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FTA and WTO

Eki KIM

WTO

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  GDP Exports  2008 2009 2010 2008 2009 2010World 1.4 -2.4 3.6 2.2 -12.0 14.5US 0.0 -2.8 3.0 5.8 -14.0 15.4EU 0.5 -4.2 1.8 0.0 -14.5 17.4China 9.6 9.1 10.3 8.5 -11.2 23.1India 6.4 5.7 9.7 14.4 -6.8 19.9NICs 1.9 -0.8 7.7 4.9 -5.7 21.3

World Economy and Trade

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World Exports of Merchandise and Services (2010)

(billion $)

Merchandise: 15,238

Services: 3,665Transport: 783Travel: 936Other: 1,945

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1. China: 1,5782. United States: 1,2783. Germany: 1,2694. Japan: 7705. Netherlands: 5726. France: 5217. Korea: 466

World Merchandise Exporters (2010)

(billion $)

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World Service Exporters (2010)

1. United States: 5152. Germany: 2303. United Kingdom: 2274. China: 170…14. Korea: 82

(billion $)

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• Contractual Trade Regime:Bilateral FTAs (US-Korea, EU-Chile), Regional FTAs (NAFTA, Pan-European System, ASEAN, COMESA etc.)

• Autonomous Trade Regime:GSP, US Caribbean Basin Initiative, EBA, etc.

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Proliferation of PTA

– Multilateral approach stumbled

– Surge in PTA in 21st century

– 70 PTA in force in 1990, 300 by 2010.

Alliance with anyone you can

Expansion of market

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• All WTO Members (except Mongolia) belong to at least one PTAs.

• Intra-PTA trade represents 35% of total world merchandise trade in 2008 (excluding intra-EU trade).

• 13 is the average number of PTAs that a WTO Member is party to.

Key Facts and Findings

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• Earlier times: to avoid relatively high tariffs.

• Recently: tariffs have fallen markedly →

new regulatory matters are increasingly on PTA agendas (investment, competition policy, government procurement and services).

• In 20 largest importer, only 16% qualified as preferential trade.

• Preferential tariffs reduce average tariff by 1 percentage point (US 2.5%, Korea 8.1%).

• Less than 2% of world trade is eligible for preference margins above 10 percentage points.

Causes and effects of PTAs

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PTA and Investment• Protection against expropriation.

• Commitment to compensate investors in the case expropriation.

• Right to invoke the PTA’s dispute settlement mechanism:

- NAFTA allows investor-state dispute settlement (investors may submit to international arbitration a claim that a PTA state has breached obligations).

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Table C:1 Shallow versus deep integrationIntegration level Type of PTA Features Example

SHALLOW INTEGRATION

↓

DEEP INTEGRATION

Free trade agreement (FTA) Members liberalize internal trade but retain their independent external tariffs

US-Israel FTA

FTA+ An FTA that in addition harmonizes some beyond the border standards (e.g. environmental standards)

NAFTA

Customs Union (CU) Members liberalize trade within the union and adopt common external tariffs against the rest of the world

SACU

Common Market Establishment of the free movement of all factors of production within the PTA, including labour and capital

EU

Monetary Union Establishment of a common currency and completely integrated monetary and exchange rate policy

Euro Area

Fiscal Union Establishment of a common fiscal policy

US

Note: The depth of integration of PTAs might overlap across types of agreements in certain circumstances.

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Avoiding “trade deflection” in RTAs

• The partner with the lowest external tariffs would serve as “port of entry” for the whole bloc.

• Stringent ROO is required.

AExternal tariff: 20%

BExternal tariff: 5%

C

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Diverse and Complex ROO• Origin criteria: VA, CTC• Value thresholds: 35%-80% • Calculation methods (ex-work price, gross factory

cost, FOB price, averaging costs, etc).

• 7% of tariff lines are excluded (agricultural, food, footwear and textiles).

Compliance cost: 5-15.%

Managed trade: nothing free about free trade

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Supply Switching

• More stringent ROO favours intermediate goods originating in the region to inputs from outside the FTA More trade diversion, less trade creation

• Less stringent ROO Less industry protection, more access to cheaper inputs

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Yarn-forwarding rule in NAFTA

• Increased use of American yarn in the region

• Increased investment into Mexican textile industries

• Decreased use of cheap Asian yarn

• Decreased import of cheap Asian clothing

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Cumulation

• Inputs originating in other countries which are members of the regional association are regarded as domestic input and not as foreign input

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Diagonal cumulation

EC

A B

Products shall be considered as originating in A, if such products are obtained there, incorporating materials originating in EC or B, provided that the processing carried out in A goes beyond the minimum operations.

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CONSOLIDATED TEXT (G/RO/W/111/Rev.6)

• HWP has not been completed.

• Text contained origin rules endorsed by the CRO and CRO Chair’s proposal.

• Text reflects the collective efforts of origin experts from all over the World.

• The most comprehensive and least-restrictive rules of origin. (Examples: Textiles and Agricultural Products

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Silk-worm cocoons (HS 50.01)

Where the cocoons are obtained in their natural or unprocessed state

Raw silk (HS 50.02)

CTH

Silk yarn (HS 50.04)

CTH, except from HS 50.06

Silk yarn, put up for retail sale (HS 50.06)

CTH, except from HS 50.04 or 50.07

Silk fabrics (HS 50.07)

CTH

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Silk yarn (Chs. 50.04)

CTH

Silk yarn (other than yarn spun from silk waste) not put up for retail sale, single or multiplied or cabled or covered yarns: printed, dyed (including dyed white)

(ex 50.04 (a))

CTH; or change by permanent dyeing or permanent printing from unbleached or prebleached yarn with at least two preparatory or finishing operations

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Woven fabrics (Chs. 50-55)

CTH

Parts of garments, cut to shape

(ex. Ch. 62(F)) Origin of the fabrics

Garments assembled from parts (ex Ch. 62(a))

Where assembled in a single country

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Wheat (HS 10.01)

The goods are obtained in their natural or unprocessed state

Wheat flour (HS 11.01)

CC

Pasta (HS 19.02)

CTH

Cooked pizza base (HS ex 1905.90(b))

CTH

Pizzas (HS ex 1905.90(a))

CTSHS

Food preparations of flour (HS 1901.90)

CTH

Preparations for infant use, put up for retail sale

(HS 1901.10)

CTSH, except when the change results only from putting up

for retail sale

What is the WTO?

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What is the WTO?

• World Trade Organization

• Intergovernmental organisation: governments

• Established in 1995

• General Agreement on Tariffs and Trade (GATT)

• Deals with the rules of trade between nations at a global level

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Location: Geneva

Staff: approx. 700

Director General: Pascal Lamy25

What are its objectives?

• Economic growth and increase in living standards and ensure full employment

• expand the production of and trade in, goods and services

• How? Allowing trade to flow as freely as possible: gradual liberalisation of trade (removal of barriers)

• i.e. create conditions so that exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives

• Integrate developing countries to global trade

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What does the WTO do?

– 5 main functions:

1) It is a forum for discussions and negotiations

2) It administers WTO trade agreements

3) It handles trade disputes

4) It monitors national trade policies

5) It provides technical assistance and training

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1. A forum to negotiate

• The WTO is a forum for Member governments to negotiate the rules of international trade• It is a table: people sit roundthe table and negotiate!

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2. Administering rules

• Set of rules concluded as a result of negotiations

• WTO Agreements

• Rules have binding effects on Members

• Facilitate the implementation, administration and operation of rules• They cover: trade in goods, trade in services and,trade-related aspects of intellectual property rights

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Coverage of rules

• Customs Valuation• Import Licensing Procedures• Non-preferential rules of origin• Anti-dumping and countervailing duties• Agriculture: subsidies• Trade-related investment measures• Etc.

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3. A place to settle disputes

• Members may have conflicting interests, • Agreements may need interpretation• Neutral procedure based on an agreed legal foundation• Panels• Appeals

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4. Monitoring of national trade policies

• Transparency help build predictability and respect of mutually agreed norms

• Regular review of Member’s national trade policy

• Trade Policy Review (TPR) Mechanism

• Frequency depends on Members’ share of international trade

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5. Technical assistance

• support domestic efforts for mainstreaming trade: national plans for economic development and strategies for poverty reduction

• assist developing, least-developed and low-income countries in transition to – adjust to WTO rules and disciplines,– implement obligations– exercise the rights of membership, including by

fully benefiting of an open, rule-based multilateral trading system

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How does it function?

• Member driven• “Negative” consensus• Regular work• Successive “Rounds”

of trade negotiations• Mutual advantageous

basis• “Single undertaking”

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Members

• All major trading nations: 154 • Developed countries, developing countries (self-designation), least-developed countries (UN criteria)• Hong Kong, Macau, EU,

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Basic principles

• Non Discrimination: Most Favoured Nation National Treatment

• Transparency and predictability: binding commitments

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Basic Principles: MFN

Most Favoured Nation (GATT Article I)• any advantage, favour, privilege or immunity

• granted by a Member

• to any product

• of any other country

• shall be accorded

• immediately and unconditionally

• to the like product

• of all other WTO Members

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Basic Principles: NT

National Treatment (GATT Article III)• internal taxes, laws, regulations and requirements

• affecting the internal sale, purchase, transportation, etc.

• should not be used to protect domestic products

• from like imported products

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Basic Principles: bindingsTariff bindings (GATT Article II)• Parties shall accord to each other

• treatment no less favourable

• than that provided for in the Schedule

• subject to the terms, conditions or qualifications set forth in that Schedule

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Thank you!

Eki KIMEki.Kim@wto.org

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