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Published : October 28, 2015 | Author : ishannb1989
Category : Company Law | Total Views : 1193 | Rating :

Advocate at The SatyaVidhi and Company, Advocates and Consultants

Obligations Under GATT and GATS: Escapable or Inevitable

The International Trade Agreements i.e. GATT and GATS are required to be honoured by all the signatory governments and in case of breach by contracting government , the same may lead to severe trade sanctions being imposed upon the country. However there are situations wherein the contracting governments are required to diverge from their obligations in the interests of their nation. Therefore the contracting government may be in dilemma as on one hand it is the fear of trade sanctions for breach of obligations and on other hand it has to take national interests into consideration. The present Article proposes to identify in International Trade Law, whether the contracting governments have any rights to escape the performance such obligations in cases of contingency.

The present day position in International Trade Law roots itself in the ancient times when the seeds of the cross border trade were sown, the approach that was reflected in the actions taken by the countries was that of a reactionary in nature. It was observed that whenever a country had taken steps as regard its policies for manufacturers / goods of a particular nation, they were taken in order to retaliate the policies the policies adopted by the other country. The policies which were being adopted during this time round were based on beggar-thy-neighbour approach. This led to a situation of trade-war between the nations and resulted in contraction of trade volumes. Moreover the policies that were being offered by some of the existing contracting governments were non-committed future-promises and therefore the same had an effect on the ultimate trade patterns of the other countries with the particular countries. In view of such key issues and other numerous concerns on various fronts of trade being on rise continuously, in the era of industrial growth and progress countries across the globe decided to unite and form a levelled play field because of which the trade barriers in the course of trade are removed. With this backdrop, there were commitments between the countries under The General Agreement on Trade and Tariff and General Agreement on Trade in Services and many such other agreements.

With the conclusion of the aforesaid agreements, there was an agreement amongst all the signatory nations whereby it was agreed amongst them that all the signatory nations shall have parity in the policies adopted as regards the trade policies for trading with them. Moreover the nations as a part of these agreements agreed upon various crucial and important points between them. It was obligatory and essential upon the states to fulfil their obligations under the agreement agreed upon by them and in case of divergence from the same, there were provisions for seeking necessary actions to redress their injury caused to them. The WTO in case of a dispute between any Contracting Party provides for the dispute resolution mechanism. However the core focus was on the issue that it was mandatory for the contracting parties to honour their commitments.

Imposition Of Contingent Measure By U.S.

However U.S. President Mr. Bush had imposed definitive safeguard measures on imports of certain steel products. The decision came after President received an investigation report concluding that such steel products were "being imported in such increased quantities as to be a substantial cause of serious injury to the domestic industry." The safeguard measure was intended to thereby provide appropriate and necessary relief to the U.S. steel industry. The safeguard was to remain in place for a period of three years and one day. The adverse effects of the safeguard measure on steel exporting nations made an international trade war all but inevitable. Nevertheless, just two days after the President's decision, the European Union requested dispute settlement consultations with the United States, pursuant to the Dispute Settlement Understanding on the grounds that the measure violated those agreements.

In view of the above incident, it can be seen that the countries have recognised the alternation / change in the policy by the U.S. as unjustified and a violation or rather a breach of the terms of the agreement. On the hand, the President had taken a stand that the action taken by him was permissible and therefore the same is within the boundaries of the agreements concluded and therefore there is no breach of the obligations by the U.S. It has been noticed that in the commercial contracts that are entered into between the private persons as regards goods or services generally contained the FORCE MEAJURE clause, allowing a relief / reprieve in performing the contractual obligations between the parties. The Force Meajure clause if is termed to be of importance in the private contracts where the economy of two private persons is at stake, then in cases where the economy of a country is at stake, then the introduction of Force Meajure Clauses in such cases is necessary.

Trade Sanctions

It is obligatory and compulsive for all the members countries to fulfil their obligations under the agreement as the non-compliance, may attract serious trade sanctions from the other member countries and the non-performance is also likely to cause a serious dent in the image of the country as a safe and a secure place to trade. The attraction of the trade sanctions is an important and a serious issue in the international trade as it leads to serious consequences and sometimes leads to situations where the various sectors and economic markets of the country are affected leading to a situation where the economy of the country is fractured or broken. Owing to the serious effects that the trade sanctions are likely to cause, all the countries would certainly wish to avoid the breach of the obligations but the situation wherein they may land is such that the either way they may opt for, they are bound to suffer. It is this situation which needs to be appreciated and therefore it is necessary to explore the possibilities of a escape clause under the GATT and GATS.

Rationale For Having Contingent Measures

At this juncture, if an analysis is made for the reasons that justify the grant of such a relief for the non-performance of the obligations, then the major grounds which stand in support of the granting such an relief to the nations are discussed by classifying them into three major categories and the discussion is as follows:

a. One of the advantages that the availability of escape clause provides, is that the same acts as a “Safety Valve” and thereby plays a function to give respite to the government’s who have entered into the trade agreement. The availability of the safety valve helps adjust the pressure created on the economy of the country due to trade liberalisation and allows the government to enter economic policies to ensure smooth functioning of the economy of the country.

b. Any government would logically lean towards keeping a sustained and developing environment for the growth of the economy. The escape clause would provide the governments with a guarantee where the governments feel assured that the environment in their country would remain certain as otherwise the governments keeping in view of the possibility of uncertainty may be reluctant and entering into such arrangements and the same would ultimately lead to act as a trade barrier.

c. Another reason that is generally put forth is that the same allows flexibility for the country to adopt and meet an entire sector change that takes due to various factors in the economy. There have been cases where in past where with the introduction of the new technology in the market, the countries have opted to give more subsidies and trade discounts that were being offered to the old technology due to the advantages that the new technology carries along with it. This shift of preference in logical and therefore it is preferred by the countries to have such flexibility so that they can adopt and change in accordance with the market conditions.

d. That if the rules as regard the escape clauses are defined then the same would establish a better Rule of Law and ensure compliance of contractual obligations. The reason is that the countries shall have knowledge that they can change / modify the regulations committed upon only in certain circumstances and therefore this would ensure more discipline into their policies due to the deterrence of penalties that may be imposed in case of deviation by the countries.

e. Apart from the economic perspectives of the escape clauses, there are also political pressures which also have to be honoured by the government. The political pressure upon the government has in fact a great force / power as the government generally analyses the nerves of the nation and takes the decisions accordingly. The sole contributing factor behind the pressure upon the governments intend to be voted back to power in the elections and the people of the nation are the persons who vote a government back to power.

f. That over and above the issues and concerns which demand the relaxation and a respite from the commitments there are also various other factors like the change the needs for restrictions of an developing sector in the country, declining industry, dumping measures, global recession, world price increase, Balance of payment crisis, subsidies by foreign government and unforeseen adjustment problems. Over and above the economic problems as stated there are also other factors such as national security, environmental reasons, health emergency and unforeseen political events.

Therefore looking at the requirements based upon the situations that are likely to arise during the course of the obligations, it can be seen that it is important to have escape clauses. The core reason for having such a clause is that the situations as narrated above are such situations which may arise only after the countries have made commitments. Due to the nature of the situations which are likely to arise and looking to the factors contributing, the countries could not have any by any stretch of imagination visualised / forecasted such a situation and taking into account the importance of the events that are likely to take place, it is of immense importance to have the escape clause.

Contingent Measures Under Gatt, Gats And Other Agreements

Owing to the importance attached to the situations that are likely to arise and the impact that they are likely to have on the country’s interests on various fronts, it is clear that the escape clause is and should be an important feature of the agreements, but upon analysing the structure and frame of the agreements concluded it can be seen that the agreements do not generally contain such clauses. Therefore it important to analyse and scrutinize the various provisions of GATT and GATS and thereby analyse whether the escape clause is available and if the same is available to the countries then the conditions under which the same is available and the extent to which the same are available. The analysis of the articles and provisions of the GATT and GATS that provide for respite / relief from the obligations under the agreements signed are discussed below:
a. The Article VI of the GATT provides that the signatory countries in order to prevent the dumping of the goods into a particular country by manufacturers, to allow an imposition of an anti-dumping duty. Any action can be said to be dumping if by which products of one country are introduced into the commerce of another country at less than the normal value of the products if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry. Therefore if the member country to an agreement imposes any additional dumping duty then the same is considered as a penalty as the Article in GATT which permits the imposition of the penalty specifies that act of dumping is to be condemned and thus the additional duty charged is not considered as a breach of the terms of agreement.

b. The Article XII and XVIII(2) of GATT and the Article XII of GATS provide that the measures may be taken by states in order to protect its external position or balance of payments. However the Article has imposed certain conditions only when the measures may be adopted by the states. The Article provides that the measures to be undertaken in cases of imminent threat, stop, decline in its monetary reserves or in case of contracting party with low monetary reserve to achieve reasonable increase in the rates of reserve. The purpose of insertion of this particular Article is in order to ensure economic developments of all the sectors in the member countries. It is important to note that the Article if is appreciated in its entirety then it can be noticed that the construction and terms of the entire Article are in such a manner that it is indicated that the purpose is to have a expansive meaning so that all policies which are for developments of sectors and industries are included in the same.

c. The Article XIX (1a) of the GATT provides that when there is an import surge of any particular product being caused into the country as a resultant effect of the trade obligations, tariff concessions and that the import surge is likely to cause serious injury to the domestic producers in that territory, then the Article provides the contracting state with a right for the particular product for such time as may be found necessary to suspend the obligation in whole or in part or withdraw or modify the concession. This article in the GATT therefore protects the rights of the participating governments to a large if they are able to establish a link / nexus between the import surge and the injury that the same is likely to cause to the domestic industry. In case of a successful establishment of the link, the Article provides the states with the unfettered rights ranging from suspend the trade concession or withdraw or modify the obligations.

d. The Article XVIII of GATT provides that the governments of the developing nations as a part of their policies to raise the general standard of living of the people can impose certain measures for the protection of the infant industry. The provisions as can be made under this Article provide for the removal of the tariff and concessions and introduction of quotas and other such measures.

e. The Article XXI of GATT and Article XIV of GATS protect any action taken by the members countries as the same being necessary for the protection of its security. The conditions as regards what shall constitute danger to the security are provided in the Article itself.

f. The Article XX of GATT and Article XIV of GATS protect any action taken in order to protect public morals, to protect human, animal, plant life or health and to secure with laws and regulations. The Article XX of GATT in addition to the above also provides for any policy divergence undertaken in order to protect national resources, protect natural treasures and to prevent export of goods in short supply.

g. The Article XXVIII of GATT and XXI of GATS provide that the parties to an agreement may by negotiation with the other countries cause such change in the concessions / tariff reductions. The re-negotiation may be done amongst the countries on product to product basis. The entire procedure which has to be followed and the circumstances under which the same is allowed have been provided with precision in the Article.
h. The Article IX of Marrakesh Agreement ( Agreement under which the World Trade Organisation was established) provides that in exceptional circumstances, the Ministerial Conference may decide to waive an obligation imposed on a Member by this Agreement or any of the Multilateral Trade Agreements, provided that any such decision shall be taken by three fourths. The entire procedure which has been laid down in this Article is very stringent and strict. The Article provides that the waiver given shall be reviewed annually and the Ministerial Conference on the basis of the annual review shall have the power to extend, modify, review or terminate the waiver which has been granted. The present Article is more procedural in nature rather than substantial, the substantial reasons shall still have to be from amongst the one’s that have been discussed above for the same to fall within the boundaries of exceptional circumstances.

i. It can be said that the last but definetly not the least provision available as a legitimate escape at the international scenario is Measures to offset the negative effect that subsidies provided by a foreign government have on domestic firms. The conditions for a government to introduce countervailing duties are defined in the Agreement on Subsidies and Countervailing Measures. Although subsidies can be challenged at the multilateral level through the WTO’s dispute settlement system, the ASCM also allows a country to undertake action against subsidized imports by adopting countervailing duties. For this, the importing member must conduct an investigation to demonstrate the existence and, if possible, the amount of subsidies, and show that subsidies provided by the foreign country cause or threaten material injury to the existing domestic industry or delay the establishment of this industry.

Thus it can be seen that there are in built mechanisms in the GATT, GATS and other agreements which provide for a escape clause in order to justify the divergence from the trade commitments under circumstances which are likely to cause injury to the contracting country.

International Trade Agreements: Incomplete Contracts?

Before summing up, one of the important points to which, the attention is proposed to be drawn is the nature of the agreements that are entered into between the nations. It can be seen that the international trade agreements which are concluded between the parties are of such a nature where the conditions the rights and liabilities of the contracting governments are not defined in respect of the all future events and the determination of the same depends on the ex-post contractual events and circumstances. This situation therefore creates incompleteness in the international trade contracts and therefore generally the International Trade Agreements are referred to as “Incomplete Contracts”. The debate as to whether the International Trade Agreements are complete contracts or incomplete contracts is never ending, however as the same is not the focal point of this article, the same is given a cursory reference and is not being dealt with in detail.

In view of the above analysis, it can be seen that though the International Trade Agreements are called as Incomplete Contracts because of the structure of such contracts. That though such agreements have been designated as Incomplete Contracts, it can be said that the nature which has led to attraction of the word “Incomplete” is in fact in the interests of the nations. It can be observed that a meaningful and plain interpretations of the GATT, GATS and such other international trade law agreements indicates that the GATT and GATS definitely have developed mechanisms and thereby established conditions and the situations under which the governments may be allowed to withdraw, modify or renegotiate the terms agreement between the contracting governments. Thus in view of the availability of the Escape Clauses, it is clear that the GATT and GATS have made a fine balance between the obligations imposed upon the countries and the measures in order to avoid injury being caused to the country in certain defined situations, which if not provided, injury would be caused due to fulfilment of the obligations imposed upon by the International Trade Agreements.

1. China Invokes WTO Escape Clause:- O’Melveny and Myers LLP
2. Breach, Remedies and Dispute Settlement in Trade Agreements: Giovanni Maggi and Robert W. Staiger.
3. Need for Coherence Among WTO’s Escape Clauses- Patrick Messerlin
4. The Optimal Design of Trade Policy Flexibility in the WTO- Komel Mahlstein and Simon A.B. Schropp
5. Trade Skirmishes And Safeguards: A Theory Of The WTO Dispute Settlement Process – Mostafa Beshkar
6. Article 8 of the WTO Safeguards Agreement: Reforming the Right to Rebalance: Matthew R. Nicely.
7. 9th World Trade Report.
8. General Agreement on Trade and Tariff
9. General Agreement on Tade in Services

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