WTO E-LEARNING

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Detailed Presentation of Pre-Shipment

Inspection in the WTO

OBJECTIVES

 Explain the non-tariff measures in the WTO framework;

 Explain the disciplines related to PSI in the WTO.

My Course series
I. INTRODUCTION

Besides tariffs, several non-tariff measures could also restrict or even impede market access of goods, some of
which can be legitimately introduced and maintained by WTO Members, as long as they are applied in a WTO
consistent manner.

There is no agreed definition in the WTO of what constitutes a "non-tariff measure" nor a "non-tariff barrier"
neither is there consistency in the way both terms have been used in the past. Although both terms are often
used interchangeably, the term "non-tariff measure" (NTM) has been preferred throughout this course1. While
the application of NTMs does not always restrict trade, they often result in unnecessary restrictions or undue
barriers, which explains the utilisation of the term "non-tariff barrier" (NTBs).

The type of measures covered by these terms varies significantly and includes all measures other than tariffs
which can have an impact on trade in goods. Measures covered by WTO Agreements include: quantitative
restrictions (e.g. quotas), and other NTMs (e.g. lack of transparency in trade regulation, arbitrary application of
trade regulations, customs formalities, technical barriers to trade, practices of customs valuation, etc.).

During the last GATT Rounds of negotiations, Contracting Parties made considerable efforts to eliminate NTBs
that were used solely for protectionist purposes or, in those cases where they were applied to pursue a
legitimate objective (e.g. to protect health or the environment), to minimize their trade distorting effects.

1 The term "non-tariff barrier" (NTB) is, nevertheless, used whenever this course cites GATT/WTO texts or
refers to specific occasions where the term NTB was originally employed.

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II. GATT NEGOTIATIONS ON NON-TARIFF
MEASURES

IN BRIEF

While the GATT 1947 already contained some provisions on non-tariff measures (NTMs), it was not until the
Kennedy Round (1964 - 1967) that GATT Contracting Parties decided to go beyond tariffs and address NTMs in
the context of a multilateral round. In the following GATT Rounds (the Tokyo Round and the Uruguay Round),
NTMs remained on the agenda of negotiations and received extensive attention. The most important
achievement resulting from these negotiations and in particular from the Uruguay Round, was the conclusion of
a number of multilateral agreements, which set out specific disciplines on different types of NTMs.

THE ''KENNEDY ROUND''

With the progressive reduction of tariffs brought about by the early GATT Tariff Conferences, it was perceived
that governments were gradually shifting to other forms of measures to restrict market access for goods and
protect their domestic industries. GATT Contracting Parties recognized that the benefits resulting from tariff
reductions and tariff bindings would only be effective if they could not be undermined by the application of
other measures. Therefore, effective trade liberalization required that not only tariff barriers had to be
reduced, but that there was a growing necessity to agree on multilateral disciplines to address NTMs.

The Kennedy Round was the first GATT Round where NTMs were addressed as part of the multilateral
negotiations in addition to tariffs. However, the results in this Round were rather modest due to the
considerable reluctance of some negotiating parties to assume new commitments in this new field. At the end
of this Round, Contracting Parties were only able to produce an Anti-dumping Code (the 1967 International
Anti-Dumping Code), which, however, applied only to those parties which agreed to be bound by it.

Contracting Parties also made efforts to identify NTMs through an exercise of notification of the barriers they
encountered in their trade relations. The result was a non-exhaustive list including 18 categories of measures
involving issues such as escape clauses, anti-dumping, customs valuation, government procurement policies,
residual quantitative restrictions, administrative and technical regulations, subsidies, etc. On the basis of that
list, an inventory of quantitative restrictions and other non-tariff barriers (NTBs) was drawn up shortly after the
Kennedy Round.

THE ''TOKYO ROUND''

Compared to the modest results on NTBs during the Kennedy Round, the Tokyo Round took a broader look at
trade rules and focused on addressing what was considered the most important NTBs facing exports at that
time.

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The results of this round were considered to be one of the major accomplishments in trade negotiations since
the creation of the GATT. The Tokyo Round negotiations on NTMs led to:

 the amendment of the Anti-dumping Code that had originally been negotiated during the Kennedy
Round; and,

 the conclusion of new "Codes", including the Code on Customs Valuation, the Code on Import Licensing
Procedures, the Code on Government Procurement, the Code on Subsidies and Countervailing
Measures, and the Code on Technical Barriers to Trade.

Instead of providing legal disciplines applicable to all Contracting Parties, these Codes were drafted as stand-
alone agreements that obliged only those Contracting Parties that became party to them. In most cases, only
a relatively small number of GATT Contracting Parties (mainly developed countries) subscribed to these Codes.
However, the operation of the MFN principle meant that even those GATT Contracting Parties who had not
signed the Codes generally enjoyed the same benefits of the Codes as those Parties who had signed them.
This diminished the incentives for joining the Codes, creating a "free-rider" problem. 2

Furthermore, the Tokyo Round did not tackle some NTBs that impeded considerably the exports of developing
countries, such as NTBs on textiles and clothing products, consumer electronics, agricultural goods and
foodstuffs, etc.

Despite these limitations, the result of the negotiations during the Tokyo Round injected an important impetus
for the further negotiation of NTMs during the Uruguay Round.

TO KNOW MORE... THE TOKYO ROUND CODES

Some of the most relevant codes included:

The Code on Customs Valuation

The Valuation Code established a positive system of Customs Valuation based on the price actually paid or
payable for the imported goods. It was signed by more than 40 Contracting Parties. The Code was
replaced by the WTO Agreement on Implementation of Article VII of the GATT 1994 after the conclusion
of the Uruguay Round.

Import Licensing Code

The Code was aimed at preventing import licensing procedures from unnecessarily hindering international
trade. During the Uruguay Round, it was revised to strengthen the disciplines on transparency and
notifications.

2 In this context, the term "free-rider" is used to describe a situation in which a country who does not make
any trade concessions, enjoys, nonetheless from the concessions made by other countries owing to the MFN
principle. From an economic perspective, free riders do themselves harm because they deny themselves the
benefits of trade liberalization (Goode Walter, Dictionary of Trade Policy Terms (2007), Fifth Edition, p. 181).
The Code on Government Procurement, however, remained a plurilateral instrument and its benefits were not
extended to non-signatory Members.

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 TBT Code or "Standards Code"

The Standards Code laid down the rules for preparation, adoption and application of technical regulations,
standards and conformity assessment procedures. Only 32 GATT Contracting Parties signed the Code.
The WTO Agreement on Technical Barriers to Trade (TBT Agreement) has strengthened and clarified the
provisions of the Standards Code.

Anti-Dumping Code

The Anti-Dumping Code provided more guidance about the determination of dumping and of injury than
did Article VI of the GATT 1947. It also set out in detail certain procedural and due process requirements
that must be fulfilled in the conduct of investigations. Nevertheless, the Code represented only a general
framework for countries to follow in conducting investigations and imposing duties. The Code was later
replaced by the WTO Agreement on Anti-Dumping.

THE ''URUGUAY ROUND''

One of the motivations behind the decision to launch the Uruguay Round was the GATT Contracting Parties'
awareness that NTMs were becoming increasingly important. In the Uruguay Round Ministerial Declaration,
negotiating parties set out as one of the objectives to reduce or eliminate NTBs, including quantitative
restrictions (paragraph D of the Ministerial Declaration). The Uruguay Round brought several significant
achievements on addressing NTMs, including:

 the amendment of the Codes adopted during the Tokyo Round;

 the conclusion of several new Agreements to deal with other forms of NTMs, including the ''Agreement
on Preshipment Inspection'', the ''Agreement on Rules of Origin'', the ''Agreement on Trade-related
Investment Measures'', the ''Agreement on the Application of Sanitary and Phytosanitary Measures'',
the ''Agreement on Textiles and Clothing'', and the ''Agreement on Safeguards''; and,

 A new "Part III" was included in the Schedules of concessions to record commitments in respect of
NTMs. Eleven Members made concessions by including specific commitments on areas such as the
removal of import licensing requirements, elimination of quantitative restrictions and tendering
requirements, reform of import licensing systems, eliminate import bans and phase out tariff-rate
quotas, etc.

A major innovation of the Uruguay Round was the introduction of the principle of ''single undertaking''.
According to this principle, all Members were required to accept the Multilateral Trade Agreements concluded
during the Uruguay Round as a whole, that is, as a single package. In other words, no Member had the
possibility to opt out of some Agreements. Thus, while the Tokyo Round Codes were applicable to signatories
only, all of the Uruguay Round Multilateral Trade Agreements were binding on all WTO Members.

EXERCISES:

1. What is the main difference between the Tokyo Round Codes and the Multilateral Trade Agreements
resulting from the Uruguay Round, besides the differences in substantive content?

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III. QUANTITATIVE RESTRICTIONS

IN BRIEF

Quantitative restrictions (QRs), which are one of the best-known NTBs, can be defined as specific limits on the
quantity or value of goods that can be imported (or exported) during a specific time period. The most common
QRs are prohibitions and quotas.

Under the GATT/WTO framework, tariffs are allowed as a form of protection as long as they do not exceed the
bound levels and are applied on an MFN basis. However, Members are generally prohibited from applying QRs.
The rationale of favouring tariffs over quantitative restrictions and other forms of NTBs is because tariffs are
considered to be more transparent and less trade distorting.

Article XI:1 of the GATT 1994 provides the general elimination of quantitative restrictions and "other
measures" instituted or maintained by a Member on the importation, exportation or sale for export of products
(other than duties, taxes or other charges consistent with GATT/WTO rules).

Despite the general rule prohibiting QRs, there are exceptions which allow the imposition of QRs in certain
circumstances and subject to certain conditions. Whenever authorized under WTO rules, QRs must be imposed
on a non-discriminatory basis according to Article XIII of the GATT.

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IV. OTHER NON-TARIFF BARRIERS

IN BRIEF

In addition to quantitative restrictions, several other non-tariff measures (NTMs) could also have the effect of
restricting market access of goods and therefore become trade barriers. Some of the measures covered by
WTO Agreements include, for example, technical barriers to trade, lack of transparency in trade regulations,
customs formalities and arbitrary practices of customs valuation. In those cases where NTMs are based on a
legitimate goal (i.e. measures to protect the environment or health), Members need to meet specific conditions
set out in the WTO Agreements to ensure the application of these measures do not result in barriers to trade.

A number of NTMs are currently subject to WTO multilateral disciplines applicable to all Members, including
inter alia the following:

 Agreement on Sanitary and Phytosanitary Measures

 Agreement on Technical Barriers to Trade

 Article V of the GATT 1994 on Freedom of Transit

 Article VII of the GATT 1994 and the Agreement on Customs Valuation

 Article VIII of the GATT 1994 on Fees and Formalities connected with Importation and Exportation

 Article X of the GATT on Publication and Administration of Trade Regulations;

 Agreement on Rules of Origin

 Agreement on Preshipment Inspection

 Agreement on Import Licensing Procedures

 Agreement on Trade Related Investment Measures

IV.A. PRESHIPMENT INSPECTION

IN BRIEF

Preshipment inspection (PSI) is the practice of verifying shipment details (essentially price, quantity and
quality), at the point of exportation, of goods to be shipped overseas. The verification is carried out by private
entities hired by importing governments for this purpose.

Preshipment inspection companies are mostly used by developing countries and economies in transition to
verify quantity and quality, as well as to prevent capital flight, commercial fraud and customs duty evasion (by
ensuring that the value of imports is not under or over declared). They also serve to compensate for
inadequacies in administrative infrastructure.

The Preamble of the Agreement on Preshipment Inspection recognizes the need of some developing country
Members to make use of PSI for as long and in so far as it is necessary to verify the quality, quantity or price

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of imported goods. It also recognizes the need for such programmes to be carried out without giving rise to
unnecessary delays or unequal treatment. Similar emphasis is laid on the objective of transparency of the
operation of PSI entities and of laws and regulations relating to PSI.

IV.A.1. WHY AN AGREEMENT ON PSI?

Since the second half of last century, private-sector buyers and sellers have resorted to PSI to ensure that the
quantity and quality of the goods to be traded conform to the specifications of the sales contract. However,
government-contracted, comprehensive PSI service is a recent phenomenon, with the first of such contracts
signed only in the 1960s. Some 35 governments in Asia, Africa and Latin America currently use the services of
PSI companies.

In general, PSI companies have mainly two functions:

(i) conformity of goods with the terms of the sales contract - To ensure the conformity of the
goods with the terms of the sales contract or invoice, which usually requires a physical inspection
of the goods; and,

(ii) verification of invoice price - To verify that the declared invoice price is not fraudulent, i.e. to
verify that there has been no under- or over-invoicing. The main objective is to prevent capital
flight which takes place through over-invoicing and/or to ensure that there is no loss in customs
revenue as a result of undervaluation or miss-classification of the good.

A number of subsidiary services might also be provided by a PSI company and include, inter alia, the
verification of origin of the product, maintenance of data for statistical purposes, technical assistance and
training.

Before the Uruguay Round and the adoption of the Agreement on Preshipment Inspection, there were no
specific multilateral disciplines on PSI. The Preamble of the Agreement recognizes the need for developing
countries to have recourse to PSI as long and in so far as it is necessary to verify the quality, quantity or price
of imported goods. It also recognizes the need for the programmes to be carried out without giving rise to
unnecessary delays or unequal treatment. Equal emphasis is laid on the objective of transparency of the
operation of PSI entities and of laws and regulations relating to PSI.

IV.A.2. SCOPE OF COVERAGE AND DISCIPLINES

The Agreement on Preshipment Inspection defines PSI activities as all activities relating to the verification of
the quality, the quantity, the price, including currency exchange rate and financial terms, and/or the customs
classification of goods to be exported to the territory of the user Member (Article 1.3). The Agreement applies
to all PSI activities carried out on the territory of Members (i.e. in the country of export prior to exportation)
whether such activities are contracted or mandated by the government (as opposed to contracts by
commercial firms), or any government body, of a Member (Article 1.1). There is no obligation for a WTO
Member to use PSI or to allow a government entity of another country to operate in its territory (Footnote 1 of
the Agreement).

The Agreement sets out obligations on the "user Member" (i.e. those using the services of PSI entities) and on
exporter Members. However, most provisions of the Agreement contain obligations for user Members. The

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Agreement also establishes an independent review procedure to resolve disputes between an exporter and a
PSI agency.

1. OBLIGATIONS ON USER MEMBERS

The obligation of PSI-user Members include:

 non-discrimination – PSI activities shall be carried out in a non-discriminatory manner and the
procedures and criteria employed in the conduct of these activities shall be objective and applied on an
equal basis to all exporters affected by such activities (Article 2.1);

 governmental requirements – respect the provisions of Article III:4 of the GATT 1994 (national
treatment principle applicable to internal laws, regulations and requirements related to internal sale,
transportation, distribution or use) to the extent these are relevant (Article 2.2);

 site of inspection – PSI shall tale place in the customs territory from which the goods are exporter or, if
that is not possible, the customs territory in which the goods are manufactured (Article 2.3);

 standards – quantity and quality inspections are performed in accordance with the standards defined by
the seller and the buyer in the sales contract – in the absence of such standards, relevant international
standards apply (Article 2.4);

 transparency – PSI activities shall be conducted in a transparent manner. Among others, Members
shall ensure that, when initially contacted by exporters, PSI entities provide to the exporters a list of all
the information which is necessary for the exporters to comply with inspection requirements. Members
shall also publish promptly all applicable laws and regulations relating to PSI (Articles 2.5 - 2.8);

 avoid unreasonable delay – ensure that PSI entities avoid unreasonable delays in inspection of
shipments. In this regard, the Agreement prescribes some time-limits (Articles 2.15 - 2.19);

 protection of confidential business information – ensure that PSI entities treat all information received
in the course of the PSI as business confidential in so far as such information is not already published,
generally available to third parties, or otherwise in the public domain. In addition, user Members shall
ensure that PSI entities do not request exporters to provide information on, among others,
manufacturing data related to patented, licensed or undisclosed processes, internal pricing and profit
levels (Articles 2.9 - 2.13);

 price verification – PSI shall conduct price verification, in order to prevent over and under – invoicing
and fraud, according to the guidelines contained in the Agreement (Article 2.20).

2. OBLIGATIONS ON EXPORTING MEMBERS

The obligation of exporter Members include: (i) non-discrimination in the application of domestic laws and
regulations relating to PSI (Article 3.1); (ii) prompt publication of those laws and regulations (Article 3.2); and,
(iii) offer to provide technical assistance to user Members, if requested (Article 3.3).

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3. INDEPENDENT REVIEW PROCEDURE

The Agreement provides for an independent review procedure to resolve disputes between an exporter and a
PSI agency (Article 4). The Independent Entity (IE) was established for this purpose through a Decision by the
WTO General Council on 13 December 1995 as a subsidiary body of the Council for Trade in Goods
(WT/L/125/Rev.1). It is administered by the WTO and is constituted by the International Federation of
Inspection Agencies (IFIA), representing PSI agencies, and the International Chamber of Commerce (ICC),
representing exporters. The independent review procedure under the Agreement on PSI , conducted by the IE,
is unprecedented in WTO terms, because both parties to the dispute are private entities. The obligation on
governments under the Independent Review Procedures is to take "such reasonable measures as may be
available to them to ensure fulfilment of the provisions and objectives'' (G/PSI/WP/W/1). Finally, it is worth
pointing out the right of Members to bring to the WTO dispute settlement system a matter which has already
been the subject to the independent review procedure. As of 2010, two cases have been brought before the IE.
The results of these two cases are contained in WTO documents G/PSI/IE/R/1 and G/PSI/IE/R/2.

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PROPOSED ANSWERS:

1. Compared to the Tokyo Round, a major change in the Uruguay Round was the introduction of the
principle of ''single undertaking''. According to this principle, all Members were required to accept the
Multilateral Trade Agreements concluded during the Uruguay Round as a whole (as a single package): no
Member had the possibility to opt out of some Agreements. Thus, while the Tokyo Round Codes were
applicable to signatories only, the Uruguay Round Multilateral Trade Agreements are binding on all WTO
Members.

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