How Trasde is Regulated

1. International Regulation of Trade
How the World Regulates Trade between Its Countries

2. Each Sovereign Nation Is a Player
• International trade can be affected by each sovereign governments exercise
of its sovereign powers within its own borders
• Each governments primary form of trade regulation depends on how it
handles imports of goods as well as services into its borders and exports
goods to other countries
• This becomes important when local businesses ordered goods or services
from another country

3. Countries can regulate trade in
different ways
• Government can bar imports from a particular country
• A government might choose to bar imports of certain categories of
goods that are shipped or originated from a particular country
• These kinds of measures are called embargoes – if an embargo
applies, the government’s custom services, which inspect imported
goods will either prevent the offloading of such goods or impound
them once they are offloaded

4. Governments
Can Control Imports by Means of Tariffs and Taxes
• A tariff is essentially a tax levied at the
border
• Tariffs might apply to certain categories of
goods from particular countries
• This form of taxation is collected at port
before the goods are allowed to enter the
country
• The additional cost is passed on to the
consumer
• Internal taxes take on various forms: they
may be imposed surcharges, imposts, and
sales taxes
• the addition of each internal taxes may
make these goods less competitive
especially if they are imposed on goods
from a particular country
• If the goods imported from another
country are similar to goods available
locally the imported goods will be
rendered less competitive

5. Necessity For Trade Law
• Sovereign nations can regulate imports and exports as they please
• If the country looks only to its own selfish interests this will be at the
expense of more vibrant commerce
• When this happens it has the effect of closing markets – this results in
stymied economic growth in the nations to which the markets are closed
• It also results in trade regulation being used to back political, military, and
diplomatic demands as a condition imposed to keep the markets of one
nation open to businesses of another nation

6. World Response to Closed Markets
• Other sovereign nations may take “counter measures” – if products from a
particular country are banned that country might retaliate by imposing higher
taxes on the goods from the barring country
• A nation whose products have been barred by the government of another
nation may impose embargoes on goods which would normally come in
from that country
• If practices such as these flourish around the world, trade among nations
would be reduced to a rather slow pace

7. Trade Law Pre-World War II
• Prior to WWII there was very little comprehensive
international trade law
• The law that did exist was established mainly by means of
bilateral treaties – that is treaties between two countries
• These treaties became known as Friendship, Commerce,
and Navigation treaties – FNCs for short

8. Subjects of “FNC” Treaties
• Entry of natural persons, goods, vessels, and money into other nations
territory
• Rights to buy and hold property
• Rights by a foreign national to send money out of one state to another
• The legal protection of each state’s nationals and the nationals’ property in
the treaty partner’s state

9. Bilateral Agreements Gave Rise to
Multilateral Trade
• International trade law is the body of bilateral and multilateral treaties that
have evolved since World War II (1939 – 1945)
• Those treaties include the General Agreement on Tariffs and Trade (GATT)
and General agreement on trade in services (GATS)
• These treaties are the foundation of modern international trade law
• In addition to GATT and GATS, the closely related subject of protecting
intellectual property across national borders led to another treaty known as
theAgreement on Trade-Related Aspects of Intellectual Property (TRIPS)

10. Multilateral treaties have transformed
the face of international law
• Rather than relying on a patchwork of FNC
agreements the modern multilateral treaties
aimed to standardize and regularize transitional
trade rules throughout the world

11. Objectives of Multilateral Treaties
• Expanding export opportunities across national borders
• Expanding import opportunities into national borders
• Resolving transitional trade-restriction disputes among
nations short of economic trade war

12. These Objectives Revolve Around Four
Principal Areas
• Have equal access by treaty member nations to mutual markets
• Have transparency in regulation affecting imports and exports
• Have stability in the function of mutual markets
• Have reciprocity in the process of regulating an opening access to
each member nation’s markets

13. Some GATT Provisions are Directly
Effective
• This means they may be relied on by individuals (in addition to other
signatories) to challenge the actions of a contracting State (i.e., country)
• Those provisions that are directly effective are those that prohibit a State
from taking action contrary to the GATT
• Provisions that do not prohibit some action – but require a contracting State
to take some positive action – may only be challenged by individuals if the
member state adopts implementing legislation authorizing such a challenge

14. Transparency in International Trade Law
• Individual governments can distort international trade law by the way that they
regulate it through their own local laws
• While treaties set the standards for international law as to what countries can do or
not do regulating trade at their borders the day today municipal (that is local) law
has the most immediate impact on the goods and businesses of other nations in the
international trade process
• In order to assure correct functioning of international trade law under the treaties
nations, international trade regulators, and private businesses must be able to find
and understand the municipal law of each country that governs import and export
process at the borders as well as international taxation

15. Transparency
• Is the name of the concept that states that
regulation of international trade by a sovereign
nation should be done in a way that is open,
accessible, and understandable to other nations,
international regulators, and private businesses

16. To beTransparent There Are Factors the
Country Needs to Be Aware of:
• First, Are the trade rules published? Are they published in a format that is
accessible to those outside the government? Are they understandable and
have the commonly understood meanings of words and concepts that are
accessible to private business?
• Second, are the rules – typically statutes – the only source of trade
regulation by the country? If not, what are the other sources? Either also
written regulations? Are these regulations published? Are there any
unwritten practices?

17. There is More to Transparency!
• For municipal system of trade regulation to be
transparent, the trade law of each country must be
forthright – it must not attempt to characterize a rule as
benign or to disguise it as something it is really not (as a
pretext to set up a trade barrier that is unlawful under one
of the international treaties governing trade)

18. Example of Lack of Transparency
• International trade treaties usually require that to qualify as a tariff, a tax on
imported goods must be collected before the goods enter the country
• If a country is permitted to characterize as a tariff any revenue-generating
measure it enacts, and improper and trade-discriminatory internal taxes
could be imposed on imported goods, favoring similar domestic goods
whose price will be lower because they are not taxed under the guise of a
tariff

19. There are Other Potential Barriers to
International Trade than Tariffs and Taxes
• These are called nontariff trade barriers
• This type of barrier includes municipal government regulation of many areas that
are considered part and parcel of the so-called police powers of the national
government – the powers to regulate in the interest of public safety, health, welfare,
and morals.
• Areas where nontariff trade barriers most often occur are environmental regulation,
drug safety regulation, other product safety regulation, consumer protection
regulation, and regulations governing that governments process for procuring goods
and services relating to governmental function

20. Example of Nontariff Trade Barriers
• Consider a food product such as genetically altered corn – this is said to be
more resistant to disease and pests and to result in higher crop yields. This
means genetically altered corn is cheaper to produce and cheaper to include
in products that use corn – this gives those who use this type of corn a
significant price advantage over competition.
• Food producers in Country A that use genetically altered corn want to
expand into the markets of Country B
• Food producers in Country B do not use genetically altered corn.

21. Continuation of Example of
Genetically Altered Corn
• Country B’s food producers are likely to seek help from Country B’s Government to
prevent genetically altered corn products from enjoying a competitive edge in the
markets of Count B.
• One way Country B might seek to do this is by citing health or safety concerns over
genetically modified corn and banning or limiting the importation of products
containing this type of corn.
• The WTO has promoted a number of side agreements to GATT by which
countries agree to limit their use of such nontariff trade barriers to only those
regulations backed by scientific evidence derived from proper studies

22. Trade Subsidies – What
are They ?
• Government support to a domestic trade, industry, or business
• They provide help to the business be on the forces of profit and loss
and supply and demand in the marketplace
• They may take the form of grant money from the government to
private enterprise, loans from the government, loan guarantees or,
sometimes an exemption from taxation

23. Regulation of Subsidies by International Law
• Agreement on Subsidies and Countervailing Measures – this allows one
country to take action against another countries subsidies by first conferring
with that country to try and resolve the issue.
• If that doesn’t work, it can provide subsidies of its own to domestic
businesses to offset the effect of the of the foreign subsidies or by imposing
duties on subsidized exports from the subsidizing nation
• This approach is available only when a specific subsidy actually violates the
treaty

24. Example of Subsidies
• State A offers subsidies to all its domestic industries – not just to a segment of the
industry – providing for infrastructure support to all domestic enterprises – these
are considered green subsidies, which do not violate the treaties enforced by the
WTO nor will they justify another state in imposing any countervailing duty on an
export from a subsidizing nation
• By contrast – yellow or actionable subsidies violate WTO-enforced treaties and
support countervailing measures in retaliation that, after consultation, would include
imposing a duty on subsidized imports or providing subsidies to domestic
businesses harmed by the competition from foreign-subsidized product producers

25. More on Subsidies
• Red subsidies are prohibited – such as those directly supporting only exports
from a country to give it competitive advantage in globalized markets with
consequences to the subsidizing country similar to those for yellow subsidies.
• These have shorter time frames for consultation in an effort to reach
resolution before countervailing measures can be implemented by the injured
country.

26. General Agreement on Life Tariffs and Trade
the Fundamental Regulatory Principle
• Nondiscrimination –the GATT treaty prohibits discrimination
in trade.
• Discrimination in trade is based on the concept that an importing
country treats some products differently from others for purposes
of import regulation
• As used in GATT, this means that discrimination occurs in either
of two common situations described in the next slide

27. Common Situations in which
Discrimination Occurs
• A product imported from Country A is treated less
favorably than a domestic product from Country B
under Country B’s municipal import regulations
• A product imported from Country A is treated less
favorably than a product imported from country C under
Country B’s municipal import regulations

28. More is Needed!
• Simply treating imported products differently from one nation versus
another or treating import less favorably than a domestic product does not
mean the government of the country of importation has engaged in trade
discrimination
• More is needed to give a reasonable basis for finding trade discrimination –
in other words, not all differences in treatment of goods, products, or
services constitute the kind of trade discrimination prohibited in
international trade law

29. What is the Key Factor that Indicates
Discrimination?
• Under General international trade law – and GATT in particular – the key
factor that needs to to be considered to determine whether different
treatment equal trade discrimination is the concept of “like products”
• Are the products being compared sufficiently similar to permit a reasonable
inference that treating one more or less favorably than the other is unlawful
trade discrimination?
• The issue, however is not as simple as “comparing apples and oranges”

30. Example
• Imagine a Japanese society where people tend to consume one major fruit
each day for a snack and would buy whichever is cheaper. If Japan taxed
imported oranges higher than Fuji apples, one could argue this might have
the effect of driving out the imported oranges altogether to make Fuji apples
the fruit of choice for snacks
• To answer such challenges the WTO has developed a test to allow it on a
case-by-case, fact-intensive basis to determine whether two products are
sufficiently like to justify the inference that if one is treated more favorably
than the other, there is trade discrimination

31. This Test can be Expressed as a
Series of Questions
• To the two products have the same physical characteristics? If yes, then that points towards a
finding of likeness
• Do the two product share similar ingredients? If yes, then that points to a finding of likeness
• Are the two products manufactured in similar processes? If yes, then it is more probable that the
two products are like
• To the two products have the same and uses? Here, we can consider how the consumer views and
uses them and even the occasions on which they are used. Again, the more evidence there is that
consumers via the product as substitutes for one another the more likely it is that the two
products will be found to be like
• Do they compete in the same strata of the marketplace? Is that where the manufacturers are
targeting them? The stronger the answer is yes the more likely the two products are like

32. Specific rules in the General Agreement on Trade in
Services that Prohibit Trade Discrimination
• The Most-Favored-Nation status rule or MFN– this rule looks outward –
at the country’s borders – and it compares how the country of import treats
items from other member countries at its borders.
• The National Treatment (NT) Rule– this rule looks in word – into the
importing country’s marketplace – and it compares how the country of
import treats its own domestic products, compared to the products of other
member countries for purposes of internal taxes

33. More on MFN and NT
• Before either of these rules can apply in a given scenario, the
product fit issue – whether an import and a domestic or two
imports – must be shown to be like products.
• If the products are like products, then the importing
nations’treatment of both products for purposes of tariffs and/or
taxes can be scrutinized under the requirements of either of these
rules depending on circumstances

34. Most-Favored-Nation Rule
• Under the MFN Rule, each WTO member state must apply its
tariff rules with nondiscrimination to the products of other
member states at its borders. The rule usually goes beyond just
tariffs to include any advantage, favor, privilege, or immunity – if
the importing state accords any of these two products from
another member state, it must accord them to like products of all
member states.

35. National Treatment Rule
• The NT Rule, by contrast, looks at the treatment of imported products in
comparison with like domestic products once inside the borders of the importing
country.
• At this point, the question is no longer tariffs – the question is principally internal
taxes
• The coverage of the nondiscrimination obligation goes be on internal taxes to
include all laws, regulations, and requirements that affect the offer process to sell. It
includes the sales process, purchase, transportation, distribution, and even the use
of the two products

36. Exceptions to These Rules
• Excepting countervailing measures
• Operations of custom unions (such as the EU)
• Free trade zones
• Regulation in the interest of health, welfare, safety, and national security
from the MF and Rule
• The NT Rule has exceptions for certain kinds of government procurement
and subsidization of domestic products.