This article is written by Tanushree Sharma and edified by Shoronya Banerjee from Amity University, Kolkata.
GATT (General Agreements on Tariffs and Trade) was a treaty that was created in 1995, after World War II with the aim of recovering the economic crisis. Over the years GATT has proved successful in liberalizing the trade and enhanced it’s limits. The main objective of GATT was to remove barriers on international trade by reducing tariffs, quotas and subsidies. World trade remained unregulated after World War I and soon after World War II, the emergency of trading regulations and policies was felt.
Essentially, the GATT established the code of conduct for multin23ational companies that are engaged in importing and exporting. Each member nation of World Trade Organisation (WTO) was expected to open its market to every other member nation without discrimination. GATT was signed in October, 1947 and included 23 countries and it became law on January 1, 1948. It was intended to be an interim agreement but it remained in place inactive until the World Trade Organisation replaced it in 1995. In total 125 nations signed off with the WTO constituting 90% of world’s trade.
Non‐Tariff measures and the WTO
Non-tariff measures are those economic policy measures that could potentially have effect on international trade along with the change in the price and quantities traded. Non-tariff policy measures are apart from ordinary custom tariffs. Classification of non-tariff measures comprises two types:
- The first type is of ‘technical measures’ such as environmental protection measures, sustainable growth, primarily sanitary and phytosanitary (SPS) and Technical Barriers to Trade (TBT).
- The second type is ‘non-technical measures’ such as quantitative restrictions (non-automatic import licensing and quotas), forced logistics, distribution channels and price measures.
Other taxonomy of non-tariff measures are discriminatory government and private procurement policies, selective indirect taxes, domestic subsidies, restrictions over foreign investments, control on immigration policies, monetary control and discriminatory exchange rate policy, restriction on business, administrative and technical measures and regulations for anti- dumping.
Non-tariff measures originate from domestic policies to address market failure, information asymmetric and externalities factors for the effective flow of goods and services. The main challenge for the government arises when it has to achieve both regulatory and public policy objectives in such a way that allows them to maximise the gain for trade. The cost enhancing effect that is associated with non-tariff measures needs to be separated from possible demand enhancing effects that bring effective transparency and consumers by settling with domestic standards. By focussing on these two objectives, the government could achieve its policy objective.
Importance of WTO in economy
Before going ahead with the importance of WTO in the economy, let’s look upon the reasons for setting up the system of WTO at international level.
- Soon after the II World War, GATT (General Agreements on Tariffs and Trade) was established as law and signed by 23 countries in October, 1947. Establishing GATT was the result of repetitive destruction of trading products and the desire for free flow of trading.
- The success of GATT led to further reforms and resulted in establishment of the World Trade Organisation (WTO) in 1995.
- Ever since the establishment of WTO, there has been a continuous increase in the number of countries associated with the organisation.
- All the countries being members of WTO adhere with the guidelines of the organisation limiting on their trade and subsidies.
- Several treaties are brought under one roof by WTO to create an environment of low tariff for its member states. This type of environment provided by the WTO is beneficial for exporters and creates the emergence of complex international value chains.
Primary objective of setting up WTO:
- To resolve the trade related disputes;
- To increase the transparency in relation to decision making process;
- To enforce rules for trading internationally;
- To provide proper forum for negotiating and monitoring dispute resolution;
- To coordinate with international economic institution for the global economic development; and
- To help in achieving developing countries the standards of the global trading system.
Problems in the WTO
Over the considerable achievements in past so many years, the WTO has gone through exceptional challenges:
- In the past few years, the government has imposed trade restrictions on substantial areas of international trade affecting $747 billion of global imports.
- The rising of uncertain market conditions in business have made an ultimate effect on postponing investment that could contribute to future potential economy.
- Setback was suffered in the settlement of disputes at the end of 2019 where members did not agree to reform the Appellate Body.
- Drawbacks were also encountered in WTO law as the 164 member countries were using national security as justification for trade restrictions and tariff disputes.
- It took almost two decades for WTO to achieve trade goals and understand the prospect of the market of all the different nations.
The impacts of the GATT/WTO on trade: formal members versus non‐member participants
The introduction of GATT/WTO has shown a tremendous effect in transforming the economic relations globally. It’s been 25 years, 164 member nations have been associated with WTO, since then the dollar value of world trade has shown an expansion of 2.7 times. Tariff has also been decreased from 10.5% to 6.4%.
For those who have been the participants of WTO since its establishment have experienced the boost in their national income. Also, WTO has been successful in attaining 70% of the total mercantile trade. As per the analysis, the nations dealing in exports and production are the main beneficiary of the membership. Industrial growth of Germany and South Korea is accounted to be around USD 31 billion growth of GDP and also the growth of China and Mexico is accounted to be around USD 58 billion growth of GDP.
In recent years with the increasing requirement of information technology, the WTO has liberalised the trading of technical products and diminished the trading of harmful farm products. It has also streamlined the facilitation of trading projects to reach over $1 trillion per year. Undoubtedly in the past 25 years have seen the fastest reduction in poverty, today one out of three people is below the poverty line which is less than 10% of the extreme poverty rate. From all the above statistics, it is critically analysed that the formal members to GATT/WTO has benefitted more as compared to the non-members participants of the organisation.
Ongoing challenges faced by WTO
- Negotiation on agriculture has been re-energised identifying the recent issues in the agricultural market.
- Working is also promoted in the sector of e-commerce, domestic facilitation and investment regulation for acceleration of the economy.
- Ministerial Conferences are held in targeting the critical growth of Sustainable development in the nations that aimed at saving aquatic life and natural resources.
- To overcome the problem of reforming Appellate Body, the members have come up with the interim option of two-stage dispute settlement operational, until and unless some permanent solution is implemented.
Price controls versus compulsory licensing: effects on patent‐holders and consumers
Effect on patent-holders
We will begin by comparing the two scenarios where patent-holder chooses for direct entry in which he/she has been imposed with price control and the other scenario being voluntary licensing of its technology to a local firm in which compulsory license is been issued to the local firm if the patent-holder neither decides to enter nor license its technology voluntary. Generally in comparison between the two, patent-holders prefer voluntary licensing over direct entry whereas compulsory licensing has its own advantages.
In order to cut off prices of patented medicines for cancer and rare diseases, the government of India has made the far reaching recommendation of compulsory licensing to any pharma company to produce drugs without the consent of the patent holding firm. In India there are many international pharmaceutical companies that are selling patented drugs in India and are strictly against the drug being produced and sold by any other company under compulsory licensing.
The annual turnover of Indian pharmaceutical market is around Rs. 2.3 lakh crore, out of this only 30% is generated from patented drugs while the remaining revenue comes from sale of generic drugs. Therefore, it is recommended that the prices of patented anti-diabetic drugs should be normalised and the patent owning companies should be encouraged to provide voluntary licensing to the other pharmaceutical companies.
Effect on consumers
A patent over invention has the right to exclude others from making, selling and using the patented product. Most of the time in this way pharmaceutical companies acquire a monopolistic right over the patented product and exclude others from using the same. The problem arises when the patented pharmaceutical product is frequently required for addressing the significant health issues.
Though, the government uses the method of price control and other regulations to overcome the power of monopoly and also tries to balance the difference between the supply and demand of the urgent pharmaceutical products. But this could be concluded that the price regulations could have an adverse effect on the consumers.
On the other hand, the policy of price control could also attract negative impact on the market. Suppose, if the local government imposes price control for the benefit of the consumers, this imposition could become counter-productive, if foreign pharmaceutical companies deny to sell their patented pharmaceutical products in the market, where they find such control to be stringent.
Hence, it is concluded from the above two cases that while on the one side the price control could be effective in improving consumer access on patented pharmaceuticals products in local availability, simultaneously, on the other side the risk that the patent-holder deliberately might choose not to make their product available in countries that imposes price control.
China’s dual export sector
In the past three decades, the self-sufficient economy of China has proved to be the world’s largest exporters. Few larger firms of China are engaged in exporting and have proved to be more productive as compared to their domestic counterparts. Chinese exporters sell a substantial share of their output abroad unlike other large and developed countries.
Recently, China’s heterodox Trade Policy Regime has been promoting exports due to high intensity of prevalence of exporters. The Trade Policy Regime has played an instrumental role in fostering the dual export sector where nine out of ten manufacturing exporters can enjoy fiscal incentives contingent on export performance.
China joined the WTO in 2001 and since then it has experienced outstanding rates of growth but the growth began only when the liberalization reform was adopted in the nation. Due to significant growth in the economy, inequality has diminished nearly 40% of the world’s population.
Generally, the lower income developing countries exporting to higher income developed countries faces three to four times higher tariff as compared to trade between high income countries. After associating with WTO, not only China but also India, Taiwan and South Korea have also shown tremendous growth in the economy. On the other hand, Vietnam who joined WTO in the year 2007 has also proved to stabilize its economy and reduce poverty in the short period of time. In 2005, the United Nations Development Programme (UNDP) reported the decline in poverty from 1990 in Asia that was calculated at the World Bank Rate (old) of $US 1 a day.
The working of WTO is not limited to market access, coordination of domestic or trading competition but is more concerned about non-economic areas like sustainable environment, social issues and transparency of fair competition. The effect of free trade on the economy is often presumed and purported to compare groups of globalizing countries with the non-globalizing, reported that the globalising group has recorded a greater rate of economic growth. Both the elements being price control and compulsory licensing are used to improve the accessibility condition of the consumer in the marketplace of patented products. Since the establishment of WTO in 1995, almost all the countries have been members of WTO and are contributing to economic growth of their respective nations. But still there are remaining 16 countries that are not members of WTO. With the increasing benefits of WTO and its contribution in liberalization of the nations, will these remaining countries ever associate with WTO?
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: