Published on November 15, 2007
Trade Agreements: Trade Agreements GATT, WTO, EU and NAFTA Trade Agreements & Globalization: Trade Agreements & Globalization Increasing flows of trade and investment are integrating the global economy. Trade and investment agreements are creating a global legal system. Governments seek to capture trade and investment flows and the economic benefits of participating in globalization by becoming members of trade agreements. Trade Agreements and Global Business Strategy: Trade Agreements and Global Business Strategy The goal of business strategy is to allow the firm to achieve its goals in an unpredictable environment. Trade agreements reduce uncertainty and enhance predictability of the laws governments impose on foreign firms. The reduction of barriers to international business expand the firm’s strategic options. Strategies affected by trade agreements: Strategies affected by trade agreements Sourcing and manufacturing of goods Pricing strategies & anti-dumping duties Technology transfer & intellectual property Market entry strategies foreign investment restrictions trade barriers personnel transfer How Trade Agreements Work: How Trade Agreements Work Regulating the Regulators Protectionist Regulations: Protectionist Regulations Uncompetitive industries pressure governments to pass regulations to protect them from foreign competition. Competitive industries pressure governments to negotiate with foreign governments to eliminate such regulations. Those negotiations produce trade agreements. Regulatory Boundaries: Regulatory Boundaries Trade agreements set limits on how governments regulate foreign business. These limits are set out in general rules. Sensitive industries may secure protection through exemptions to general rules. General Exceptions: General Exceptions Many regulations have a purpose other than protectionism, such as criminal and environmental laws. General exceptions in trade agreements leave governments free to pass such laws. These laws are not regulated by trade agreements unless their true purpose is to protect domestic industries from foreign competition. Key Matters Governed by Trade Agreements: Key Matters Governed by Trade Agreements Trade in goods Trade in services Foreign investment Temporary visas for business people Government purchases (procurement) Intellectual property law Trade in Goods: Trade in Goods Tariff elimination Product standards Customs procedures Customs valuation Rules of origin Subsidies and dumping Trade in Services: Trade in Services Cross-border supply Consumption abroad Presence of natural persons Commercial presence (foreign investment) Foreign Investment: Foreign Investment Foreign Investment Restrictions Performance Requirements Protection from Expropriation Right to Transfer Profits Across Borders Right to Sue Governments for Compensation Visas for Business People: Visas for Business People Temporary entry for non-immigrants Conducting trade and investment activities Providing professional services Intra-company transferees Senior management Government Procurement: Government Procurement Allows foreign companies to bid on government contracts. Depends on value of contracts. Generally federal government purchases, not states or municipalities. Intellectual Property: Intellectual Property Property rights that can be enforced by suing “pirates” or applying criminal laws. Patents (for inventions like drugs) Copyright (for authors of books, software) Trademarks (brand names and logos) Geographical indications (tequila, champagne, bourbon) Conclusion: Conclusion Trade agreements cover more than just trade regulations. Trade rules prohibit the use of regulations to favor domestic companies over foreign companies. Trade agreements facilitate the globalization of business. Evolution of Trade Agreements: Evolution of Trade Agreements GATT/WTO, European Union (EU), NAFTA, Mexico-EU FTA General Agreement on Tariffs and Trade (GATT): General Agreement on Tariffs and Trade (GATT) 1947: 22 countries signed "provisional" agreement. 3 pillars of post-war peace and prosperity: IMF, WB, ITO. 1968- 1979 Rounds: Anti-dumping Code, Multi-fibre Arrangement, Subsidies Code, Standards Code, Customs Valuation Code. 1986-93: Uruguay Round: 1986-93: Uruguay Round 119 signed Uruguay Round Agreements. World Trade Organization established. Average tariff on goods reduced to 6%. Extension of GATT rules to agriculture, textiles, services, & intellectual property. Improved dispute settlement (veto eliminated and Appeal Body set up). WTO (1995- 2000): WTO (1995- 2000) Uruguay Round Agreements came into effect January 1995. 1995-1999: Sectoral agreements negotiated (telecomm., computers, financial services, textiles and clothing). 1999: The Battle in Seattle and a North-South divide prevented the launch of Millenium Round. 2000: New services negotiations began. WTO Doha Round (2002-2005): WTO Doha Round (2002-2005) Meeting of WTO ministers in Doha, Qatar, November 2001. Agreed to launch new round of negotiations. Partial agreement on AIDS drugs. China and Taiwan become members, increasing total to 144 countries. Doha Round Agenda: Doha Round Agenda Agricultural subsidies Conflicts between trade liberalization and environmental protection Competition policy Foreign investment protection Trade remedy laws (subsidies and dumping) Implications of Doha Round: Implications of Doha Round Success: Bridging North-South divide Failure: Risk of trade blocs Global security implications of failure Global economic implications of success: Add $2.8 trillion to world income $1.5 trillion in developing countries Raise 320 million people out of poverty European Union: European Union Customs union versus free trade area. Historical, political and economic differences between EU and NAFTA. Beyond a customs union: Open borders, labor mobility, supranational institutions and common currency. Evolution of EU: Evolution of EU 1951 European Coal & Steel Community: pooling resources to prevent war. 1957 Treaty of Rome signed: created European Community and single market. 1958-85: grew from 6 to 10 members Single Europe Act: Single Europe Act 1987-92 Single Europe Act Harmonization of standards. Mutual recognition of certificates. From consensus to majority voting in Council of Ministers on “single market” issues. 1994 Maastricht Treaty of European Union: 1994 Maastricht Treaty of European Union Political purpose: to encourage further European integration. Economic purpose: reduce transaction costs, coordinate fiscal and economic policies, reduce interest rates. Agreement on common currency and European Central Bank (ECB). Common Currency: The Euro: Common Currency: The Euro Euro launched Jan 1, 1999. Notes and coins introduced January 2002. Adopted by 12 of 15 members. Danes said no in referendum Sept. 2000. Britain and Sweden are undecided. $1.18 US (Jan 1999), $0.88 (Sept 2000), $0.89 (Jan 2002). EU Institutions: EU Institutions European Council: main decision-making body; creates EU laws together with Parliament & concludes international agreements. European Commission: 20 legislators appointed for 4 year terms by member states(2 for UK, France, Germany, Italy, Spain); can initiate draft legislation; implements laws adopted by Parliament and Council. EU Institutions: EU Institutions European Parliament: directly elected for 5 years; shares legislative and budgetary powers with Council; approves nomination of Commissioners. European Court of Justice: 15 judges for EU law. European Central Bank: monetary policy and foreign exchange EU Enlargement: EU Enlargement 13 countries have applied for accession. They have signed Association Agreements. 3 Membership criteria: stability of democratic institutions functioning market economy and ability to cope with competitive market ability to take on the political, economic and monetary obligations of membership. EU Enlargement: Initial Plan: EU Enlargement: Initial Plan First wave from 2003: Poland, Hungary, Czech Republic, Slovenia, and Estonia. Next: Cyprus (complicated by economic and political division between Greek and Turkish Cyprus). Other 7: Bulgaria, Latvia, Lithuania, Malta, Romania, Slovakia, Turkey. EU Enlargement: Oct 2002 Update: EU Enlargement: Oct 2002 Update Ten countries may qualify to join in 2004: Poland, Hungary, Czech Republic, Slovenia, Cyprus, Latvia, Lithuania, Malta, Slovakia and Estonia. In October 2002 referendum, Irish voters approved Nice Treaty (which includes enlargement issue), 63% to 37%, reversing rejection in earlier referendum. Other 14 EU members did not require a referendum. EU Conclusion: EU Conclusion Introduction of Euro has gone smoothly. Enlargement issues will dominate EU policy in the coming years. First wave will increase population by over 25% (by over 100 million people). But GDP will increase only 5%. NAFTA: NAFTA Began as Canada-United States Free Trade Agreement (January 1, 1989). Initiated by Canada. Mexico initiated negotiations for Mexico-United States FTA. Canada joined negotiations to make it trilateral NAFTA. NAFTA began January 1, 1994. NAFTA : NAFTA NAFTA is integrating the economies of Canada, the United States and Mexico. Trade and investment flows have increased greatly between the NAFTA countries. The current challenge is how to balance border security and economic integration. Merchandise Trade of North America [Can/US] (1990-00): Merchandise Trade of North America [Can/US] (1990-00) Billions of dollars Source: WTO, International Trade Statistics, 2001 North America’s Share of World Trade [Can/US] (1990-00): North America’s Share of World Trade [Can/US] (1990-00) Source: WTO, International Trade Statistics, 2001 Mexico’s Share of Latin American Exports (2000): Mexico’s Share of Latin American Exports (2000) Billions of dollars and percentage Source: WTO, International Trade Statistics, 2001 Mexico’s Share of Latin American Imports (2000): Mexico’s Share of Latin American Imports (2000) Billions of dollars and percentage Source: WTO, International Trade Statistics, 2001 Mexico – European Union Free Trade Agreement: Mexico – European Union Free Trade Agreement Only one of many accords Mexico has negotiated recently: GATT(1986), Chile(1992), APEC(1993) OECD, NAFTA (1994) Colombia, Venezuela, Bolivia, Costa Rica (1995) Nicaragua (1998), Uruguay, European Union (2000) Northern Triangle (El Salvador, Guatemala, Honduras), Israel, Singapore, EFTA Slide48: Mexico Canada USA Chile Bolivia Colombia Venezuela Costa Rica Nicaragua El Salvador Guatemala Honduras Dominican Republic Caricom European Union Source: http://www.sice.oas.org/tradee.asp Mexico’s goals: attract FDI and diversify trade: Mexico’s goals: attract FDI and diversify trade 85% trade with USA 6.5% trade with EU, down from 11% in 1990 60% of FDI is from USA EU Mexico's second largest source of FDI 30% of Mexico's GDP depends on trade w USA Automobile trade: Automobile trade Mexico 7th vehicle producer in world Mexico is 3rd largest supplier to USA (7.3% of US market) Canada 12.3%, Japan 11.6% of US market 2003, Mexico's auto goods duty free to EU FDI from Renault, Volkswagen and Daimler-Chrysler, Toyota Key Aspects of MEUFTA: Key Aspects of MEUFTA eliminates tariffs on industrial exports in 4 stages to 2007 1999 Mexican tariff on EU goods average 8.6% (max 35%) minimal liberalization of agricultural trade some liberalization in trade in services FDI rules Government procurement covered Conclusion: Conclusion Trade benefits consumers and competitive firms. Competition creates innovative products and higher quality at a lower price. Firms that can’t compete go out of business. Because benefits outweigh costs, trade liberalization has moved forward. International Trade in Goods: International Trade in Goods Volume of World Merchandise Trade 1993-2000 (% change): Volume of World Merchandise Trade 1993-2000 (% change) Exports and Imports Source: WTO, International Trade Statistics, 2001 GATT and International Law: GATT and International Law GATT is a treaty (an agreement between different countries). Treaties, including GATT, must be interpreted in accordance with the principles of international law. Key principles include state sovereignty, non-intervention, and rules on conflicts between treaties. State sovereignty: State sovereignty Empowers countries to enter into treaties. Gives governments authority to regulate the acts of persons inside their territory and their own citizens. Gives countries the right to exploit their own resources as they wish. Gives countries the responsibility to ensure that activities inside their borders do not cause damage to the environment outside their borders (in other countries or in international areas). Principle of non-intervention: Principle of non-intervention Limits the ability of nations to interfere in the internal affairs of others. Restricts the ability of nations to regulate acts outside their territorial limits. Extraterritorial laws (laws applied to persons, acts or property outside the country's jurisdiction) are invalid under international law. Conflicts between treaties: Conflicts between treaties If the same countries enter into more than one treaty, a conflict may arise. Three ways to resolve such conflicts: a conflicts clause states which treaty prevails. presume later treaty prevails over earlier treaty on the same subject. presume the more specific treaty prevails over the more general one. Basic Principles of Trade Agreements: Basic Principles of Trade Agreements NAFTA and WTO use the same basic principles Procedural rules are based on the principles of transparency and reciprocity Other fundamental principles prohibit discrimination Transparency: Transparency Publish laws and regulations Accept comments from trade partners on proposed changes Make administrative decision-making “transparent” (based on recorded evidence and arguments, not corruption or nepotism) Reciprocity: Reciprocity Make equivalent concessions in trade negotiations Take equivalent retaliation against other countries’ trade barriers The national treatment principle : The national treatment principle Prohibits discrimination between domestic products and imports. Requires domestic laws, regulations and procedures to treat imported goods no less favourably than “like goods” produced domestically. The most-favored nation (MFN) principle : The most-favored nation (MFN) principle Prohibits discrimination between the products of different trade partners Prohibits favouring the imports from one trade partner over those of another Does not allow a country to have a most favoured nation MFN Exceptions: MFN Exceptions GATT Article XXIV permits the formation of free trade areas or customs unions Generalised System of Preferences (GSP) allows developed countries to grant preferential market access to developing country products Prohibition of import and export restrictions or quotas : Prohibition of import and export restrictions or quotas Prohibits restrictions on the volume or value of particular goods, including total bans. Exceptions: textiles and clothing (ATC phasing out); agriculture. “Voluntary” Export Restraints, such as Canada-United States Lumber Agreement, still happen. General Exceptions: General Exceptions To maintain independent social and environmental policies Temporary restrictions on trade to safeguard a country’s balance of payments Emergency protection against injury to domestic industry from surge in imports To protect national security Tariffs: Tariffs Import duties of general application Different from anti-dumping and countervailing duties Rates vary by product and country MFN tariff rate is the one applied to WTO members Once reduced, tariffs are bound. Tariff Elimination: Tariff Elimination Canada-US eliminated January 1998. NAFTA eliminates over 15 years (2008). WTO has eliminated some and reduced others WTO Information Technology Agreement computers, telecom, chips, networks, etc. 40 countries, 92% of trade, January 1, 2000 Tariff Classification: Tariff Classification Harmonized Commodity Description and Coding System (HS) uses 6 digits Product family: first 4 digits Specific product: last 2 digits 8703: cars 8703.10: snowmobiles 8703.21: vehicles with cylinder capacity of less than 1000cc Tariff Classification: Tariff Classification Tariff classification determines rate of duty Under NAFTA, business people can request advance rulings on classification Advance rulings can be appealed WTO has no advance rulings requirement. Safeguard Measures: Safeguard Measures Both NAFTA and WTO allow safeguard measures Where import surge threatens serious injury to domestic industry due to removal of trade barriers, importing country may impose temporary restrictions NAFTA Safeguard Measures: NAFTA Safeguard Measures Can be used until December 31, 2003. Can suspend tariff reductions or increase tariff to MFN rate for 3 years. Safeguards can be used only once against the same product. After 2003, NAFTA members can only use WTO safeguard measures. WTO Safeguard Measures: WTO Safeguard Measures Maximum 4 years, but may be extended an additional 4 years. Can use tariffs or quantitative restrictions. WTO agreement on agriculture has special safeguard measures. Agreement on China’s accession to WTO applies special safeguards for 12 years. Safeguard example: US Steel Tariffs: Safeguard example: US Steel Tariffs April 2002, Bush imposed tariffs on steel imports, using WTO safeguard mechanism. Stated purpose: to protect US steel companies from competition while they restructure and recover from recession. Underlying purpose: to buy votes in Congress and Senate to get fast-track. Rules of Origin: Rules of Origin Country of origin determines tariff rate. For example, NAFTA country, WTO country or non-member country. WTO rules of origin are under negotiation. NAFTA Chapter 4 harmonizes rules of origin in Canada, Mexico and USA. NAFTA: “Originating” goods: NAFTA: “Originating” goods Goods wholly obtained in Canada, Mexico or US with no non-NAFTA materials. Goods produced in NAFTA region wholly from originating materials. Goods containing 60% regional value using transaction method or 50% using net cost. Goods that meet Annex 401 rules. Annex 401: Annex 401 Based on change in tariff classification, regional value content or both. Change in tariff classification can occur in processing, eg from plastic to plastic doll. Special Rules of Origin: Special Rules of Origin Textiles and clothing: yarn forward rule Automobiles: net cost method only Autos and light vehicles 62.5% Other vehicles (eg trucks) 60% NAFTA Customs Procedures: NAFTA Customs Procedures Certificate of Origin. Single or multiple shipments of same good over 12 months. Completed and signed by exporter. Importers must maintain records for 5 years. Importing country may audit exporters and producers to ensure the goods qualify. Advance rulings can be obtained. Customs Valuation: Customs Valuation WTO rules apply in NAFTA countries. NAFTA provides advance rulings. WTO only provides right to appeal. Customs officials must use the valuation methods required by WTO. If importer lies, runs risk of audit and anti-dumping duties. Customs Valuation Methods: Customs Valuation Methods Price actually paid or payable when sold for export. Transaction value of identical goods sold for export to same importing country. Transaction value of similar goods sold for export to same importing country. If cannot determine transaction value, use price sold to unrelated buyer in country of importation, or Computed value (cost or value of materials and fabrication + profit and general expenses + other expenses). Customs Valuation Methods: Customs Valuation Methods If none of above methods work, use reasonable means of valuation based on available information. Do not use price of similar or identical domestic goods. Do not use selling price in country of origin or other export markets. Do not use fictitious values. Standards: Standards National treatment and MFN. Transparency (notice of new standards; publish standards) If based on international standards, presumed valid. Right to adopt standards for legitimate objectives - eg health and safety, environmental protection, consumer protection. Can deviate from international standards based on climate, geography, technology, infrastructure and scientific justification. Harmonization not mandatory. Government Procurement: Government Procurement 10-15 % of GDP. NAFTA applies to federal contracts above $25,000 (Canada and US) & $50,000 (Mex) NAFTA rules cover bidding procedures, advertising, breaking up contracts, and evaluation of bids. WTO uses specific commitments for small number of WTO members, including Canada and US, but not Mexico. Strategies affected by rules on trade in goods: Strategies affected by rules on trade in goods Sourcing for importers and manufacturers. Main barriers are tariffs, other duties and import restrictions. Standards affect choice between product standardization or adaptation to local market requirements, and thus economies of scale. Tariffs affect choice between price or quality as competitive strategy. Trade barriers affect entry strategy: export or FDI Conclusion: Conclusion NAFTA and WTO rules overlap. NAFTA eliminates tariffs faster. NAFTA rules of origin encourage sourcing in NAFTA countries. NAFTA provides better enforcement opportunities for firms through advance rulings. International Trade in Services: International Trade in Services World Trade in Services 1993-2000 (% change in value): World Trade in Services 1993-2000 (% change in value) Exports and Imports Source: WTO, International Trade Statistics, 2001 NAFTA and Services: NAFTA and Services Chapter 11: Foreign Investment Commercial presence Chapter 12: General Rules on Services cross-border supply consumption abroad presence of natural persons Chapter 13: Telecommunications Chapter 14: Financial Services Chapter 16: Movement of Natural Persons Temporary Entry for Business Persons : Temporary Entry for Business Persons Governments shall grant temporary entry to business persons. “Business person" = citizen engaged in: trade in goods, provision of services, or conduct of investment activities “Temporary entry" = entry without intent to establish permanent residence Temporary Entry for Business Persons: Temporary Entry for Business Persons Principles - reciprocity, transparency, border security, protection of domestic labour and employment. A country may refuse entry based on national security & public health and safety. A country may impose a visa requirement US has visa requirement for Mexico Annex 1603: Annex 1603 Business visitors: place of business outside territory, not seeking to enter local labor market see Appendix 1603.A.1 for authorised activities no quotas Traders: trade between home country and country of destination, no quotas Investors: establish, administer or service a “substantial” investment, no quotas Annex 1603: Annex 1603 Intra-Co. transferees: managerial, executive or specialised knowledge, may require minimum 1 year with company in prior 3 years no quotas Professionals see Appendix 1603.A.1 for authorised professions and qualifications US limit for Mexico is 5500; expires January 1, 2004. NAFTA Professional Visas: NAFTA Professional Visas Canadians and Mexicans must have: letter offering employment in the US proof of citizenship and proof of professional engagement in listed occupations. In addition, Mexicans require: nonimmigrant visa, prior petition by the employer, and Department of Labor certification. Canadians can apply at the border, Mexicans must apply at American consulate or embassy. TN visas replacing Green Card (for Canadian University Grads): TN visas replacing Green Card (for Canadian University Grads) TN valid for one year, but can be extended indefinitely as long as the applicant maintains nonimmigrant intent. Canadian survey of 1995 university graduates who moved to the United States: 90% entered with a temporary visa. 72% used a TN visa. Of those with TN visa only 22% had returned to Canada by 1999. WTO: GATS: WTO: GATS Very different from GATT and NAFTA Establishes framework for negotiations Sets out general principles of MFN & transparency No general obligations to provide market access or national treatment WTO: GATS: WTO: GATS Members submit schedules of specific commitments to open a particular sector to foreign service providers Schedules set out any restrictions on market access and national treatment that remain Commitments apply to all WTO members unless exceptions listed in Annex on MFN exemptions Global Business Strategy and Trade in Services: Global Business Strategy and Trade in Services Trade in services more restricted that trade in goods Strategies depend on the nature of the service, how it is delivered, and what restrictions remain on trade & investment Restrictions affect transfer of personnel, ownership & control, and market entry options Conclusion: Conclusion International trade in goods created need for international trade in services. Global companies need international services for transportation, finance, telecom, accounting and law. Liberalization of trade in services has just started, making rules more complex and barriers more difficult to identify. Foreign Investment Agreements: Foreign Investment Agreements The Growth of FDI Flows: The Growth of FDI Flows Over 75% of FDI flows between OECD countries. 1982 world inflows + outflows: $94 billion 2000: 2,421 billion Why the growth? Liberalization, privatization, global production, growth in joint ventures, mergers and acquisitions. Trade and Foreign Investment: Trade and Foreign Investment Both are market entry strategies. Exporting is a shorter-term commitment. Exporting familiarizes firm with market. FDI is a longer-term commitment. FDI can achieve strategic goals that exports don´t: adapting to local needs incorporating local inputs gathering more sophisticated intelligence Trade and Foreign Investment: Trade and Foreign Investment FDI can increase trade through intra-firm trade. Half of all trade occurs between related firms. Sometimes FDI is the only viable market entry strategy for goods, when transport costs are high for services, where local presence required Foreign Investment Protection: Foreign Investment Protection Because FDI is a greater commitment than exporting, foreign investors seek legal protection. NAFTA provides protection. WTO Doha Round is negotiating. Most WTO members have signed bilateral investment treaties, similar to NAFTA. NAFTA Chapter 11: NAFTA Chapter 11 A non-NAFTA company can become a NAFTA company by incorporating in a NAFTA country. From there, they can invest in the other 2 NAFTA countries and have NAFTA protection for the investments. However, they may be denied NAFTA benefits if it is just a shell company. NAFTA Chapter 11: NAFTA Chapter 11 National treatment and MFN Treat foreign investors in accordance with international law No performance requirements (some exceptions) No restrictions on transfer profits No restrictions on nationality of senior managers Can require directors be nationals Annex III sets out restricted areas, e.g. oil NAFTA Chapter 11: NAFTA Chapter 11 Expropriation subject to guidelines: public purpose non-discriminatory due process of law pay compensation Exceptions for environmental measures, taxation, compulsory licenses, national security Investor-state arbitration: International Center for Settlement of Investment Disputes, World Bank WTO and Investment: WTO and Investment Agreement on Trade-related Investment Measures (TRIMS) requires national treatment prohibits quotas for trade in goods transparency requirement to notify WTO of TRIMS GATS and TRIPS also contain investment related provisions. No investment protection yet (under negotiation); may resemble MAI. FDI and Business Strategy: FDI and Business Strategy Goal of FDI varies with sector, clients and strategic purpose. Service sector may use FDI to serve local market or multinational clients. Manufacturing sector may use FDI as: resource-seeking strategy (e.g. oil), market entry strategy (where import barriers) or to exploit location advantages (e.g. VW beetle). Trade Remedy Laws: Trade Remedy Laws Subsidies and dumping WTO says what the domestic laws must be WTO provides procedure for challenging domestic laws NAFTA provides procedure for challenging decisions of domestic agencies, but does not say what the domestic laws must be. WTO Subsidies Code: WTO Subsidies Code Definition of Subsidy financial or other commercial benefit from government direct transfer of funds; amounts owing are forgiven; government sells or purchases goods or services at less or more than FMV) direct or indirect specific to one industry or sector WTO Subsidies Code: Categories for subsidies: WTO Subsidies Code: Categories for subsidies Prohibited (Red): contingent upon export performance or domestic inputs; transition period for developing and least-developed countries. Actionable (Yellow): apply above definition Permitted (Green): R&D for/by firms: 75% R/50% D assist disadv. regions(85% GDP/110 % UE) 20% cost of new environmental standards certain agricultural support programs WTO Subsidies Code:Elements required to impose duty: WTO Subsidies Code: Elements required to impose duty Prohibited or actionable subsidy Material injury, threat of material injury to domestic industry, or threat to retard creation of new industry 25% must support complaint of those expressing support or opposition, 50% must support complaint Causal relation between subsidy and injury WTO Subsidies Code:Countervailing Duties: WTO Subsidies Code: Countervailing Duties Maximum duty is estimated subsidy De minimus rule: no duties where subsidy of less than 1% (2% for Mexico) imports are less than 3% of total for product (4% for Mexico) Duties last maximum of 5 years Decision to impose duties must be subject to judicial review (Chapter 19 for NAFTA) WTO Dumping Code: WTO Dumping Code Dumping is price discrimination between markets, where export price < normal value Normal value: home market/domestic sales price constructed cost: cost of production + admin. costs + sales cost + profit margin third country method WTO Dumping Code:Anti-dumping duties: WTO Dumping Code: Anti-dumping duties Elements required: dumping, material injury and causal relation Maximum duty is margin of dumping De minimus rule: no duties where margin of less than 2% of export price imports are less than 3% of total for product Duties last maximum of 5 years WTO Dumping Code:Review of Anti-dumping duties: WTO Dumping Code: Review of Anti-dumping duties Must provide judicial review (Chapter 19 for NAFTA) May also be reviewed by WTO panel, but limited review and only governments Procedures for ADD & CVD in NAFTA Countries: Procedures for ADD & CVD in NAFTA Countries Complaint can be initiated by private industry or government agency Who Determines Subsidy or Dumping ? Canada: Deputy Minister of National Revenue for Customs and Excise US: Department of Commerce (International Trade Administration) Mexico: Secretaría de Economía Procedures for ADD & CVD in NAFTA Countries: Procedures for ADD & CVD in NAFTA Countries Who Determines Material Injury ? Canada: Canadian International Trade Tribunal US: International Trade Commission Mexico: Secretaría de Economía Business Strategy and Trade Remedy Law: Business Strategy and Trade Remedy Law Assess impact of dumping laws on differential pricing strategies. Consider impact of subsidies laws on government assistance strategies. Use trade remedy laws against foreign competitors. Dispute Settlement: Dispute Settlement NAFTA and WTO NAFTA Chapter 11: NAFTA Chapter 11 Foreign Investor claims against government Must file claim within 3 years from date investor aware of breach. Must wait 6 months to file claim. Can receive monetary damages or restitution for expropriation, but no punitive damages. If government does not pay, investor’s government can complain under Chapter 20. NAFTA Chapter 19: NAFTA Chapter 19 Binational panels replace domestic courts in reviews of CVD and ADD cases. Government or citizen has 30 days to request a panel. Each party chooses 2, then agree on 5th. Arbitrators elect chair. Process takes 315 days. NAFTA Chapter 19:Extraordinary Challenge Panel: NAFTA Chapter 19: Extraordinary Challenge Panel Can overturn panel decision where: arbitrator violated code of conduct (e.g. bias or conflict of interest); panel made serious procedural flaw; or panel exceeded powers or jurisdiction; and it materially affected the decision; and it threatens integrity of panel process. ECP composed of 3 judges or former judges each party selects one; they draw lots to select third NAFTA Chapter 20: NAFTA Chapter 20 Government use only; application of NAFTA to domestic laws. Step 1: free trade commission consultations Step 2: request WTO or NAFTA panel NAFTA Chapter 20 panel: 5 arbitrators parties agree on chair or draw lots to choose non-national; reverse selection of other 4 no appeal can impose trade sanctions if non-compliance WTO Dispute Settlement: WTO Dispute Settlement Governments only; similar to Chapter 20 Step 1: Consultations between governments Step 2: Request panel WTO Secretariat suggests 3 arbitrators. If the parties disagree, WTO Director General can appoint the arbitrators. Panel report adopted after 60 days if no appeal. WTO Dispute Settlement: WTO Dispute Settlement Step 3: Appeal the legal interpretation of the panel to the appeal body appeal report adopted after 30 days Step 4: Loser has 30 days to state how it will comply within reasonable time. Step 5: if non-compliance, negotiate compensation (reduce other barriers) request permission to impose trade sanctions. Conclusion: Conclusion Dispute settlement system not perfect, but works in most cases. Some free trade agreements eliminate use of trade remedy laws. Trade remedy laws will be subject of negotiation in Doha Round.