Basic principles of the WTO, exceptions and transparency
The non-discrimination principles – Most-Favoured Nation ("MFN") and National Treatment ("NT") – are the cornerstones of the multilateral trading system. These principles, which are reflected in the main WTO agreements (GATT 1994, GATS, TRIPS, SPS Agreement, TBT Agreement etc.), take their origins from Article I and III of the General Agreement in Tariffs and Trade ("GATT") 1947. In the goods' context, the principles require the following:
By virtue of the first principle, the best treatment – regardless of whether it takes the form of an advantage, favour, privilege or immunity – provided by one member to any country – whether WTO member or not – on any of the aspects referred to in Article I of the GATT 1994 must be extended, immediately and unconditionally, to the rest of WTO Members (i.e. that treatment shall be multilateralised). In turn, through the second principle, the treatment provided to domestic stakeholders must also be extended to foreign ones.
While the application of the above principles is subject to requirements, these requirements have been interpreted in an expansive manner that the scope of the MFN and NT principles is very comprehensive. With respect to the exceptions to the principles, the jurisprudence is clear in that they must be interpreted restrictively. This is why, with the exception of free trade areas or customs unions, the justification of violations to the MFN principle are often denied by panels and the Appellate Body.
Only WTO members benefit from the application from the application of these principles. Only by acceding to the WTO a country can benefit from these two principles.
Medium and small countries benefit specially from the application of these principles. Even taking a passive approach to negotiations, such countries will benefit – in the same way that those members that actually negotiated – from the best outcome of trade negotiations.
By contrast, a country that is not member of the WTO has to conduct separate negotiations with each partner – which requires considerable time and large resources – and has to cope on its own with the differences in negotiating power.
What is the Most-Favoured Nation ("MFN") principle?
MFN is an obligation not to discriminate among third countries. It implies that like products should be treated equally irrespective of their country of origin. The MFN principle requires WTO members to apply no less favourable treatment to a member than it applies to any other country with regard to like products. It is worth mentioning that the identification of like products can be a difficult assessment at times.
Any advantage – whether a tariff preference or otherwise – granted to a country (even if it is not a WTO member) should be extended to other WTO members immediately and unconditionally.
There are two exceptions to MFN’s application:
- When WTO members conclude free trade agreementsor set up customs unions, conditions regulating the trade between the parties to the free trade agreement or the customs union may be different (e.g. more favourable) to those applied to trade with the rest of WTO membership
- Preferential regimes in favour of less-developed members based on Generalized System of Preferences
What does the National Treatment ("NT") principle entail?
National Treatment is the obligation of WTO members not to discriminate between domestic and foreign goods. The goal is to make sure that internal measures are not applied to protect domestic producers. The principle requires WTO members to apply no less favourable treatment to foreign goods than they apply to their domestic like products. In this way, National Treatment protects equality of conditions for imported products vis-à-vis domestic products.
The measures applied to foreign goods should not be in excess of those applied to domestic like products. These measures can include any regulation or government action or internal taxes and other charges.
Tariffs have traditionally been the most widely utilized tool of protecting domestic market and an important source of revenues for governments. Thanks to GATT negotiations through the decades, tariff rates have come down from 40% average rate in 1947 to 9% average applied rate in 2013. And since WTO’s establishment there has been a 15% reduction in average tariffs applied by WTO members.
WTO rules require from members to impose to the commerce of the other members tariffs not higher than those provided for in their schedules of concession for goods. Members’ goods schedules are the legal means by which tariff commitments are recorded. They are annexed to and an integral part of the WTO treaty. For goods, the schedule of concessions contains the following information:
- Tariff item number
- Description of the product
- Rate of duty
- Present concession established
- Initial Negotiation Rights (or "INR", such as main suppliers of product)
- Concession first incorporated in a GATT Schedule
- INR on earlier occasions
- Other duties and charges
- For agricultural products special safeguards may also be defined
An example of a schedule of concessions is presented below:
(From Kazakhstan’s Goods Schedule, Source: www.wto.org)
All tariff information of WTO Members can be accessed through the Tariff Download Facility, click on the image below to have access to it:
The most used types of customs duties are:
- Ad valorem duties: e.g. 5% of assessed value
- Specific duties: e.g. 5 USD/kg
- Compound duties: e.g. 10 USD/kg + 5%
Once a tariff for a certain product is bound, the WTO member is obliged not to apply customs duties in excess of the bound rate. Otherwise, the member breaches its obligations. Two cases are presented as example:
Case 1: Tariff treatment to certain goods from the European Union
The European Union ("EU") alleged that Russia was not acting in compliance with its tariff bindings. In particular, it argued that for certain goods such as refrigerators, palm oil or various types of paper products, Russia was charging customs duties that exceeded bound rates. In all cases the panel determined violations of Russia’s commitments.
Case 2: Tariff treatment of certain Information Technology ("IT") products
The EU is party to the WTO Information Technology Agreement ("ITA") and as such it shall apply no customs duties on imports from IT products covered by that Agreement. With technological development, new products appeared on the market during late 90s and early 2000s. By classifying some of those new products under EU Combined Nomenclature positions subject to customs duties, the EU did not extend to them the duty-free treatment contemplated under the ITA. The panel found that certain set-top boxes, multi-functional digital machines and flat panel display devices were products covered by the ITA and hence the EU, by charging customs duties on imports from those products, was in breach of its WTO obligations.
There are exceptions to the above-mentioned rule. Customs duties applied may be higher than the respective bound rates as a result, for instance, of the application of trade defence (anti-dumping, countervailing or safeguard) measures.
Suppose that Azerbaijan binds import duties for milk at 10%. If following entry into the WTO, its domestic producers suffer injury due to imported milk, Azerbaijan could initiate an anti-dumping investigation to determine whether such imports are made at dumped prices thereby causing injury to the domestic producers of milk. Suppose further that a margin of dumping of 50% is found and that all other requirements are met. In this case, an anti-dumping measure of 50% could be imposed. From the moment of entry into force of this measure, importers would have to pay duties in the amount of 60% (ordinary duty of 10% plus anti-dumping duty of 50%)
Bound tariffs may be increased through a procedure established in the GATT. This procedure has been used on many occassions, for instance by the European Union. In this case, however, compensation shall be granted to the Members negatively impacted by the rise of the tariffs.
Tariffs lower than the bound rate may be applied, on an MFN basis, at any time. For instance, a WTO Member can bind its tariff at 25% (ceiling) and apply the tariff at any rate below that (e.g., 10%). At any moment, it could raise its applied rate to any level not exceeding 25%.
The obligation not to exceed the bound rate does not apply where the WTO Member has not taken tariff commitments with respect to a given tariff line. In this case, the Member is free to apply any tariff rate to imports of products falling under that tariff line.
The provisions relating to tariff bindings do not affect the right of a WTO Member to provide preferential tariffs to one or more countries under unilateral tariff preference arrangements, such as the Generalised System of Preferences, or under free trade agreements or customs unions.
Quantitative restrictions – such as quotas or bans – are more distortive than tariffs as they offer greater protection to domestic market. While tariffs might be discouraging, quantitative restrictions are prohibitive since they prevent foreign goods from entering the market. That’s why, the prohibition of quantitative restrictions is one of the fundamental principles of the WTO.
All prohibitions or restrictions, other than duties, taxes or other charges,applied or maintained by a WTO member on the importation or exportation of goods, which can be made effective through quotas, bans, import or export licensing procedures, or other measures are considered quantitative restrictions and therefore prohibited. The following table presents a wide range of measures which panels and the Appellate Body have found to constitute quantitative restrictions:
In sum, restrictions may take many forms and are all subject to the prohibition. The WTO Agreements not only forbid quantitative restrictions which are set forth in the normative framework but also those that are applied “in practice”.
Note that while generally duties, taxes or other charges may be applied or maintained by a WTO Member on the importation or exportation of goods, acceding countries may undertake commitments to the effect of limiting or prohibiting their right to use those measures once they become WTO members. China, Russia and Kazakhstan are examples of such countries. If violated, these commitments are enforceable before the WTO Dispute Settlement Mechanism. For instance, in WT/DS394/R, WT/DS395/R, WT/DS398/R, China – Raw Materials the panel decided that the export duties charged on certain materials were in violation of China’s Schedule of Commitments.
Five exceptions to the ban on quantitative restrictions
As a first exception to rule, Members are allowed to maintain quantitative restrictions in specific circumstances. The same GATT provision that outlaws such restrictions sets forth several instances in which they are permitted, e.g. temporary export prohibitions or restrictions to prevent critical shortages of essential foodstuffs.
Second, quantitative restrictions are allowed to be imposed in certain cases, e.g. a safeguard measure can take the form of a quantitative restriction. The “balance of payments” clause of the GATT can also adopt the form of a quantitative restriction.
Third, the general exceptions and the security exception can also justify the adoption of a measure which violates the provision banning quantitative restrictions. Read more
In most cases, members try to justify an illegal measure on a general exception. Often, the defences are rejected because the requirements for applying the exceptions are not met. Two examples are presented below:
The United States banned imports of shrimp and shrimp products harvested by vessels of foreign nations, where exporting countries had not been certified by U.S. authorities as using methods not leading to incidental killing of sea turtles at certain levels. The Dispute Settlement Body found that this ban was in violation of Article XI of the GATT and that it was not justified under a general exception. Following this decision, the US made some changes to the legislation and continued to apply the ban. In the Article 21.5 panel report, the panel concluded that the amended measure complied with the requirements of the exception on exhaustion of natural resources. Hence, the import ban was justified.
Case 2: Re-treated tyres
Brazil put in place a number of measures which were found to constitute a prohibited quantitative restriction. The justification for the measure, based on the need to protect human health, was rejected because Brazil permitted imports of re-treaded tyres from other MERCOSUR members. To implement the ruling of the Dispute Settlement Body, Brazil extended the application of the import ban of re-treaded tyres to all countries, including those part of MERCOSUR. Since the measure was allowed to protect human health and the problematic aspect thereof – the discriminatory side – was removed, the measure is likely to be WTO-compatible now.
Fourth, any measure benefiting from a waiver under Article IX:3 of the WTO Agreement. A waiver was for instance approved with respect to the Kimberley Process Certification Scheme for Rough Diamonds.
Lastly, an international agreement can require the application of quantitative restrictions and in such a case, members are allowed to act in line with that agreement. The CITES Convention or the Montreal Protocol on substances that deplete the ozone layer are just two examples.
WTO requires the publication and notification with respect to each quantitative restriction in place. Information notified is available in the Quantitative Restrictions Database of the WTO which can be accessed clicking here. Quantitative restrictions have to be administered in a non-discriminatory way.
Being a mix of tariffs and quantitative restrictions, Tariff-Rate Quotas ("TRQs") contain elements of both. They are results of “tariffication” process which aimed at eliminating or converting non-tariff barriers, including quantitative restrictions, to tariffs. But since such a conversion could lead to unreasonable tariff rates, TRQs were decided to be optimal for the transition period.
TRQs provide for two different tariff rates: lower tariffs for a specified quantity within the quotas (the so-called, in-quota tariff) and higher rates for quantities outside the quotas (the out-of-quota tariff). For example, in the following graph quota amount is 500 units. If after the opening of the quota period, the product entering the country is within 500 units limit, it will be charged 10% ad valorem tariff duty. But, if the product enters the country after the quota limit is filled, so if it is out of quota, it will be charged 40% ad valorem tariff duty which makes a huge difference for the importer and price of the product.
For the administration of TRQs and allocation of TRQs among exporting countries, WTO members use various methods. However, such administration or allocation has to be of non-discriminatory nature.
The negotiations on reducing high levels of out-of-quota tariffs and the size and administration of quotas have been on-going since the Uruguay Round.
Exceptions to WTO rules give the WTO members a right to step back from their commitments in the WTO. This is a recognition of the legitimacy of certain social values and national security concerns of members. The key in the use of exceptions is balancing values and avoiding abuse.
The purpose of having general exceptions is to ensure that commitments undertaken by countries in the WTO do not hinder the pursuit of legitimate policy objectives. The main such objectives are presented in the figure below.
It is each WTO member’s own choice to set the objectives it seeks to achieve and the level of protection it wants to obtain. These exceptions allow Members to derogate from the WTO principles, provided that they comply with certain conditions set forth in the GATT, GATS and TRIPS. They are summarised underneath.
In case of justifying a measure on the basis of protection of human, animal or plant life or health, for instance, the necessity requirement implies that the Member’s measure shall be appropriate and proportionate with the objective and that without this measure it would not be possible to reach to desired consequence. Additionally, such measures should not be applied in an arbitrary and discriminatory manner. The purpose of the measure should not be to protect domestic market and by this restrict trade flow, but actually to achieve those policy objectives. Two examples of invocations of defences can be seen above, under Market access: Prohibition of quantitative restrictions.
Because national security is at core of the sovereignty, security concerns are superior to trade concerns. As a result thereof, Members may apply trade restrictive measures if they are necessary to protect essential security interests, as is recognised in the GATT, GATS and TRIPS. Based on the security exception, a WTO Member:
- Is not required to furnish any information the disclosure of which it considers contrary to its essential security interests
- May take any action which is considers necessary for the protection of its essential security interests:
- relating to fissionable materials or the materials from which they are derived
- relating to the arms traffic, or traffic in other goods and materials for the purpose of supplying a military establishment
- taken in time of war or other emergency in international relations
- May take any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security
There have been some invocations of security exceptions in the past, for instance in the case of war conflicts. In recent times, this provision has been invoked by several Members in order to justify unilateral measures and countermeasures. Various disputes have been brought to the WTO related to measures applied by Russia and the Gulf Countries. These challenges are expected to shed light about the justiciability of such measures, in the first place, and on the limits of the security exceptions.
Transparency is vital in international trade because without awareness of a country’s laws and policies, trade with that country becomes more difficult or impossible. By making trade rules as clear and accessible as possible, transparency brings security and predictability the trade relations, improves mutual confidence and helps to reduce trade barriers. In countries applying a transparent approach to decision-making, all interested parties can participate in the elaboration of the regulatory framework. Opening decision-making and taking into account the views of all parties helps preventing unnecessary barriers to trade.
There are transparency provisions in almost all WTO agreements. These include provisions on publication, notification, right to review and comment, etc. WTO also conducts regular surveillance of members’ trade policies through the Trade Policy Review Mechanism encouraging transparency both domestically and at the multilateral level. Read more
WTO Agreements require members to publish or make publicly available all relevant trade-related regulations before application. All laws, regulations, judicial decisions and administrative rulings of general application shall be published promptly in such a manner as to enable traders to become acquainted with them. No new or more burdensome duties or requirements can be applied prior to publication.
Examples of violations of publication requirements
In one case examined by the WTO, China failed to publish export quota amount for zinc. The panel concluded that, in so doing, China violated the transparency obligation of the GATT Agreement.
In another dispute, Dominican Republic’s failure to publish average-price surveys of cigarettes used to determine tax base for the application of the consumption tax on cigarettes has also considered to be unlawful.
Publication or making publicly available trade-related information is not enough. Members are also required to notify to the WTO their laws and regulations. Notifications enhance transparency and allow all WTO members to be informed about other Members' trade-related policies. Notifications are reviewed in WTO bodies. They meet regularly to review notifications and compliance thereon. Members are allowed to submit questions on the information notified and members receiving them, should provide replies within set deadlines.
Notifications are especially important within the context of some agreements such as the ones on sanitary and phytosanitary measures and technical barriers to trade. Some 15,805 trade measures have been notified to the SPS Committee, while 24,464 regular notifications have been submitted to the TBT Committee. Both areas have developed separate information management systems, which allow research on notifications and area-related documents:
(Click on the picture to access SPS Information Management System)
The TBT information management system is available at: tbtims.wto.org The WTO Agreements on Sanitary and Phytosanitary Measures and on Technical Barriers to Trade also call for establishment of Enquiry Points to answer other Members’ requests which are also elements of transparency.
Transparency mechanism for Regional Trade Agreements
In 2006, a new transparency mechanism for all Regional Trade Agreements ("RTAs") was established in the course of Doha Round negotiations on RTAs. It operates on a provisional basis until a final agreement on RTAs is reached. The aim is to provide an RTA Information System that stores, maintains, analyses and disseminates factual and analytical information on RTAs. It enhances transparency and accessibility of information on RTAs and provides statistical indicators for RTA analysis at the time when conclusions of RTAs reached the peak. New negotiations of RTAs, signing and ratification of RTAs, any changes affecting the operation of RTAs and the end of the RTAs’ implementation shall be notified to the WTO Secretariat. Notifications are encouraged to be in electronic form. Information about all notified RTAs (including some of those in which Azerbaijan is a party to) can be found on this database.
(Click on the picture to access Regional Trade Agreements Database)
More information on basic principles, exceptions and transparency
- Dedicated page to tariffs in WTO’s website
- Dedicated page to goods schedules in WTO’s website
- “Get Tariff Data”
Transparency: Publications and notifications
- SPS Information Management System
- Transparency toolkit (SPS)
- TBT Information Management System
- Transparency toolkit (TBT)
- SPS and TBT notification alert system
- Technical cooperation handbook on notification requirements
- I-TIP Services
- Transparency mechanism for Regional Trade Agreements
WTO Analytical Index