International Economic Law

The term IEL has no universal accepted meaning. Various scholars and authors
have different definitions of the term IEL. There are 2 schools of thought on
the meaning of the term. These are

1. Broad School
2. Narrow School

According to the broad school of thought the term IEL means any aspects of IL
that has an economic bearing. This definition implies that the entire branch of
public international law, monetary law, environmental law, the law of the sea
and all other laws of international character are part of international economic
law.

The narrow school of thought defines International Economic Law to strictly

encompass those principles and guidelines issued by sovereign states to regulate
trade relationship between countries. In this narrow sense of International
Economic Law is concerned with the trade relations between sovereign
countries. It only relates to the policies and principles underlying the trade
relations. In this narrow sense; I.E.L. does not include public International law,
International Monetary Law, International Finance Law, the Law of the Sea and
all those other branches of International legal regime. Due to the narrow and
broad meanings of the term, this course adopts the narrow definition of
international economic law.

Distinction Between International Economic Law & International Trade Law

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The trade relationships between countries is conducted at two levels

(a) By sovereign states;

(b) By private individuals.

Sovereign States in the International Economic Arena lay down policies and
principles that enable private citizens to conduct trade. They lay down the
general legal framework. This framework is the narrow meaning of
International Economic Law.

On the other hand private citizens or individuals engage in the importation and
exportation of goods and services across national frontiers. These private
individuals are engaged in the buying and selling of goods. The importer of a
product is a purchaser of goods. The exporter is a seller of goods. In most
cases the importer does not meet with the exporter. It is essential that there
must be a contract of sale of the goods between the buyer and the seller between
the importer and the exporter. This contract must be valid, the contract has an
international element to the extent that the buyer and the seller reside in
different countries, the contract is to be performed in different countries
payment is to be made and received in different currencies, the goods must be
shipped or air-freighted by a 3rd party, the financial transaction is being handled
by different banks and underlying all these the importer and the exporter must
have a valid contract for the sale of goods.

International Trade Law is that law for the sale of goods at the
international level. At the domestic national level, the law of contract or the
law of sale of goods is the one that governs the relationship between the buyer

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and the seller. At the international level, it is the international trade law that
governs the relationship between the importer and the exporter i.e. International
Trade Law is the law of sale of goods at the International Level. It purely
regulates private individual transactions and not sovereign state transactions.
This International Trade Law encompasses the following topics

The validity of a contract for sale of goods at the international level,

Shipping and maritime law as relates to the Bill of Lading
Insurance of Goods in Transit either FOB or C.I.F.
Letters of Credit both reversible and irreversible.

These items of international trade law give validity to the transaction between a
buyer and a seller.

Distinction between International Economic Law & International

Finance/Monetary Law

When goods cross national frontiers involving importers and exporters, there
are two financial transactions taking place

(a) International Economic Law

The financial transaction between the individual importer and exporter; this
transaction involves payment by the importer for the purchased products using
local currency. To enable the importer to pay for the goods ordered he uses
letters of Credit and a respondent and correspondent bank. The Respondent
Bank is the bank nominated by the importer. The Correspondent Bank is the

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bank designated by the exporter to receive payment on his behalf. The
Respondent Bank receives the purchase price from the exporter. This bank
opens or issues a Letter of Credit in favour of the Correspondent Bank on one
condition, the Respondent bank guarantees the correspondent bank that it shall
pay the purchase price to it upon the correspondent bank confirming that it has
received the Bill of Lading on instructions of the exporter. The Bill of Lading
is a document issued by the Captain of a Ship confirming that he has received
the goods mentioned therein and designed for export and delivery to the
importer or his nominee. This transaction is a private affair. International
Finance Law regulates this private financial transaction; it determines the
validity of the letters of credit, the rights and obligations of the Respondent
and Correspondent Bank and the Financial liabilities of the all the Parties.

(b) International Monetary Law

International Monetary Law on the other hand deals with the financial
relationship between sovereign countries. When a sovereign borrows or lends
money or when the balance of accounts or balance of payments is made
between countries. International Monetary Law regulates that relationship.
Those institutions that formulate policies and principles on monetary affairs of
sovereign states are known as International Monetary Institutions. These are
the World Bank and the IMF. They are concerned with the Sovereign status of
countries.

SOURCES OF INTERNATIONAL ECONOMIC LAW

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 1. Treaties. International economic law governs the sovereign trade
relationships between countries. Sovereign states enter into legal binding
commitments through treaties. Whatever agreements the sovereign
countries agree upon these will bind them in a treaty form. The Vienna
Convention on the Law of Treaties regulates the procedures and
determines the validity of treaties signed by states. Treaty Law is thus
the most important and fundamental source of International Economic
Law.

Historically countries entered into economic treaties as far back as the

13th Century during the age of exploration. At inception economic
treaties were referred to as Treaties of Friendship, Commerce and
Navigation (FCN).

The FCNs were treaties of friendship to the extent that the explorers were
announcing to their hosts that we have come for peace and not war. They were
treaties of navigation because the explorers were seeking guidance on
navigation routes in the search for the sea routes to India and the Americas.
They were treaties of Commerce because the explorers were interested in Trade
to obtain spices and other exotic products of the new Lands.

As the FCN treaties increased in usage they ceased being purely FCNs and they
started to regulate the bilateral relationship between countries. To this end the
terminology changed from FCN to Bilateral Investments Treaties (BIT).
The BITs with time acquired a new function. They started to regulate the whole
individual foreigner not as a person per se but as an investor. For this reason
the BITs acquired the following functions:

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(a) Regulating the right of entry of the foreigner;
(b) The right of residence in the host state;
(c) The right of establishment i.e. the right to enter the host state and do
business therein;
(d) Protection of the person of the foreigner from arbitrary arrest;
(e) Protection of the property of the foreigner against compulsory
acquisition, Nationalisation and Expropriation;
(f) The right of foreigner to access justice and arbitral or judicial
proceedings;
(g) Issues of double taxation to determine which country has the right to
tax the income of the foreigner, is it the host state or the Home
country;
(h) Incentives that can be given to the foreigner and issues of repatriation
of earnings or profit.
These new functions of the BITs increased with the growing international
trade amongst countries. The BITs started as bilaterals, they became
regional and now they are multilateral. There are several regional and
multilateral agreements that States have concluded to determine their trade
relationships. Bilateral agreements are still part and parcel of todays world.
There are also original and multilateral agreements.

The examples of the East African Community and COMESA and the
European Union and NAFTA are regional economic agreements. The
World Trade Organization is an example of a multi-lateral agreement
between countries. Whether it is bilateral, regional or multi-lateral the Law

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of Treaties as embodied in the Vienna Convention determines the validity of
those instruments.

2 Public International Law

Underlying International Economic Law is public International Law. public

International Law provides fundamental concepts that form the cornerstone
of International Economic Law e.g. the concept of Puncta sund Servada
article 26 of the Vienna Convention on the Law of Treaties (Agreements
shall be kept) is the cornerstone of the Law of Treaties and herein Public
International Law lends this concept to International Economic Law. The
Rules of interpretation of treaties as established by Public International Law
are used to interpret the International Economic Agreements. Custom as
defined by Public International law is used to modify, expand or diminish
the realm of International Economic Law. These concepts borrowed from
Public International Law are a source of International Economic Law.

3. Decisions of International Economic Organisations

There are certain fundamental international economic institutions whose
policies, decisions and practices are a source of international economic law.
To this extent the decisions of the World Trade Organization, the IMF
and the World Bank are a source of International Economic Law. These
Institutions are involved in the creation of customs and practices that are soft
international law. Their resolutions are binding on members because they
are multilateral in character.

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 THEORIES OF INTERNATIONAL ECONOMIC LAW

1. Treaty Law e.g. the treaty establishing the East African Community
determines our rights and obligations

THEORIES OF INTERNATIONAL ECONOMIC LAW

There are 3 theories that underpin the international economic law. These
theories seek to answer the question
(a) Why do countries trade with one another?
(b) What product will countries trade with each other?

The 3 theories that explain the international economic law are

(a) Comparative advantage;

(b) Free Trade Theory
(c) Foreign Policy and Strategic Trade.

1. Comparative advantage.
The comparative Advantage trade theory was developed by Adam Smith and
Jeremy Bentham. This theory states that a country will specialize in the
production and export of those goods that it can produce cheaply
compared to its neighbours and trading partners. This theory compares
the cost of production between the trading partners. The theory at its
inception was used to compare country A and B in terms of wheat
production. Under this theory assuming that country A uses 20 people to
produce 2 bushels of wheat while country B used 2 people to produce 10

8
bushels of wheat, the theory observes that country B has a comparative
advantage over country A in terms of wheat production. The argument is one
person in country B can produce 5 bushels of wheat while in country A one
person produces one tenth of a bushel. Under this theory of comparative
advantage a country is supposed to specialise in producing and exporting only
those products where it has a comparative advantage. The argument is that by
engaging in comparative advantage a country can benefit from economies
of scale in large-scale production and export to its trading partners.

The theory of comparative advantage has been criticized for various

shortcomings.

1. The theory assumes that the factors of production are mobile between
countries. It assumes that people can freely move from country A to
country B and engage in production there. In the real world there are
political boundaries and labour and other factors of production are not
mobile.

2. The theory assumes that land and labour are the only factors of
production. In the modern world there are 3 other crucial factors of
production namely Capital, Technology and Entrepreneurship.
These factors contribute to a large extent in determining comparative
advantage.

3. The theory places emphasis on people or labour without examining

the quality of that labour. Labour can be skilled or unskilled. The

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 failure to draw such a distinction renders the theory inadequate in
explaining the role of labour in the production process.

4. The theory assumes that comparative advantage is static or constant in

reality a countrys comparative advantage is dynamic and comparative
advantage can be created or destroyed. Using capital and technology,
a country can create its own comparative advantage for example
irrigation technology has been known to create comparative advantage
in desert countries. Science and technology have created
comparative advantage in countries which are inventive. In most
developing countries social and political upheavals have destroyed
comparative advantage or rendered the countries incapable of taking
advantage of their comparative advantage.

The inadequacy of the theory of comparative advantage in explaining why

countries trade with one another led to the development of the free trade theory.

FREE TRADE THEORY

Under the Free Trade Theory, the theory stipulates that countries trade with one
another on the basis of free trade. Free trade presupposes the absence of
barriers to trade. Free trade in effect means free from trade barriers. The theory
argues that when barriers to trade are eliminated the cost of production goes
down. With reduced cost of production consumer prices also go down and
increase in demand takes place. The theory argues that goods will move from
countries of supply or production to be exported to those countries where there
are free or no barriers to trade. The theory of free trade must be distinguished

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from the concept of freer trade. The concept of freer trade does not mean that
the trade is free, it only implies that the barriers are much more reduced. Free
trade presupposes absence of freedom from barriers to trade. One advantage of
the theory of free trade is that it enables large scale production to take place. In
practice no government practices free trade. Some form of protection is
imposed by government. The arguments against free trade are normally
referred to as the case for protection or the reason why trade barriers are
important. In the modern days free trade theory is what is referred to as a
liberalised economy or a market economy or a Keynesian economy named after
John Maynard Keynes who developed the theory.

The various arguments for protection that have been advanced by the
government in imposing trade barriers are
(a) the need to protect domestic or infant industries; this argument is
favoured mainly by developing countries. Developing countries have
argued that their industries are young and infants. These industries
cannot compete with the mature and technologically superior
industries of the West. For this reason they argue that some form of
protection through tariffs (tax) is necessary to cushion or protect their
infant industries. This is to give these infant industries time to mature
and to be able to face competition. Developed countries also use
infant domestic industry argument to protect certain sectors from
competition. The sectors that they deem important to their economy
are normally protected using tariffs. The financial and
telecommunications sector is a case in point.

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(b) Employment Creation: Countries have argued that some form of
protection is necessary in order to create employment or to protect
employment in the National Economy. A country that relies on
imported products is in fact importing unemployment and exporting
employment. Exports generate employment in the exporting country
while imports generate unemployment in the importing country.
Countries impose trade barriers to stop imports from creating
unemployment in their countries. Similarly countries engage in
export promotion as a means of generating employment in the
National Economy. To this extent a liberalised economy or a free
trade economy if not checked will create unemployment in the
importing country.

(c) Balance of Payment considerations: Trading countries incur a debt

when they import. They incur a credit when they export. A country
that imports more than it exports creates a debit balance in its national
account. A country that persistently exports more than it imports
creates a surplus in its national account. A persistent debit or
persistent surplus is bad for trading nations. A balance must be struck
out in the national account. Countries impose trade barriers in the
form of tariffs or quotas so as to restore a balance in the national
account. A higher tariff or quotas is used to prevent imports from
entering a country and creating a debit. Lower tariffs and lower
quotas have the opposite effect. They encourage imports

(d) Food Security: Some countries pursue a policy of being self-

sufficient in food production. A country that is striving for self-

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 sufficiency is known to be pursuing a policy of autarky. There are
certain countries that are determined to be self sufficient in food
production. They are pursuing this policy as a matter of national food
security policy these countries prohibit imports of food or specified
foods. They impose trade barriers to importation of the food. For
example Japan prohibits the importation of rice into the country
arguing that rice is a staple food for the Japanese and they cannot
allow their staple diet to be supplied by foreigners since supplies
cannot be guaranteed. Today food is no longer food for the table but a
weapon of war and a tool of blackmail. Countries with excessive
surplus of food are using food as a tool to make food deficit countries
to change their policies. Food as a weapon of war is used as a
strategic military reserve. It is argued that in times of war a country
should be able to feed itself and its soldiers because your enemy could
be the supplier of your food. Depending on imported food at times of
war makes the supplier of food to have a bargaining hand in the
conduct of war. Countries pursuing self-sufficiency in food
production in most cases are countries preparing for war and using
food as a military strategy.

The inadequacy of the theory of comparative advantage and free trade theory
led to the development of the foreign policy and strategic trade theory. The
foreign policy and strategic trade theory stipulates that a country examines its
own national interests and pursues a strategic foreign policy to determine which
countries it will trade with and what products it will deal in. for example during
the cold war between the United States and the Soviet Union, the US
strategically developed a trading relationship with countries that they wanted to

13
put under their sphere of influence. This trade relationship was dictated by the
strategic interests of the United States and not the theory of comparative
advantage or free trade. Similarly the Soviet Union developed a trading
relationship with communist countries in order to keep these countries under the
Soviet Satellite regime. A notable example is the Soviet/Cuba trade relationship
and the United States Monroe doctrine. The present day relationship between
United States and Israel is dictated by the United States strategic interest and
not the theory of comparative advantage. The US as a super power requires to
have a foothold in the Middle East and a reliable partner. In this they see Israel
as fulfilling that role. The strategic interest of a country also determines which
products it shall trade with that country for example the US strategic interest to
remain the sole super power makes it adopt a policy that no technology in the
cutting edge or superior military technology shall be sold to developing
countries. The same strategic interest dictates that Israel must be provided with
the latest military technology. The foreign policy and strategic trade theory thus
supplements the comparative advantage trade theory and the free trade theory in
explaining why countries trade with one another and which products they trade
with each other.

The theory of comparative advantage must be distinguished from the concept of

absolute advantage. Within a country different regions produce different
products and a regional comparative advantage can be done within a country.
At the International Level, there are countries that have a comparative
advantage over another in almost all products and sectors. This is known as
absolute advantage of country A over B. in such a scenario comparative
advantage theory dictates that the countries should not trade with one another.

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However if the countries trade with one another, the disadvantaged countries
will have unfavourable terms of trade.
INTERNATIONAL ECONOMIC INSTITUTIONS:

There are several institutions at the global level that shape and influence the
development of international economic law. Some of these institutions are
multilateral while others are regional in character.
The International Bank for Reconstruction & Development.
(The World Bank)

The IBRD or World Bank is one of the Bretton Woods Institutions. The World
Bank is established by the articles of agreement of the bank signed at Bretton
Woods in 1944.
The origins of the World Bank lie in the San Francisco Conference of 1942
whereby the allied powers agreed to establish 3 Institutions to govern post
world war two affairs one of these institutions was to be political and in charge
of International Peace and Security. These later became the United Nations.
The other institution was to be Economic to regulate the Monetary and financial
aspects of the World. Three institutions were set up with this regard namely

1. World Bank;
2. IMF
3. ITO

The third Institution was to regulate the International trade in goods and
employment. This was to be known as the International Trade Organization.
(ITO)

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THE WORLD BANK

The World Bank was established with the mandate of lending money to
governments for the purpose of reconstructing war torn Europe. The banks
mandate was restricted to financing infrastructural programs such as the
reconstruction of roads, hydro-electric stations, health facilities and other
social amenities that had been destroyed during the war. The Bank was to
extend the loans on concessional terms which loans were repayable over a
long term period.

Membership to the World Bank is open to countries that are members of the
United Nations. Each member state contributes shares to the World Bank.
The unit of currency at the Bank is known as a Special Drawing Right
(SDR). One SDR is equivalent to $100 and this rate is reviewable.

The bank is managed by a team of executive directors and a Managing

Director. There are 24 Executive Directors of the Bank and one Managing
Director. The Executive Directors and the MD are appointed by the
members through voting. The member states of the bank vote the directors
and each director is voted by the countries that nominated him or her. The
Bank has an additional group of directors who are not executives. Each
member state appoints a director and an alternate director. In practice the
Minister of Finance of a member state is a director of the World Bank and
the Governor of the Central Bank is the alternate Director.

THE INTERNATIONAL MONETARY FUND (IMF)

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 The IMF was established at the same time as the World Bank in 1944 at
Bretton woods. The mandate of the IMF is restricted to regulating global
monetary affairs. It is charged with the responsibility of maintaining
balance of payment equilibrium and stability of exchange rates. In order
to achieve its purposes, the bank lends monies to governments to restore
balance of payment equilibrium.

The mandate of the World Bank and the IMF are restricted to the extent that
they cannot lend to private individuals. For this reason the International
Finance Corporation (IFC) was established to be able to lend money to the
private sector and business community in general. The necessity of
establishing the IFC was also realised because the mandate of the World
Bank is restricted to infrastructural development and not risk capital and
joint ventures.

VOTING & DECISION MAKING IN THE IMF AND THE WORLD

BANK

Ordinarily in the international level the concept of one nation one vote applies.
Decisions are made based on the concept of simple majority. At the World
Bank and IMF voting and decision making is not based on one nation one vote.
In these institutions decision making is based on weighted voting. Each
country has a vote commensurate with its shareholding. The more shares
you have the more votes you have. The shares are converted into SDRs and a
country uses the value of its shares to determine its votes.

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In order to reflect the principle of sovereign equality of nations, each country
has an initial vote of two hundred and fifty thereafter; the weight of the shares
determines the votes. Using the weighted formula as of 2003 the USA had
285,000,000 votes followed by Germany with 72,000,000, Japan 55,000,000
UK 55,000,000 and France 52,000,000, Kenya has 260 votes and South Africa
had 1,100 votes. In line with these weighted decision making, the practical
consequence has been that the USA has reserved for itself 10 positions of
Executive Director and the office of the Managing Director. The European
Union has reserved five seats for itself and the rest of the positions are to be
shared one for Africa, one for Asia, one for Latin America, one for Europe, one
for Australia and the remaining seats they are still votes. The developing
countries have objected to the weighted voting system in these Bretton Wood
Institutions.
However in order to change the system, one requires the voting power to be
exercised through the weighted system. This has proved impossible. The
reaction of the developing countries in the early 60s was to try and shift the
forum of economic issues from the Bretton Wood Institutions to the United
Nations where one nation one vote system occurs. The consequence of this was
that in 1964 the United Nations Conference on Trade and Development was
held. This conference established (UNCTAD) as an organ of the United
Nations. The mandate of UNCTAD was to address Trade and Development
issues particularly as affecting developing countries. UNCTAD has tried to
discharge its mandate and it depends on the UN budget for its operations.
Whenever UNCTAD does something against the interests of the developed
countries, particularly United States, the effect has been the US freezes its
financial contribution to the UN. In the UN the US contributes 15% of the
budget and the majority of the developing countries are always in arrears.

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There are two particular instruments that the UNCTAD has passed that the
developed countries have rejected. These are the Charter of Economic
Rights and Duties of States and the Code of Conduct of Multinational
Corporations. Under the Charter there is a clause that seeks to impose an
obligation on developed countries that had colonies to pay compensation or
reparation to the colonized people. The Charter seeks to declare colonisation as
a crime against humanity. There is also a provision in the Charter that seeks to
impose an obligation on developed countries to assist in the development of the
developing world. Under the Code of Conduct of Trans-national corporations,
there is a provision that seeks to outlaw repatriation of profits. The Trans-
National Corporations are also required to transfer technology to the developing
countries. Possession of arms by any nation is also deemed to be declared an
act of aggression against human kind. The developed countries have objected
to these provisions and have exercised their veto power to stop these
instruments from becoming International Conventions with treaty obligations.

The Organization for Economic Cooperation and Development [OECD]

The OECD is a successor to the OEEC (Organization for European Economic

Cooperation). The OECD is a grouping of 24 industrialized countries of the
world led by the USA and Germany. The OECD is a policy making body. It
conducts research and issues policy directions to its members. It issues
guidelines on economic policy and advises its members on what economic
instruments or policies to pursue. In practice the decisions and the policies of
the OECD are binding on its members. The OECD countries control over 75%
of World Trade. They also control over 98% of Global Wealth. They are the

19
major stake holders in the global trade and monetary system. Whatever the
OECD countries decide, it will be implemented by the Bretton Woods
Institutions since these are the countries with the votes in these institutions.

THE G7 +1

The Group of 7 plus one countries are the most industrialised countries of the
world. The group of seven is made up of the USA, Germany, Japan, Italy,
United Kingdom and France, The Netherlands and the one is Russia.
These industrialised countries consider themselves as the backbone of
international trade and monetary system. An important aspect of the G7 is that
they are the source of foreign direct investment or foreign aid flowing into the
rest of the world. They are also the home to most multi-national corporations.
Their private citizens and banks are the lenders to the rest of the world. The G7
came into existence largely as a reaction of the inability of governments of
other countries to pay back loans that are owed to private banks in the G7
Countries. The G7 is an informal grouping not established by treaty or any
instrument. These countries meet to decide on the debt issues whether they are
going to forgive a debt, reschedule a loan or waive interest. They also
formulate what they perceive to be an appropriate global monetary policy.
When they meet to reschedule national debt they are referred to as the Paris
Club. This emanates from the practice whereby they meet annually in Paris to
discuss debt rescheduling . Although the group is referred to as the G7, to date
it has 19 members but they have retained the name G7.

OTHER INTERNATIONAL INSTITUTIONS

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In addition to UNCTAD and the Bretton Woods Institutions, there are other
organizations affiliated to the United Nations which have an impact on global
economic relations. The includes;
1. The International Labour Organization (ILO) deals with labour matters
and it has come up with certain ILO conventions that have an economic
impact.
2. The International Civil Aviation Authority,
3. The International Maritime Organization,
4. The World Meteorological Organization and a host of other institutions
also formulate policies that have an economic impact.
All these institutions through their policies and practices have a bearing on
creating principles of International Economic Law.

THE GENERAL AGREEMENTS ON TARIFFS & TRADE (GATT)

In 1942 at the San Francisco Conference it had been agreed that an international
trade organization was to be established to regulate international trade in goods.
It was agreed that a conference of experts was to be held later to draft the
Charter of the Institution. In 1947 the conference was held in Havana Cuba
to draw up the ITO Charter. The Charter was drafted and it was titled The
Havana Charter on Trade and Employment establishing the ITO. This Charter
is commonly referred to as the Havana Charter of 1947.
In consonance with the US Constitution the Havana Charter was presented
before the US Congress for ratification. The Congress was controlled by the
Democrats but the President was a republican. In order to teach the
Republicans a lesson the US Congress rejected the Havana Charter citing two
reasons

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 a. The US President had no authority to negotiate a treaty without
congressional approval;
b. The US was not ready to surrender her economic sovereignty to an
international organization.
Congress agreed that the US had already surrendered political sovereignty to
the United Nations whose future was uncertain. Consequently the US could not
surrender economic sovereignty and experiment with another organization.
Congress declined to sanction the Charter.
Noting that the US was the strongest economy in the World, when Congress
rejected the Havana Charter the idea of establishing an International Trade
Organization came to an end.
Despite the US rejection of the Havana Charter 23 countries met in Geneva in
1947 and agreed to apply amongst themselves that part of the Havana Charter
that was titled the General Agreement on Trade and Tariffs (GATT). In order to
do this the 23 countries signed a protocol on the provisional application (PPA)
of GATT. They reasoned that they were applying GATT provisionally or
temporarily until the US Congress would change her mind. It took the
Congress 47 more years to change its mind and to agree to the establishment of
the ITO under the name WTO. In the interim in 1947 onwards GATT operated
as the informal provisional media whereby the 23 countries would discuss trade
and tariffs issues amongst themselves. Over the years membership to GATT
increased from 23 to 140 in 1994. The practical consequence was that this
informal set-up known as GATT slowly emerged as the forum controlling
global trade. The 23 original countries which included the USA and UK are
known as the GATT founder members. The signatories to GATT are
known as Contracting Parties. Since GATT was not established by a Treaty,

22
it did not have members or any rules on how to join it. It was an ad hoc system.
When Contracting Parties met as GATT as a Corporate entity they would make
binding decisions. When the contracting parties met to discuss issues, there
were no binding decisions. The practice developed in GATT whereby the
Contracting Parties would meet to periodically review tariff issues. These
periodic meetings came to be known as Rounds of Negotiations. During these
Rounds of Negotiations, the Contracting Parties would formulate principles and
policies that bind them. The following rounds of negotiations have been held

1. Geneva 1947
2. Annecy 1949;
3. Torquay 1950-51
4. Geneva 1955-56;
5. Dillon 1961-62;
6. Kennedy Round 1963-67;
7. Tokyo Round 1973-79
8. Uruguay Round 1986-94 at the conclusion of the Uruguay round, one
of the final instruments was the Marrakech Agreement establishing
the World Trade Organization.
9. 2001 the DOHA Round negotiations still continuing

Lecture 4
OBJECTIVES OF GATT
At its inception GATT was established with the sole aim of addressing the tariff
barriers between the contracting states. The primary goal of GATT was to
identify the trade barriers between countries and come up with policies,

23
principles and guidelines that will enable the contracting parties reduce or
eliminate the trade barriers.

There were two types of barriers that were identified under GATT. These are
tariff and non-tariff barriers (NTBs).
A tariff as a barrier to trade is a duty levied on imported goods. It is commonly
referred as customs duty. A customs duty must be distinguished from an excise
duty. An excise duty is any tariff or tax levied on goods produced or sold within
a national economy.
There are three categories of tariffs, namely (a) ad valorem tariff (b) specific or
fixed rate tariff or (c) a mixed rate tariff.
An ad volarem tariff is a tax imposed based on the value of the goods, for
example, a 50% tariff denotes 50% of the value of the product.

A specific tariff or a flat rate tariff or a fixed tariff is a tax dependent on the
quantity of the goods, for example $10 per one 1,000 pounds.

A mixed rate tariff structure is one that combines both an ad valorem rate and a
specific flat rate. Each country is required to make a policy decision on what
combinations of tariffs to apply.

At the market place the effects of the tariff is to raise the domestic price of the
imported product. The tariff raises the price of the imported product compared
to the price of a domestically produced good. The practical consequence is that
consumers will purchase domestically produced goods, which are cheaper in
comparison with of like imported products. This amounts to a domestic
distortion whereby the laws of supply and demand cannot apply.

24
With respect to non-tariff barriers or NTBs the GATTs objective was to
identify these barriers and formulate principles governing the same. Several
non-tariff barriers were identified, and these are:

1. Technical barriers to trade (TBT). These are standards that must be

observed by producers before their products can be sold. Some of these
technical standards relate to specifications of products and safety
regulations. In some cases the standards are environmental. The TBTs
operate as a barrier to trade in that if a producer does not meet the
standards his products will be out of the market.

2. Sanitary and phytosanitary standards (SPS). The SPS are standards

put in place with the aim of protecting human, animal and plant life.
These standards determine what products are fit for human
consummation. The also regulate the type of pesticides, herbicides and
germicides that can be used in agricultural and veterinary production.
The SPSs have an element of environmental conservation more
particularly when they relate to the protection of plant life. For
agricultural economies such as Kenyas the SPSs are a major barrier to
trade particularly in the horticultural sector.

3. Import licensing procedures. In most countries import licensing

procedures there are several procedures to be followed before an
important can import goods. In most countries there are several licenses
or forms to be filled. The forms are in different languages all over the
world and consequently the cost of interpretation and translation must

25
 be borne by the producer. In some countries the forms are non-existence
yet there are required. In a majority of countries the administrative
procedure of acquiring the forms and filling it out is time wasting and
bureaucratic. The bureaucracy involved and the amount of licenses
required and the time involved is a cost to business and a barrier to trade,
for example in Kenya, before an enterprise or a business can be set up
you require 48 licenses from different offices. In most cases the
businessmen do not know that they require the licenses until they are
arrested. This lack of transparency in licensing procedures is a barrier to
trade.

4. Rules of origin. GATT identified the operation of rules of origin as a

barrier to trade. In order to be able to administer the tariff system the
rules of origin are critical. In most countries the tariff system is
preferential to the extent that different countries enjoy different tariff
rates. For example goods from the European Union into Kenya could
enjoy a rate of 25% customs duty while goods from outside the
European could have a 100% ad valarem tariff. Other countries could
enjoy a duty free status. To be able to administer these different tariff
structures the rules of origin become critical. The rules of origin
determine the origination of a product, that is, where does the product
originate from. It must be emphasized that the origin of a product is not
determined by the origin or source of the ship, which carried the product.
Product origin is a function of a complex formula of value adding and
processing. It the value adding and the processing of a product that
determines its origin. Percentage criteria are used and this percentage can

26
 operate as a trade barrier. One of the objectives of GATT was to instill
discipline in countries in the use of the rules of origin as a barrier.

There are other non-tariff barriers that GATT identified such dumping,
subsidies and the use of safeguard measures. In all these non-tariff barriers
as identified GATT came up with principles regulating the same.

The World Trade Organization (WTO)

The World Trade Organization can aptly be described as a successor to

GATT. The origin of the World Trade Organization lies in the fundamental
defects of GATT as a system. GATT from 1947 to 1994 had major
weaknesses. These weaknesses of GATT gave rise to the justification of the
establishment of the World Trade Organization. The key weaknesses of
GATT can be enumerated as follows:
1. Absence of a legal framework establishing GATT. GATT was created
as an accident of history. The original aim in 1947 was to establish the
ITO. With the failure of the ITO GATT came into being without any
treaty establishing it. Historians argue that GATT had a birth defect and it
was thus necessary to rectify these defects by establishing the World
Trade Organization through a treaty and this treaty came to be known as
the Marrakech Agreement of 1994. This is the agreement that establishes
the World Trade Organization.
2. Absence of clear rights and obligations. Since GATT did not have a
legal framework the rights and obligations of the contracting parties were
unclear. There were no clear rules of joining GATT and even after joining
the contracting parties did not know their rights. This uncertainty of rights

27
and obligations gave rise to a system of whereby powerful and strong
countries would get their will and bulldoze the weaker countries. GATT
therefore become lopsided and the weaker economies felt they were .. in
order to address this concern and to restore the concept of the sovereign
equality of states it was necessary to have a treaty designation clear rights
and obligations of countries.

2. Lack of a dispute settlement mechanism. The GATT system did not

have a mechanism of resolving trade disputes between countries. This
was a fertile for strong economies to have their way. It was thus
necessary to establish the WTO and make provision for a centralized
dispute supplement system. In GATT each GATT cord or agreement had
its own procedures for resolving disputes. The practical consequences
was that countries would go for forum shopping, looking for a forum
that is favourable to their interests. The result was that conflicting
decisions emanating from various forums and these generated uncertainty
to the international economic legal order. It was thus necessary to
establish the World Trade Organization with the aim of restoring
certainty to international economic law and establishing a clear,
mandatory and centralized dispute settlement mechanism. To achieve this
goal the understanding on Dispute Settlement agreements (DSU) was
signed and concluded at Marrakech.

3. The GATT system was made up of several disjointed codes and

agreements. The various rounds of trade negotiations held under GATT
from the Geneva round to the Tokyo round produced various codes and
agreements. For example, the Tokyo round produced the Valuation Code,

28
 the Antidumping Code, the Subsidies Code and various understandings.
Each of the GATT rounds of trade also produced their own results and
agreements. These various agreements were Stand-alone Agreements
with no clear relationships between themselves. It is these standalone
agreements that can rise to forum shopping and added to the uncertainty
of the international economic order. It thus became necessary to establish
the World Trade Organization to be able to establish a clear system of
hierarchy between these agreements.

4. Absence of a clear relationship between GATT and the national legal

regimes. GATT having been established by way of accident it was not
clear which took precedence, GATT or the national laws. Due to this
uncertainty on precedence many countries applied their national law as
superior to the GATT system. Under international law multilateral
commitments should take precedence over national positions. Breach of
the multilateral obligations should give rise to state responsibility. With
the shaky foundation of GATT it was not possible to clearly state that
GATT rules took precedence over national laws. It was thus necessary to
establish the World Trade Organization by way of treaty in order to
clearly give precedence to the WTO rules.

Objectives of the World Trade Organization

The objectives of the World Trade Organization are contained in the preamble
to the Marrakech Agreement. These objectives are
(a) To raise the standards of living of its members;
(b) To generate employment amongst its members on this point it must
be noted that full employment and unemployment are both dangerous

29
 to an economy. What is required is the optimum level of employment
and the reduction of underemployment
(c) To increase trade amongst the WTO member states
(d) To increase productivity amongst the WTO member states
(e) To reduce trade barriers amongst the WTO member states

In the preamble to the Marrakech Agreement and in the entire GATT and WTO
documentation nowhere is stated that the objectives of GATT and WTO is to
liberalise trade or to encourage Free Trade. The phrase free trade or
liberalisation is not used in the WTO documents. However the practical
consequence of implementing and attaining the WTO goals is to liberalise
global trade.

THE WORLD TRADE ORGANISATION AS A SYSTEM

The WTO exists at two levels

(a) As an institution with its structures and

(b) As a trading System

As a trading system the WTO is a complex web. Within it it contains all the
GATT Agreements and Codes. It also embodies all the principles and rules and
decisions of the GATT round of trade negotiations. It also encompasses all the
GATT panel decisions. It embodies all decisions of the CONTRACTING
PARTIES. From this perspective as a trading system the WTO is a system
made up of over 40,000 page document. It is this system and the rules that
create it that make up the body of law known as international economic law.

30
As an institution the WTO is made up of one single treaty namely the
Marrakech Agreement. The Marrakech Agreement as other WTO Agreements
was signed 30th April 1994 at Marrakech in Morocco. Under the terms of the
Marrakech Agreement the WTO as an institution was to come into force or into
being on 1st January 1995. Consequently the WTO was established in 1995.

The institution known as the WTO has its own governing structure as follows:
(a) The Ministerial Conference: This is the highest decision making
organ of the WTO. Under the terms of the Marrakech Agreement the
Ministerial Conference meets at least once every two years. The first
Ministerial Conference was held in 1996 at Singapore, the next one
was in 1998 in Geneva, the next one was in Seattle Washington in
1999, Doha Qatar in 2001 and Cancun Mexico in 2003 and the next
one will be in 2005 in Hong Kong December 17. The Ministerial
Conference has the mandate to make several important decisions
affecting the WTO for example admission to the WTO can only be
done by the Ministerial Conference. Amendment to any of the WTO
agreements requires a decision of the Ministerial Conference.
Imposition of sanctions and withdrawal of concessions to a member is
by decision of the Ministerial Conference. Introducing any new issue
for negotiation at the WTO requires a decision of the Ministerial
Conference. The commencement and termination of any round of
trade negotiations requires the decision of the Ministerial Conference.

The Ministerial Conference is made up of the Ministers for the time

being of Trade of the member countries.

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(b) THE GENERAL COUNCIL: The General Council is the second
highest organ of the WTO. Its membership is made up of the
Ambassadors or representatives of the member states at Geneva. It
sits in a continuous session in Geneva. It is charged with the
responsibility of carrying out the decision of the Ministerial
conference. The General Council can sit as a court to hear and
determine dispute between member states. When the General Council
sits as a court it is known as the Dispute Settlement Body (DSB)

(c) THE COUNCILS: In addition to the General Council there are four
other councils established under the Marrakech Agreement. These are

(i) Council for Trade in Goods: this council oversees the

implementation of the GATT 1947 and GATT 1994
Agreements;
(ii) Council for Trade in Services: This council oversees the
implementation of the general agreement for trade in services
(GATS)
(iii) Council for Trade Related Aspects of Intellectual Property (The
TRIPS Council) This Council is charged with the responsibility
of implementing the TRIPS Agreement.
(iv) Council for Dispute Settlement otherwise known as The
Dispute Settlement Body (DSB). The DSB is established to
implement and supervise the dispute settlement procedure of
the WTO. The General Council is authorised to perform the
functions of the DSB. The DSB is established under the DSU.

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 The DSU likewise establishes the TPRM (Trade Policy Review
Mechanism). The function of the TPRM is to review the trade
policy of the WTO member states to determine if such trade
policies are in conflict with the WTO.

(v) The Secretariat: The Secretariat of the WTO is made up of

international civil servants. They provide secretariat services to
the organization. The Secretariat is headed by a Director
General appointed by the Ministerial Conference. The DG is
assisted by two deputy Director Generals. There are other
divisions within the WTO headed by various international civil
servants. The Secretariat implements the decisions of the
Ministerial Conference and the General Council. The
Secretariat is not the WTO and it does not make decisions.
Decisions are made by WTO members and the Secretariat is
purely a civil service system.
Agreements Making up the WTO

The WTO as a trading system is made up of the following agreements

1. The Marrakech Agreement of 1994 establishing the WTO;

2. Annex 1 Agreement made up of GATT 1994: The Annex 1

Agreement contains all the multilateral agreements that concluded the
Uruguay Round of Trade negotiations. In these Agreements one of
the most important is GATT 1994. At the end of the Uruguay Round
Agreement one of the issues of concern was how do you deal with the

33
 GATT of 1947 and all the Agreements of the various rounds of
negotiations. It was decided that all these GATT 1947 and the various
rounds of negotiations were to become part of WTO. For this reason
GATT 1994 Agreement was signed. GATT 1994 is made up of

(a) GATT 1947, and

(b) All the GATT decisions and rounds of negotiations agreements;
this is a 22,000 page document making up the goods regime.

3. The Agreement on Agriculture:

4. Agreement on Sanitary and Phytosanitary Measures;
5. Textiles and Clothing Agreement
6. TBT Agreement
7. Trade Related Investment Measures Agreement (TRIMS)
8. Agreements on the implementation of Article VI of GATT 1994 (the
Dumping Code)
9. Agreement on implementation of Article VII of GATT 1994 (The
valuation Code)
10. Pre-Shipment Inspection Agreement;
11. Rules of Origin Agreement;
12. Import licensing Agreement;
13. Subsidies and Counter veiling measures Agreements
14. Safeguards Agreements;
15. Annex 1 B containing the general agreement on Trade in Services
(GATS) and its schedules of concessions.
16. Annex 1 C the TRIPS Agreement.

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 17. Annex 2 the understanding on Dispute Settlement which establishes
the DSB
18. Annex 3 The Trade Policy Review Mechanism (TPRM)
19. Annex M the Plurilateral Agreements (Optional Agreements)

Annex IV contains four optional agreements which member countries may sign.
These are
a. The agreement of Government procurement
b. Trade in civil aircraft;
c. The Bovine Meet Agreement
d. The Daily Products Agreement

PRINCIPLES OF GATT/WTO

The GATT/WTO operates on two fundamental principles namely:

(a) The most favoured nation principle (MFN) and

(b) The National Treatment Principle (NT).

These two principles are the cornerstone of the GATT and WTO trading system.
They are principles of non-discrimination. The assumption is that if all
countries apply the MFN and National Treatment principles all will benefit
from the resulting efficient use of resources.

The Most Favoured Nation Principle

The MFN Principle is divided into two namely

35
 1. The conditional MFN principle; and
2. Unconditional MFN Principle.

The term MFN Most Favoured Nation is an undertaking by a country to extend

the best or the most favoured treatment to its trading partner that it has signed
the MFN Agreement with. If a country signs an MFN Agreement, it undertakes
to ive the best treatment to that country that it has signed the agreement with.

Under conditional MFN, when country A grants a privilege to country C while

owing MFN to country B, then Country A must grant the equivalent privilege to
country B but only after B has given A some reciprocal privilege {to pay for
it

Under unconditional MFN, in the above case A must grant the equivalent
privilege to B, without receiving anything in return from B.

The GATT/WTO system is based on the unconditional MFN. Article I of

GATT 1947 and GATT 1994 requires all the WTO member states to extend the
unconditional MFN Treatment to all WTO Member States. The unconditional
MFN Principle is a principle of geographical non-discrimination. Under Article
I of GATT all member countries are supposed to extend unconditionally any
privilege, right or benefit to all WTO counties without discrimination. The
provisions of Article I is referred to as the principle of Geographical non-
discrimination because it prevents the importing country from discriminating
products on the basis of the geographical origin of the product.

36
The unconditional MFN treatment has several advantages to trading nations:

First from an economic viewpoint, the MFN principle ensures that each country
will satisfy its total import needs from the most efficient sources of supply
thereby allowing the operation of comparative advantage.

Secondly from the trade policy viewpoint the MFN commitment protects the
value of bilateral concessions and spreads security around by making these
bilateral commitments the basis of a multilateral system.

Thirdly, from an international viewpoint, the MFN clause mobilises the power
of large countries behind the interest and aspirations of small ones which are to
be treated equally. This MFN Principle restores equality of treatment of
Nations.

From the domestic political viewpoint the MFN commitment makes for a
straight- forward and transparent policies which are simple to administer. If all
countries observe the MFN there will be no need for special rules of origin.

The unconditional MFN has a constitutional significance. It serves as the safe

constraint on the delegated discretionary powers of the executive branch in
trade matters. The MFN Principle that is embodied in GATT other than being
the cornerstone of the system, it is the one that guarantees international trade
security.

There are two crucial questions that arise from the operational of the MFN
Principle

37
 (a) When does it apply? (Breath of MFN)
(b) To what does it apply? (Scope of MFN)

Scope of the MFN Obligation:

The MFN principle applies to all products imported into a country. The scope
of MFN seeks to answer the question to what does the MFN Principle apply?
The answer is the MFN applies to like products. Scope of MFN is determined
by the concept of like products. MFN thus states that like products must be
treated alike. The practical question is what is a like product? Is shoes the
same thing as slippers? Are sandals slippers? Is an open shoe a shoe or is it
slippers? Is a bed sheet the same thing as a leso and is a coat the same thing as
a blazer? Is a shirt the same thing as a blouse so that they should be treated
alike.

The MFN principle clearly requires that like products must be treated alike. In
practical terms the difficulty has been how to determine like products. The
GATT/WTO system to answer this question has come up with a system of
product classification. Products are classified and given different tariff lines
and headings. For this reason there must be product differentiation. Different
products must be classified and differentiated. It is only after differentiation
and classification that the MFN principle can be applied.

Concept of like products. MFN says no discrimination where tariffs are

concerned,, if you treat like products differently, you must come up with a
criteria, is slippers same as sandals? Tariffs are fixed high where the states want

38
to discourage import. If Mitumba tariffs go up by 200% the nation is trying to
discourage mitumba and encourage the textile industry. This concept can be
complex when you manufacture goods cause when goods are manufactured
they become different. What is coffee bee? Is it coffee or is it a beer. The
tariffs change.
MFN applies to like products, if it is maize from Uganda, it must be treated the
same with Maize from USA and Maize from Mozambique.

The real impact is that MFN is discriminatory as it tends to treat unequals

equally

THE BREADTH OF MFN

The breadth of MFN seeks to answer the question, when does the MFN apply?
Article I of the GATT Agreement states that the unconditional MFN principle
applies in all cases relating to any privilege, concession or benefit of every kind
given by a country more particularly the MFN applies in the following
instances

It applies to
(a) Customs Duties and other subsidiary charges or levies of every kind;
(b) The method of levying such duties and charges;
(c) To all rules, formalities and charges imposed in connection with
clearing the goods through customs;
(d) To all laws, regulations affecting the sale, taxation, distribution or use
of imported goods within the country.

39
Interpretation of the MFN Breadth implies that the MFN principle applies at all
times at all places to all products.

THE NATIONAL TREATMENT PRINCPLE

The second principle of GATT/WTO is the national treatment principle. This

principle like its counterpart the MFN is a principle of non-discrimination.
Whereas the MFN prohibits discrimination at the point of entry, the National
treatment principle prohibits discrimination once the imported products have
entered into the national territory of the importing country. The MFN prohibits
Geographical discrimination between countries at the point of entry. The
National Treatment principle prohibits discrimination within the National
boundaries. The National Treatment Principle basically states that once
imported products have entered into the national territory, they should not be
discriminated with like domestic products. The NT principle thus requires that
like imported products must be treated in the same way that you treat like
domestically produced goods. This principle prohibits discrimination between
domestically produced goods and like imported products.

The National Treatment principle is contained in GATT Article III. Article III
of GATT stipulates that no charges or levies of equivalent effect shall be
imposed on imported products in preference to domestic goods. The provisions
of Article III on National Treatment read together with Article I of MFN
completes the liberalisation process. These two principles are the cornerstone
to the GATT/WTO Regime.

40
Paragraph I of Article III establishes the General principle that internal taxes
and regulations should not be applied so as to afford protection to domestic
production.

Many countries have raised concern that when governments give a subsidy they
are in effect violating the National Treatment Principle. Rural Development
Programmes have also been construed to be violating the National Treatment
Principle. Education Scholarships and Grants are also being construed to be
violating the National Treatment Principle. Just as its counterpart the MFN the
Breadth of the National Treatment Principle is that it applies to all internal
taxes, laws and regulations.

EXCEPTIONS TO THE MFN & NATIONAL TREATMENT PRINCIPLE

Lecture 5
EXCEPTION TO THE MFN & NTP
There are several exceptions to the MFN and the National Treatment Principle
The most important exception are

(a) Article XXIV exception on Customs Union and Free Trade Areas or
Agreements leading to the formation of Free trade areas or customs
union.
(b) Article XX security exception;
(c) Article XIX Escape Clause
(d) Articles IX and XVIII on balance of payments;
(e) Article III paragraph 8 on government purchases;
(f) The exception on Customs Union and free trade agreements is the
widely used exception to the MFN and the National Treatment

41
 Principle. It is this article that justifies the existence of Free Trade
Areas and Customs Union.

Article XXIV stipulates that countries can form a free trade area or a customs
union as an exception to the obligations in Article I and III of GATT. Article
xxiv paragraph 8 (b) defines a Free Trade Area as an association of Nations
with duty free treatment for imports from members. In a free trade area the
members have a Common Internal Tariff (CIT) and each member is free to have
its own common external tariff applicable to non-members.

Article XXIV paragraph 8 (a) defines a Customs Union as an Association of

Nations with duty free treatment for imports from members and a common
external tariff (CET) for imports from non-members.

An interim Agreement leading to the formation of a free trade area or a customs

union is also an exception to the MFN and National Treatment Principle.

For a free trade area or a Customs Union to operate as an exception the

agreement must cover substantially all trade between the parties. There is no
consensus as to the meaning of the term substantially all trade. Does it mean
trade in all goods and services between the countries or does it refer to the
volume or value of trade. A rule of practice has been developed whereby
substantially all trade means 90% of the trade between the countries.

The operation of the provisions of article XXIV provides the legal basis for the
existence of all regional economic groupings such as the European Union,

42
COMESA, SADC, NAFTA and the ASEAN, MERCUSOR (Economic
Association for Latin America).

Most regional economic groupings have not complied with the provisions of
Article XXIV as relates to substantially all trade. The other requirement under
Article XXIV is that the integrating countries must be at the same levels of
economic development. This provision has been interpreted to mean that only a
developed country can enter into a Free Trade Agreement with another
developing country. Likewise a developing country can only integrate with a
developing country. Recent practice at the global level demonstrate that
developed countries are entering into free trade agreements with developing
countries for example the NAFTA is an arrangement between United States and
Canada being developed countries with Mexico which is developing. The
European Union has concluded a free trade agreement with Egypt and other
Arab Countries which are developing. Presently the European Union is
negotiating a free trade agreement with Kenya and other COMESA countries
which agreement will come into force on 1st January 2008.

The rationale for the Article XXIV exception stems from the fact that GATT
and WTO seek to liberalise Trade and reduce trade barriers between countries.
These objectives of GATT and WTO are global in nature. Free trade
agreements and Customs Union also share similar objectives at a regional level.
It is thus considered that Article XXIV exception enhances the Objectives of
GATT and WTO at a regional level.

Article XX of GATT is the security exception. Whenever the security of a

country is threatened by increased imports Article XX allows the country to

43
impose Tariffs and Quotas to prevent imports that can threaten its national
security. Anything that threatens public order, health and morals is deemed to
be a security threat. Article XX has also been used to justify import restrictions
that threaten key economic sectors. This exception has been used frequently by
the United States to restrict imports and exports of steel.

Article XIX is regarded as the GATT escape clause. It is also known as the
safeguard clause. It is an escape clause because it allows a country to escape
from its MFN and its National Treatment obligations. This article can only be
utilised when 3 conditions are fulfilled. These are

(a) There must be increased imports due to Trade Concessions;

(b) The increased imports must threaten to cause injury or cause injury to
a like domestic producer;
(c) There must be causation whereby the injury or threat thereof is
actually caused by the increased imports.

Upon fulfilment of these conditions a country can impose tariffs or quota

restrictions to restrict importation of a given product. The Clause is also known
as a Safeguard Clause since it is the Clause that allows government to impose
Tariffs to protect or Safeguard Domestic Infant Industries.

Articles IX and XVIII of GATT make provisions for balance of payment

exceptions. Whenever a countrys balance of payment is not in equilibrium,
Article IX and XVIII allows the country to impose Tariffs or Quotas to restore
the equilibrium. Imports are a debit on the balance of payment accounts of a
country. Conversely exports are a credit on these accounts. Whenever imports

44
exceed exports the balance of payment of a country remains in debit. Persistent
debit year in year out implies that a country is in debt and cannot meet its
financial obligations. In order to restore this account to equilibrium, Articles IX
and XVIII permits a country to use tariffs or quotas to restrict imports and
encourage exports. The wordings of Article XVIII implies that its only
developing countries that can use the Article. Developed Countries use Article
IX for balance of payment purposes.

GATT Article III makes provision for the National Treatment Principle (NTP).
Paragraph VIII of Article III stipulates that the National Treatment Principle
does not apply for government purchases. The implication is that govt
procurement is not subject to National Treatment Principle. By extension
scholars have interpreted the provisions of Article III paragraph VIII liberally to
imply that the MFN does not apply to government purchases.

WAIVER AND THE ENABLING CLAUSE

The GATT Contracting Parties and WTO Ministerial Conference are

empowered to waive any obligation of the WTO Agreement on any member
state. This power to waive is usually referred to as the waiver clause of Article
XX. The implication of the Waiver Clause is that a member may apply to the
WTO Ministerial Conference seeking a waiver from any obligation. Using the
waiver clause in the year 2001 the WTO Ministerial Conference at Doha
waived the application of the MFN and National Treatment Principle to the
European Union ACP (Africa Caribbean Pacific Agreement) to the Partnership
Agreement otherwise known as the COTONOU from the MFN and National
Treatment Obligations. This waiver is to last to 30 years expiring on 31 st

45
December 2007. Under the EU ACP Partnership Agreement goods emanating
from the ACP countries would enter the EU duty free. The EU ACP partnership
agreement was started in 1975 under the name the LOME Convention. This
convention provides that African Caribbean Pacific Countries products will
enter the European Union duty free. Kenya is a member of the ACP group of
countries and it is by virtue of the provisions of the LOME convention and the
COTONOU partnership Agreement that Kenyan Tea and Coffee enter the EU
Duty free. Recognising that the waiver was to last up to 2007 the implication
is that from 2008 Kenyan Tea and Coffee and other products will be subjected
to import duty into the European Union.

In 1967 most of the developing countries began raising concerns that the MFN
and were the National Treatment Principles discriminatory. The basic agreement
was that the MFN and National Treatment Principles were treating unequals
equally. It was argued that this amounted to substantive and real discrimination.
Developing countries further argued that the MFN Principle did not address the
developing concerns of these Nations. In order to address these accusations
Part IV of GATT was introduced containing Articles XXXVI, XXXVII and
XXXVIII. these articles normally referred to as the development dimensions of
GATT allowed developing countries to impose tariff and quotas as a means of
enhancing their development.
To enable developed countries to give market to developing countries products
the GATT Contracting Parties passed a resolution in 1975 known as the
Enabling Clause. The Enabling Clause permits developed countries to grant
Preferential Market Access to developing countries. The Enabling Clause
enables a developed country to have two sets of tariffs, one applicable to
developed countries and a low tariff applicable to developing countries. The

46
Enabling Clause permits individual developed countries to or set up its own
scheme of preferential treatment to developing countries. By virtue of the
operation of the Enabling Clause, developed countries have established a
Generalised Scheme of Preference (GSP) which operates as an exception to the
MFN and National Treatment Principle. It is an exception because the GSP
allows discrimination between developed and developing countries. Presently
there exists the EU-GSP, the Japanese GSP, the USA GSP, Canadian GSP
and the Australian GSP.

In the year 1999 India filed a suit before the WTO alleging inter alia that the EU
GSP was a violation of the MFN Clause. The argument by India was that
whereas the Enabling Clause permitted the EU to set up a GSP it did not
authorise the EU to discriminate between developing countries. Under the then
EU- GSP the EU would discriminate between different developing countries in
delivering its panel decision in 2002 the WTO Panel upheld Indias claims and
stated that the Enabling Clause is an exception to the MFN as regards
developed countries but as between Developing Countries the MFN applies and
the EU could not discriminate between Developing countries.

This interpretation of the Indian EU GSP case implied that the USA AGOA
regime was illegal. The United States has been implementing AGOA under the
provisions of the Enabling Clause. However, AGOA is discriminatory to the
extent that it only applies to sub-Sahara Africa and not other developing
countries and also that within Sub-Sahara Africa, it also discriminates. To
prevent the possibility of AGOA being declared illegal, the US sought a waiver
from the WTO Ministerial Conference and this waiver was granted.

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DISGUISED DISCRIMINATION

Notwithstanding the operations of the MFN and National Treatment Principles

multinational corporations have been able to find ways of going round these
principles. They have adopted measures which on the face of it appear
innocent, neutral and non-discriminatory but which in practice are
discriminatory. There are four main practices which fall under Disguised
Discrimination: these are

1. Advertisement;
2. Labelling;
3. Technical Regulations;
4. Product Standards.

The use of these restrictions effectively discriminate between countries and

producers.

TARIFFS & QUOTAS

The most important policy instruments that countries use in their Trade
Relations are Tariffs and Quotas. A tariff is a tax on imported goods. The
GATT/WTO regime has specific country obligations with respect to Tariffs.

A quota is a quantitative restriction on imports or exports of products. GATT

and WTO have specific rules on the use of quotas. The general obligation with
respect to quotas is that the use of Quantitative Restrictions is prohibited. A
country under Article XI is prohibited from using quotas. Article XI provides

48
that no prohibitions or restrictions other than duties, taxes or other charges,
whether made effective through quotas, import or export licences or other
measures shall be instituted or maintained by any contracting party on the
importation of any product of the territory of any contracting party.

These wordings in Article XI are a sweeping prohibition on the use of quotas.

Article XI (2) allows the use of export restrictions necessary to prevent
shortages or to apply marketing standards and also the use of import restrictions
necessary to implement Agricultural Programs. Article XII and XVIII B allows
the use of import restrictions in order to safeguard a countrys external financial
position (Balance of Payments)

Quotas can either be specific or original or at the extreme a complete ban. A

country specific quota is a quantitative prohibition of imports from a specified
country. For example during the Apartheid days, many countries had countrys
specific prohibitions of imports from South Africa. Today the United States
maintains a countrys specific quota with respect to Cuba. A regional quota is a
quota that applies to a specific geographical region, for example Kenya
maintains a regional sugar quota whereby the country can only import a
maximum of 200,000 tonnes of sugar from COMESA countries. The EU under
the LOME Agreement has country specific quotas on various products.
Whenever a country does not impose a specific or regional quota, it can opt to
have a total ban of the import. This complete prohibition can only be justified
under the provisions of Article XX exception. Article XI of GATT outlaws
import and quota restrictions.

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With respect to tariffs the mainstay of the GATT/WTO regime is the Tariff
System. GATT Article II contains the general obligations with respect to tariffs.
The Tariffs can either be specific, ad valorem or a mixture of the two. GATT
Article II imposes 3 main obligations with respect to tariffs
(a) Each WTO Member country is required to prepare a tariff schedule;
(b) Each country is required to have a tariff binding or bindings;
(c) Each member country is required to observe its bindings and to
renegotiate the bindings only under the provisions of the WTO
agreements.

It must be noted that there is no obligation to reduce tariffs. Each country is

sovereign and it reserves the right to impose whatever tariff it wishes. However
during the rounds of negotiations as countries negotiate the tariffs the agreed
rates shall be the MFN Tariff Rate.

A binding is a commitment by a country to bind itself to a given percentage of

tariff for example country A can bind itself that the import duty for Coffee shall
be 50%. This 50% is known as the bound rate or the binding. The bound rate is
the maximum tariff that a country shall impose. A country is not under an
obligation to apply the bound rate. The applied rate can be lower than the
bound rate so long as the applied rate does not exceed the bound rate. The
bound rate is the MFN rate for the country. The difference between the applied
rate and the bound rate is the margin of preference. That margin is the most
important market instrument. It determines the competitive age of a product.

A concession is a benefit, right or privilege given by one country to its trading

partners. Each of the WTO Member States is sovereign. No third country has a

50
right to enter and sell its products in another country. The privilege or rights or
benefits to enter another country is a concession. This concession can also
extend in form of a customs duty or tariff. In most cases country A gives a
concession to country B to enter its territory and sell a product having paid an
import duty of 10% or 20%. This Tariff is a concession.

Customs & Excise Act Cap Annex 1

Concession
Every country is sovereign. The privilege or right to sell is a concession, the
concession is subject to conditions.

Reciprocity
When you give concessions to one another you are supposed to give equivalent
concessions. Tit for tat. Reciprocity is not conditional MFN all we are saying is
that if I give you a concession you give me an equivalent concession. The only
problem is how to calculate the value of reciprocity of concessions. This is one
of the cornerstones of MFN. The waiver clause and the enabling clause are not
reciprocal this is because it is one way as goods from developing countries are
allowed to enter developed countries preferentially and there is no reciprocity.

Lecture 6
TARIFF NEGOTIATION TECHNIQUES

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In the multilateral system there are various modalities of tariff negotiations.
Basically to be able to get the MFN Tariff rates countries must negotiate
together. There are 5 main modalities of tariff negotiation techniques. These
are
(a) Request List;
(b) Offer List;
(c) Bilateral;
(d) Linear Approach;
(e) Formula Approach

Under the Request List approach country A makes a request to country B and
any other country requesting tariff reduction in given products or tariff lines.
The countries receiving the request make counter proposals and the various
countries negotiate. These counter proposals are referred to as the offered lists.
The Request and Offer Lists therefore go together. When only two countries
are involved in the Request and Offer, the negotiations are bilateral. When
several countries are involved in the request and offer, the negotiations are
multilateral and the agreed rates shall be the MFN rates.

In 1947 when GATT came into being the request and offer list was the mode of
tariff negotiations. This modality was appropriate taking into account the small
number of countries that were involved and the few products that were covered.
With the increasing number of countries in the GATT system the request and
offer list became inappropriate. With more countries in GATT and increasing
product range or coverage the offer and request approach had to be done away
with. During the Tokyo Round of Trade Negotiations the Linear Approach was
adopted as the modality of trade negotiation.

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Under the Linear Approach countries agree on a percentage that shall be used as
a mode of tariff reduction for example it can be agreed that all countries are to
reduce their tariffs by 10% or 20%. The Linear Approach is a straight Line
Tariff Reduction for all products and all countries. At the beginning the Linear
technique proved useful in that it was easy to bring higher tariffs down.
However at the market place the linear technique had a disadvantage. It did not
address the question of the gap between low tariffs and high tariffs and the issue
of tariff peaks and tariffs escalations. Due to the inadequacies of the linear
technique a Formula Approach was designed. The Formula Technique was
developed by the Swiss whereby the Swiss formula is that Z = A x X divided by
A + X whereby Z represents the new tariff (MFN Rate) X is the initial tariff rate
and A is a co-efficient any number between (1-10). This formula brings down
the tariff peak. The value of A is what countries negotiate, it is any number
between1-10.

A tariff Peak is a tariff that is three times above the national average. You take
the average tariff in the country for all products to arrive at a national average.
Tariff escalation in many countries when one imports a raw material the tariff
is zero, when one imports manufactured products the tariffs go up, the more you
process the product the higher the tariff to encourage importation of raw
materials. Tariff escalation is a term referring to the increase in tariff rates with
increase in processing of a product. The linear approach does not address tariff
peaks or tariff escalations. In developing countries one of our problems is tariff
escalations.

NEGOTIATING PARTIES

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At the multilateral level, there are 3 primary parties that take part in tariff
negotiations. These are
(a) Principle Supplier;
(b) Principle Consumer;
(c) The country holding the Initial Negotiating Right (INR)

The Principle Supplier is that country or group of countries that are the
principle suppliers of the product in question. These countries are deemed to be
principles both from the volume and value of the products in question. The
Principle Consumer is that country that purchases the bulk of the product.
When renegotiations of tariffs take place during rounds of negotiations, the
country that last participated in the negotiation is also invited to the negotiating
fora. This country is referred to as the country holding the initial negotiating
right.

The tariff rates agreed by these participating countries become applicable to

everybody else and is then known as the MFN Tariff Rate. The negotiations at
the initial stages starts off as bilateral negotiations. The result of these bilateral
negotiations is multilateralised by the MFN principle to become the MFN Tariff
Rate.

Renegotiations, Modifications and Rectification of the MFN Tariff Rate

There are seven provisions or articles in GATT that allow a country to
renegotiate its tariff bindings and commitments.
1. Under Article 28 paragraph 1 after every 3 years countries are allowed
to reopen and renegotiate their tariff bindings. This is referred to as
the Triennial Renegotiations;

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2. Under Article 28(4) any country experiencing special difficulties and
circumstances may apply to be allowed to renegotiate its tariff
bindings. The special circumstances need to be proved with empirical
data for example a country experiencing balance of payment
difficulties or a surge in imports can invoke this clause and renegotiate
its bindings;
3. Article 28(5) allows a country to make a reservation in its national
schedule and reserve for itself the right to renegotiate or amend its
bindings;
4. Article 24(6) permits other countries to change their tariff bindings
whenever a group of countries form a customs union or a free trade
area. It is argued that the formation of a customs union or free trade
area affects the tariff bindings of the member states. Consequently
other countries who are not members are given an opportunity to
renegotiate their bindings with members of the Customs Union or free
trade area. This renegotiation is referred to as Compensatory
Renegotiation in order to compensate non-members for any
concession loss that they suffer due to the creation of the customs
union or free trade area;
5. Article 18(7) permits developing countries to renegotiate their
commitments in the even of balance of payment difficulties.

6. Article 27 allows the GATT/WTO member states to withdraw their

concessions and tariff bindings with respect to a country that ceases to
be a GATT or WTO member;

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 7. Rectification of minor mistakes and minor changes to a countrys
schedule is permissible without affecting the substantive
commitments of a country.

CUSTOMS LAW
Customs Law is a detailed and specialised area of international economic law.
it has 3 main dimensions that Customs Officials must know and take in order to
administer tariffs and quotas. Before a Customs Officer can impose any tariff
he must do 3 things:
(a) He must classify the goods namely is it a shoe or a sandal or is it a
handkerchief or a scarf;
(b) He must value the goods: Most of the tariffs are ad valorem, they
depend on the value of the imported product. The Customs Officer
must give a value to this imported goods;
(c) The Officer must determine the origin of a product. In order to
administer a preferential tariff rate or a quota the origin of the product
is crucial;
Customs Law as a body of law is thus made up of 3 main branches
(a) Product classification;
(b) Product valuation
(c) Rules of Origin
Product Classification

Product Classification is a system of categorization of every conceivable

tradeable goods. All products must be classified and categorized. The system
of classification must be simple enough to be applied consistently and

56
uniformly by hundreds of customs officers throughout the world and in
thousands of transactions daily.
GATT and WTO have developed 3 systems of product classifications. These are
(i) The Brussels Tariff Nomenclature (BTN)
(ii) Customs cooperation Council Nomenclature (CCCN)
(iii) The Standard International Tariff Classification (SITC) otherwise
known as the Harmonised Tariff Nomenclature (HS system)
Kenya under the Customs & Excise Act uses the four digit Brussels Tariff
Nomenclature for product classification. The WTO is presently using the 6
digits harmonised system. All countries are required to move to the 6 digit
system. The United States and European Union is using the 8 10 and 12 digit
system with Bar Coding.
The BTN system of product classification was developed by the European
Economic Community. When the EEC was formed in 1957 each of the
individual countries had its own product classification system. To enable the
EEC to operate and function there was need to have a uniform classification
system applicable to all the countries. A European Customs Union study group
was established in Brussels to develop a classification system. This system
came to be known as the BTN. The BTN was applicable mainly to the EEC
countries. With time the BTN became small since it was a four digit system.
As trade between the EEC and the outside world increased, there was need to
expand the product coverage of the BTN. Due to this a Customs Cooperation
Council (CCC) was established in 1967 to formulate a new nomenclature
system. The CCC established a 6 digit Customs Cooperation Council
Nomenclature (CCCN). In 1970 the US joined the CCC but it did not adopt the
Nomenclature. The US argument was that the nomenclature was outdated and a
modern classification system was needed. Subsequently the CCC developed

57
with US participation, the harmonized commodity description and coding
system (The Harmonised System) which entered into force on first January
1988. On its part the United Nations through its statistical commission also
developed a commodity classification system. The UN system is known as the
Standard International Trade Classification (SITC). The HS system is based
partly on the SITC.

The GATT Agreement contains no specific provision on customs classification,

except under Article 2(5) which provides for negotiation with a view to
compensatory adjustment when a tariff classification ruling prevents the
implementation of a negotiated concession. Today under the WTO countries
are required to adopt the HS Harmonised System of the 6 digits. Technical
assistance is available to enable developing countries adjust and implement the
6 digit HS.

PRODUCT VALUATION (THE VALUATION CODE)

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