretionary licensing on a case-by-case basis for the following reasons. India’s economy had been almost totally closed to imports barely 15 years ago. Because of the size and structure of the economy, it was impossible for India to estimate precisely the level of demand for imports, the import elasticity of demand for a huge number of products, as well as the elasticity of substitution of domestic products by consumers, and the effective rate of protection for all these products. Accordingly, India considered recourse to discretionary licensing to be unavoidable. Further, India was progressively phasing out its import restrictions. As part of its autonomously initiated programme of economic liberalization, India had already reduced the number of items on which there were import restrictions to just 2,296 as of 1998, from about 11,000 HS-lines in l991.

* * *

The United States stated that India’s quantitative restrictions and licensing regimes had damaged and continued to damage U.S. trade interests…. In 1996, the United States exported $1.3 billion to India in goods subject to quantitative restrictions. However, while the ASEAN area had a population half the size of India’s, U.S. exports to ASEAN were eight times the value of U.S. exports to India. As the panel on “Japanese Measures on Imports of Leather” noted, “the fact that the United States was able to export large quantities of leather to other markets [than Japan] … tended to confirm the assumption that the existence of the restrictions [on leather imports] had adversely affected [the] United States’ exports.”

The nature and operation of India’s import licensing regimes also damaged and continued to damage U.S. trade interests. The uncertainty and limitations imposed by India’s licensing regime deterred or prevented exporters from undertaking the investments in planning, promotion and market development necessary to develop and expand markets in India for their products. No exporter would put resources into developing a product’s market in India without some assurance that it would be able to export some minimum amount per year, and the Indian system provided no such assurance—only a guarantee of continuing uncertainty—if the product in question was on the Negative List of Imports.

* * *

In light of the foregoing, we note that it is agreed that India’s licensing system for goods in the Negative List of Imports is a discretionary import licensing system, in that licences are not granted in all cases, but rather on unspecified “merits.” We note also that India concedes this measure is an import restriction under Article XI: 1.

* * *

Having determined that the measures at issue are quantitative restrictions within the meaning of Article XI:1 and therefore prohibited, we must examine … India’s defence under the balance-of-payments provisions of GATT 1994.

* * *

In this connection, we recall that the IMF reported that India’s reserves as of 21 November 1997 were $25.1 billion and that an adequate level of reserves at that date would have been $16 billion. While the Reserve Bank of India did not specify a precise level of what would constitute adequacy, it concluded only three months earlier in August 1997 that India’s reserves were “well above the thumb rule of reserve adequacy” and although the Bank did not accept that thumb rule as the only measure of adequacy, it also found that “[b]y any criteria, the level of foreign exchange reserves appears comfortable.” It also stated that “the reserves would be adequate to withstand both cyclical and unanticipated shocks.”

* * *

For the reasons outlined … we find that … India’s monetary reserves of $25.1 billion were not inadequate as that term is used in Article XVIII:9(b) and that India was therefore not entitled to implement balance-of-payments measures to achieve a reasonable rate of growth in its reserves.

* * *

The institution and maintenance of balance-of-payments measures is only justified at the level necessary to address the concern, and cannot be more encompassing. Paragraph 11, in this context, confirms this requirement that the measures be limited to what is necessary and addresses more specifically the conditions of evolution of the measures as balance-of-payments conditions improve: at any given time, the restrictions should not exceed those necessary. This implies that as conditions improve, measures must be relaxed in proportion to the improvements. The logical conclusion of the process is that the measures will be eliminated when conditions no longer justify them.

* * *

In conclusion … we have found that India’s balance-of-payments situation was not such as to allow the maintenance of measures for balance-of-payments purposes under the terms of Article XVIII9, that India was not justified in maintaining its existing measures under the terms of Article XVIII: 11, and that it does not have a right to maintain or phase-out these measures on the basis of other provisions of Article XVIII:B which it invoked in its defence. We therefore conclude that India’s measures are not justified under the terms of Article XVIII:B.

* * *

This panel suggests that a reasonable period of time be granted to India in order to remove the import restrictions which are not justified under Article XVIII:B. Normally, the reasonable period of time to implement a panel recommendation, when determined through arbitration, should not exceed fifteen months from the date of adoption of a panel or Appellate Body report. However, this 15-month period is “a ‘guideline for the arbitrator,’ not a rule,” and … “that time may be shorter or longer, depending upon the particular circumstances.”

* * *

Decision. India’s quantitative restrictions and the licensing scheme at issue were no longer justified to preserve its balance of payments and needed to be quickly phased out.

Comment. The panel’s decision was upheld by the WTO Appellate Body in its report of August 1999 and later adopted by the Dispute Settlement Body.

1. What causes a balance of payments problem, and why can this be a critical problem for many developing countries?

2. How did India deal with the balance of payments problem?

3. Does GATT generally permit countries to take emergency action in a balance of payments emergency?

4. Why did the panel rule against India?

CONCLUSION

The GATT has provided a framework for the international trading system since the close of World War II. It established the principles of international trade law on which national trade laws are based. The GATT agreement and its principles of trade liberalization prevented reactionary forces from drawing the world back into the isolationism and protectionism of the 1930s. Multilateral trade negotiations have resulted in tariff concessions and a worldwide lowering of duties. Today, tariffs are at reasonable levels compared to the 1930s, and rates no longer act as a barrier to world trade.

Although non-tariff barriers are still an obstacle to free trade, they have been slowly reduced by a number of important WTO agreements and dispute resolutions. Some of the most difficult issues facing global trading nations today are the subsidization of agricultural trade, especially cotton; reducing barriers to trade in services; and finding ways to use trade to promote the economies of the poorest developing countries. Readers are encouraged to follow the work of the WTO and the meetings of the WTO Ministerial Conference as they address these issues.

It seems that all countries, perhaps the United States more than others, use their trade policy as a tool of foreign policy. The United States has linked its trade policies with China and Russia to its foreign policy goals. For example, the United States has used the granting of MFN/NTR tariff rates on imports from these countries as an enticement to encourage these and other countries to move toward democracy, respect for human rights, freedom of emigration, and the development of free-market economies. China received normal trade status with the United States in 2001. As of mid-2010, Russia’s trade status was still in question.

Cuba is one of the last remaining countries to not have normal trading relations with the United States. In the next few years, the world will witness the fiftieth anniversary of Cuba’s communist revolution. It will be interesting to see whether there will be great political changes in the country or a continuation of past policies, whether the country will move toward democracy, and whether there will be changes in U.S. foreign policy and trade policy toward its island neighbor.

Chapter Summary

1. Nations regulate trade for several important reasons, including collection of revenue, regulation of import competition, retaliation against foreign trade barriers, implementation of foreign policy or national economic policy, national defense, protection of natural resources and the environment, protection of public health and safety, and protection of cultural values or artifacts.

2. The terms tariff and import duty are used interchangeably. Tariffs are a tax levied on goods by the country of importation. A non-tariff barrier is broadly defined as any impediment to trade other than a tariff. The most severe form of import restriction is the embargo. It is usually used as a drastic measure for reasons of foreign policy or national security.

3. Import licensing schemes are a form of non-tariff barrier to trade that are often hidden in administrative regulations and bureaucratic red tape. Exporters faced with foreign licensing schemes often have to retain local agents and attorneys to advise them on import measures in the foreign market. Import regulations that are not made readily available to foreign exporters are said to lack transparency.

4. The General Agreement on Tariffs and Trade, or GATT, includes the original 1947 agreement, the 1994 agreement that founded the WTO, and many side agreements on specific trade issues. The original agreement only covered trade in goods. In 1994, a General Agreement on Trade in Services was added.

5. GATT’s major principles are a commitment to multilateral trade negotiations, tariff bindings, nondiscrimination, and unconditional MFN trade; national treatment; and the elimination of quotas and other non-tariff barriers.

6. Through multilateral trade negotiations at the WTO, countries agree to reduced tariffs on individual items and become “bound” to those tariff rates. This is found in their “tariff binding,” which is kept on record at the WTO. This rate then appears in that country’s tariff schedules. The schedules are made available to all exporting and importing countries.

7. WTO dispute-settlement procedures provide a legal forum for nations to resolve trade disputes. No single country can veto the decisions of a WTO panel. If a settlement is not reached, the WTO Dispute Settlement Body may authorize one country to impose retaliatory tariffs against another one that has violated a GATT agreement.

8. The principles of most favored nation (MFN) trade mean that a nation must accord products imported from any country with which it has MFN trading status the most favorable treatment or the lowest tariff rates that it gives to similar products imported from other MFN countries. Unconditional MFN treatment means that if a country negotiates a lower tariff rate with one MFN country, that rate is automatically applicable to all MFN countries. The United States applies MFN tariff rates to those countries that qualify for “normal trade relations.” The MFN/NTR rate is considered the normal tariff rate for goods coming from most developed countries. Goods imported from developing countries or within free trade areas often qualify for better-than-MFN rates.

9. Under the national treatment provisions of GATT Article III, imported products must not be regulated, taxed, or otherwise treated differently from domestic goods once they enter a nation’s stream of commerce.

10. GATT outlaws most quantitative restrictions on imports, such as quotas. Quotas on imported products are permitted only in certain situations, such as when a nation has insufficient foreign exchange to meet its foreign payments obligations.

Key Terms

trade barrier 276

tariff or import duty 277

ad valorem tariff 277

non-tariff barrier 277

embargo 277

quota 277

global quotas 277

bilateral quotas 277

allocated quotas 277

auctioned quota 278

tariff-rate quota 278

transparency 280

tariffication 289

tariff concession 289

tariff bindings 289

tariff schedules 289

nondiscrimination 290

most favored nation trade 291

normal trade relations 292

national treatment 295

Questions and Case Problems

1. Visit the Website of the World Trade Organization (www.wto.org). It is a practical, user-friendly guide that offers complete information on the WTO’s role and organizational structure as well as access to the GATT legal texts and dispute settlement cases.

a. As a beginning point, from the home page click on Resources and navigate to the Resources Gateway. From there you will have access to WTO Distance Learning, WTO Videos, and a helpful WTO Glossary. The Distance Learning page offers training modules and excellent multimedia presentations on the basics of world trade and on many of the more technical WTO issues. You can also access the WTO Magazine. From the WTO Videos page, you can view programs or link to the WTO Channel on YouTube.

b. For links to all GATT/WTO agreements from 1947 to the present, navigate to Documents and choose either Legal Texts or Official Documents, which is a portal to the Documents Online database. Accessing WTO materials through the Legal Texts page is quick and easy. You can find Web documents either by browsing or searching.

c. For access to WTO trade issues, including trade in goods, services, intellectual property, electronic commerce, investment, government procurement, trade and the environment, and dispute settlement, click on Trade Topics and navigate to the Trade Topics Gateway and choose a subject.

d. The highest decision-making body of the WTO is the Ministerial Conference, which brings together all members of the WTO for meetings every two years. The Ministerial Conference can make decisions on all matters under any of the multilateral trade agreements. Ministerial Conferences have been held in Geneva (2009), Hong Kong (2005), Cancún (2003), Doha (2001), Seattle (1999), Geneva (1998), and Singapore (1996). From the Trade Topics menu, navigate to Ministerial Conferences. What topics were on the most recent Ministerial agenda?

e. For access to the reports of WTO dispute settlement panels and the Appellate Body, from the home page navigate to Trade Topics > Dispute Settlement > The Disputes. From here you may search either chronologically, by country, or by subject. Notice that disputes are cited as DS followed by a number. The numbers are sequential; for example, DS1 designates the first dispute filed in 1995. Citations for panel reports will generally appear as WT/DS#/R, and reports of the Appellate Body will appear as WT/DS#/AB/R.

2. One of the most controversial areas for the WTO and its member governments has been the relationship between trade and the environment. What are the overlapping issues? What impact does trade, or trade negotiations, have on environmental issues? How do these issues affect the developing countries, and what is their position? Explain the relationship between protection of the environment and economic development.

a. Consider the following major trade-related environmental disputes at the WTO: U.S.—Standards for Reformulated and Conventional Gasoline (provisions of the U.S. Clean Air Act, DS52)

• U.S.—Import Prohibition of Certain Shrimp and Shrimp Products (selling of shrimp caught in nets without turtle extractors, DS58)

• European Communities—Measures Affecting Asbestos and Asbestos-Containing Products (DS135)

• European Communities—Measures Concerning Meat and Meat Products (containing growth hormones, DS26, DS48, DS39)

• European Communities—Measures Affecting the Approval and Marketing of Biotech Products (genetically engineered foods, DS291)

Using one of these cases, write a case study on the relationship between trade and environmental issues. Be sure to explore both sides of the debate.

b. For alternative views on trade and the environment, see the Websites of Public Citizen and the Sierra Club and a highly educational site presented by the Levin Institute at the State University of New York, aptly called Globalization101.org. To learn more about the important Shrimp/Turtle case at the WTO, see the Website of the National Wildlife Federation.

3. Every year, the U.S. Trade Representative issues a report on foreign government trade barriers to U.S. goods and services. Locate these reports and describe the nature of these trade barriers. Which countries are the greatest offenders? What industries are most affected?

4. What is the current trading status of Russia with the United States? Has Russia received permanent NTR status? What are the political issues affecting the granting of permanent NTR status? Which countries of the world do not have normal trade relations with the United States?

5. In 1990, a Korean law established two distinct retail distribution systems for beef: one system for the retail sale of domestic beef and another system for the retail sale of imported beef. A small retailer (not a supermarket or a department store) designated as a “Specialized Imported Beef Store” may sell any beef except domestic beef. Any other small retailer may sell any beef except imported beef. A large retailer (a supermarket or department store) may sell both imported and domestic beef, as long as imported and domestic beef are sold in separate sales areas. A retailer selling imported beef is required to display a sign reading “Specialized Imported Beef Store.” The dual retail system resulted in a reduction of beef imports. By 1998, there were approximately 5,000 imported beef shops as compared with approximately 45,000 shops selling domestic beef. Korea claims that stores may choose to sell either domestic or imported beef and that they have total freedom to switch from one to another. Moreover, Korea argues that the dual system is necessary to protect consumers from deception by allowing them to clearly distinguish the origin of the beef purchased. Is the Korean regulation a valid consumer protection law? Do you think this system is necessary to protect consumers from fraudulent misrepresentation of the country of origin of the beef? Does it matter that scientific methods are available to determine the country of origin of beef? How do you think the dual system might affect the prices of imported beef versus domestic beef? Assuming that countries have the right to protect consumers from deception, what other methods might be available to accomplish this goal? WTO Report on Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, World Trade Organization Report of the Appellate Body, WT/DS161/AB/R, WT/DS169/AB/R (11 December 2000).

6. One of the central obligations of WTO membership is a limit on tariffs on particular goods according to a nation’s tariff commitments. If a member does not abide by its agreement, can another WTO member unilaterally raise its agreed-upon tariff? Explain.

7. The U.S. auto industry has had its problems in the past from foreign competition. If the auto industry lobbied the president and Congress for implementation of a quota on the total number of imported automobiles and trucks, would such a quota be in violation of GATT 1994? Under what circumstances may a country impose a quota?

8. The WTO comprises many nations from all regions of the world. As such, the GATT/WTO system takes a global view of trade liberalization based on nondiscrimination, unconditional MFN, national treatment, tariffication, and multilateral trade negotiations. The GATT

Managerial Implications

Your firm designs, manufactures, and markets children’s toys for sale in the United States. Almost 90 percent of your production is done in the People’s Republic of China. During the 1990s, U.S. relations with China improved. Even though there were many disagreements between the two countries, the United States granted normal trade status to China and continued to support China’s application for membership in the WTO. Your firm invested heavily in China during that time. You have developed close ties to Chinese suppliers and have come to depend greatly on inexpensive Chinese labor and the lower costs of doing business there.

You are now concerned about increasing political tension between China and the United States over a variety of issues. The U.S. president has criticized the Chinese government, arguing that it has supported communist North Korea and sold missile technology to Middle Eastern countries. Most worrisome is China’s claim to Taiwan under its “One China” reunification policy. China continues to aim more missiles at Taiwan, accusing the United States of fostering “independence” there. The United States indicates that it may sell the newest navy destroyers and AEGIS radar systems to Taiwan. When China warns that sales of military equipment to Taiwan could lead to “serious danger,” the president publicly reaffirms the importance of trade with China.

1. Describe the impact that a trade dispute would have on your firm.

2. Describe the impact on your firm if China were to lose its MFN trading status.

3. What strategic actions might you consider to reduce your firm’s exposure to political risk?

4. What are the current areas of agreement or disagreement between the United States and China, and how do you think they will affect future trade relations between the two countries?

5. The United States often links trade policy with the nation’s foreign policy, such as in the case of Jackson-Vanik. Do you agree with this? What do you think of U.S. trade policies toward China being linked to foreign policy issues?

6. Although both mainland China and Taiwan are “Chinese,” doing business in Taiwan differs greatly from doing business in China. Investigate and describe that difference. How do business opportunities differ on the mainland versus the island?

Ethical Considerations

How do you reconcile free trade with the protection of cultural diversity? Free trade in goods and services means that a country will necessarily open itself to foreign influences. Just look at the impact of American fast-food restaurants, hotels, and large retail outlets on the American landscape and particularly on small-town America. Now imagine the influence of American companies and American culture in foreign countries. Consider the long-term impact of American music and agreements recognize that nations may form bilateral or regional free trade areas and customs unions. Yet a free trade area only has free trade between the countries that belong to it. How does the concept of a free trade area, such as the North American Free Trade Agreement (NAFTA), fit into the GATT/WTO global framework? Do bilateral or regional free trade areas violate the principles of nondiscrimination and MFN trade? Evaluate these arguments. film on the indigenous culture of a foreign country. Despite these impacts, free trade agreements mandate the opening of local markets to foreign goods, services, and advertising, including music and film. The French, as well as French-Canadians, are notorious for trying to manipulate trade rules to preserve their French language and French culture. Examples might include limits on foreign advertising, television programming, or films. Consider the Convention on the Protection and Promotion of the Diversity of Cultural Expressions, which has been ratified or approved by sixty-nine nations and entered into force in 2007. The Convention states that

Nations may adopt measures aimed at protecting and promoting the diversity of cultural expressions within its territory. Such measures may include (a) regulatory measures aimed at protecting and promoting diversity of cultural expressions; (b) measures that, in an appropriate manner, provide opportunities for domestic cultural activities, goods and services among all those available within the national territory for the creation, production, dissemination, distribution and enjoyment of such domestic cultural activities, goods and services, including provisions relating to the language used for such activities, goods and services.

In addition, a country may take “all appropriate measures to protect and preserve cultural expressions” that are “at risk of extinction, under serious threat, or otherwise in need of urgent safeguarding.”

The United States is not a party to the Convention. In response to the Convention, the U.S. State Department stated, “The United States is a multicultural society that values diversity…. Governments deciding what citizens can read, hear, or see denies individuals the opportunity to make independent choices about what they value.”

1. Do you feel that countries should limit the influence of foreign cultures in their communities? How should they do that? Do you think that a country should restrict the foreign content of advertising, television, music, or film?

2. Do you think that this Convention might be used as a means of restricting trade in the guise of protecting cultural expressions and national identity?

3. Reconcile the terms of this convention with principles of free trade. What will be the effect on trade in audiovisual products? How would American industry respond?

(Schaffer 275)

Schaffer, Agusti, Dhooge, Earle. International Business Law and Its Environment, 8th Edition. South-Western, 2011-01-01. .

CHAPTER 10: Laws Governing Access to Foreign Markets

Left to their own devices, the natural inclination of most nations is to protect their domestic industrial and agricultural base from foreign competition. National governments are easily tempted by the persuasive voices of trade groups representing powerful industries, political lobbyists, voters, and local politicians, and domestic producers calling for protection from low-cost foreign competitors. One of the most rudimentary principles of modern economics is that protectionism causes market distortions and economic inefficiency. Most nations today recognize the economic benefits of opening their markets to foreign competition. At the same time, nations realize that many of their domestic firms are also competing for business in foreign markets and facing barriers to market access there. As more and more of their industries become dependent on export sales, they also become vulnerable to protectionist tactics. These nations realize protectionism is a double-edged sword. If they expect their firms to have open access to foreign markets, or market access, they must be willing to grant the same privileges to foreign firms in their own markets. Agreeing to concessions that open a market to foreign competition can be a painfully slow process. It can be economically painful, because local firms are finding that they now must either reinvent themselves—retraining employees, retooling their factories, and employing new technologies to become more competitive—or go out of business. And it can be politically painful, because politicians at all levels of government find themselves pressured by local interests to protect the status quo.

This chapter examines specific GATT/WTO agreements that open markets for goods and services in the following areas: (1) technical barriers to trade, including product standards; (2) import licensing procedures; (3) government procurement of goods and services; (4) trade in services, including consulting, engineering, banking and financial services, insurance, telecommunications, and the professions; (5) trade in agricultural products; (6) trade in textiles and apparel; (7) trade-related investment measures; and (8) trade-related aspects of intellectual property rights. The chapter concludes with a look at the U.S. response to foreign trade barriers that deny access to U.S. products and services or that treat U.S. firms unfairly. This includes U.S. laws that permit retaliation against illegal foreign barriers to fair trade.

THE GENERAL PRINCIPLE OF LEAST RESTRICTIVE TRADE

We begin with one of the broadest and most important legal concepts in the body of international trade law: the principle of least restrictive trade. The principle states that WTO member countries, in setting otherwise valid restrictions on trade, shall make them no more onerous than necessary to achieve the goals for which they were imposed. For example, if a country requires inspections of foreign fruit arriving from countries affected by a plant disease, the inspection procedures must be no more arduous, rigorous, or expensive than is needed to achieve those ends. They may not be a trade barrier in disguise.

A corollary is that national laws and regulations passed for purely internal purposes, such as the protection of the general health, welfare, and safety, must also pose the fewest barriers to trade as possible. This principle is relevant to all types of regulations: health codes, environmental regulations, worker safety laws, and uniform technical specifications for a wide range of industrial or consumer products. Examples might include laws regulating the sale of alcohol or tobacco or banning the sale of beef containing growth hormones, genetically modified foods, or toxic lead paint. It might include testing requirements for the fire resistance of fabrics or the safety of children’s toys or set mandatory standards for the practice of law or medicine. The list is endless; the concept is the same. Countries may protect their citizens to the extent they deem necessary but must choose those methods that do not unduly burden international trade and/or single out foreign goods or service providers for unfair or discriminatory treatment.

The WTO Appellate Body has stated that this is a balancing test: nations must weigh the necessity of protecting the public against restrictions on free trade. The principle of least restrictive trade appears throughout GATT law and applies to most of the discussions in this chapter.

The following case, Thailand—Restrictions on Importation of Cigarettes (1990), is an early GATT panel decision that is still cited by the WTO Appellate Body. It considers Thailand’s options for reducing tobacco use. As you read, consider reviewing the GATT national treatment provisions in the previous chapter.

Thailand—Restrictions on Importation of Cigarettes

GATT Basic Instruments and Selected Documents, 37th Supp. 200 (Geneva, 1990) Report of the Dispute Settlement Panel

BACKGROUND AND FACTS

The Royal Thai government maintains restrictions on imports of cigarettes. The Tobacco Act of 1966 prohibited the import of all forms of tobacco except by license of the Director-General of the Excise Department. Licenses have only been granted to the government-owned Thai Tobacco Monopoly, which has imported cigarettes only three times since 1966. None had been imported in the ten years prior to this case. The United States requested the panel to find that the licensing of imported cigarettes by Thailand was inconsistent with GATT Article XI and could not be justified under Article XX(b) since, as applied by Thailand, the licensing requirements were more restrictive than necessary to protect human health. Thailand argued that cigarette imports were prohibited to control smoking and because chemicals and other additives contained in American cigarettes might make them more harmful than Thai cigarettes.

REPORT OF THE PANEL

ADOPTED ON 7 NOVEMBER 1990

The Panel, noting that Thailand had not granted licences for the importation of cigarettes during the past 10 years, found that Thailand had acted inconsistently with Article XI:1, the relevant part of which reads: “No prohibitions or restrictions … made effective through… import licenses…shall be instituted or maintained by any [country] on the importation of any product of the territory of any other [country].” …

The Panel proceeded to examine whether Thai import measures affecting cigarettes, while contrary to Article XI:1, were justified by Article XX(b), which states in part:

[N]othing in this Agreement shall be construed to prevent the adoption or enforcement by any [country] of measures: …

(b) necessary to protect human, animal or plant life or health.

The Panel then defined the issues which arose under this provision…. [The] Panel accepted that smoking constituted a serious risk to human health and that consequently measures designed to reduce the consumption of cigarettes fell within the scope of Article XX(b). The Panel noted that this provision clearly allowed [countries] to give priority to human health over trade liberalization; however, for a measure to be covered by Article XX(b) it had to be “necessary.” …

The Panel concluded from the above that the import restrictions imposed by Thailand could be considered to be “necessary” in terms of Article XX(b) only if there were no alternative measure consistent with the GATT Agreement, or less inconsistent with it, which Thailand could reasonably be expected to employ to achieve its health policy objectives. The Panel noted that [countries] may, in accordance with Article III:4 of the GATT Agreement, impose laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of imported products provided they do not thereby accord treatment to imported products less favourable than that accorded to “like” products of national origin. The United States argued that Thailand could achieve its public health objectives through internal measures consistent with Article III:4 and that the inconsistency with Article XI:1 could therefore not be considered to be “necessary” within the meaning of Article XX(b). The Panel proceeded to examine this issue in detail….

The Panel then examined whether the Thai concerns about the quality of cigarettes consumed in Thailand could be met with measures consistent, or less inconsistent, with the GATT Agreement. It noted that other countries had introduced strict, non-discriminatory labeling and ingredient disclosure regulations which allowed governments to control, and the public to be informed of, the content of cigarettes. A non-discriminatory regulation implemented on a national treatment basis in accordance with Article III:4 requiring complete disclosure of ingredients, coupled with a ban on unhealthy substances, would be an alternative consistent with the GATT Agreement. The Panel considered that Thailand could reasonably be expected to take such measures to address the quality-related policy objectives it now pursues through an import ban on all cigarettes whatever their ingredients.

The Panel then considered whether Thai concerns about the quantity of cigarettes consumed in Thailand could be met by measures reasonably available to it and consistent, or less inconsistent, with the GATT Agreement. The Panel first examined how Thailand might reduce the demand for cigarettes in a manner consistent with the GATT Agreement. The Panel noted the view expressed by the World Health Organization (WHO) that the demand for cigarettes, in particular the initial demand for cigarettes by the young, was influenced by cigarette advertisements and that bans on advertisement could therefore curb such demand. At the Forty-third World Health Assembly a resolution was approved stating that the WHO is: “Encouraged by…recent information demonstrating the effectiveness of tobacco control strategies, and in particular…comprehensive legislative bans and other restrictive measures to effectively control the direct and the indirect advertising, promotion and sponsorship of tobacco.”

A ban on the advertisement of cigarettes of both domestic and foreign origin would normally meet the requirements of Article III:4…. The Panel noted that Thailand had already implemented some non-discriminatory controls on demand, including information programmes, bans on direct and indirect advertising, warnings on cigarette packs, and bans on smoking in certain public places.

The Panel then examined how Thailand might restrict the supply of cigarettes in a manner consistent with the GATT Agreement. The Panel noted that [countries] may maintain governmental monopolies, such as the Thai Tobacco Monopoly, on the importation and domestic sale of products. The Thai Government may use this monopoly to regulate the overall supply of cigarettes, their prices and their retail availability provided it thereby does not accord imported cigarettes less favourable treatment than domestic cigarettes or act inconsistently with any commitments assumed under its Schedule of Concessions….

For these reasons the Panel could not accept the argument of Thailand that competition between imported and domestic cigarettes would necessarily lead to an increase in the total sales of cigarettes and that Thailand therefore had no option but to prohibit cigarette imports.

In sum, the Panel considered that there were various measures consistent with the GATT Agreement which were reasonably available to Thailand to control the quality and quantity of cigarettes smoked and which, taken together, could achieve the health policy goals that the Thai government pursues by restricting the importation of cigarettes inconsistently with Article XI:1. The Panel found therefore that Thailand’s practice of permitting the sale of domestic cigarettes while not permitting the importation of foreign cigarettes was an inconsistency with the GATT not “necessary” within the meaning of Article XX(b).

Decision. The licensing system for cigarettes was contrary to Article XI:1 and is not justified by Article XX(b). The panel recommended that Thailand bring its laws into conformity with its obligations under the GATT.

Comment. GATT Article XVII permits a country to create state agencies and “marketing boards” that have the authority to import and export goods. The Thai Tobacco Monopoly is an example. State trading enterprises are often used in developing countries and usually have the exclusive right to import or export certain classifications of goods. Products traded by state enterprises might include foodstuffs, medicines, liquor, or, as in this case, tobacco. Article XVII requires that state enterprises not discriminate against the purchase of foreign goods, or treat them differently than domestic goods.

Case Questions

1. What reasons did Thailand give for restricting imports of cigarettes? What GATT provision did Thailand rely on to restrict cigarette imports?

2. The panel states that GATT permits countries to give priority to human health over trade liberalization only under certain conditions. What are those conditions?

3. How was the doctrine of “least restrictive trade” used in this case?

4. What alternative means could Thailand have used to achieve its objectives that would have not singled out imported cigarettes for discriminatory treatment?

TECHNICAL BARRIERS TO TRADE

A technical regulation is a law or regulation affecting a product’s characteristics—such as performance, design, construction, chemical composition, materials, packaging, or labeling—that must be met before a product can be sold in a country. A product standard, or standard, is a voluntary guideline for product characteristics established by a recognized private or administrative body. Technical regulations are mandatory and imposed by government regulations, whereas standards are usually voluntary and issued by either private industry groups or government agencies. Although a standard may be “voluntary,” a product may not be accepted by consumers in the marketplace unless it complies with the standard. Technical regulations and standards that apply to imported foreign products, even if they also apply equally to domestic products, are called technical barriers to trade.

The Protection of Public Health, Safety, or Welfare

Almost all products are subject to technical regulations or standards set by either government regulators or private standard-setting groups. They are generally imposed for the protection of public health, safety, or welfare to promote uniform design, engineering, and performance standards or to ensure product quality or purity. Examples include standards for the safe design of consumer goods, for automotive safety, vehicle emissions, or fuel economy, for safe foods and pharmaceuticals, standards of weights and measures, or worker safety standards for machinery and industrial equipment. Other standards protect consumers from fraud or deception (such as labels that disclose the product’s content or warn of safe uses); impose environmental criteria on appliances and other products (such as by restricting ozone-damaging refrigerants or eliminating dangerous formaldehyde or heavy metals from bed linens, carpeting, or construction materials); set packaging requirements for products such as plastic bottles that aid in recycling or for energy efficiency; require technical specifications standardizing electrical power and telecommunications, building and construction standards (such as common sizes for lumber and building materials), standards for barcodes and barcode readers, and many others. Imagine multinational companies such as Ford, General Electric, Electrolux, or Bosch-Siemens and the incredibly diverse product standards they must meet in each country in which their products are sold.

Product Testing, Inspections, and Certifications for Compliance with Technical Standards and Regulations.

Most countries require some type of testing, inspection, or certification of regulated products. There are several different approaches taken with regard to inspections. In some countries, regulated products must be tested or inspected by an approved laboratory, receive a certification of compliance with technical standards, and then receive prior regulatory approval before sale. In other countries, regulated products must be tested or inspected and certified, but that certification remains on file with the manufacturer or importer, and no regulatory approval is needed prior to import or domestic sale. Different countries have different philosophies and thus take different approaches. For instance, in the United States, the U.S. Flammable Fabrics Act places technical restrictions on the sale of all bed mattresses. The law is administered through regulations of the Consumer Products Safety Commission. Six prototypes of a given mattress are subjected to a controlled cigarette burn test under laboratory conditions to determine whether they meet federal safety requirements. If the length of the char is longer than allowed or if the mattress ignites, then it does not pass. The manufacturer usually arranges to have the test performed by an independent laboratory. They are required to keep photographs and records of the results at their place of business and to make them available to retailers, customers, or agency regulators when requested. Importers are also subject to these regulations; any of their products entering into the United States must meet these standards. If they cannot produce the certification, their goods will be denied entry or removed from stores. Thus, foreign manufacturers and importers alike must be familiar with the regulations of the countries to which their products will be shipped.

Because they often cause delays in getting goods to market, inspection and testing requirements can prove to be a tremendous barrier to trade. This is especially true if the product has a short shelf life, as with produce or other food products, or a short technological life (semiconductors or computer parts). In 1989, the European Community complained that the United States was delaying the inspection of perishable products by making them wait in turn behind nonperishable goods such as steel products, causing the perishables to spoil in the process. Entire shipments of citrus fruit from Spain had to be dumped, and the importer received no compensation.

In the United States, technical regulations and product standards are set by many federal agencies, including the Department of Agriculture, the Consumer Product Safety Commission, the Food and Drug Administration, the Federal Communications Commission, the Department of Energy, and the Department of Transportation. To illustrate, the U.S. Department of Agriculture is required by law to review meat inspection standards in foreign countries to ensure that imported meat products comply with USDA standards. The Federal Communications Commission promulgates uniform standards for telecommunications equipment that apply to foreign products. The Consumer Product Safety Commission’s rules apply to all consumer products, regardless of where they are made. In 2007, it was discovered that Chinese-made toys were found to contain dangerous amounts of lead (a known carcinogen, long banned in the United States and other countries), as well as other chemicals that can cause seizures, coma, and death. (In 1994, Chinese crayons had been removed from sale for the same reasons.) Millions upon millions of these toys were found in many countries around the world. The event caused an outcry of public opinion, a reawakening of consumer safety sentiment, a review of consumer legislation in the United States and elsewhere, and a vast change in concern and oversight by the Chinese government.

Why Standards and Technical Regulations are Barriers to Trade.

It is obvious that a regulation or standard that applies only to foreign goods and not to domestic goods discriminates against the foreign goods. However, many technical barriers do not discriminate on their face, only in their application. As a result, discrimination may occur even when imported and domestic products are treated the same. A manufacturer whose product meets local regulations may find that building another product specially to meet foreign regulations is cost prohibitive. For instance, if U.S. wallboard manufacturers produce wallboard in compliance with U.S. regulations that is 1/2″ thick and Europe requires wallboard to be 2.0 cm thick, then a U.S. exporter would have to produce specially made wallboard for export to Europe. Certainly, the European nations have the right to determine safety standards for construction, but the regulation does not allow the U.S. firm to take advantage of economies of scale and is, thus, an indirect technical barrier to trade. Environmental regulations, in particular, can vary greatly from country to country.

Another problem is that many technical regulations and standards are not transparent; they lack transparency. Transparency refers to ability of the public, particularly foreign firms, to have open access to government rules or private standards that are published and made readily available to foreign firms. If a technical regulation is made known only to domestic firms, then it indirectly becomes a technical barrier to foreign firms who are unable to comply. Indeed, many foreign firms never learn of a foreign technical barrier until it is too late – only after their shipment to a customer is turned away by a foreign customs agency. Moreover, foreign companies are generally not a part of the standard-setting process. Domestic firms are typically invited to participate in developing and writing regulations or standards; foreign firms are not. Thus, they often experience delays in adapting their products for sale in the foreign market, causing them to lose competitive advantage to local firms. The U.S. Department of Commerce maintains a collection of international standards so that U.S. exporters will have access to foreign technical regulations and standards applicable to their industries. Another problem is that some countries require the inspection of the factory where a product is made, including foreign factories, or advance approval of certifying laboratories. This makes it extremely difficult and expensive to import these products.

European Union Standards and Technical Regulations

The problem of technical barriers is critical to firms operating in the EU, where national standards vary tremendously. Consider the impact of these barriers on a firm such as Phillips, a Dutch electronics company, which has had to manufacture twenty-nine different types of electrical outlets. Thus, the standards policy of the EU is designed to balance the health and safety interests of member countries with the need for the free flow of goods. Despite decades of work by the EU Commission to reduce technical barriers to trade, thousands of new national standards have arisen. Even after years of debating detailed standards for thousands of products, companies wishing to sell their products in Europe still face a maze of complex regulations, applicable to a wide range of products from beer to hair dryers, automobiles to plywood. However, EU countries understand that uniform standards are essential to achieving a unified market.

The EU’s effort to reduce technical barriers is reflected in many opinions of the European Court of Justice. In one case, arising over the sale of liquor made in France and sold in Germany, the Court ruled that an EU member country could not prohibit the sale of a product produced in another EU member country when that product had already met the technical specifications of the producing country.

In decisions handed down in the 1980s, the Court rejected attempts by two EU countries to protect centuries-old industries. Disregarding consumer protection arguments, the Court of Justice struck down Germany’s beer purity law, which had kept out foreign beers containing preservatives and required that beer only be made from wheat, barley, hops, and yeast (beer made in other European countries often contains rice and other grains). The Court also struck down Italy’s pasta content regulations. In one long-standing dispute with the United States, the EU prohibited the import of beef containing growth hormones. Because these hormones are widely used in the United States, U.S. beef was kept out of European markets.

Standard setting in the EU for nonelectrical products is done by the European Committee for Standardization. This intergovernmental agency works with manufacturers, including some European subsidiaries of U.S. firms, and with scientists to develop workable product standards. When adopted by directive of the European Council, the standards become legally binding for products sold in Europe (see Exhibit 10.1).

Exhibit 10.1: EU Council Directive Concerning the Safety of Toys*

Article 1.1. This Directive shall apply to toys. A “toy” shall mean any product or material designed or clearly intended for use in play by children of less than 14 years of age.

    2. Taking account of the period of foreseeable and normal use, a toy must meet the safety and health conditions laid down in this Directive.

Article 5.1. Member states shall presume compliance with the essential requirements referred to in Article 3 in respect of toys bearing the EC mark provided for in Article 11, hereinafter referred to as “EC mark,” denoting conformity with the relevant national standards which transpose the harmonized standards the reference numbers of which have been published in the Official Journal of the European Communities.

Article 7.1. Where toys bearing the EC mark are likely to jeopardize the safety and/or health of consumers, it shall withdraw the products from the market.

Article 8.1. Before being placed on the market, toys must have affixed to them the EC mark by which the manufacturer or his authorized representative established within the Community confirms that the toys comply with those standards; …

3. The approved [inspection firm] shall carry out the EC type-examination in the manner described below:

-it shall check that the toy would not jeopardize safety and/or health, as provided for in Article 2.

-it shall carry out the appropriate examinations and tests—using as far as possible the harmonized standards referred to in Article 5 (1).

Article 11.1. The EC mark shall as a rule be affixed either to the toy or on the packaging in a visible, easily legible and indelible form.

2. The EC mark shall consist of the symbol “CE.”

3. The affixing to toys of marks or inscriptions that are likely to be confused with the EC mark shall be prohibited.

Article 12.1. Member States shall take the necessary measures to ensure that sample checks are carried out on toys which are on their market and may select a sample and take it away for examination and testing.

ANNEX II ESSENTIAL SAFETY REQUIREMENTS FOR TOYS

II. PARTICULAR RISKS

1. Physical and mechanical properties:

(a) Toys must have the mechanical strength to withstand the stresses during use without breaking at the risk of causing physical injury.

(b) Edges, protrusions, cords, cables, and fastenings on toys must be so designed and constructed that the risks of physical injury from contact with them are reduced as far as possible….

(d) Toys, and their component parts, and any detachable parts of toys which are clearly intended for use by children under thirty-six months must be of such dimensions as to prevent their being swallowed or inhaled….

(e) Toys, and their parts and the packaging in which they are contained for retail sale must not present a risk of strangulation or suffocation.

(h) Toys conferring mobility on their users must, as far as possible, incorporate a braking system which is suited to the type of toy and is commensurate with the kinetic energy developed by it.

2. Flammability: (a) Toys must not constitute a dangerous flammable element in the child’s environment. They must therefore be composed of materials which…irrespective of the toy’s chemical composition, are treated so as to delay the combustion process.

ANNEX IV WARNINGS AND INDICATIONS OF PRECAUTIONS TO BE TAKEN WHEN USING TOYS

1. Toys which might be dangerous for children under thirty-six months of age shall bear a warning, for example: “Not suitable for children under thirty-six months.”

5. Skates and skateboards for children. If these products are offered for sale as toys, they shall bear the marking: “Warning: protective equipment should be worn.”

* Exhibit text was edited for student use by the authors.

Council Directive 88/378/EEC of 3 May 1998 concerning the safety of toys. Official Journal I. 187, 16/07/1988, p. 0001–0013;

Document 388L0378.

SOURCE: EU Website.

The EU has attempted to increase its standardization through the CE Mark. (CE means Conformité Européene.) The CE Mark is an internationally recognized symbol for quality and product safety for many different types of products, such as children’s toys, gas appliances, machinery, and medical and electrical equipment. European manufacturers seeking the mark are inspected and audited by an EU-authorized body. Their products must be tested by an independent laboratory. Once the mark is received, a European manufacturer may sell its products throughout the EU without undergoing inspections in each individual country. Manufacturers outside the EU may submit their products to an independent laboratory for testing before attaching the CE Mark. The U.S. government estimates that soon half of the U.S. products shipped to Europe will require CE Mark compliance.

Japanese Standards and Technical Regulations

Japan and the United States have had a long history of disputes over Japanese technical barriers to trade. U.S. and other non-Japanese firms have lodged many complaints against Japan’s technical barriers, most of which involve unreasonable and burdensome inspection procedures or import licensing requirements and the arbitrary enforcement of overly strict standards. Japan has maintained complex technical regulations on thousands of important products, including electrical appliances, telecommunications and medical equipment, lumber, electronic components, pharmaceuticals, and food. The prolific use of technical requirements in Japan is rooted in Japan’s protective attitude toward consumers, the historical role of the Japanese government in economic life, and the Japanese people’s acceptance of governmental regulation of business. Product standards in Japan have been generally based on design characteristics that govern how a product should be designed. U.S. standards, by contrast, are usually based on performance. Performance standards describe how a product should function. It is usually more cost-effective for a manufacturer to meet foreign performance standards than design standards. Thus, it is easier for Japanese manufacturers to meet U.S. performance standards than for U.S. manufacturers to meet Japanese design standards. In Japan, products capable of inflicting injury on consumers or products that affect public health are more highly regulated than other products. For example, for many years Japan banned the import of cosmetics containing colorants and preservatives for health reasons, despite the fact that they are approved for use in the United States.

Japanese agencies that enforce technical regulations include the Japanese Ministry of Economy, Trade, and Industry, which has the widest authority, and the ministries that oversee the health, agriculture, and transportation sectors. Many products require testing and prior approval before they can be sold in Japan. For instance, prior to the mid-1980s, foreign products could not be inspected for pre-clearance at the foreign factory, but could only be inspected, shipment by shipment, as they arrived in Japan. Items had to be individually inspected and tested for compliance with the applicable technical regulations or standards. Legal changes have now made it possible for a foreign firm to register with the appropriate regulatory ministry and to obtain advance product approval without going through a Japanese importer or intermediary.

Another problem occurs when Japanese technical regulations and standards lack transparency. Their agencies still generally do not permit foreign input into the drafting of the regulations, although on occasion U.S. industry groups, under pressure, have succeeded in being heard by Japanese standard-setting groups. During the 1980s, new Japanese regulations provided that advance announcements of product standards be made by the Japan External Trade Organization.

The symbol of an approved product in Japan is the government-authorized Japan Industrial Standards Mark, or JIS Mark. Its appearance on a product, although voluntary, indicates that the manufacturer has submitted to on-site inspections by the appropriate Japanese ministry and has met accepted standards for quality control, production techniques, and research methods. Because this mark has become widely recognized, foreign products without it are often not competitive in the Japanese market.

Chinese Standards and Technical Regulations

China has a complex regulatory system governing product quality, safety, and other standards and technical regulations. As a socialist country, the enormous bureaucracy dwarfs any similar agencies in Western countries. The laws are administered by China’s General Administration of Quality Supervision, Inspection, and Quarantine, or AQSIQ. In 2008, AQSIQ had 19 major departments, 15 national institutes and research centers, 35 inspection and quarantine bureaus in 31 provinces, 500 branches and local offices across the country, and over 30,000 employees at Chinese seaports, airports, and other ports of entry. Over 180,000 employees work for provincial or municipal bureaus in developing and enforcing quality and standards laws. These bureaus also have the responsibility for enforcing Chinese laws against counterfeit products. Ten industry trade associations are allied with AQSIQ in setting standards and technical regulations. The most important Chinese laws and regulations administered by AQSIQ are:

• The Law on Product Quality

• The Standardization Law

• The Law on Metrology (weights and measures)

• The Law on Import and Export Commodity Inspection

• Food Hygiene Law

• Frontier [all air, land, and sea ports of entry] Health and Quarantine Law

• The Law on the Entry and Exit Animal and Plant Quarantine

• Regulations on the Import and Export of Endangered Wild Animals and Plants

• Regulations on the Recall of Defective Motor Vehicles

China enforces its product quality standards through compulsory product testing, factory inspections, and certifications and by the accreditation of testing laboratories. China’s compulsory certification and inspection system covers thousands of consumer and industrial products. Chinese rules require that covered products receive certification prior to import. Samples must be shipped to an approved laboratory in China for inspection and testing for compliance with Chinese quality, safety, and environmental standards. Chinese inspectors must then visit the foreign plants, whether they be in the United States, Canada, or Europe, that produce goods destined for China. Products that meet the quality and safety requirements for certification may be marked with the China Compulsory Certification Mark (CCC). No covered products can be imported into China without the mark. Under the regulations, fines may be imposed for falsification of marks. Anyone who plans to export goods to China should check the AQSIQ and CCC Mark Websites to determine whether their products are covered by Chinese regulations. The Chinese certification process can be expensive and time consuming. Follow-up supervision and reviews are conducted annually. Many companies wishing to ship to China find that they must employ a consulting firm to manage the certification process. Many of the regulations, such as those related to human health, apply to all travelers to China.

The WTO Agreement on Technical Barriers to Trade

The WTO Agreement on Technical Barriers to Trade (TBT Agreement) is one of the 1994 Uruguay Round agreements. It governs the use of technical regulations, product standards, testing, and certifications by WTO member countries. The TBT Agreement is binding on all WTO member countries. Remember that this agreement does not contain standards of its own. It makes no attempt to say how a product should perform or be designed or when a product is safe or unsafe. These are matters for nations and local governments to decide. But the TBT Agreement does prohibit countries from using their regulations or standards to discriminate against the import of foreign goods.

Harmonization, Equivalence, and Mutual Recognition.

The primary goal of the TBT Agreement is to minimize technical barriers to trade. It sets out three methods of achieving this goal. The first is harmonization, by which nations will attempt to bring their standards and technical regulations into harmony with internationally accepted standards. The second is equivalence, by which nations agree to accept foreign standards that are functionally equivalent to their own. The third is known as mutual recognition. Nations are encouraged to enter into mutual recognition agreements, whereby they recognize the certifications, or conformity assessments, of foreign inspection firms and laboratories approved in the country where the article is manufactured. For example, if a manufacturer ships telephones to several different markets, it would be far cheaper if all countries accepted the certification of an inspection firm in the manufacturer’s country that the device conforms to the telecommunications standards in the importing country. This avoids the expense of having to perform multiple tests.

Main Provisions of the TBT Agreement.

The WTO Agreement on Technical Barriers to Trade applies to all products, including agricultural, industrial, and consumer goods. The agreement’s main provisions can be outlined as follows:

1. All technical regulations shall be applied on a nondiscriminatory basis, without regard to the national origin of the products.

2. Regulations must not be made or applied to create an unnecessary obstacle to trade, and they must not be more trade restrictive than is necessary to fulfill a legitimate objective such as national security, preventing fraud or deception of consumers, protecting public health or safety, or protecting the environment.

3. Countries should take into account available scientific and technical information in writing their standards. This provision is intended to ensure that standards are not just made to keep out foreign goods, but have some scientific foundation.

4. Wherever possible, product requirements should be based on performance abilities of the product rather than on design or descriptive characteristics. For example, there are several different mechanisms in use to hold automobile doors securely closed. Government regulations that require industry to use a mechanism of a certain type or design are creating a barrier to trade. Instead, the agreement encourages governments to set a performance standard requiring that the door remain securely closed during certain collisions, leaving the design up to the manufacturer.

5. Countries should develop and use internationally accepted standards where they exist. International standards will be presumed to be in compliance with the TBT Agreement.

6. Countries should work toward the goals of harmonization of standards and equivalence.

7. Proposed standards must be published and made available to foreign countries, and those countries must be given an opportunity to make written comments prior to adoption.

8. Final regulations must be published a reasonable time before they become effective so that foreign producers have time to adapt their products.

9. Testing and inspection procedures should restrict trade as little as possible and should not discriminate. The agreement encourages on-site factory inspections instead of port-of-entry inspections for foreign goods.

10. Nations should accept the testing reports and certifications from approved foreign inspection firms and laboratories (mutual recognition of conformity assessments).

11. Countries should try to ensure that state and local governments, as well as private standard-setting groups, comply with the agreement.

12. Disputes between countries may be referred to the WTO for negotiation and settlement.

The following case, WTO Report on the European Communities—Measures Affecting Asbestos & Asbestos-Containing Products, is considered a landmark case in world trade law. Not only is it the first case to interpret the WTO Agreement on Technical Barriers to Trade but it also addresses a country’s right to pass laws protecting the public health and safety under this agreement and under general GATT principles.(Consider reviewing the GATT articles reproduced earlier in this chapter.)

International Organization for Standardization

The International Organization for Standardization (ISO), based in Geneva, is a non-governmental organization comprising the national standards institutes of 157 countries. It has developed over 16,500 product standards for goods and services in many industries. ISO standards are not legally binding, and the organization has no legal authority to enforce them. However, the standards have been accepted by businesses and entire industries worldwide and are legally enforceable in countries where they have been incorporated into a treaty or under national law. In general, the standards are intended to ensure product quality, safety, efficiency, and interchangeability, although some standards have been adopted to minimize the impact of manufacturing or the use of products on the environment.

European Communities—Measures Affecting Asbestos & Asbestos-Containing Products

WT/DS135/AB/R (2001)

World Trade Organization Report of the Appellate Body

BACKGROUND AND FACTS

Asbestos is a natural mineral product that has been in use since the 1800s. It is inexpensive, resistant to heat and flame, and has been used in many industrial applications. It has been used in making fireproof materials, fireproof insulation, and brake linings and is used today in construction materials such as asbestos cement boards and pipes. It has been known for some time that exposure to asbestos fibers and particles can cause deadly lung disease, including a form of cancer for which the death rate is 100 percent. Signs of disease may not manifest themselves for thirty years after exposure. Although most uses of asbestos are now banned, it is still used in certain forms. Today, deposits are still mined in Russia, Canada, China, Brazil, and a few other countries. There are substitutes for asbestos whose fibers are not as dangerous, such as glass and cellulose.

The asbestos at issue in this case involved Canadian chrysotile exports to France. Prior to 1997, Canada was exporting up to 40,000 tons of asbestos to France each year. Citing the health risk, France imposed a virtual ban on its manufacture, import, sale, and use, subject to a few limited and temporary exceptions. The Canadian asbestos industry responded that chrysotile fibers could be used without incurring any detectable risk because the fibers become encapsulated in the hardened products into which it is made, such as heat-resistant cement blocks. Canada requested WTO dispute settlement. France claimed that it could restrict asbestos both under GATT Article XX(b) (general provisions that a country may protect public health) and under similar provisions in the Agreement on Technical Barriers to Trade (the TBT Agreement). The Canadian government argued that the French law was not a “technical regulation” as permitted under the TBT Agreement, but a total prohibition. It also argued that under GATT Article III:4 (the general principle of nondiscrimination) a country may not treat imported products differently than “like products” of domestic origin. Canada maintained that the restrictions on asbestos discriminated against other, less-harmful substitute products made of glass or cellulose. Finally, Canada argued that the restrictions went beyond what was “necessary” to protect human health, as set forth in GATT Article XX(b). It claimed that less restrictive measures, such as “controlled use” of the product, were enough to guarantee safety. The Appellate Body report upheld the French law, although for different reasons than those stated by the original panel.

REPORT OF THE APPELLATE BODY

* * *

The TBT Agreement applies to “technical regulations.” Are the restrictions on asbestos a technical regulation? [added by authors for comprehension]

The heart of the definition of a “technical regulation” is that a “document” must “lay down”—that is, set forth, stipulate or provide—“product characteristics.” The word “characteristic” has a number of synonyms that are helpful in understanding the ordinary meaning of that word in this context. Thus, the “characteristics” of a product include, in our view, any objectively definable “features,” “qualities,” “attributes,” or other “distinguishing mark” of a product. Such “characteristics” might relate…to a product’s composition, size, shape, colour, texture, hardness, tensile strength, flammability, conductivity, density, or viscosity…. The definition of a “technical regulation” also states that “compliance” with the “product characteristics” laid down in the “document” must be “mandatory.” A “technical regulation” must, in other words, regulate the “characteristics” of products in a binding or compulsory fashion. * * *

“Product characteristics” may, in our view, be prescribed or imposed with respect to products in either a positive or a negative form. That is, the document may provide, positively, that products must possess certain “characteristics,” or the document may require, negatively, that products must not possess certain “characteristics.” In both cases, the legal result is the same: the document “lays down” certain binding “characteristics” for products, in one case affirmatively, and in the other by negative implication. * * *

With these considerations in mind, we examine whether the measure at issue is a “technical regulation.” [The French law] aims primarily at the regulation of a named product, asbestos [and imposes] a prohibition on asbestos fibers, as such. This prohibition on these fibers does not, in itself, prescribe or impose any “characteristics” on asbestos fibers, but simply bans them in their natural state. Accordingly, if this measure consisted only of a prohibition on asbestos fibers, it might not constitute a “technical regulation.”

There is, however, more to the measure than this prohibition on asbestos fibers…. It is important to note here that, although formulated negatively—products containing asbestos are prohibited—the measure, in this respect, effectively prescribes or imposes certain objective features, qualities or “characteristics” on all products. That is, in effect, the measure provides that all products must not contain asbestos fibers [emphasis added]…. We also observe that compliance with the prohibition against products containing asbestos is mandatory and is, indeed, enforceable through criminal sanctions. * * *

Accordingly, we find that the measure is a “document” which “lays down product characteristics … including the applicable administrative provisions, with which compliance is mandatory.” For these reasons, we conclude that the measure constitutes a “technical regulation” under the TBT Agreement. * * *

GATT prevents discrimination between “like products.” Are the asbestos imports a “like product” as compared to the safer substitutes?

The Panel concluded that [the safer non-asbestos alternatives] are all “like products” under Article III:4. * * * In examining the “likeness” of these two sets of products, the Panel adopted an approach based on the Report of the Working Party on Border Tax Adjustments. Under that approach, the Panel employed four general criteria in analyzing “likeness”: (i) the properties, nature and quality of the products; (ii) the end-uses of the products; (iii) consumers’ tastes and habits; and, (iv) the tariff classification of the products. The Panel declined to apply “a criterion on the risk of a product”, “neither in the criterion relating to the properties, nature and quality of the product, nor in the other likeness criteria….” The European Communities contends that the Panel erred in its interpretation and application of the concept of “like products”, in particular, in excluding from its analysis consideration of the health risks associated with chrysotile asbestos fibres. * * * These general criteria, or groupings of potentially shared characteristics, provide a framework for analyzing the “likeness” of particular products on a case-by-case basis. These criteria are, it is well to bear in mind, simply tools to assist in the task of sorting and examining the relevant evidence. * * * The kind of evidence to be examined in assessing the “likeness” of products will, necessarily, depend upon the particular products and the legal provision at issue. When all the relevant evidence has been examined, panels must determine whether that evidence, as a whole, indicates that the products in question are “like” in terms of the legal provision at issue. * * *We are very much of the view that evidence relating to the health risks associated with a product may be pertinent in an examination of “likeness” under Article III:4 of the GATT 1994. This carcinogenicity, or toxicity, constitutes, as we see it, a defining aspect of the physical properties of chrysotile asbestos fibers. The evidence indicates that [cellulose, glass, and other less harmful fibers] in contrast, do not share these properties, at least to the same extent. We do not see how this highly significant physical difference cannot be a consideration in examining the physical properties of a product as part of a determination of “likeness” under Article III:4 [general principles of nondiscrimination] of the GATT 1994. * * *

We also see it as important to take into account that, since 1977, chrysotile asbestos fibers have been recognized internationally as a known carcinogen…. This carcinogenicity was confirmed by the experts consulted by the Panel, with respect to both lung cancers and mesotheliomas….” In contrast … [t]he experts also confirmed,…that current scientific evidence indicates that [cellulose and glass] do “not present the same risk to health as chrysotile” asbestos fibers. * * * It follows that the evidence relating to properties indicates that, physically, chrysotile asbestos and [its substitutes] are very different….

Is the French law valid under GATT Article XX(b), which provides that a country may adopt measures necessary to protect human life or health, provided that it is not a disguised restriction on trade?

[W]e have examined the seven factors on which Canada relies in asserting that the Panel erred in concluding that there exists a human health risk associated with the manipulation of chrysotile-cement products. We see Canada’s appeal on this point as, in reality, a challenge to the Panel’s assessment of the credibility and weight to be ascribed to the scientific evidence before it. Canada contests the conclusions that the Panel drew both from the evidence of the scientific experts and from scientific reports before it. As we have noted, we will interfere with the Panel’s appreciation of the evidence only when we are “satisfied that the panel has exceeded the bounds of its discretion, as the trier of facts, in its appreciation of the evidence.” In this case, nothing suggests that the Panel exceeded the bounds of its lawful discretion. To the contrary, all four of the scientific experts consulted by the Panel concurred that chrysotile asbestos fibers, and chrysotile-cement products, constitute a risk to human health, and the Panel’s conclusions on this point are faithful to the views expressed by the four scientists. In addition, the Panel noted that the carcinogenic nature of chrysotile asbestos fibers has been acknowledged since 1977 by international bodies, such as the International Agency for Research on Cancer and the World Health Organization. In these circumstances, we find that the Panel remained well within the bounds of its discretion in finding that chrysotile-cement products pose a risk to human life or health. Accordingly, we uphold the Panel’s finding that the measure [protects human life or health], within the meaning of Article XX(b) of the GATT 1994.

Does GATT mandate the level of protection necessary to protect life and health or the means of achieving it?

As to Canada’s argument, relating to the level of protection, we note that it is undisputed that WTO Members have the right to determine the level of protection of health that they consider appropriate in a given situation. France has determined, and the Panel accepted, that the chosen level of health protection by France is a “halt” to the spread of asbestos-related health risks …. Our conclusion is not altered by the fact that [glass and cellulose] fibers might pose a risk to health. The scientific evidence before the Panel indicated that the risk posed by [these substitutes] is, in any case, less than the risk posed by asbestos, although that evidence did not indicate that the risk posed by [glass or cellulose substitutes] is nonexistent. Accordingly, it seems to us perfectly legitimate for a Member to seek to halt the spread of a highly risky product while allowing the use of a less risky product in its place. In short, we do not agree with Canada’s third argument.

Canada asserts that [France could achieve the same level of public safety through a “controlled use” policy instead of a complete prohibition and that this] represents a “reasonably available” measure that would serve the same end. The issue is, thus, whether France could reasonably be expected to employ “controlled use” practices to achieve its chosen level of health protection—a halt in the spread of asbestos-related health risks.

In our view, France could not reasonably be expected to employ any alternative measure if that measure would involve a continuation of the very risk that the [French law] seeks to “halt.” Such an alternative measure would, in effect, prevent France from achieving its chosen level of health protection. On the basis of the scientific evidence before it, the Panel found that, in general, the efficacy of “controlled use” remains to be demonstrated. Moreover, even in cases where “controlled use” practices are applied “with greater certainty,” the scientific evidence suggests that the level of exposure can, in some circumstances, still be high enough for there to be a “significant residual risk of developing asbestos-related diseases.” “Controlled use” would, thus, not be an alternative measure that would achieve the end sought by France.

Decision. The French restrictions on asbestos were found to be a valid technical regulation under the TBT Agreement. GATT requires that national laws not discriminate between imports and domestic “like products.” Asbestos and its less harmful domestic substitutes are not “like products” because their effects on human life and health are very different. This impact on health may be taken into account in determining if the products are “like” each other. The restrictions are permitted both under the TBT Agreement and under the general right of a country under Article XX(b) to protect public health. Given the deadly long-term effects of asbestos inhalation, France need not use a less restrictive means of controlling asbestos, but is free to decide the level of health protection for its citizens. Future disputes over the health and safety of other imported products must be considered by panels on a case-by-case basis.

Case Questions

1. What is a technical regulation? Does the Appellate Body find that France’s restrictions on asbestos are a technical regulation?

2. Are the less harmful asbestos substitutes a “like product” as compared with asbestos? What is the proper “test” for determining if products are “like”?

3. Does GATT mandate a certain level of protection necessary to protect life and health, or specify the means of achieving it?

These standards also foster international business and trade, because it is easier and cheaper to design and build products that comply with one international standard than to design products that comply with dozens of local standards all over the world. The ISO has developed standards in diverse areas such as the dimensions of screw threads and other fasteners, the size and dimensions of international freight containers, methods of storing data on credit cards, warning and information symbols for signs and labels, ergonomics, computer protocols, food safety management, life vests, and inflatable boats.

The most commonly known ISO standard is ISO 9000. Since 1987, ISO 9000 has become the standard used for ensuring product quality through the product design and manufacturing process. Companies become ISO 9000-certified through a costly and rigorous inspection of their facilities and documentation of their quality control systems. They are audited on a regular basis for compliance. In order to sell in Europe, many U.S. firms have obtained ISO certification. By meeting ISO requirements, the firms no longer have to certify each product individually in every European country.

ISO certification is required under EU law for certain regulated products such as medical devices and construction equipment. Market demands make compliance for other products equally essential. In the United States, a number of firms offer assistance to U.S. companies seeking ISO certification.

Another standard, known as ISO 14000, provides guidelines for environmental management. It does not set criteria for pollution or environmental impact. Rather, it requires that a firm establish a management system for setting its own environmental objectives, complying with national or local environmental laws, and continuing to improve its environmental performance.

IMPORT LICENSING PROCEDURES

Import licensing refers to government laws and regulations that restrict imports to those that are licensed by government. Import licensing schemes are not widespread in developed countries, but applied selectively to certain industries. An example might be imports of firearms, pharmaceuticals, or alcoholic beverages. However, import licensing is more common in developing countries or in those countries that historically have had more socialistic economic and political systems. The case of Thailand’s cigarette restrictions earlier in the chapter is an example of how an import licensing scheme can work to block foreign imports.

Article XI does permit a country to use licensing in a nondiscriminatory and transparent fashion in order to regulate imports in certain cases. For instance, a country may use licensing to enforce its technical regulations or standards laws, as long as they are applied without discrimination to goods coming from all countries with normal trade relations. Revenues from license fees could go to support the costs of inspection and administering the law.

Import licenses are also used to track the quantities of imported goods subject to a quota. For instance, a few textile products from certain countries still enter the United States under tariff-rate quotas. A textile importer must hand over their license for the given quantity to U.S. Customs. The license must be in the precise format (including typeface and color) that has been agreed upon by the United States and foreign governments so it can be authenticated. After authentication, the license information is sent to Washington, where U.S. Customs and Border Protection tracks the quantity of each type of textile product that has entered from each foreign country so far in that year.

Imagine if you were trying to ship to a foreign customer in, say, Burkina Faso, Slovenia, or Japan. Suppose that country maintained complex licensing requirements for your products. Imagine now that you and your customer are told that the application and conditions for import are not set out in the local law books or regulations, but are published in some internal “back office” manuals or, even worse, are made up by local government bureaucrats on a case-by-case basis. Both you and your customer might throw up your hands and give up.

This is an example of licensing requirements that lack “transparency.” GATT requires that import license procedures be transparent. Under WTO rules, a licensing scheme is transparent if the procedures to obtain the license are not unduly complicated and the licensing rules are published and openly available to business parties in all countries. GATT requires that applications for import licenses should be handled within thirty to sixty days.

The WTO Agreement on Import Licensing Procedures

The WTO Agreement on Import Licensing Procedures (1994) sets guidelines for countries issuing import licenses. It calls for the procedures to be fair, reasonable, and nondiscriminatory and requires application procedures to obtain a license to be as simple as possible. Applications should not be refused because of minor errors in paperwork. In other words, governments should see that clerical workers and bureaucracies do not use the licensing procedures to stand in the way of trade. Where licenses are used to administer quotas, the amount of the quota already used must be published for all importers to see. The WTO Import Licensing Committee must be notified if any new products will become subject to licensing requirements.

Trade Facilitation

Anyone experienced in moving goods from one country to another has probably had to suffer through arcane foreign regulations, reams of paperwork, miles of government red tape, and what sometimes seems like endless delays at the border. The WTO estimates that these “hidden” costs can often be greater than the cost of tariffs themselves. Trade facilitation refers to the WTO’s effort to simplify and standardize government regulations and procedures affecting the movement of goods across national borders. Although many of the specific trade agreements, such as the WTO Agreement on Import Licensing Procedures, deal with certain aspects of this problem, trade facilitation is a broader effort to reduce the costs of cross-border shipments and to speed the movement of goods through the use of streamlined procedures, computerization and automation, and increased communication between customs agencies in different countries.

GOVERNMENT PROCUREMENT

Government procurement is the purchase of goods and services by government agencies at all levels. Governments are among the largest business customers in the world. GATT contains an exception to its national treatment provision that permits government agencies to favor domestic suppliers when making purchases.

Most nations of the world have laws that require their own government agencies to give some preference to domestically made products. The laws often apply to goods purchased by defense-related agencies or by the military. Other laws might require that the purchased product contain a certain proportion of domestically made component parts or raw materials.

In the United States, the U.S. Buy American Act (enacted in 1933 during the Great Depression) is the primary federal statute that requires federal agencies to purchase goods that are mined, produced, or manufactured in the United States rather than purchase foreign-made goods. There are several exceptions. The restrictions do not apply if U.S.-made goods are not available in sufficient quantities or quality, if the U.S.-made goods are unreasonably more expensive (generally 6 to 12 percent), to purchases under $2,500, to goods purchased for use outside the United States, where purchasing domestic goods would not be in the public’s best interest, or where the terms of a trade agreement provide for nondiscrimination in procurement. There are also specific buy-American provisions in the other statutes applicable to procurement for mass transit projects, and to procurement by the U.S. Department of Defense. The U.S. Department of Defense must purchase domestic products unless those products are more than 50 percent more expensive than competing foreign goods. Under a separate law known as the Berry Amendment, most food, clothing, textiles, textile products, wool products, and hand tools purchased by the Defense Department must be grown or produced in the United States of entirely U.S. components.

The WTO Agreement on Government Procurement

As a general rule, large-scale procurement by governments or government agencies is exempt from the normal WTO rules for trade in goods and services. Instead, most large-scale government procurement is governed by the WTO Agreement on Government Procurement (1994), known as AGP.

The AGP brought about many changes in procurement practices in the United States and other countries. The purpose of the agreement is to bring competition to world procurement markets. The agreement requires fair, open, and nondiscriminatory procurement practices and sets up uniform procurement procedures to protect suppliers from different countries. It applies to the purchase of goods or services by national governments worth more than 130,000 IMF Special Drawing Rights (approximately $197,000 as of 2010) and to construction contracts (buildings, dams, power plants, etc.) worth more than 5 million SDRs (approximately $7.6 million as of 2010). Unlike the other WTO agreements, the AGP applies only to those countries that have signed it. As of 2010, forty nations were participating in the AGP, including the United States, Canada, Japan, and the EU nations.

The signatories have negotiated bilaterally with each other, one on one, as to how the AGP will be applied between them, so the rules can differ depending on the countries involved in a procurement contract. For instance, the AGP says that Japan will not receive the benefit of the agreement if it wants to sell goods or services to NASA because Japan has not treated U.S. companies equally in procuring satellite technology. The ITC estimates that the agreement will open up export markets for U.S. companies worth hundreds of billions of dollars.

Agencies Excluded from the Procurement Rules.

The AGP applies to almost ninety U.S. federal agencies, large and small—from the Department of Labor to the American Battle Monuments Commission—and to the executive branch departments. There are several exclusions from the procurement rules, including purchases to be sent to foreign countries as foreign aid; purchases by the Department of Agriculture for food distribution or for farm support programs; and some purchases made by the Federal Aviation Administration, the Department of Energy, and the Department of Defense that are related to national security or to the military. In the United States, thirty-seven states have also agreed to comply, and more will do so in the future. Many states—based on political reasoning—have opted to exclude certain items. For example, New York excluded subway cars and buses, and South Dakota excluded purchases of beef. Thus, state agencies in these states may give preferences to local producers when awarding procurement bids for these products.

Procurement Rules.

The AGP reverses the general WTO rules that allow government agencies to favor domestic products. It brings the principles of MFN trade, nondiscrimination, and transparency to government procurement. A procuring agency must treat equally, and no less favorably than if they were from its own country, the products, services, and suppliers that it obtains from all other countries that have signed the agreement. Moreover, a government agency may not discriminate against local suppliers just because they are foreign-owned. The agreement also prohibits a procuring agency from awarding a contract to a foreign firm on the basis of certain conditions, called offsets. Examples of offsets might be a condition that the foreign firm awarded the contract use local subcontractors, domestically made materials, or local labor; that the firm agree to license its technology to local firms; that it make local investments; or that it engage in countertrade. Offsets can be complex. For instance, assume that Aeroflop, a U.S. firm, wants to sell several million dollars’ worth of airplanes to a government-owned airline in a European country famous for cheese. In order to get the contract, it agrees to pay a 5 percent kickback to another U.S. company, Cheezy, if Cheezy agrees to buy all of its cheese from a seller in that European country. If the cheese-producing country requires Aeroflop to make the offset, it violates the AGP.

Other rules state how the country of origin of products sold to a government agency is to be determined. For instance, a supplier that sells a product that is fraudulently labeled with the incorrect country of origin may be subjected to severe penalties under the law of the country involved.

Transparency in Procurement Procedures.

To ensure that the procurement rules are applied fairly, the AGP sets up procedures for governments to follow. When a government agency intends to make a purchase by inviting suppliers to “bid on the job,” the agency must give adequate notice to potential bidders when the contract is announced and must disclose all the information necessary for them to submit their bid. The agreement requires fairness in qualifying foreign companies to bid (e.g., countries can disqualify companies that are not technically or financially capable of delivering). In the event of a disagreement between a supplier and a procuring agency, a country must allow the supplier to challenge the contract before either an independent administrative review board or the courts.

Administering Government Procurement Rules in the United States

Congress has placed responsibility for implementing the AGP with the president. The president may waive the requirements of the Buy American Act for suppliers from any country that is party to the AGP and complies with the AGP’s terms in its own procurement practices. Suppliers from a least-developed country also receive the waiver, which entitles those foreign suppliers to nondiscrimination and equal treatment with U.S. domestic suppliers.

The president must compile an annual report of those countries that have adopted the AGP but do not abide by it. The U.S. Trade Representative (USTR) negotiates with violating countries to get them to end their unfair practices and give equal access to U.S. firms. If no agreement is reached, then the USTR must present the case to the WTO for dispute settlement. If an agreement or resolution is still not reached within eighteen months of initiating dispute settlement, then the president must revoke the waiver of the Buy American Act, and preferences for domestic suppliers will be allowed.

In certain cases, the president must completely prohibit U.S. government agencies from procuring products from suppliers in a foreign country, such as where the country “maintains a significant and persistent pattern or practice of discrimination against U.S. products or services which results in identifiable harm to U.S. business.” The prohibition also applies to a country that has not joined the AGP—but from whom the U.S. government buys significant amounts of goods or services—that fails to provide U.S. firms with equal access to its procurement markets or that permits its agencies to engage in bribery, extortion, or corruption in procuring goods or services. This severe sanction can only be used if the president has first consulted interested U.S. companies and has determined that imposing the sanction will not harm the public interest of the United States or unreasonably restrict competition.

TRADE IN SERVICES

Trade in services includes areas such as professional services (law, accounting, architecture, engineering, and others); travel, recreation, and tourism; health care; transportation and distribution; finance, banking, and insurance; computer and data processing services; research and development; business services such as advertising, market research, and consulting; education; environmental engineering and waste management; and telecommunications. According to the WTO, exports of commercial services (non-governmental) totaled approximately $3.3 trillion in 2008. That represents about 20 percent of total world trade in goods and services. The United States was the leading exporter of commercial services, followed by the UK, Germany, France, China, and Japan. Services account for the majority of the gross domestic product in the United States and most developed countries. Although the GATT agreement regulated trade in goods for more than forty-five years, it did not regulate trade in services until the Uruguay Round agreements. (Also, the North American Free Trade Agreement permits a free flow of services among the United States, Canada, and Mexico.)

The WTO General Agreement on Trade in Services

The WTO General Agreement on Trade in Services (1994), or GATS, establishes rules for international trade in services. It is a part of the WTO system and is overseen by the Council for Trade in Services. The agreement is largely patterned after the concepts that GATT applies to trade in goods. The agreement covers trade in most services, including health services, architecture, engineering and construction, travel and tourism, legal and other professional services, rental and leasing, distribution and courier services, education, management and environmental consulting, market research and advertising consulting, computer services, repair and maintenance, sanitation and disposal, franchising, entertainment, and others. (Two areas, telecommunications and financial services, are treated in separate GATS agreements.) GATS applies to the federal government as well as to state and local governments. GATS defines four different ways of providing an international service:

• Services supplied from one country to another (e.g., international telephone calls), officially known as cross-border supply Consumers or firms making use of a service in another country (e.g., tourism), officially known as “consumption abroad”

• A foreign company setting up subsidiaries or branches to provide services in another country (e.g., foreign banks setting up operations in a country), officially known as “commercial presence”

• Individuals traveling from their own country to supply services in another (e.g., fashion models or consultants), officially known as “presence of natural persons”

GATS principles are similar to the GATT principles studied in previous chapters. Rules affecting service providers must be transparent and made readily available. Signatory countries to the agreement can place no limit on the number of service providers or on the number of people they may employ. The agreement also prohibits countries from imposing a requirement that local investors own any percentage of the service company (although they may if the parties choose). Like GATT, the GATS agreement also contains MFN trade and national treatment (nondiscrimination) provisions. Countries may not treat foreign service providers less favorably than they treat domestic providers. Laws and regulations must be transparent, reasonable, objective, and impartial. Also, countries may not unreasonably restrict the international transfer of money by service industries or the movement of people across borders for the purpose of providing a service.

GATS contains a set of schedules, or commitments, in which each country lists the types of services excluded from the agreement. For example, the United States excluded transportation services from GATS. Japan excluded repair services for certain automobiles and motorcycles, as well as courier services with respect to letters. In Canada, GATS applies to legal services only if they are provided by law firms or attorneys who advise clients on foreign or international law. Many countries exclude printing and publishing services.

A country may not treat foreign services or service providers any less favorably than promised in the schedules. As a result, no new or additional restrictions may be imposed in the future. Countries also are bound to negotiate an eventual elimination of the exceptions made in the schedules.

Recognition of Licensing and Professional Qualifications.

GATS also has special provisions governing the qualifications of service providers set by national or local governments. Most governments license certain service providers at some level; in the United States, licensing generally occurs at the state level. Of course, areas such as law, medicine, nursing, engineering, architecture, surveying, and accounting will continue to have more strict professional licensing requirements than, say, management consulting. Countries can continue to license professionals and other service providers as necessary to ensure the quality of the service, provided that licensing is not made overly burdensome just to restrict trade. Licensing must be based on objective criteria, such as education, experience, or ability. It must not discriminate on the basis of the person’s citizenship. Countries may recognize licenses granted by other countries, but only if they choose to do so.

The WTO Agreement on Trade in Financial Services.

Over one hundred nations, including the EU and the United States, have joined the WTO Agreement on Trade in Financial Services, a part of the GATS agreement. The purpose of the agreement is to open commercial banking, securities, and insurance industries to foreign competition. The agreement is intended to promote efficiency, reduce costs, and provide consumers with a greater choice of service providers, while still permitting countries to regulate these industries for the protection of investors, depositors, and consumers.

The WTO Agreement on Basic Telecommunications.

This agreement is also part of the larger GATS agreement. The services included under the WTO Agreement on Basic Telecommunications are voice and facsimile telephone systems, data transmission, fixed and mobile satellite systems and services, cellular telephone systems, mobile data services, paging, personal communications systems, and others. The agreement binds 108 countries, including the United States, Canada, the EU, and Japan, to MFN trade and to honor their specific commitments to open their telecommunications markets to foreign competitors. Local, long distance, and international communications are included.

TRADE IN AGRICULTURE

Agricultural exports are an important part of world trade. According to the WTO, agricultural exports totaled $1.34 trillion worldwide in 2008, the most recent statistics available at the time of this writing. That accounted for 8.5 percent of all world exports in that year. Like world trade generally, that number fell in 2009. According to the U.S. Department of Agriculture, the United States exported almost one-quarter of its agricultural production, worth over $98 billion in 2009. The largest markets for U.S. agricultural products are Canada, China, Mexico, Japan, and Europe. Agricultural products are among the most heavily protected products traded in the world. No nation wants to be dependent on other nations for its food supply. Also, both large scale farming conglomerates and family farmers represent politically powerful and important constituencies in most countries. To protect farmers, many governments control the domestic pricing structure in order to provide market stability. These agricultural price supports set prices at higher-than-world-market prices and contribute to the buildup of food surpluses. To avoid disrupting their price support systems, many countries impose import restrictions on both raw and processed food products. There are many programs that provide guaranteed incomes to farmers. Other programs provide disaster aid for weather-related and other natural disasters, rural development, conservation, wildlife preservation, and more. GATT Article XI, which prohibits quantitative restrictions, contains a loophole allowing quotas on agricultural imports when necessary to protect government price support programs.

Some Agricultural Trade Issues in the EU and Japan

The United States, Japan, and the EU provide subsidies to farmers and controls on agricultural prices through a morass of complex legislation and government programs. In the United States, federal legislation (commonly called the Farm Bill) is enacted every five years. It establishes U.S. agricultural and food policies, programs, and funding for that period. The 2008 farm bill included $288 billion in total funding with billions of dollars in farm aid, price supports, and subsidies for farm exports. One program affecting production and exports of U.S.-grown cotton is covered in the next chapter, when we discuss the broader issue of export subsidies. Several agricultural issues in the European Union and Japan are of special interest to students of world trade law.

The EU Common Agricultural Policy.

Agricultural policies in the EU are handled through a Common Agricultural Policy. The policies are rooted in the period following World War II, when a war-devastated continent needed expensive government policies that assured food supplies by promoting food production and aiding farmers. Today, expenditures for agricultural subsidies and price supports cost billions of euros each year, constituting a major portion of the annual total budget of the EU. The system has long been very controversial, and has become unpopular with consumers, taxpayers, and free market economists. Of course, farmers are a powerful political force in Europe, as they are in all countries. In more recent years, the Common Agricultural Policy has undergone many changes. While expensive subsidies, cash payments to farmers, and some quotas still exist, there is a new focus on helping farmers deal with natural disasters, controlling plant and animal disease, promoting ecological standards, assuring food quality and safety, improving land and water management, and support for renewal energy sources in rural areas. Subsidies are no longer dependent on crop production.

No other single trade issue has created so much international disagreement, particularly between the U.S. and Europe, as trade in agriculture. The United States has generally demanded that EU farm subsidies, including direct payments to European farmers, be reduced. France, Europe’s largest grain exporter, has been unwilling to reduce farm subsidies because French farmers are politically powerful. (Pictures of rioting French farmers setting trucks afire in the early 1990s to contest their government’s negotiations with the United States over agricultural subsidies filled TV screens around the world.)

Japanese Rice: A Trade Dilemma.

An excellent example of how nations feel about their agricultural trade is the Japanese treatment of rice imports. Rice has long been considered the staple food of Japan, and rice farming lies at the center of its agricultural community. Rice is a food that is symbolic of Japanese culture. The Japanese government’s objective is to maintain self-sufficiency in rice production by ensuring the economic health of rice farmers. Since World War II, Japanese laws have placed strict limitations on rice imports and imposed governmental controls on rice pricing and distribution. As a result, the domestic price of rice in Japan has often been many times higher than the price of rice in international markets. One small but vivid example of protectionism occurred in 1991 when U.S. rice exhibitors at a Japanese trade fair were threatened with arrest for merely exhibiting American-grown rice products there. The American rice had to be removed from the show.

Today, rice imports are permitted, although they are still subject to tariff and non-tariff barriers. Rice illustrates the dilemma facing protectionist nations. The Japanese are self-sufficient in rice production; they produce enough for their own needs. There is also some reduced demand because the Japanese diet is become more Westernized and is incorporating more grains other than rice. But for decades other rice-producing nations, including the United States, have pressured Japan to reduce tariffs and to accept more rice imports. Of course, any economist will tell you that these forces should combine to reduce the price of rice in Japan. But the Japanese government had feared that this would lead to a loss of self-sufficiency in rice, and an end to family rice farming. In the 1990s, Japan was pressured into agreeing to purchase a minimum quantity of foreign rice annually. According to Japanese government and industry sources, and to reports of the U.S. trade representative, the government now purchases about three-quarters of a million tons of foreign rice each year. Most of it is unneeded, warehoused, and sold for food processing, animal feed, or re-exported as foreign aid to poorer countries (leaving the government with regular annual surpluses). Only a tiny portion of American rice is consumed at the dining table. In addition, private farmers have stockpiled millions of tons more of surplus rice. As prices fall, the government then is forced to artificially maintain them, through import barriers, cash subsidies to farmers, market controls, and a system of incentives and disincentives for rice farmers. In all, it is a “perfect storm” of market disruption from excessive government intervention.

The WTO Agreement on Agriculture

The 1994 Uruguay Round called for many significant changes in government control of agricultural trade. The WTO Agreement on Agriculture, effective in 1995, began the process of removing government intervention in the farming sector and ending government programs that distort normal market conditions. The agreement has three main objectives: (1) cutting subsidies and other government support to farmers, (2) cutting programs that subsidize exports of farm products, and (3) assuring greater market access for imported farm products by converting quotas and other non-tariff barriers into tariffs. (Agricultural subsidies fall under both the WTO Agreement on Agriculture and a broader agreement that covers government subsidies generally. For that reason, we will return to discuss agricultural subsidies again in the next chapter, which covers unfair trade laws.)

Domestic Support Programs.

Domestic support programs artificially cause an overproduction of farm products, suppress prices, and encourage cheap exports, all while protecting the incomes of domestic farmers. The agreement prohibits programs that distort farm production, prices, or trade, but permits support for research, disease control, environmental protection, rural development, and other national concerns. Cash payments to farmers who have had a loss of income from unexpected emergencies or disasters are permitted. This is a politically sensitive issue in most countries (as the Japanese rice example shows), and any effort to reduce support programs will be difficult. Negotiations on domestic support programs have been a major topic of the Doha Rounds.

Agricultural Export Subsidies.

Agricultural export subsidies are payments or any other benefits given to farmers that directly encourage, or are conditional upon, the export of food or agricultural products. Even indirect benefits are included, such as subsidies that reduce the cost of export marketing, or where a government subsidizes the cost of shipping food products to foreign customers. The Agreement on Agriculture prohibits export subsidies on farm products in all WTO member countries, with the exception of the European Union and twenty-five other nations (including Canada, Mexico, and the United States) that have binding commitments to reduce those subsidies that still exist. Government subsidized food exports that are part of a foreign aid program to needy countries are not considered illegal subsidies under the agreement.

Making Export Markets Accessible.

An important step in making agricultural markets accessible was to alleviate the quotas, licensing schemes, and non-tariff barriers that existed prior to 1995. The agreement called for this to be done through tariffication, the process of converting quotas and other non-tariff barriers to tariffs, and then gradually negotiating a reduction or elimination of the tariffs. By 2004, developed countries had reduced their tariff rates by an average of 36 percent, and developing countries had reduced theirs by 24 percent.

Sanitary and Phytosanitary Measures: Food, Animal, and Plant Safety

Trade in agricultural goods has been impeded because some countries use food safety as an excuse for blocking agriculture imports. No one doubts the right of a government to take extraordinary measures to protect its citizens from contagious disease or to protect food or agricultural products from infestation. If a blight, fungus, or insect were found in orange groves in Mexico, no one would argue against the right of the United States to keep out Mexican oranges to protect the U.S. crop. A sanitary and phytosanitary measure is a government rule or regulation that protects or enhances food, animal, or plant safety or quality, including preventing the spread of pathogens and disease. The WTO Agreement on the Application of Sanitary and Phytosanitary Measures (known as the SPS Agreement) is specifically designed to allow governments to protect human, animal, and plant life from infestations, contaminants, pesticides, toxins, harmful chemicals, or disease-carrying organisms. However, its restrictions may not be used as an excuse to keep out foreign goods.

The SPS agreement opens markets for agricultural exports by requiring that the protective measures taken by nations (1) may not be more trade-restrictive than required and may be applied only to the extent necessary for the protection of human, animal, or plant life; (2) may not be a disguised restriction on trade; (3) must be based on a risk assessment made according to scientific principles and scientific evidence; and (4) may not unjustifiably discriminate between countries where similar threatening conditions prevail. In addition, under the SPS agreement, countries must ensure that inspections or controls are fair and reasonable and are instituted without delay. Consider an example: If an Asian country sets a short shelf life for a food product such as hot dogs, then hot dogs shipped from the United States will be discriminated against because their shelf life has been “used up” in the time it takes to ship them across the Pacific. Under the SPS agreement, however, the shelf life restrictions cannot stand unless they are based on scientific evidence. Another novel example is the strict Japanese law prohibiting thoroughbred racehorses from entering Japan. This prohibition would violate the agreement if the laws were unnecessary, discriminatory toward the United States, or not backed by scientific evidence. Citing the SPS agreement, the U.S. Department of Agriculture in 1995 partially repealed an eighty-one-year-old prohibition against the import of Mexican avocados.

Codex Alimentarius.

Whenever possible, countries must rely on internationally accepted standards or recommendations for the protection of their plants, animals, and foodstuffs. The most notable are found in the Codex Alimentarius. This “food code” for the protection of the world’s food supply developed slowly over most of the last century. Today, the Codex Alimentarius Commission develops these important standards on the basis of worldwide scientific studies and disseminates them to government agencies and lawmakers. The commission is based in Rome and is made up of countries that belong to the UN World Health Organization and the UN Food and Agricultural Organization. If a country’s national standards are based on the Codex Alimentarius, they are deemed to be in compliance with the SPS agreement.

In the following 1997 WTO panel decision, WTO Report on EC Measures Concerning Meat & Meat Products (Hormones), the panel held that the European ban on the sale of beef containing residues of growth hormones violated the SPS agreement.

EC Measures Concerning Meat and Meat Products (Hormones)

WT/DS26/R/USA (1997)

Complaint by the United States

World Trade Organization Report of the Panel

BACKGROUND AND FACTS

Throughout the 1970s, European consumers became more concerned over the use of hormones to speed the growth of livestock. Their fears were in part based on the fact that some people had been injured by the illegal use of certain banned hormones. Some consumer organizations boycotted meats. By 1986, the EC had banned the sale of beef from cattle given growth hormones. The EC maintained that such measures were necessary to protect public health (primarily from hormone-related illnesses and cancer) and necessary to restore confidence in the meat industry. The United States began contesting the hormone ban in 1987 at GATT. In January 1989, the United States introduced retaliatory measures in the form of 100 percent ad valorem duties on a list of products imported from the European Communities. The United States, together with Australia, Canada, New Zealand, and Norway, maintained that the ban was unlawful under the 1994 Agreement on the Application of Sanitary and Phytosanitary Measures (“SPS Agreement”). The United States argued that the ban was not based on an assessment of risk, not based on scientific principles, more trade-restrictive than necessary, and a disguised restriction on trade. In June 1996, the European Communities requested the establishment of a panel to examine this matter, and the United States terminated its retaliatory action entirely. Prior to the ban, U.S. firms had exported hundreds of millions of dollars of goods annually to Europe. After the ban, exports plummeted to nearly zero. The European Communities argued that its measures offered equal opportunities of access to the EC market for all third-country animals and meat from animals to which no hormones had been administered for growth promotion purposes. Of the thirty-one countries that were authorized to export meat to the European Communities, only six apparently allowed the use of some or all of these hormones for growth promotion purposes.

REPORT OF THE PANEL

Article 3.1 requires Members to base their sanitary measures on international standards, guidelines or recommendations [where they exist]. We note, therefore, that even if international standards may not, in their own right, be binding on Members, Article 3.1 requires Members to base their sanitary measures on these standards…. We shall therefore, as a first step, examine whether there are international standards, guidelines or recommendations with respect to the EC measures in dispute and, if so, whether the EC measures are based on these standards, guidelines or recommendations in accordance with Article 3.1….

Article 3.1 of the SPS Agreement reads as follows:

To harmonize sanitary and phytosanitary measures on as wide a basis as possible, Members shall base their sanitary and phytosanitary measures on international standards, guidelines or recommendations, where they exist, except as otherwise provided for in this Agreement …

…For food safety…the SPS Agreement defines “international standards, guidelines or recommendations” as “the standards, guidelines and recommendations established by the Codex Alimentarius Commission relating to food additives, veterinary drug and pesticide residues, contaminants, methods of analysis and sampling, and codes and guidelines of hygienic practice” (emphasis added)…. [The Codex Alimentarius Commission is an advisory body to the World Health Organization. The purpose of this programme is to protect the health of consumers and to ensure fair practices in food trade by establishing food standards. These standards, together with notifications received from governments with respect to their acceptance or otherwise of the standards, constitute the Codex Alimentarius … a collection of internationally adopted food standards presented in a uniform manner]…. We note that [there are] five Codex standards …relating to veterinary drug residues…with respect to five of the six hormones in dispute when these hormones are used for growth promotion purposes…. We find, therefore, that international standards exist with respect to the EC measures in dispute….

The amount of residues of these hormones administered for growth promotion purposes allowed by these Codex standards is…higher than zero (a maximum level of such residues has not even been prescribed). The EC measures in dispute, on the other hand, do not allow the presence of any residues of these three hormones administered for growth promotion purposes. The level of protection reflected in the EC measures is, therefore, significantly different from the level of protection reflected in the Codex standards. The EC measures in dispute are…therefore, not based on existing international standards as specified in Article 3.1….

[For those sanitary measures for which no international standards exist]…a Member needs to ensure that its sanitary measures are based on an assessment of risks. The obligation to base a sanitary measure on a risk assessment may be viewed as a specific application of the basic obligations contained in Article 2.2 of the SPS Agreement which provides that “Members shall ensure that any sanitary…measure is applied only to the extent necessary to protect human, animal or plant life or health, is based on scientific principles and is not maintained without sufficient scientific evidence…” (emphasis added). Articles 5.1 to 5.3 sum up factors a Member needs to take into account in making this assessment of risks…. [A]n assessment of risks is, at least for risks to human life or health, a scientific examination of data and factual studies; it is not a policy exercise involving social value judgments made by political bodies….

We recall that under the SPS Agreement a risk assessment should, for the purposes of this dispute, identify the adverse effects on human health arising from the presence of the specific hormones at issue when used as growth promoters in meat or meat products and, if any such adverse effects exist, evaluate the potential or probability of occurrence of these effects. We further recall that a risk assessment should be a scientific examination of data and studies and that the SPS Agreement sets out factors which need to be taken into account in a risk assessment.

[The panel conducted a review of the scientific studies.] All of the scientific studies outlined above came to the conclusion that the use of the hormones at issue for growth promotion purposes is safe; most of these studies adding that this conclusion assumes that good practice is followed. We note that this conclusion has also been confirmed by the scientific experts advising the Panel. Accordingly, the European Communities has not established the existence of any identifiable risk against which the EC measures at issue…can protect human life or health.

Decision. The EC’s ban on the sale of beef containing residues of growth hormones was found to violate the Agreement on the Application of Sanitary and Phytosanitary Measures. Where an existing internationally accepted standard permits beef to contain a residue of a certain growth hormone, an EC regulation permitting zero residue is in violation of the agreement. Where no internationally accepted standard exists on the residue of a certain hormone, the EC ban on that hormone is not permitted because it is not based on a risk assessment made using scientifically accepted principles.

Comment. The panel’s decision was upheld by the WTO Appellate Body in 1998 and accepted by the WTO Dispute Settlement Body. The United States and Canada were authorized to impose retaliatory tariffs on EU imports. The United States imposed 100 percent duties on a range of European products valued at $116 million per year (Canada at CDN$11.3 million). In 2009, an agreement was finally reached in which the EU would allow increased duty free imports of U.S. beef produced without hormones in return for the United States eliminating the retaliatory tariffs over a period of several years.

Case Questions

1. What was the role of the panel in settling this dispute under the SPS Agreement? Did it make its own determination and draw its own scientific conclusions about the effect of beef hormones on human health, or did it give total deference to the conclusions of the EU scientists?

2. What factors were taken into account to determine whether a sanitary measure violates the SPS Agreement?

3. It is an interesting irony in this case, that today many scientists, environmentalists, and consumer groups in the United States are calling for a similar domestic ban on been growth hormones. How do you feel about the use of hormones in beef cattle?

TRADE IN TEXTILES AND CLOTHING

Textiles and clothing comprise an important part of total world trade, amounting to $612 billion in 2008, or roughly 4.5 percent of world exports of total merchandise, according to the WTO. The textile and apparel industries are among the most import-sensitive sectors of the world economy. They are labor intensive, allowing developing countries quickly to become major competitors in world markets. For example, Pakistan’s export economy is extremely dependent on textiles, which comprised 35 percent of its total merchandise exports in 2008. China is the world’s largest textile and clothing producer, and the United States is the world’s largest importer, consuming almost 9 percent of the world’s textile exports and 22 percent of the world’s clothing exports in 2008. In 2009, the United States had a trade deficit in textiles of over $74 billion, to the chagrin of U.S. textile workers and politicians in textile-producing states.

History of Textile Import Regulation and Deregulation

The textile trade remained outside of the GATT system for many years, allowing strict regulation of textile imports by textile-consuming nations such as the United States. The process of “managing” trade in textiles and apparel began in the early 1960s, when the developed countries were flooded with textile imports from low-wage developing countries. Until 1994, trade in textiles and textile products was governed by a series of international agreements between textile-importing and textile-producing countries. These agreements set quotas on a country-by-country basis for each product category (e.g., silk blouses from India, cotton sweaters from Pakistan, down-filled comforters from China). A complex licensing system was established to track shipments and monitor quotas. That system came to an end as a result of the Uruguay Round agreements.

From 1995 through 2004, trade in textiles and clothing was regulated by the WTO and was under a temporary ten-year agreement giving textile companies in the major textile-consuming nations time to readjust, with minimum economic disruption, and to prepare for global trade in textiles without protection. The WTO required textile-consuming nations to gradually reduce tariffs and other barriers to textile imports. The agreement came to an end in 2005. Since that date, all trade in textiles and clothing between WTO member countries has been governed by the same general rules that apply to trade in goods and general merchandise under the GATT/WTO rules.

Today, trade in textiles and clothing is covered by the basic GATT principles of MFN trade and nondiscrimination. Quotas on textiles have been abolished for trade between WTO countries.

Although the strict quota systems are gone, textiles are still subject to the WTO “escape clause” on safeguards and unfair trade, a topic covered in Chapter Eleven. As with other goods, an importing country may still impose temporary safeguards consisting of higher tariffs if increased textile imports cause serious injury to a domestic industry making like products.

Trade in textiles and clothing is also governed in the United States by trade agreements and U.S. laws granting special treatment for textile products imported from Africa, the Caribbean, Vietnam, and a few other countries. In the United States, a specialized agency of government oversees U.S. textile trade relations. The Committee for the Implementation of Textile Agreements (CITA) is responsible for developing U.S. policy on trade in textiles, negotiating textile agreements, monitoring textile imports to assure foreign compliance with trade agreements, monitoring foreign barriers to U.S. textile exports, determining if trade agreements are actually being violated, negotiating textile trade disputes with foreign governments, preparing and publishing statistical data, and helping U.S. industry promote exports textile exports. CITA is comprised of representatives from several departments of the U.S. government.

OTHER WTO “TRADE-RELATED” AGREEMENTS

Two other agreements that will have an effect on world trade are the WTO Agreement on

Trade-Related Investment Measures

and the WTO Agreement on

Trade-Related Aspects of Intellectual Property Rights

. These issues are mentioned only briefly here because they are discussed more fully in Part Four of this book.

Trade-Related Investment Measures

There is no question today that trade and foreign direct investment are interrelated. To be competitive in a global market, firms must do more than just produce in one country and sell in another. They must be able to supply services or conduct procurement, manufacturing, assembly, and distribution operations on a global scale. This requires the freedom to build foreign factories, open new foreign subsidiaries, or merge with foreign firms. The link between investment and trade becomes even more obvious when looking at the volume of trade between related companies. According to UNCTAD’s World Investment Report 2007, discussed in Chapter One, there are about 82,000 multinational corporations and about 810,000 foreign affiliated companies worldwide. Intracompany trade—trade between foreign affiliated companies or between subsidiaries and their parent companies—accounts for over one-third of world trade. Government controls that hamper the freedom of firms to acquire or merge with foreign firms or to make critical investment decisions will have an adverse effect on trade in goods and services, especially between these multinational affiliates.

The 1994 Uruguay Round agreements resulted in the WTO Agreement on Trade-Related Investment Measures (commonly called TRIMS). A trade-related investment measure is a national rule or regulation on foreign investment that has a direct or indirect effect on trade in goods. The agreement does not set broad rules for local investing, such as rules affecting domestic stock exchanges. It does attempt to reduce restrictions on foreign investment that might restrict cross-border trade in goods and services. It also eliminates discrimination against foreign firms and their goods and services to the extent that those restrictions distort or restrict trade. For example, TRIMS prohibits trade balancing requirements—laws that condition a company’s right to import foreign goods on the basis of the volume of goods that company exports. TRIMS also prohibits local content requirements—regulations that dictate that a foreign company or other producer must use a certain minimum percentage of locally made parts or components in the manufacture of a product. For instance, Argentina may not say to a U.S. multinational corporation, “We will finance the construction of a new automobile factory for you, but only if you guarantee us that 25 percent of the component parts used in assembling cars are made in this country,” or “You may only import foreign raw materials on the condition that you export an equal volume of finished goods from our country.” These requirements would violate the prohibition of quantitative restrictions of GATT Article XI. Also prohibited are laws that condition the receipt of foreign exchange on the company’s foreign exchange revenues. Thus, Argentina may not demand, “Our central bank will only permit you to transfer U.S. dollars out of the country if you have brought into the country an equivalent amount this year in dollars, yen, or other hard currency.”

Trade-Related Aspects of Intellectual Property Rights

Intellectual property rights (IPRs) include copyrights, trademarks, and patents. The economic value of an IPR lies in the right of its owner to be the sole user of the IPR or to license its use to someone else; therefore, an IPR only has worth if the owner can prevent its unauthorized use. Because IPRs are not “goods,” they did not fall within the bounds of the 1947 GATT agreement. However, IPRs are often attached to, and used to sell, goods. Thus, if IPRs are not protected from unauthorized use, trade in goods and services will suffer as a result. For this reason, the Uruguay Round negotiations focused on IPRs and resulted in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPS. Trade-related aspects of intellectual property rights refers to government rules or regulations on IPRs that have a direct or indirect affect on trade in goods.

TRIPS sets new, comprehensive standards for the protection of IPRs in all member countries of the WTO. It requires every WTO country to abide by the most important international intellectual property conventions and then calls on countries to grant even greater protection to inventors, authors, and trademark owners. The agreement requires that all domestic and foreign IPR owners, regardless of their citizenship, be treated the same under a country’s IPR laws. It prohibits countries from imposing requirements on foreign firms in exchange for being granted a trademark, patent, or copyright. For instance, a WTO country will not be able to condition the award of a patent on the inventor’s promise to manufacture the item in that country. Countries must publish all laws, regulations, and administrative rulings that pertain to the availability, application, protection, or enforcement of IPRs. Enforcement efforts will be strengthened worldwide to reduce the billions of dollars’ worth of losses every year due to counterfeit and pirated goods (e.g., fake Rolex watches or unauthorized copies of Microsoft software). WTO member countries will bring their IPR laws into compliance with TRIPS, as the United States has already done. For example, in 1995 the United States increased the patent period from seventeen years to twenty years to comply with TRIPS’ longer period. The TRIPS Council of the WTO monitors compliance with TRIPS. TRIPS disputes are settled by the WTO Dispute Settlement Body.

Information Technology Agreement

The 1996 WTO Information Technology Agreement called for the elimination by 2005 of all tariffs on computers, flat panel monitors (excluding HD televisions), semiconductors and semiconductor manufacturing equipment, telecommunications equipment, software, and other information technology products and component parts. The agreement has been signed by more than seventy WTO member countries, including the United States, Canada, the EU, Japan, Hong Kong, Singapore, India, China, and other countries that account for virtually all world trade in information technology products. China is the world leader in exports of information technology products.

TRADE SANCTIONS AND U.S. SECTION 301: THE THREAT OF RETALIATION

One of the most important legal weapons in the U.S. arsenal against foreign trade barriers and unfair trade practices is commonly known to businesspeople and lawyers alike as Section 301. Section 301 of the U.S. Trade Act of 1974 has been amended by Congress several times and is still in effect today. The law permits the United States Trade Representative (USTR) to take retaliatory trade action against other countries whose trade policies toward the United States are unreasonable or discriminatory.

The purpose of the law is to discourage foreign countries from violating their trade agreements with the United States. If they do, or if they unreasonably restrict access of U.S. goods or services to their markets, they face losing access to the U.S. market. Retaliation would subject their products to punitive tariffs or other trade restrictions upon entering the United States. Even prior to the GATT agreements of the mid-1990s and the founding of the WTO, Section 301 had already proven to be a significant threat to foreign countries that had discriminated against U.S. goods and services.

The manner in which the United States, or any country, takes retaliatory action in a trade war has long been a subject of argument. Some commentators and politicians argue for unilateralism. Unilateralism is a general term that refers to the policy or conduct of a nation that affects its relationship with foreign nations taken without consultation or cooperation with other foreign nations, or outside an established international or multilateral framework for agreement. Those who favor unilateralism usually do so because they believe it furthers a nation’s self-interest. Those opposed to unilateralism believe that a nation’s self-interest is best furthered by gaining support from other nations. Unilateralism is in direct conflict with the principles of the WTO system. After the creation of the WTO in 1995, the United States, like other member countries, became obligated to seek consultations at the WTO and approval from the WTO Dispute Settlement Body before imposing retaliatory measures. For instance, if the European Community imposes a licensing scheme on imports that unfairly discriminates against products from the United States, the United States must first attempt to resolve the matter by negotiations. If this fails, the United States must invoke WTO dispute settlement procedures, seek WTO authorization for retaliation, and gain approval of the amount of punitive tariffs and the types of European goods to which they will apply.

In the 1990s, the EU argued that Section 301 violated WTO dispute settlement procedures. In the following case, WTO Report on United States—Sections 301–310 of the Trade Act of 1974 (1999), a dispute settlement panel held that Section 301 does not violate U.S. obligations under GATT if it is applied in accordance with WTO dispute settlement provisions.

United States—Sections 301–310 of the Trade Act of 1974

WT/DS152/R (1999)

World Trade Organization Report of the Panel
BACKGROUND AND FACTS

The European Communities requested a WTO panel to decide whether U.S. Sections 301–310 [the Act] violated GATT dispute settlement procedures. The Act permits the USTR to investigate possible violations of GATT or other international trade agreements, to negotiate a settlement of the dispute, and to request a WTO dispute settlement panel if necessary. The Act also permits the USTR to impose retaliatory tariffs or other trade sanctions either unilaterally or if authorized by the WTO Dispute Settlement Body. The EC argued that the Act violated WTO rules.

REPORT OF THE PANEL

The European Communities argues that [WTO rules] prohibit unilateralism in the…dispute settlement procedures. Members must await the adoption of a panel or Appellate Body report by the Dispute Settlement Body, or the rendering of an arbitration decision…before determining whether rights or benefits accruing to them under a WTO agreement are being denied….

The European Communities…took the position in the Uruguay Round that a strengthened dispute settlement system must include an explicit ban on any government taking unilateral action to redress what that government judges to be the trade wrongs of others.

The United States argues that nothing in Sections 301–310 requires the US government to act in violation of its WTO obligations. To the contrary, the Act requires the USTR to undertake WTO dispute settlement proceedings when a WTO agreement is involved, and provides that the USTR will rely on the results of those proceedings when determining whether US agreement rights have been denied. Likewise, [the Act] explicitly indicates that the USTR need not take action when the DSB has adopted a report finding no denial of US WTO rights.

Under well-established GATT and WTO jurisprudence and practice which the European Communities appears to accept, a law may be found inconsistent with a Member’s WTO obligations only if it precludes a Member from acting consistently with those obligations. The European Communities must therefore demonstrate that Sections 301–310 do not permit the United States government to take action consistent with U.S. WTO obligations—that this legislation in fact mandates WTO-inconsistent action. The European Communities has failed to meet this burden. Its analysis of the language of Sections 301–310 ignores pertinent statutory language and relies on constructions not permitted under U.S. law. Sections 301–310 of the Trade Act of 1974 are fully consistent with U.S. WTO rights and obligations.

* * *

If a law does not make it compulsory for authorities to act so as to violate their international obligations, that law may not be said to command such action. This can be illustrated through a simple example. A law which provides, “the Trade Representative shall take a walk in the park on Tuesdays, unless she chooses not to” does not oblige the USTR to walk in the park on Tuesdays. She has complete discretion not to take a walk in the park on Tuesdays; the law in no way obliges or commands her to do so. This remains true despite the use of the word “shall” in that law.

Decision. Sections 301–310 of the U.S. Trade Act of 1974 were found to be valid under the GATT 1994 agreements. The panel clarified that the United States may impose retaliatory trade sanctions against other WTO members only where the United States strictly followed WTO dispute settlement rules and when authorized by the Dispute Settlement Body.

Comment. Upon entering the WTO, the United States had filed a binding “Statement of Administrative Action,” in which it committed to abide by all WTO dispute settlement procedures and to not act unilaterally. That was noted by the panel in its report and was a factor in the panel’s decision.

Case Questions

1. What did the panel mean by “unilateralism”?

2. If a trade dispute arises, what is the proper procedure under WTO rules for settling that dispute?

3. In Chapter 2 we learned from The Charming Betsy case that “An act of Congress ought never to be construed to violate the law of nations if any other possible construction remains.” The panel cited The Charming Betsy in its report. What is the relevance of this rule to this WTO dispute?

Basic Section 301

Basic Section 301 sets two different standards for retaliation against different types of foreign trade barriers. The first defines when retaliatory action by the USTR is discretionary. The second defines when it is mandatory. Discretionary retaliatory action may be taken at the option of the USTR, under the direction of the president, against any foreign country whose policies or actions are found by the USTR to be unreasonable or discriminatory and burden or restrict U.S. commerce. A foreign country acts unreasonably if its policies toward U.S. firms are unfair and inequitable, even if they are not in violation of any international agreement. This includes the unfair restriction of foreign investment, denial of equal access to their markets, failure to protect U.S. intellectual property rights, or the subsidization of a domestic industry. In this case, the USTR determines whether any action is necessary, and if so, what action to take. The USTR also has the discretion to take retaliatory action when a foreign government (1) fails to allow workers the right to organize and bargain collectively; (2) permits forced labor; (3) does not provide a minimum age for the employment of children; or (4) fails to provide standards for minimum wage, hours of work, and the health and safety of workers. This gives the USTR sufficient discretionary authority and flexibility to attack a wide variety of foreign unfair trade practices.

Mandatory retaliatory action is proper if the USTR determines that (1) a foreign country has denied the United States its rights under any trade agreement or (2) a foreign country’s actions or policies are unjustifiable and burden or restrict U.S. commerce. An act, policy, or practice is unjustifiable if it is in violation of the international legal rights of the United States. Examples of unjustifiable acts or policies include tariffs above the agreed rate, quotas, denial of MFN treatment, illegal import procedures, overly burdensome restrictions on U.S. foreign investment, and IPR violations. In a case of a violation of GATT, the “burden” to U.S. commerce is presumed. Mandatory action is waived if a WTO panel has upheld the foreign government action, if the foreign country has agreed to eliminate the illegal policy, if the USTR believes that a negotiated solution is imminent, or, in extraordinary cases, if the USTR believes that the adverse effects of retaliation on the U.S. economy would exceed the benefits.

Section 301 Procedures.

A Section 301 action begins with the filing of a petition by an interested party, such as a U.S. company, or on the initiative of the USTR. The petition asks the USTR to conduct an investigation of the foreign unfair trade practice. The USTR has forty-five days in which to decide whether to conduct the investigation. Petitions for investigation are usually granted only when an entire U.S. industry is affected. An opportunity must be provided for interested parties to submit their views in writing, and a hearing must be provided if requested. All petitions and decisions to investigate are published in the Federal Register.

Once an investigation is begun, the USTR must also begin negotiations with the foreign government involved. If the petition claims that the foreign government has violated GATT and the dispute is not resolved within 150 days or within the time required in the agreement, then the USTR must invoke the formal WTO dispute settlement procedures. The USTR must complete its investigation and determine whether to impose sanctions within eighteen months of having initiated the investigation or within thirty days after the conclusion of WTO dispute procedures, whichever occurs first. When sanctions are authorized by the WTO, Section 301 is used to carry them out under U.S. law.

Sanctions and Retaliatory Measures.

Trade sanctions are imposed for the purpose of ending an illegal foreign practice, not to compensate the petitioning U.S. firm. No benefits accrue directly to the petitioning firm other than those that affect all U.S. companies or industries in a similar position. The most common form of retaliation is the assessment of additional import duties on products from the offending nation in an amount that is equivalent in value to the burden imposed by that country on U.S. firms. The products affected are said to be placed on the USTR’s “retaliation list” or “hit list.” The USTR may impose sanctions against any type of goods or any industry. If a country puts quotas on U.S. food products, the United States can retaliate against imports of any type, such as electronic parts. For instance, when the United States threatened trade sanctions against Japan for unfairly keeping out U.S. auto parts, the USTR proposed 100 percent import duties on imports of Japanese luxury automobiles. When China refused to protect U.S. copyrights, the United States threatened to impose over $1 billion a year in trade sanctions on all Chinese imports. When the EU refused to comply with a WTO panel decision and lift its ban on U.S. beef containing growth hormones in 1999, the United States imposed 100 percent duties on $117 million in European imports. Tariffs of this magnitude are calculated to temporarily raise prices on imported goods and to discourage their purchase, until such time as foreign trade barriers are lifted and the trade dispute is resolved.

The Carousel Law: Rotating Products Subject to Retaliation

The U.S. Trade and Development Act of 2000 amends Section 301 by requiring the USTR to periodically revise the list of products subject to retaliatory tariffs. This has become commonly known as the “Carousel law.” The purpose of regularly changing the list of products subject to retaliatory tariffs, instead of simply continuing the tariffs on one group of products, is to “spread the pain” across more companies in the offending country, causing them to put greater political pressure on their governments to conform to WTO requirements. It also eliminates the likelihood that a targeted country could subsidize products kept on the retaliatory list for long periods. The EU has criticized the Carousel law as violating WTO rules. American importers are opposed to the Carousel law because of the uncertainty as to whether their products will unexpectedly end up on the retaliatory list and be subjected to punitive tariffs. For example, in Gilda Industries, Inc. v. United States, 446 F.3d 1271 (Fed. Cir. 2006), the Court of Appeals considered the case of an importer of toasted bread from Spain whose products unexpectedly turned up on a retaliation list of products subject to a 100 percent tariff imposed on EU products in retaliation for Europe’s refusal to allow imports of U.S. beef from cattle fed beef hormones. (The WTO beef hormones case appeared earlier in this chapter.) The court rejected Gilda’s argument that the USTR could not place toasted bread on its retaliation list in a dispute over beef. The court also said that it was in the USTR’s discretion whether to terminate the list or remove toasted breads from it.

Special 301

The United States uses Special 301 to assure that American-owned intellectual property rights (IPRs) are adequately protected in foreign countries. Each year, the USTR must identify those foreign countries that deny adequate and effective protection to American IPRs. These countries are placed on a watch list and are monitored. The worst offenders must be designated as
priority foreign countries
and placed on the
priority watch list
. If a country is designated as a priority foreign country, the USTR is required to begin a Section 301 investigation. The USTR has six months to decide whether to invoke sanctions according to Basic Section 301. A country is not placed on the priority list if the USTR finds that they are making progress in strengthening and enforcing their IPR laws, or taking part in bilateral or WTO negotiations to do so. Information used in determining if a country should be placed on a list is obtained from foreign investigations, reports from American companies and others, and public hearings. In 2009, eleven countries were placed on the priority watch list: Algeria, Argentina, Canada, Chile, China, Russia, India, Indonesia, Pakistan, Thailand, and Venezuela. Twenty-nine countries were on the watch list. From 2001 through 2005, Ukraine was subjected to $75 million per year in U.S. trade sanctions as a priority country.

CONCLUSION

This chapter discussed the “market access” provisions of international trade law. The laws and cases that you studied represent a worldwide effort, under the auspices of the World Trade Organization, to move from economic protectionism to freer and fairer trade. It is not within the scope of this book to advance the economic and political reasons why a nation might adopt protectionist trade policies versus free trade policies. While it does seem that free trade attitudes are generally supported by most modern economists and by free-thinking politicians, lawmakers, and government leaders, protectionist habits are difficult to break. Nations accustomed to protecting domestic industries from outside competition—in some cases dating to the Smoot-Hawley period of the 1930s—are often politically encumbered by the status quo and by the need to be responsive to the demands of local firms, labor groups, or unemployed workers. Moreover, some countries such as China, Russia, and its former Eastern European allies still retain trade barriers that are remnants of their past, when they were isolated from the world for many decades by their communist governments. Similarly, some Latin American countries that had once been governed according to socialist or Marxist principles still find it difficult to open market access in key industry sectors to competition from firms from the developed countries of the northern hemisphere. Nevertheless, it is probably safe to say that the general trend internationally has been away from protectionism and toward greater open market access for foreign firms.

The United States has generally taken a pro–free trade stance ever since the 1930s. This is despite quite a bit of protectionist talk from lawmakers representing old-industry and organized labor states and from some candidates for public office, a few news commentators, and some think tanks and economists. Every U.S. president has had to balance free trade with domestic political pressure to protect industries at home. However, as U.S. firms became more dependent on export sales, they also became more vulnerable to foreign trade barriers that denied them access to export markets. For this reason, almost all Americans agree with the need to remove foreign trade barriers to the sale of U.S. goods and services abroad. This requires reciprocity—a give and take—with America’s trading partners so that all will follow the rules of international trade law for the improvement of the business environment around the world.

Chapter Summary

1. The Uruguay Round trade negotiations resulted in many important trade agreements designed to remove trade barriers and improve access to foreign markets, including agreements on technical barriers, import licensing, government procurement, trade in services, agriculture, and textiles.

2. The WTO Agreement on Technical Barriers to Trade does not set standards of its own for product performance, design, safety, or efficiency, but it guides nations in the application of their own regulations and standards through legal principles of nondiscrimination, transparency, and MFN trade. The agreement applies broadly to regulations imposed to protect the public health, safety, and welfare, including consumer and environmental protection. Health and safety regulations may not be used unless they are “trade neutral” and restrict trade no more than necessary, according to the principle of least restrictive trade.

3. Governments are some of the largest consumers of goods and services in the world. The WTO Agreement on Government Procurement requires that countries “free up” their procurement policies and practices by giving foreign firms equal access to bidding on government contracts and by providing transparent and easily obtained rules for submitting bids.

4. About 20 percent of world trade is in services. The General Agreement on Trade in Services (1995) applied basic GATT principles to service industries for the first time since 1947. This agreement has already opened access to foreign markets in construction, engineering, health care, banking, insurance, securities, transportation, and the professions.

5. Trade in agriculture has been distorted by billions of dollars’ worth of government subsidies granted to farming interests worldwide that artificially lower the cost of agricultural exports. In turn, importing nations artificially raise the price of agricultural imports with trade restrictions and tariffs. Attempts to limit government support of agriculture have been met by attacks from politically powerful farm groups, particularly in France and other European countries. Negotiations during the Doha Rounds of trade negotiations focus on making agricultural trade freer and fairer.

6. Exports of farm products have suffered because of discriminatory trade barriers imposed under the guise of health standards. Under the WTO Agreement on Sanitary and Phytosanitary Measures, countries cannot impose restrictions to protect animal and plant life from pests or contagious diseases unless those restrictions are applied fairly and equally to goods from all countries that present a risk of infection. Restrictions must be supported by scientific evidence and be as unrestrictive of trade as possible. These issues are critical to all humankind, as we face potential scourges like “mad cow” disease and hoof-and-mouth disease.

7. Textiles are one of the most import-sensitive industries of all. Many jobs in developed countries have been lost to low-wage jobs in textile-producing developing countries. Since 2005, trade in textiles has been governed by ordinary GATT/WTO rules for trade in goods.

8. The U.S. Trade Act of 1974 (Sections 301–310) provides the United States Trade Representative, under the direction of the president, with the tools needed to retaliate against foreign government trade barriers that breach trade agreements with the United States or that deny fair and equal access of U.S. goods and services to foreign markets. The United States is committed to only using Section 301 retaliation after it has unsuccessfully resorted to the dispute settlement process at the WTO.

Key Terms

market access 306

least restrictive trade 306

technical regulation 309

product standard 309

technical barrier to trade 309

Conformité Européene 311

China Compulsory Certification 313

transparent or transparency 310

import licensing 318

trade facilitation 319

government procurement 319

offsets 320

trade in services 321

cross-border supply 321

Common Agricultural Policy 323

sanitary and phytosanitary measures 324

Codex Alimentarius 325

trade-related investment measures 328

trade-related aspects of intellectual property rights 328

unilateralism 329

priority watch list 332

Questions and Case Problems

1. In 2009, the United States began prohibiting the production, import, and sale of flavored cigarettes, claiming that smoking had become a “pediatric disease.” Menthol cigarettes, the largest selling flavoring, were exempt from the rule. Indonesia had been a major supplier of cloveflavored cigarettes to the United States. According to Indonesian reports to the WTO, about 6 million Indonesians directly or indirectly depend on clove cigarette production. Clove cigarettes are popular in many countries. In 2010, Indonesia requested a panel ruling on the U.S. actions. What argument could the United States make for prohibiting clove cigarettes? What is Indonesia’s argument? What GATT agreements are applicable to this dispute? Do you think that “clove cigarettes” and “menthol cigarettes” are “like products” under the GATT Article III:4? See, United States—Measures Affecting the Production and Sale of Clove Cigarettes, DS406 (2010).

2. In 2001, an outbreak of hoof-and-mouth disease threatened the meat supply of Europe. This virus is spread through the air or by contact. To control its spread, millions of cattle, sheep, and pigs were slaughtered and burned; export and transportation of British livestock, meat, and dairy products were halted; and many areas of Great Britain were placed off limits to travelers. Certain areas of the country were quarantined, with “Keep Out” notices posted on the roads. Officials sprayed chemicals to kill the virus on the soles of shoes and automobile tires. The virus quickly spread to continental Europe, and even the United States banned the import of meat from Europe. Explain the application of the WTO Agreement on Sanitary and Phytosanitary Measures to this issue. Does the agreement tell countries specifically what actions to take? What action does the agreement permit nations to take to fight a disease like this? Do you think that the agreement gave sufficient latitude to countries to fight the disease? For additional information, see the Website for the World Organization for Animal Health, a Paris-based government organization comprising 157 nations.

3. Immediately after India was targeted under Super 301 for restricting market access by U.S. firms, it began a public relations campaign against the United States. Its representatives stated that India would not negotiate “at the point of a gun.” Evaluate this statement. Do you agree that unilateral retaliation by the United States has been the best way to improve access to foreign markets and to protect U.S. IPRs?

4. What are the real economic impacts and long-term effects of trade sanctions? Assume that the United States imposes punishingly high tariffs of 100 percent on Japanese cars. Immediate costs might be borne by the Japanese manufacturers, U.S. dealerships, or consumers, but what does such a measure do to the long-term health and competitiveness of the U.S. car industry? Could you see any impact on the U.S. lead in innovation, design, and quality? Discuss.

5. Research the term managed trade. Do you agree or disagree that trade can be “managed”? Give examples from the text, and from your reading, of how governments manage trade. Can you cite successful or unsuccessful cases? What is the position of recent U.S. administrations in regard to “managing” trade?

6. Imports of Japanese automobiles in the United States have been a major contributor to the annual U.S. trade deficit. U.S. automobiles and auto parts have not sold very well in Japan either. Access to the Japanese market by U.S. manufacturers has been a key U.S–Japan trade issue for the past several decades. Members of the U.S. auto industry maintain that the Japanese government has not done enough to reduce tariff barriers and to encourage the import of U.S. goods. They further argue that Japan is manipulating the value of its currency to keep it at artificially low levels, making U.S. imports in Japan unfairly expensive. They also argue that Japan’s keiretsu system of business relationships has resulted in a highly integrated vertical distribution system. Keiretsu is the Japanese practice of having interlocking directorships, joint ownership, and other linkages between Japanese companies. Keiretsu companies share corporate directors and develop long-term contractual relationships that favor other keiretsu members, thus keeping U.S. firms from many business opportunities. The Japanese government has responded by saying that U.S. cars are simply not in demand by Japanese consumers. In a major “trade war” of the mid-1990s, the United States threatened to place 100 percent import duties on Japanese luxury car imports. A 1995 agreement resulted in Japan agreeing to some voluntary goals for U.S. auto imports. In the end, U.S. public opinion saw the Clinton administration as being “tough on Japan.” On the other hand, the opinion of many commentators and of the world trade community was that the Japanese commitment was an empty promise. The United States was criticized for resorting to threats and intimidation.

What have been the key issues affecting trade between the United States and Japan, particularly trade in automobiles and auto parts? How has their relationship been affected by political considerations? What has happened since 1995? Has the U.S. trade deficit in the automobile trade increased or decreased since then? Have there been any further agreements between the United States and Japan over automobiles? What are the current arguments of the U.S. industry against Japan regarding market access for automobiles? Do you think that the United States has been guilty of “Japan-bashing” in the automotive trade? Where would you find information on the current position of the Japanese government on this issue? Where would you find information on the U.S. auto industry’s position?

7. At the request of the Canadian owner of a country music channel, Canada removed a Nashville-based country music channel from the air. This effort is only one in a series made by Canada to restrict U.S. programming. Canadians argue that their country is dominated by U.S. culture on television and want it restricted. The U.S. firm petitions the USTR to impose trade sanctions unless the Canadian policy is changed. After an investigation, the USTR threatens the Canadian government with $500 million in punitive tariffs. Discuss whether the USTR should have threatened sanctions before the case is heard by the WTO. See Initiation of Section 302 Investigation Concerning Certain Discriminatory Communications Practices, 60 FR 8101 (February 10, 1995).

8. The marketing and sale of beer and alcoholic beverages in Canada are governed by Canadian provincial marketing agencies or “liquor boards.” In most of the ten Canadian provinces, these liquor boards not only regulate the marketing of domestic beer in the province but serve as import monopolies as well. They also warehouse, distribute, and retail imported beer. Canada imposed restrictions on the number of locations at which imported beer could be sold; authorization from the liquor board was needed to sell a brand of beer in the province; and higher markups were required on the price of foreign beer than on domestic beer sold by the liquor boards. Do the regulations violate the nondiscrimination provisions of GATT? May Canada use state trading monopolies to regulate imports of this kind? Are Canada’s provisions valid public health regulations or illegal discrimination? If trade statistics showed that foreign beer sales have actually increased, could an exporting country’s rights under GATT still be subject to “nullification and impairment”? Would Section 301 apply to this case? See 56 FR 60128 (1991). See also GATT Dispute Settlement Panel Report: Canada Import, Distribution and Sale of Alcoholic Drinks By Canadian Provincial Marketing Agencies (1988).

9. Each year the United States Trade Representative publishes an annual report to Congress entitled the National Trade Estimate Report on Foreign Trade Barriers. The report details trade barriers, by country and industry sector, U.S. firms face in exporting goods and services to foreign markets. The Special 301 Report is an annual assessment of the effectiveness of foreign intellectual property rights laws and enforcement efforts in foreign countries. Starting in 2010, the USTR introduced two new reports: The Report on Technical Barriers to Trade and the Report on Sanitary and Phytosanitary Measures. Find these reports, and select several countries of interest. What is the USTR’s position with regard to trade barriers in those countries?

Managerial Implications

1. Your company is a U.S. multinational corporation with a 40 percent share of the world market for its product. Over the past decade, management has invested more than $100 million trying to get its products into Japanese stores. Despite all of its efforts, the company still has less than a 10 percent share of the Japanese market, and only 15 percent of Japanese stores carry its products. Company investigations show that its major Japanese competitor has a virtual monopoly there and has violated Japanese antitrust laws by fixing prices and refusing to sell to any store that carries your firm’s products. Most distributors and retailers are linked to your competitor through keiretsu relationships. Management believes that by having the Japanese market all to itself, the competitor is able to maintain sufficiently high prices in Japan to permit them to undersell your company in the United States. Apparently, the Japanese government simply “looks the other way.” Moreover, your firm has been effectively restrained by the bureaucracy that administers government procurement contracts in Japan. As a result, management estimates that it has lost several billion dollars in exports since the company first entered the Japanese market. Your competitor responds that it is not the only producer in Japan, that the market there is very competitive, and besides, it also outsells your firm’s products in several other Asian countries.

a. If you petition for a Section 301 action, do you think the USTR will begin an investigation? What political factors in the United States might affect the USTR’s decision to investigate? What is the attitude of the current U.S. administration toward the use of Section 301?

b. Management thinks that the Japanese government should require distributors to agree to import a given quantity of U.S.–made products in a year’s period. How would the Japanese government mandate this? Do you think the Japanese distribution system or its keiretsu practices can be reformed? What other remedies or sanctions might be appropriate in this case? What is the likelihood that the threat of sanctions by the United States will affect the Japanese position? Given the history of U.S.–Japanese trade relations and the authority of the WTO, what do you think is the likely outcome of this case? Based on your study of the last two chapters, what provisions of the GATT agreement, if any, might apply to this case?

c. Are the market share statistics relevant to your case? What other data or information will be important?

2. The Asian country of Tamoa imports large quantities of down pillows each year. DownPillow, a U.S. company, would like to do more business there, but it has a problem. Tamoa has a number of regulations affecting the importation and sale of down bedding. Consider the following five regulations:

a. Pillows made from down harvested from Tamoan flocks may be labeled as “goose down” even though they contain up to 25 percent duck down. (Down is taken from both geese and ducks, but duck down is considered inferior.) If the pillow is made from foreign down, then a pillow labeled “goose down” may contain no more than 5 percent duck down. U.S. regulations recognize that geese and ducks often get plucked together and therefore permit goose down to contain up to 10 percent duck down. DownPillow believes the 10 percent tolerance is reasonable, but given farming methods in most countries it is not possible to sort out the geese and the ducks any better than that. Tamoa believes that the stricter standard for imported pillows is justified to protect Tamoan consumers from fraud, and because Tamoan farmers do not raise any ducks, the 25 percent domestic standard is irrelevant anyway.

b. Tamoa also requires that the cotton coverings of all pillows be certified to meet certain ecology and human health standards for textiles: they may not contain any harmful chemicals such as formaldehyde or chlorine, and they must be tested according to minimum standards set by the International Organization for Standardization. Certifications are accepted from qualified testing laboratories in any country. U.S. regulations do not require certification.

c. All pillow imports must be inspected on arrival in Tamoa. No inspections are permitted at the foreign factory. Tamoa has only one full-time inspector, who must remove down from at least three pillows from every shipment and subject it to laboratory analysis. Given the current backlog, inspections and analysis are taking up to four weeks, during which time the pillows are often damaged by Tamoa’s high humidity.

d. Tamoan regulations also require that Down-Pillow’s plant be inspected and that the sterilization process be approved by Tamoan officials. In the United States, the down is washed, sanitized, and subjected to hot air heat several hundred degrees in temperature, all under health department supervision. The Tamoan ministry of agriculture refuses to accept the sterilization permits, inspections, and approvals from state health departments in the United States. Tamoa does not pay the overseas travel expenses of its inspectors.

e. Tamoan regulations prohibit pillows and comforters from being compressed or vacuum packed for shipment to ensure the down will not be damaged in shipment.

DownPillow ships smaller orders by air freight and larger orders by ocean container. DownPillow and other U.S. firms are not pleased with these requirements. Evaluate the legality of the regulations and their impact on DownPillow. What course of action should DownPillow take?

Ethical Considerations

Many proponents of environmental safety and public health are concerned about the creation, spread, and potential impact of genetically modified foods. The United States, along with Canada and Argentina, is one of the leading producers of genetically modified foods made from bioengineered organisms (GMOs). The U.S. government believes that GMOs are important for the world’s food supply because they can boost food production and nutrition and lead to both disease-resistant crops and better-tasting foods. Many respected scientific studies vouch for the safety of GMOs for human and animal consumption and on the earth’s environment. GMOs are important to U.S. agriculture economically. According to the U.S. Department of Agriculture, approximately three-quarters of U.S. soybean and cotton production and over one-third of corn production are genetically modified. However, many consumer groups and countries argue that the dangers to humans, wildlife, and the environment are unknown. Genetically modified corn and soy were approved for sale in the EU prior to 1998, but the European countries ceased new approvals after that time. In addition, the EU and several other countries have adopted regulations requiring the tracing of biotech crops through the chain of distribution, and they imposed strict labeling requirements on all foods and animal feed containing more than 1 percent GMO. European consumers who fear GMO foods will not purchase products with these labels. The United States claims that the requirements are expensive and unnecessary and have cost U.S. farm exporters hundreds of millions of dollars in lost revenues. In 2003, the United States requested a WTO panel to decide whether the moratorium and labeling requirements violate the WTO Sanitary and Phytosanitary Agreement. Research the history of the WTO’s deliberations. What was the outcome? Can you find any decisions of the European Court of Justice on GMOs? What is the current state of EU legislation on GMOs? What is your opinion? Do you think that GMOs should be permitted, or do you think they present some possible harm to the environment or to public health?

(Schaffer 306)

Schaffer, Agusti, Dhooge, Earle. International Business Law and Its Environment, 8th Edition. South-Western, 2011-01-01. .

· Read the overview for Module 4

· From the textbook, International business law and its environment, read the following chapters:

·

National Lawmaking Powers and the Regulation of U.S. Trade

·

GATT Law and the World Trade Organization: Basic Principles

·

Law Governing Access to Foreign Markets

· From the Argosy University online library resources, read:

· Desai, M., Foley, C., & Hines Jr., J. (2004, December). Foreign direct investment in a world of multiple taxes.Journal of Public Economics, 88(12), 2727–2744. (LIRN Article A152498641)

· Gunter, H. (2006). Global expansion plans broaden horizons. Hotel & Motel Management, 221(18), 1–49. Retrieved from EBSCO database 

http://search.ebscohost.com/ login.aspx?direct=true&db=buh&AN=22746846&site=ehost-live

· International growth. (2009). Franchising World, 41(2), 93. Retrieved from EBSCO database

http://libproxy.edmc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bsh&AN=36530783&site=ehost-live

Growth in International Markets

Can managers afford to be conservative when taking decisions related to potential growth prospects?

After a company has successfully entered a foreign market, it may decide to continue to grow. Decisions to invest further can become easier to make based on the company’s experience in that market.

In early 2009, the Hongkong and Shanghai Banking Corporation (HSBC), Europe’s largest bank, announced that it was retreating from its expansion plans in the U.S. HSBC had recorded a $16 billion bad-debt loss in 2008. The loss was from an acquisition that initially cost the bank $14.8 billion. HSBC also had an additional $10 billion write-down on goodwill from its acquisition. The decision was primarily influenced by the eroding U.S. real estate market and a decline in the lending portfolio value of Household Financial, a six-year-old acquisition. Federal policies and regulations such as reduced interest rates, increased money supply, and Troubled Assets Relief Program (TARP) funds were contributing factors.

Raising capital, finding labor, and leveraging existing distribution channels all play a part in the decision to grow further. However, growth in international markets continues to be a challenge despite any circumstances.

Module 4 Overview (2 of 2)

Growth in International Markets This module will cover the risks associated with growth in international markets. You will compare the risks of further expansion in an existing market with the risks of expanding into a new market. In your assignment, you will also investigate economic incentives offered to companies that plan on investing. You will also look at the various regulatory issues companies need to take into account prior to further expansion.