978-0132718974 Chapter 7 Solution Manual Part 2

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Multilateral Trade Agreements

In addition to GATT 1994, there are 13 other Agreements on Trade in Goods annexed to the WTO

Agreement: Nine of these deal with regulatory matters; two are sectoral agreements that extend

GATT to certain types of goods not covered under GATT 1947; one is a program to devise a new

agreement; and one is a protocol.

The most significant aspect of these agreements is that they have to be acceded to by all WTO

member states. Disputes between member states over their application are now uniformly

governed by the WTO Dispute Settlement Understanding.

Customs Valuation – The Agreement on Implementation of Article VII of GATT 1994 (Customs

Valuation Code) is designed to harmonize the methods used by WTO member states to determine

the value of those goods. Its detailed rules are meant to provide for a fair, neutral, and uniform

system of customs valuation. A primary method and fallback methods are established.

The primary method of customs valuation is to figure the transaction value of the imported item.

This is based on “the price actually paid or payable for the goods when sold for export to the

country of importation” plus certain amounts reflecting packing costs, commissions paid by the

buyer, any royalties or license fees paid by the buyer, and any resale, disposal, or use proceeds

that accrue to the seller.

If the transaction value of imported items cannot be fairly determined, then fallback methods are

used. The first such method involves determining the transaction value of identical goods sold for

export to the same importing country at about the same time. If this value cannot be established,

then the second method is to determine the transaction value of similar items sold for export to

the importing country at about the same time. If neither of these values can be ascertained, the

deductive value method is used. In this case, the customs value is based on the price actually paid

for the greatest number of units sold to unrelated persons in the importing country at about the

same time.

Under the fourth method, the computed value is derived from the sum of (a) the cost or value of

the materials, including the cost of fabrication or processing; (b) the profit and overhead that

customarily apply to the particular goods in the exporting country; and (c) charges for handling,

transportation, and insurance. Finally, if none of these methods can be applied, a derived value is

used. This is determined by applying whichever of the other methods best fits and adjusting it to

the particular circumstances.

Preshipment Inspection – Developing states frequently engage private companies to verify

price, quantity, quality, customs classifications, and other characteristics of goods before the

goods are shipped from other states. This preshipment inspection (PSI) is meant to prevent over-

and underinvoicing and fraud, and thus prevent the flight of capital and the evasion of customs

duties. The Agreement on Preshipment Inspection authorizes developing states to make use of

PSI, but it also tries to limit its harmful trade effects.

Central to the PSI process is the verification of prices. The PSI Agreement allows an entity

engaged to carry out PSI activities to reject a contract price it believes wrong only if the entity

follows certain guidelines.

Trade in Goods

The states in which PSI activities are carried out have certain obligations. These states must

ensure that their laws and regulations relating to PSI activities are applied nondiscriminatorily

and transparently. If requested, they also must offer to provide technical assistance to the states

engaging in PSI activities within their territories.

Disputes between an exporter and an entity engaged to carry out PSI activities are to be resolved

by mutual accord. If not, either party may refer the matter for review to an independent review

body.

Technical Barriers to Trade – The Agreement on Technical Barriers to Trade (TBT Agreement)

establishes rules governing the way WTO member states draft, adopt, and apply technical

regulations and standards to ensure that they (1) provide an appropriate level of protection for the

life and health of humans, animals, and plants, as well as for the environment; (2) prevent

deceptive practices; and (3) do not create unnecessary obstacles to trade.

Technical regulations are mandatory laws and provisions specifying (1) the characteristics of

products; (2) the processes and production methods for creating products; and (3) the

terminology, symbols, packaging, marking, or labeling requirements for products, processes, or

production methods.

Standards are voluntary guidelines that specify the same kind of requirements. Conformity

assessment procedures include the sampling, testing, and inspecting of products; their evaluation,

verification, and assurance of conformity; and their registration, accreditation, and approval.

All products, including agricultural and industrial products, are covered by the TBT Agreement,

but purchasing specifications related to the production or consumption requirements of

governmental bodies and sanitary and phytosanitary measures are not. The TBT Agreement

applies to local governments and NGOs, and central governments are required to take “reasonable

measures” to see that these bodies do so.

Sanitary and Phytosanitary Measures – The Agreement on the Application of Sanitary and

Phytosanitary Measures (SPS Agreement) is meant to complement the Agreement on Technical

Barriers to Trade by defining the measures that may be taken by WTO member states to protect

human, animal, and plant life and health.

Member states may protect the life and health of living things, but they may not do so as a

disguised means for restricting international trade, nor may they act arbitrarily to unjustifiably

discriminate between states where identical or similar conditions exist. In addition, the measures

taken must generally be justified by scientific evidence.

Case 7-4: Australia—Measures Affecting Importation of Salmon

Facts: Australia appealed from a Panel Report holding that Australia had violated Article 5.5 of

the WTO’s SPS Agreement by establishing unjustifiable distinctions in the levels of sanitary

protection it required on imports of Pacific salmon as compared to imports of herring used as bait,

and imports of live ornamental finfish.

Issue: Had Australia acted inconsistently with its obligations under Article 5.5?

Holding: Yes.

Law: To show that a WTO member state has acted inconsistently with Article 5.5, the following

Trade in Goods

Explanation: (1) Australia’s levels of sanitary protection for Pacific salmon were quite

restrictive. Its levels of protection for herring and finfish were not so restrictive. The Panel in

ascertaining Australia’s compliance with Article 5.5 could compare these different criteria

Order: The Panel’s findings are upheld.

Trade-Related Investment Measures – The Agreement on Trade-Related Investment Measures

(TRIMs Agreement) is aimed at facilitating foreign investment and eliminating some of the

provisions commonly found in foreign investment laws that distort or reduce international trade.

In particular, the agreement forbids provisions in investment laws that discriminate unfavorably

against foreigners and that impose quantitative restrictions on the use of foreign products by

foreign-owned local enterprises.

Import-Licensing Procedures – The Agreement on Import-Licensing Procedures seeks to ensure

that import-licensing procedures are neutral in their application and administered in a fair and

equitable manner.

Forms and procedures are to be as simple as possible and applicants should have to deal only with

a single administrative body. Import licenses are not to be denied because of minor errors in

completing the application; nor are imports to be barred because of minor deviations in the value,

quantity, or weight designated on the license.

Anti-dumping – The Agreement on Implementation of Article VI of GATT 1994, or the

Anti-dumping Code, replaces codes negotiated during the Tokyo and Kennedy Rounds. The

current code defines dumping in the following way: “A product is to be considered dumped, i.e.

introduced into the commerce of another country at less than its normal value, if the export price

of the product exported from one country to another is less than the comparable price, in the

ordinary course of trade, for the like product when destined for consumption in the exporting

country.”

Significantly, the Anti-dumping Code does not prohibit dumping. It recognizes instead that the

dumping of imports may be countered through the application of anti-dumping duties, but only if

an investigation determines that the dumped imports cause or threaten to cause material injury to,

or materially retard the establishment of, a domestic industry within the importing country.

Provisional measures may be imposed after an investigation has been initiated, a preliminary

determination has been made of dumping and consequential injury to a domestic industry, and the

authorities concerned believe that such measures are necessary to prevent injury being caused

during the course of the investigation.

Trade in Goods

Final anti-dumping duties may be imposed at the discretion of the authorities concerned upon the

completion of an investigation and a final determination that dumping, injury, and a causal link

between them exist.

Case 7-5: Nippon Steel Corporation v. United States

Facts: In 2000, the United States International Trade Commission (ITC) found that the domestic

Issue: Is there substantial evidence to support the ITC’s determination of affirmative material

injury from the dumping of certain Japanese steel imports?

Holding: Yes.

Law/ Explanation: The Federal Circuit uses “substantial evidence” review of the entire

administrative record, including ITC determinations, as the appellate review standard for the trade

Order: The Federal Circuit reverses the Court of International Trade’s decisions in Nippon IV

and Nippon V and instructs the CIT to vacate the ITC’s negative material injury and negative

threat of material injury determinations and reinstate the Commission’s affirmative material

injury determination.

Subsidies and Countervailing Measures – A subsidy is a financial contribution made by a

government (or other public body) that confers a benefit on an enterprise, a group of enterprises,

or an industry. Examples of subsidies are:

direct transfers of funds (e.g., grants, loans, and equity infusions),

potential direct transfers of funds (e.g., loan guarantees),

the foregoing of revenues (e.g., tax credits),

the providing of goods or services (other than general infrastructure), and

the conferring of any form of income or price support.

The Agreement on Subsidies and Countervailing Measures, or SCM Agreement, replaces the

1979 Subsidies Code concluded at the Tokyo Round. The SCM Agreement clearly states that its

“disciplines” apply only to “specific” subsidies; that is subsidies that target:

a specific enterprise or industry,

specific groups of enterprises or industries, or

enterprises in a particular region.

Trade in Goods

The disciplines do not apply to (1) nonspecific subsidies, (2) certain specific subsidies defined in

the agreement, and (3) agricultural subsidies (which are governed by the Agreement on

Agriculture).

Categories of Specific Subsidies

Specific subsidies are divided into two categories: (1) prohibited subsidies (informally referred to

as red subsidies), and (2) actionable subsidies (yellow). The agreement originally contained a

third category: nonactionable subsidies. This category existed for five years, ending on December

31, 1999, and was not extended.

Prohibited subsidies (red subsidies) are subsidies that either (1) depend upon export performance

or (2) are contingent upon the use of domestic instead of imported goods. Actionable subsidies

(yellow subsidies) are subsidies that may or may not be trade distorting, depending on how they

are applied. They are defined as specific subsidies that, in the way they are used, (1) injure a

domestic industry of another member state, (2) nullify or impair benefits due another member

state under GATT 1994, or (3) cause or threaten to cause “serious prejudice” to the interests of

another member state.

Remedies and Countervailing Measures

A WTO member state that believes that its domestic industries have been injured by either

prohibited subsidies or actionable subsidies is given four options: (1) do nothing, (2) request

consultations, (3) seek a remedy from the WTO, or (4) independently impose countervailing

duties.

If an injured member state chooses to do nothing, neither the WTO nor any other member state is

entitled to intervene. To obtain a remedy from the WTO, a member state claiming an injury must

first consult with the subsidizing member state. If the two states are unable to find a mutually

acceptable solution, either one may refer the matter to the WTO’s Dispute Settlement Body

(DSB) for the latter to set up a Panel.

If the Panel concludes that there is a prohibited subsidy, it will recommend the subsidy’s

withdrawal; if it concludes that there is an actionable subsidy, it will recommend that the

subsidizing member state either remove the subsidy’s adverse effects or withdraw the subsidy. If

neither party appeals to the DSB’s Appellate Body, the DSB must promptly adopt the report

(unless it rejects it by consensus). If there is an appeal, the Appellate Body’s decision must be

unconditionally observed.

Case 7-6: United States—European Communities—Measures Affecting Trade in Large Civil

Facts: The United States complained that the European Union was providing illegal subsidies to

Airbus companies in violation of Articles 3, 5, and 6 of the SCM Agreement and Articles III:4,

XVI:1, and XXIII:1 of GATT 1994. The measures at issue in this dispute are more than 300

separate instances of alleged subsidization, over a period of almost 40 years, by the European

Communities and four of its member States, France, Germany, Spain and the United Kingdom,

with respect to large civil aircraft (“LCA”) developed, produced and sold by the company known

today as Airbus SAS. The measures that are the subject of the U.S. complaint may be grouped

into five general categories: (i) “Launch Aid” or “member State Financing” (LA/MSF); (ii) loans

from the European Investment Bank; (iii) infrastructure and infrastructure-related grants; (iv)

Trade in Goods

corporate restructuring measures; and (v) research and technological development funding. The

United States claims that each of the challenged measures is a specific subsidy within the

meaning of Articles 1 and 2 of the SCM Agreement, and that the European Communities and the

four member States, through the use of these subsidies, cause adverse effects to the U.S. interests

within the meaning of Articles 5 and 6 of the SCM Agreement. In addition, the United States

claims that seven of the challenged LA/MSF measures are prohibited export subsidies within the

meaning of Article 3 of the SCM Agreement.

Issue: Were the subsidies, which were provided by members of the European Union to Airbus

companies, prohibited under the SCM Agreement and GATT 1994?

Holding: Yes.

Law / Explanation: The WTO panel considered whether subsidies provided by members of the

Order: The panel recommended the immediate withdrawal of all subsidies found to be

prohibited.

If a member state does not comply with a DSB-adopted report or Appellate Body decision, the

DSB will authorize (unless it agrees by consensus not to do so) a complaining member state to

adopt countervailing measures. A countervailing measure is defined in the SCM Agreement

simply as a duty specially levied to offset a subsidy.

A state may independently impose countervailing duties so long as it follows the procedures

specified in the SCM Agreement.

Developing States and States Transitioning to Market Economies

Developing states are given special treatment in the SCM Agreement. The least developed states

and developing states with a per capita income of less than U.S. $1,000 are allowed to use

subsidies based on export performance and were given until the year 2003 to phase out subsidies

based on domestic content. Other developing states were required to phase out both kinds of

subsidies by the end of 1999.

Safeguards – Safeguards are emergency actions that a WTO member state may take to protect its

domestic industries from serious injury from a sudden increase in the quantity of an imported

product. Until the Agreement on Safeguards was adopted with the inauguration of WTO, the

provisions of Article XIX (entitled “Emergency Actions on Imports of Particular Products”) of

GATT 1947 governed safeguards.

A WTO member state may apply safeguard measures against a product only after conducting an

official investigation to determine that the product is being imported into its territory in such

increased quantities and under such conditions as to cause or threaten to cause serious injury to

the domestic industry that produces like or directly competitive products. The measures must then

be applied to a product (1) regardless of its origin and (2) only for the time and to the extent

necessary to prevent or remedy serious injury and to facilitate adjustment.

Trade in Goods

To encourage domestic industries to make adjustments, any safeguard measure that is to last

longer than one year must be progressively liberalized at regular intervals over its lifetime. If it is

to last for more than three years, a review must be made by its midterm to determine if the

measure should be withdrawn or liberalized more quickly. The WTO Safeguards Committee

meets twice a year to review all safeguard actions and notifications by member nations.

Agriculture – The Agreement on Agriculture establishes guidelines for “initiating a process of

reform of trade in agriculture.” Its ultimate goal is the establishment of a market-oriented system

for trade in agricultural products that is free of restrictions and distortions.

To begin the process of reform, the agreement:

specifies the agricultural products it governs;

requires that nontariff barriers to agricultural imports be converted into customs tariffs;

defines permissible forms of domestic supports;

defines export subsidies;

phases in initial reductions in tariffs, impermissible domestic support measures, and export

subsidies during a six-year implementation period (developing countries are given a 10-year

period); and

progressively integrates international trade in agricultural products into the GATT system.

The agricultural products governed by the agreement include foodstuffs (except for fish and fish

products), hides, skins, animal hairs, raw cotton, raw flax, raw hemp, raw silk, and certain related

products. Domestic agricultural support measures and export subsidies for agricultural products

can sometimes restrict or distort trade. The Agreement on Agriculture provides for the gradual

phasing-in of member state obligations.

Textiles and Clothing – The Agreement on Textiles and Clothing is designed to eliminate the

current system of special arrangements governing international trade in these products. Prior to its

adoption, a series of collateral arrangements had been entered into by the states principally

involved in the clothing and textiles trade that created an exception to the GATT principle of

protection through tariffs. The Agreement on Textiles and Clothing provided for the complete

elimination of the Multi-Fiber Arrangement at the end of a 10-year transition period.

Rules of Origin – Rules of origin are important in implementing such trade policy instruments as

antidumping and countervailing duties, origin marking, and safeguard measures. The Agreement

on Rules of Origin is essentially a program outlining procedures for bringing about an

international system of harmonized rules of origin. Rules of origin are the laws, regulations, and

administrative procedures used by states to determine the country of origin of goods.

According to the guidelines set out in the Agreement on Rules of Origin, the resulting rules of

origin are to be:

coherent;

objective, understandable, and predictable;

administered in a consistent, uniform, impartial, and reasonable manner;

applied equally to each member state’s nonpreferential commercial policy instruments; and

based on a positive standard.

II. Chapter Questions

Trade in Goods

Customs Valuations

1. Students’ answers may vary. Possible answers include:

If the transaction value of the widgets cannot be fairly determined, then fallback methods are

used. The first such method involves determining the transaction value of identical widgets sold

for export to the same importing country at about the same time. If this value cannot be

Under the fourth method, the computed value is derived from the sum of (a) the cost or value of

the materials, including the cost of fabrication or processing; (b) the profit and overhead that