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Understanding the WTO: Principles of the trading system (2)

IN this second part of our series of articles on the WTO, we will discuss the principles of the multilateral system governing trade in goods and services.

The WTO and the ASEAN. Last October 7, 2003, leaders of the ASEAN signed a plan to transform the region into a giant free trade zone similar to that of the European Union. ASEAN member countries also subsequently signed various trade agreements with China, Japan, Korea and India. This latest plan highlights the failure of last month’s world trade talks held in Cancun, Mexico to arrive at significant new agreements.

Amid these developments, it is now more important for the Philippine trading community to understand how a free trade system works and the principles governing such trading system. The same principles apply for the WTO and the regional trading blocs such as the European Union, the North American Free Trade Area and the ASEAN Free Trade Area. In addition, as the WTO agreements cover a wide array of activities (e.g. agriculture, banking, textile, product standards, intellectual property, food sanitation regulation, customs valuation, etc.), it is necessary to get a clear understanding of the fundamental principles running through all these agreements.

Trade without Discrimination. Under the WTO, member countries must not discriminate against any of their trading partners. This principle is embodied in the concepts of “most favored nation (MFN)” and “national treatment. Under the MFN clause, if one country grants special rates to another, it must do the same to all other countries. In other words, each country must treat all other members as a “most favored” trading partner.

Under the concept of “national treatment”, a member country must treat local and imported goods equally, at least after the imported goods have been cleared from customs custody. This concept likewise applies to trade in services and in the protection of intellectual property rights.

There are, however, certain exceptions to the concept of trade without discrimination. In particular, the WTO agreements allow countries to form regional trading blocs (e.g. AFTA, European Union and NAFTA) to provide special privileges for trade in goods and services among member countries within the bloc. Likewise, special market access may be given to developing countries.

The WTO agreements also allow countries to avail of “trade remedy measures” to protect their domestic industries. To illustrate, while tariff rates must uniformly apply to all importations regardless of origin, exceptions are allowed in case of: (a) actions against dumping; (b) special “countervailing duties” to offset subsidies; and (c) emergency measures to temporarily limit imports to “safeguard” domestic industries. (Author’s Note: Please refer to previous articles on trade remedy measures dated March 17, 2003 and May 25, 2003.)

Protection only through Tariffs. This principle provides that protection of domestic industries and markets must be made only through customs tariffs and not through other commercial measures. This is to make the protection transparent and clear and to promote market access and export competition. Prior to the WTO, countries were allowed to provide export subsidies and import restrictions (e.g. import quotas). Under the new system, subsidies and quantitative restrictions are no longer allowed and non-tariff barriers are to be removed through tariffication, i.e., replacing an import quota with an import tariff rate.

To illustrate, the Philippines previously imposed quantitative restrictions on numerous agricultural products. At present, importations of agricultural products are merely subject to in-quota/out-quota rates. Thus, importations made outside of the quota are subject to higher rates while importations within the quota are given lower rates.

Freer Trade. The reduction or removal of trade barriers (tariff and non-tariff) clearly promotes trade among trading partners. Among the barriers to trade are customs tariffs, quotas and import bans. Since the creation of GATT in 1948, there had been numerous rounds of trade negotiations to address the issue of trade barriers. As a result of these negotiations, tariff rates have continuously gone down. In contrast to developed countries, developing countries are, however, allowed to gradually reduce their tariff rates for a longer period.

In recent years, the discussion on trade barriers has included the subject of intellectual property and services. A parallel development in the Philippines is the gradual opening up of the services sector. In the last decade, among the liberalized industries have been insurance, banking and retail. These industries now allow foreigners to engage in similar services in the domestic market.

Predictability and Fair Competition. A stable, predictable and transparent rule on trade in goods and services is one of the requirements for trade under a multilateral trading system. When a country agrees to open its market, it binds itself to that commitment. Hence, if it agrees to a ceiling for tariff rates on imported articles, it cannot unilaterally increase its rates beyond the ceiling without attracting reciprocal action from other countries. The WTO system therefore seeks to promote fair trade among member countries even if it allows countries to maintain tariffs and exercise measures to protect domestic industries under limited conditions.

Our third and last article will discuss the various agreements under the WTO.

The author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email at and 


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