THE GENERAL AGREEMENT ON TARIFFS AND TRADE

It is evident that no first look or overview can give a complete picture of a complex institution such as the
GATT, always fragile and controversial, and designed to be ‘provisional’ only, survived for five decades with
relatively little change, compared for example with its older and originally much stronger sister, the
International Monetary Fund. Many of the rules of the GATT were made more explicit, some were changed
by design or practice, and not all were obeyed with equal ardor. New mechanisms and indeed a new
institution have grown up, and the agenda has grown wider in scope. But the principles have remained
standing, despite ambivalence within almost every contracting party and continuing tensions among the
various parties. The details of these tensions and ambivalences, as well as analyses and precedents that
make up the public law framework of international trade, are set out in the succeeding chapters of this
book.

EVOLUTION OF THE GATT AND THE GATT LAW

The GATT evolved unevenly from its almost accidental beginnings in the 1940s to a vastly greater
organization and corpus of law. In the first five rounds of multilateral trade negotiations (1947-61), the
emphasis was largely on reduction of tariffs on the basis of most-favored-nation treatment and ‘mutual
exchange of benefits’. Beginning with Kennedy Round (1964-67) and more particularly in the Tokyo Round
(1973-79), the Contracting Parties turned their attention to crafting rules applicable to non-tariff measures
that affected trade in goods, including dumping and anti-dumping, subsidies and countervailing duties,
government procurement, and various techniques of valuation of merchandise for purposes of assessing
customs duties. In the Uruguay Round (1986-93), the GATT contracting states, by now over 100, continued
the practice of negotiating rules to govern international trade, but moved well beyond trade in goods to
address also intellectual property and aspects of services and transnational investment. They also reached
agreements that previously eluded them concerning so-called ‘safeguards’, and concerning trade in
agriculture, they formally established a new World Trade Organization, and they created a system of
binding dispute settlement designed to be applicable to the vast new body of law developed by the
Uruguay Round and its predecessors.

An overview of the law and institutions of international trade at the beginning of the twenty-first century is
presented in Chapter 5. The succeeding chapters address the principal subjects in more detail.

THE GATT/WTO SYSTEM AFTER THE URUGUAY ROUND: A PRELIMINARY SURVEY

Viewed as an eight-year legislative session, the Uruguay Round must be regarded as an enormous
achievement. Not only was the fragile GATT enabled to evolve into an apparently strong and close to
universal World Trade Organization; there was an enormous expansion in scope of economic activity
brought under the principles set down in the late 1940s – national treatment, most-favored-nation
treatment, and periodic collective efforts to reduce barriers to exchange across frontiers.

All of the Tokyo Round codes were clarified, and in the subsidies area an innovative new set of criteria was
developed. For all but the Government Procurement Code, the optional character of the Tokyo Round
Codes was abandoned, so that the coexistence of conditional and unconditional most-favored-nation
treatment as had prevailed from 1979 to 1994 was largely put aside. The resort to ‘market disruption’ and
‘grey area’ safeguard measures was subjected for the first time to quite rigid discipline, linked in text and, it
appears, in commitment, to the need for adjustment and recognition of the effect of comparative
advantage. Trade in agriculture, if not actually liberalized very much, was brought under a detailed regime
in which both import barriers and subsidies of various kinds were identified, quantified, and made suitable
for negotiation within the WTO system.

Beyond these advances in a system focused on the exchange of goods, the architects of the Uruguay Round
– for all their differences – arrived at a common understanding that the international economy could also
benefit from legal rules concerning services, intellectual property, and investment. On intellectual property,
they developed a significant code of conduct, built on the earlier international treaties but now applicable
to all the members of the WTO and linked to state-to-state dispute settlement and enforcement. On the
exchange of services, they erected a foundation that was incomplete when the Uruguay Round came to a
formal end, but that has provided a basis for continuing growth. As for investment, the achievement was
rather modest, and it appears that the consensus for a genuine multilateral legal regime remains a distant
prospect, even as a web of bilateral agreements grows even denser. But investment no longer seems ‘off
limits’ for an organization addressed primarily to trade.

Finally – or perhaps primarily – the whole system is now bound together by an Understanding on Dispute
Settlement, which at least in concept, subjects all the other obligations, commitments, and understandings
to a compulsory process of consultation, arbitration, and appeal, followed by a system which if not literally
‘enforcement’, is designed to eliminate cost-free defiance.

Of course, achievement on paper does not guarantee success in action. The difficulty first in launching a
new ‘Millennium Round’ and subsequently the failure (as of mid-2007) to bring the Round to successful
conclusion demonstrate the continuing controversies surrounding both the institution and the legal codes
that came out of the Uruguay Round and its predecessors. But while there was much unfinished business,
and a good deal of disagreement concealed beneath the signed accords, after completion of the Uruguay
Round it was more plausible to speak of a body of International Economic Law than had ever been the case
before.

THE INTERNATIONAL EXCHANGE OF SERVICES AND THE CREATION OF GATS

The GATS was a major innovation – a breakthrough that for the first time subjected services to an
international set of rules, linked to the WTO and therefore to the Understanding on Dispute Settlement as
well as to any future negotiating round.

 The basic principles – MFN and National Treatment – and the basic techniques – schedule of
bindings, periodic negotiations, and organized dispute settlement – have been made applicable to
the exchange of services. But the commitment to the principles was made subject to a mixture of
opt-out and opt-in provisions, quite unfamiliar in the tradition of the GATT.
 Negotiation across sectors – Patria making an offer on banking in return for Xandia’s concession on
travel bureau – is out of the question, and the permission for opting out (for MFN), and opting in
(for national treatment) is quite different from the GATT/WTO tradition in other areas. Market
access, a term not used in the GATT or the associated agreements except in the 1994 Agreement
on Agriculture, becomes the main focus in the Services Agreement and associated Annexes and
Protocols. Monopoly, privatization, and competition law, subjects thus far largely avoided by the
makers of international law, become a major subject for negotiation and legislation, particularly in
the area of telecommunications.
 Most-Favored-Nation Treatment is made mandatory, but subject to opting out for specific sectors
on the basis of existing preferences. The United States, for example, initially opted out of MFN for
financial services and for telecommunications, with a view to offering full MFN when other
 countries came up with satisfactory offers in the sectoral negotiations due to begin soon after the
close of the Uruguay Round.
 Market access is not made mandatory, but requires opting in by sector; however, even if a member
state submits a ‘positive list’, i.e. it opts in, it may opt out of certain of the requirements for full
market access set out in the General Agreement.
 National treatment is supposed to attach to any sector on a country’s positive list, but that list may
itself provide for opting out of national treatment for particular sectors or subsectors.

The growth in trade in services since the completion of the Uruguay Round has been roughly parallel
with the growth in merchandise trade, with substantial variation in the different regions. How much of
the increased trade in services is attributable to implementation of the GATS, as contrasted with
developments in the world economy as a whole is difficult to judge. What can be said with some
confidence is that privatization, deregulation, non-discrimination, and enhanced market access for
foreign suppliers form part of a common trend, and that the international rules of international trade
have moved to keep up with that trend in the area of services. If the negotiations and agreements
display a continuing ambivalence, that could be said about the evolution of the GATT and the other
constituents of the WTO system as well. The overall movement, however, remains in the direction of
reducing restraints, and trade in services appears to have joined that movement.

DISPUTE RESOLUTION IN THE GATT, 1948-94

DISPUTE SETTLEMENT IN THE WTO ( A DECADE OF THE DISPUTE SETTLEMENT MECHANISM)

Looking at the big picture, and putting aside the Bananas case and one or two others, the WTO Dispute
Settlement Mechanism is a great success – more so than any other arrangement for resolving
international legal disputes at government level. Most complaints that are carried through to a Report
end up with a finding of violation, most Respondents promise to withdraw or modify the practice found
to be inconsistent with the agreement in question, and most do so.

There have been no scandals, no charges of conflict of interest, and the decision to choose members of
the Appellate Body to hear a particular appeal without regard to nationality has worked smoothly.
There has been less complaint about domination of the disputes process by the United States and the
European Communities than in respect to other aspects of the Organization’s activities, notably the
negotiations in the Doha Round.

If there is some concern within the WTO that ‘the lawyers have taken over’, that was to be expected in
a system modeled partly on arbitration and partly on adjudication, with briefs, exhibits, expert
testimony, appeals, compliance proceedings, and so on. What was perhaps not expected was that the
other aspects of the WTO system – particularly interpretation by the Councils and negotiation in the
areas left incomplete in the Uruguay Round, notably Agriculture and Services – have not met with
comparable success. With no real executive and a weak legislative branch, it is not surprising, even if it
was not wholly foreseen, that WTO jurisprudence (in the sense of case law) has grown rich and strong.
While one may not always agree with the outcome in a particular case, all the Reports of the Appellate
Body, and most of the panel reports as well, have been carefully drafted, with close attention to the
submissions of the parties and the relevant precedents. Proposals for a check on the Appellate Body by
some outside ‘peer group’ have gone nowhere.
Both the panels and the Appellate Body have relied closely – perhaps too closely – on prior decisions. In
fact nearly every Report has a list, complete with citations, of every prior WTO or GATT case mentioned
in the opinion, in the style of the English law reports. As between the common law and the civil law
models, the case method has clearly prevailed, notwithstanding the general international rule that
decisions bind only the parties and that there is no rule of stare decisis.

Finally, consider the effect of the existence of the Dispute Settlement Mechanism from the point of
view of the national governments and agencies of the member states. It is difficult to prove, but not
hard to infer, that the possibility of being sued, and the likelihood of being found in violation, has acted
as a powerful counter-pressure to the constant domestic pressures and lobbying in favor of particular
exemptions and protections, so that despite setbacks in negotiations of new agreements the
international trade system as a whole has been kept on track. That may be the system’s most
important effect of all.

THE QUESTION OF SUBSIDIES

In all, the Subsidies Code that emerged from the Tokyo Round introduced more law into the question
of subsidies than had existed before. In normative terms, the rules seemed to be clear in prohibiting
export subsidies by industrial countries on non-primary products, whether or not they caused injury.
Any other signatory to the Code could request consultations, and could initiate dispute settlement,
even if it did not assert that it had been injured. But importing states were permitted to impose
countervailing duties, provided they established in a formal investigation the existence of a subsidy,
material injury to their industry, and a casual link between the subsidization and the injury.

The Code left many questions unanswered – how to measure a subsidy, how to allocate grants or loans
over various products and over time, how to define and measure injury to an industry, and how to sort
out the multiple causes of injury, given that in times of prosperity subsidy cases are rarely brought. All
of these questions came up in disputes in the years following conclusion of the Tokyo Round. A fair
number of these questions were resolved in the Uruguay Round fifteen years later.

A footnote to Article 4 of the 1979 Subsidies Code said: ‘An understanding among signatories should be
developed setting out the criteria for the calculation of the amount of the subsidy’. Essentially, that
understanding has been reached, generally along the lines advocated by the United States. A
comprehensive definition of subsidy, which eluded the Tokyo Round, was achieved in the Uruguay
Round. The accompanying consensus concerning the kinds of governmental measures that ought not to
be opposed (the green light subsidies) was never firm, and did not survive the five-year review. The fact
that twenty-five cases involving the question of subsidies were brought before the Dispute Settlement
Mechanism in the first ten years of the WTO suggests that at the margin, the law, as well as the
practice, remain unsettled.

At the risk of oversimplification of an inherently intricate subject not yet fully worked out, one may
summarize the state of the law of the first decade of the twenty-first century as follows (agriculture
excepted):

 State aids generally available without targeting particular industries or particular performance
will not be treated in the regulation of international trade as subsidies. Better schools, lower
taxes, easier availability of raw materials, devalued currency, may all help the producers and
exporters of Patria, and may in some sense constitute transfers from the taxpayers or
 consumers of Patria to its producers, but they will not be regarded in the law and practice of
international trade as ‘unfair trade practices’.
 Benefits of government intervention linked explicitly to export performance (or to import
substitution) are presumed to be specific, and will be treated as prohibited subsidies, even
when they represent no net cost to the public treasury.
 Domestic subsidies are not automatically condemned, but if they are specific and cause injury,
they are vulnerable to anti-subsidy remedies, national and international.
 Manipulation of internal taxes to benefit a country’s exports is suspect, but forgiveness of
exercise taxes on exports is not generally regarded as a subsidy, and neither is differential
taxation so as to favor export of processed products rather than of raw materials.
 Special and differential treatment for developing countries still plays a role in the law of
subsidies, but that role is declining except for the least developed countries, and may be
different for different products.

In sum, the continuing controversy over subsidies in international trade reflects both the staying power of
mercantilism and the staying power of the vision of trade free from the manipulations of governments. An
appreciation of that vision may be gained by comparison with treatment of the same subject in connection
with trade in agriculture, treated in Chapter 11. First, however, comes another comparison, with the law of
Dumping and Anti-dumping, in Chapter 10.

DUMPING AND ANTI-DUMPING

The law of dumping and anti-dumping turns out to be a blend of restraints on private activity and restraints
on states in taking measures against that activity. The condemnation of dumping contained in Article VI of
the GATT is tempered by the rule that anti-dumping measures are permissible only when injury is shown.
The suggestion that anti-dumping is the last protectionism is probably overdrawn. But it is not too strong to
say that anti-dumping is a price paid by the proponents of trade liberalization for the almost universal
acceptance of the GATT/WTO system, and the vast expansion of subjects embraced by the system.

Dumping and anti-dumping are clearly more important in the work of lawyers and officials than in the
overall conduct of international trade. But in the mixture of rules and discretion, of national and
international law, and of conflicting values, the law of dumping and anti-dumping may fairly be said to
reflect the ambivalence – currents and counter-currents – present throughout the international law of
international trade.

AGRICULTURE

In concluding the Agreement on Agriculture as part of the Uruguay Round, the negotiations accomplished a
task that had eluded the Contracting Parties since the origin of the GATT. All trade-distorting devices, as
defined, were required to be quantified, posted on schedules of each member, and subject to reduction
over a six-year period ending in the year 2000, and bound thereafter. The three major types of measures
used by governments to distort international trade in agriculture were placed under a discipline applicable
to all member states, and the Agreement called for elimination of a number of devices that had grown up
without express sanction under the GATT, notably variable levies, voluntary export restraints, and
discretionary import licensing, as well as programs that had been implemented pursuant to GATT waivers
long overdue. But whereas a system of definitions and rules was put in place, the Agreement did not
establish ceilings for import barriers, export subsidies, or domestic support programs. Thus the reduction
commitments started and ended at different levels for each country, and the actual amount of
liberalization was rather modest. One could fairly say, to paraphrase the first preambular clause of the
Agreement, that ‘a basis for initiating a process of reform of trade in agriculture’ had been established. The
actual, significant reform was to be accomplished in the next round.

INTELLECTUAL PROPERTY LAW AND THE WORLD TRADING SYSTEM

In including intellectual property in the world trading system, the Uruguay Round expanded into a new
area, in many ways different from its traditional focus on international trade in goods. But in the post-
industrial information age, the belief prevailed that intellectual property was too important to be left
outside the ambit of the new World Trade Organization.

The fundamental principles of the GATT/WTO system – most-favored-nation treatment and national
treatment – are included in the TRIPS Agreement, as are the requirement for adherence to the Agreement
by all member states, and the requirement to participate in the WTO dispute settlement mechanism.

The principal provisions of the nineteenth-century conventions on intellectual property – Paris (for patents
and trademarks) and Berne (for copyright) – are incorporated in the TRIPS Agreement, even for states that
have not separately adhered to those conventions. But new obligations are added, notably the obligation to
make patents available for virtually all products and processes, to protect new kinds of intangible property
such as software and geographic indications, and to establish effective national enforcement procedures,
including criminal procedures for counterfeiting and willful infringement.

There is no doubt that protection of intellectual property worldwide has been significantly strengthened by
adoption of the TRIPS Agreement. Whether the benefits of increased protection have been spread equally
to developed and developing countries is much more doubtful. The proponents of the TRIPS Agreement –
that is the major industrial states – predicted that enhanced intellectual property protection in developing
countries would provide incentives both to local innovation and to foreign direct investment and
technology transfer. Others feared that TRIPS would increase the gap between have and have-not states,
and would lead to a drain on resources of the developing countries. As of 2007, it appeared that there was
some evidence supporting both predictions, but no firm conclusion had emerged and the debate was likely
to continue.