Principles of The Trading System: Trade Without Discrimination

Principles of the trading system
The WTO agreements are lengthy and complex because they are legal texts
covering a wide range of activities. They deal with: agriculture, textiles and
clothing, banking, telecommunications, government purchases, industrial standards
and product safety, food sanitation regulations, intellectual property, and much
more. But a number of simple, fundamental principles run throughout all of these
documents. These principles are the foundation of the multilateral trading system.
A closer look at these principles:
Trade without discrimination

1. Most-favoured-nation (MFN): treating other people equally Under the WTO
agreements, countries cannot normally discriminate between their trading
partners. Grant someone a special favour (such as a lower customs duty rate for
one of their products) and you have to do the same for all other WTO members.
This principle is known as most-favoured-nation (MFN) treatment (see box). It
is so important that it is the first article of the General Agreement on Tariffs and
Trade (GATT), which governs trade in goods. MFN is also a priority in
the General Agreement on Trade in Services (GATS) (Article 2) and
the Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) (Article 4), although in each agreement the principle is handled slightly
differently. Together, those three agreements cover all three main areas of trade
handled by the WTO.
Some exceptions are allowed. For example, countries can set up a free trade
agreement that applies only to goods traded within the group — discriminating
against goods from outside. Or they can give developing countries special
access to their markets. Or a country can raise barriers against products that are
considered to be traded unfairly from specific countries. And in services,
countries are allowed, in limited circumstances, to discriminate. But the
agreements only permit these exceptions under strict conditions. In general,
MFN means that every time a country lowers a trade barrier or opens up a
market, it has to do so for the same goods or services from all its trading
partners — whether rich or poor, weak or strong.
2. National treatment: Treating foreigners and locals equally Imported and
locally-produced goods should be treated equally — at least after the foreign
goods have entered the market. The same should apply to foreign and domestic
services, and to foreign and local trademarks, copyrights and patents. This
principle of “national treatment” (giving others the same treatment as one’s own
nationals) is also found in all the three main WTO agreements (Article 3
of GATT, Article 17 of GATS and Article 3 of TRIPS), although once again the
principle is handled slightly differently in each of these.
National treatment only applies once a product, service or item of intellectual
property has entered the market. Therefore, charging customs duty on an import
is not a violation of national treatment even if locally-produced products are not
charged an equivalent tax.
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Freer trade: gradually, through negotiation

Lowering trade barriers is one of the most obvious means of encouraging trade.
The barriers concerned include customs duties (or tariffs) and measures such as
import bans or quotas that restrict quantities selectively. From time to time other
issues such as red tape and exchange rate policies have also been discussed.
Since GATT’s creation in 1947-48 there have been eight rounds of trade
negotiations. A ninth round, under the Doha Development Agenda, is now
underway. At first these focused on lowering tariffs (customs duties) on
imported goods. As a result of the negotiations, by the mid-1990s industrial
countries’ tariff rates on industrial goods had fallen steadily to less than 4%.
But by the 1980s, the negotiations had expanded to cover non-tariff barriers on
goods, and to the new areas such as services and intellectual property.
Opening markets can be beneficial, but it also requires adjustment. The WTO
agreements allow countries to introduce changes gradually, through
“progressive liberalization”. Developing countries are usually given longer to
fulfil their obligations.
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Predictability: through binding and transparency

Sometimes, promising not to raise a trade barrier can be as important as
lowering one, because the promise gives businesses a clearer view of their
future opportunities. With stability and predictability, investment is encouraged,
jobs are created and consumers can fully enjoy the benefits of competition —
choice and lower prices. The multilateral trading system is an attempt by
governments to make the business environment stable and predictable.
The Uruguay Round increased bindings
Percentages of tariffs bound before and after the 1986-94 talks
Before After
Developed countries 78 99
Developing countries 21 73
Transition economies 73 98
(These are tariff lines, so percentages are not weighted according to trade
volume or value)
In the WTO, when countries agree to open their markets for goods or services,
they “bind” their commitments. For goods, these bindings amount to ceilings on
customs tariff rates. Sometimes countries tax imports at rates that are lower than
the bound rates. Frequently this is the case in developing countries. In
developed countries the rates actually charged and the bound rates tend to be the
same.
A country can change its bindings, but only after negotiating with its trading
partners, which could mean compensating them for loss of trade. One of the
achievements of the Uruguay Round of multilateral trade talks was to increase
the amount of trade under binding commitments (see table). In agriculture,
100% of products now have bound tariffs. The result of all this: a substantially
higher degree of market security for traders and investors.
The system tries to improve predictability and stability in other ways as well.
One way is to discourage the use of quotas and other measures used to set limits
on quantities of imports — administering quotas can lead to more red-tape and
accusations of unfair play. Another is to make countries’ trade rules as clear and
public (“transparent”) as possible. Many WTO agreements require governments
to disclose their policies and practices publicly within the country or by
notifying the WTO. The regular surveillance of national trade policies through
the Trade Policy Review Mechanism provides a further means of encouraging
transparency both domestically and at the multilateral level.
Promoting fair competition
The WTO is sometimes described as a “free trade” institution, but that is not
entirely accurate. The system does allow tariffs and, in limited circumstances,
other forms of protection. More accurately, it is a system of rules dedicated to
open, fair and undistorted competition.
The rules on non-discrimination — MFN and national treatment — are
designed to secure fair conditions of trade. So too are those on dumping
(exporting at below cost to gain market share) and subsidies. The issues are
complex, and the rules try to establish what is fair or unfair, and how
governments can respond, in particular by charging additional import duties
calculated to compensate for damage caused by unfair trade.
Many of the other WTO agreements aim to support fair competition: in
agriculture, intellectual property, services, for example. The agreement on
government procurement (a “plurilateral” agreement because it is signed by
only a few WTO members) extends competition rules to purchases by
thousands of government entities in many countries. And so on.
Encouraging development and economic reform

The WTO system contributes to development. On the other hand, developing
countries need flexibility in the time they take to implement the system’s
agreements. And the agreements themselves inherit the earlier provisions of
GATT that allow for special assistance and trade concessions for developing
countries.
Over three quarters of WTO members are developing countries and countries in
transition to market economies. During the seven and a half years of the
Uruguay Round, over 60 of these countries implemented trade liberalization
programmes autonomously. At the same time, developing countries and
transition economies were much more active and influential in the Uruguay
Round negotiations than in any previous round, and they are even more so in
the current Doha Development Agenda.
At the end of the Uruguay Round, developing countries were prepared to take
on most of the obligations that are required of developed countries. But the
agreements did give them transition periods to adjust to the more unfamiliar
and, perhaps, difficult WTO provisions — particularly so for the poorest, “least-
developed” countries. A ministerial decision adopted at the end of the round
says better-off countries should accelerate implementing market access
commitments on goods exported by the least-developed countries, and it seeks
increased technical assistance for them. More recently, developed countries
have started to allow duty-free and quota-free imports for almost all products
from least-developed countries. On all of this, the WTO and its members are
still going through a learning process. The current Doha Development Agenda
includes developing countries’ concerns about the difficulties they face in
implementing the Uruguay Round agreements.

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Principles of the trading system

Trade without discrimination

Freer trade: gradually, through negotiation

Predictability: through binding and transparency

Encouraging development and economic reform

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