Tag: trade

Educational (and more): The TFA, or negotiating about standards

My editorial

Today, I am taking on discussing the Trade Facilitation Agreement  signed, and, since recently, enforced under the auspices of the World Trade Organization. This is basically educational content, mostly for the Graduate Master’s students in their curriculum of International Economic Transactions, but it can serve other curriculums just fine, like Microeconomics or Economic Policy. It is also pertinent regarding those few notes about how the opportunity for new business is connected to the growth of markets, which I put on this blog in my last update in French (see Stratégie fin 17ème , stratégie fin 18ème ). So, on the 27th of November 2014, the General Council of the World Trade Organisation adopted the Protocol of Amendment to insert the WTO Trade Facilitation Agreement into Annex 1A of the WTO Agreement (“the Protocol”). The Protocol quickly gained that nickname of Trade Facilitation Agreement. As it had been opened for acceptance by Members, a member country formally accepts the Protocol by depositing a so-called instrument of acceptance for the Protocol with the WTO. The Trade Facilitation Agreement (TFA) entered into force on 22 February 2017. It applies only to the WTO members that have accepted it. In respect of each member that accepts the TFA after its entry into force, it will take effect upon acceptance, in accordance with Article X:3 of the Marrakesh Agreement Establishing the World Trade Organization.

I am going to practice my favourite method of analysis, which goes from the end towards the beginning. It means I start studying a legal document from its last provisions (bottom of the last page). This is a place, where many people don’t even bother to look, and, kind of by acceptance, those last provisions turn into the proverbial ‘small print’ in a contract. The TFA ends with Annex 3, which specifies the Code of Good Practice for The Preparation, Adoption and Application of Standards. Annex 3, in turn, ends up with substantive provision (Q), which states: ‘The standardizing body shall afford sympathetic consideration to, and adequate opportunity for, consultation regarding representations with respect to the operation of this Code presented by standardizing bodies that have accepted this Code of Good Practice. It shall make an objective effort to solve any complaints’. Good. So now, we know that whatever grand goals and intentions are declared in the preamble of the TFA, we have a network of the so-called standardizing bodies, which interact with other, local standardizing bodies, and they do so with sympathetic consideration, offering adequate opportunities, and making objective effort.

This little technical provision at the very end of the TFA opens up on two important aspects of international relations in general, as well as of trade specifically. If you look at the phrasing, it essentially means that standardizing bodies commit to being nice to each other, which in nice in general, but could be seen as odd in a contract. After all, the TFA is a contract between countries. Have you seen many private contracts, where the contracting parties engage into being nice? Probably you haven’t seen that many. So, what’s the point? The point is one of the most fundamental principles in the international public law, namely the principle of national sovereignty. Each country is sovereign in their national territory, just as each government is. It means that technically countries cannot force each other into doing anything, and they cannot prevent each other from doing things. Every single country is a sovereign entity. Sometimes, sovereign countries are in disagreement about things important to them. Actually, this type of sometimes happens quite often, and even between countries signatories of the same treaty or agreement.

This provision (Q) in the Annex 3 to the TFA shows, in practice, two techniques that can be used to soften the edge of controversies when such arise: standardization, and legal precedent. First of all, whilst countries cannot be forced into doing or not doing anything, private entities inside those countries can. I want to do trade with Cameroon. Let’s say I want to export frozen pork meat to Cameroon. The government of Cameroon wants imported food to meet some standards, and the process of import should occur according to some expected rules. The government of Cameroon cannot, technically, force the Polish government into doing anything about frozen pork meat. Still, both governments can agree on a system of standards. If a private entity in Poland wants to export frozen pork to Cameroon, it has to comply with those standards, just as the private entity in Cameroon, which is the first wholesale buyer of said frozen pork. At the end of the 18th century, the European economy saw a sudden flourishing of standardized money based on bank notes. There was suddenly much more money in circulation, and that money was becoming more and more standardized. Now, if we look at what happens today, in international trade, we can see two things: trade is mostly trade in technologies or for technologies. We trade complex goods based on complex technologies, and even when we trade simple goods, they are frequently an input to complex technologies. Even frozen pork makes such an input. If you have ever seen the way that large quantities of food are being handled in international trade, there is a cartload of technology in the process. This frozen pork is likely to stay in places, where humans are hardly ever allowed and only robots can go inside (high storage warehouses, loading spaces on ships etc.). If a technology is to grow its market, it needs a phase of standardization (see for example Mahoney 1988[1]). Standardization does things that direct relations between governments cannot: it makes business go just smoothly so as (almost) everybody be happy with the end result.

Good, now we pass to the second technique of blunting sharp disputes: the legal precedent. Maybe you remember those times, when you refuse to do someone wants you to do, and then the someone in question gently reminds you ‘But you promised…’. Past promises make a frame, made of precedents, and that frame limits the freedom of future action. Notions like ‘objective effort’ or ‘sympathetic consideration’ have their force of precedent, as well. If a national standardizing body addresses another standardizing body with some complaint, or is the addressee of a complaint, someone in the interaction could, technically, stick their middle finger up in a big, juicy f*** you. They could, but they probably are not going to, as all the countries agreed that it should ‘give sympathetic consideration’ and ‘make objective effort’. These, in turn, translate into procedures. When a complaint is being filed, it should be handled according to procedures, which reflect sympathetic consideration and objective effort. Moreover, those procedures can be reviewed and evaluated according to how sympathetically considerate and objectively effortful they are. Legal precedents form something called ‘customary international law’, which is really important in international relations (see for example Goldsmith & Posner 1999 [2]).

When we discussed the GATT 1994, I explained that it was being signed in a climate of tension between countries as it regards trade. This is why the GATT 1994 is so strange an agreement, stating that whatever the signatory governments have done so far is just fine, provided it can be presented as a rational policy. Right now, tension builds up in international trade as well. The geography of trade is changing, progressively. The so-called ‘resource curse’, which is the Ricardian paradigm of comparative advantage gone bad, and on steroids, is really kicking many asses. The world is changing and that creates tensions.

Let’s scroll further back to the beginning. Substantive provisions (O) and (P) in Annex 3 state, respectively, that: ‘(O) Once the standard has been adopted, it shall be promptly published (P) On the request of any interested party within the territory of a Member of the WTO, the standardizing body shall promptly provide, or arrange to provide, a copy of its most recent work programme or of a standard which it produced. Any fees charged for this service shall, apart from the real cost of delivery, be the same for foreign and domestic parties’. We can see that the TFA, whilst technically being an agreement between governments is, in fact, a base for technical cooperation between standardizing bodies. The core issue if is smooth communication: whatever we agree on, as well as whatever any of us has come up with individually, should be made known to the others. This is the deep sense of standardization: quick communication with quick feedback.

I scroll further back towards the beginning, and in the same Annex 3 there is the substantive provision (F): ‘Where international standards exist or their completion is imminent, the standardizing body shall use them, or the relevant parts of them, as a basis for the standards it develops, except where such international standards or relevant parts would be ineffective or inappropriate, for instance, because of an insufficient level of protection or fundamental climatic or geographical factors or fundamental technological problems’. It shows an interesting aspect of customary international law: the intentional ambiguity. What does it mean ‘imminent completion’? In a week or in a year? Who assesses whether standards are effective or not? How can anyone say, which technological problems are fundamental? These ambiguities make this provision hardly applicable directly, as such, to any standards, but it creates the frame for negotiating about those standards.

[1] Mahoney, M.S., 1988, The History of Computing in the History of Technology, Princeton, NJ, Annals of the History of Computing 10(1988), pp. 113-125

[2] Goldsmith J.L., Posner, E.A., 1999, A Theory of Customary International Law, JOHN M. OLIN LAW & ECONOMICS WORKING PAPER NO. 63 (2D SERIES), THE LAW SCHOOL, THE UNIVERSITY OF CHICAGO, This paper can be downloaded without charge at: The Chicago Working Paper Series Index: http://www.law.uchicago.edu/Publications/W orking/index.html or at The Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=145972

Educational: International Economic Transactions, Analysis of the GATT 1994

My editorial

In this update, I am mostly addressing my Graduate Master’s students in their curriculum entitled ‘International Economic Transactions’. Still, I will be delighted to provide meaningful insight to any of my readers. We take on analysing the GATT 1994. It is on purpose that I am not starting with GATT 1947. That mother-treaty of the World Trade Organization was signed in very special circumstances, when the Western world was shaking off after World War II. The political and economic climate was somehow unique. The GATT 1994 is much closer to the present reality, and the road covered between its signature and that of the Trade Facilitation Agreement (2013 – 2017) is easier to trace than if we were starting in 1947. And so we start with GATT 1994. I am starting with decrypting the acronym: GATT means ‘General Agreement on Tariffs and Trade’. Nothing to write home about, basically, and still one thing is interesting. If there is a general agreement, it logically implies the existence of specific agreements. This is very much the reality of international trade: wherever you look, you see complicated, multi-level, intricate structures made of bilateral agreements, multilateral ones, letters of understanding, memoranda and whatnot (e.g. protocols).

If now, you care to read GATT 1994, there is not much reading to do, indeed: it is just two pages. It is a strange logical structure. On those two pages, you have just two sections. Section 1 says what specific documents does the GATT 1994 cover, and section 2 provides ‘Explanatory Notes’. The questions pops up: why the hell should anyone put any effort in negotiating that looks like two pages of minutes from a management meeting? As you read through section 1, you notice that the member countries of the World Trade Organization (WTO) have hatched quite a lot of various documents concerning trade, between 1947 (some of them even before the entry into force of the GATT 1947) and 1994. The most cryptic category is to be found under section 1(a)(iv), namely ‘Other decisions of the Contracting Parties’. Thus, many governments had had signed the GATT 1947, and then they had been doing things that stretched the original agreement in so dire a way that a new agreement had to be signed, recognizing the legal validity of those things that governments had been doing.

This is a good moment to exemplify the relation between an international agreement pertaining to trade, and its economic context. The GATT 1947 had been signed with a general purpose of avoiding so-called ‘trade wars’, i.e. a spiral of aggressive pro-export policies in individual countries, when a government deliberately depreciates its own currency in order to make its exported goods more price-competitive in foreign markets. Thus, the GATT 1947 had been originally combined with an international financial architecture, where the currencies of major economies had been tied nominally to the price of gold, and de facto to the price of the US dollar. On the other hand, the general principle of free trade, in GATT 1947, was strongly supported by economic sciences, either on the grounds of the so-called Ricardian paradigm – countries benefit from free trade by the development of their most competitive categories of businesses – as well as based on the the Heckscher – Ohlin model , which, in turn, stated that free trade compensates the negative effects of the otherwise imperfect geographical distribution of production factors. Still, since 1947, things kept happening, and they did so in a way which very much contradicted the fundamental principles of free trade. The biggest economies in the world, led by the biggest of the biggest, the United States of America, kept enforcing protectionist policies regarding trade. The clause of domestic components has been really the fashion since 1947. It says that you can import any goods inside a given country, but if you do not include in those goods a given percentage of components made domestically in this country, you pay additional tariffs, or, for example, your goods are excluded from public procurement (i.e. the government cannot buy them). In the 1970ies, most economies started departing from the gold standard, and even the United States detached their dollar from the price of the gold. As the system of tied monetary exchange rates faded progressively, the idea of free trade supporting said system became obsolete as well. New economic research showed that whilst the Ricardian paradigm, and the Heckscher – Ohlin one generally hold, other forces are at work, which can actually increase economic inequalities . The idea of aggressive depreciation in domestic currencies returned, with the energetic showing around from the part of Asian economies (Japan, China etc.), and with the governments of developed countries rediscovering an old truth that manipulating their own currencies could help in alleviating the burden of public debt. Regional zones of free trade, like the European communities or the ASEAN in the Asia and Pacific region, made the provisions of GATT 1947 look a bit pale. All in all, by the beginning of the 1990ies, it became obvious that the GATT 1947 has to be changed somehow, only in the meantime, i.e. since 1947, a whole bureaucratic structure had emerged under the label of World Trade Organization, and this structure was not keen to give up their position. It is funny how an otherwise quite substantial bureaucratic structure can call for ‘minimizing bureaucracy in trade’.

Now, here is the first big lesson in understanding international economic transactions. When countries transact ‘economically’, it means they do so in a way that affects whole economic orders. In fact, countries do not transact at this level: governments do. In international economic exchanges, there is a business level, and a government level. The latter expresses itself in policies, and some of these policies find an expression in international agreements and treaties. Second lesson: those international agreements and treaties are usually at least one step behind the business level of economic exchange. When governments claim they ‘signed a forward looking agreement’, it is to be understood as ‘we sincerely hope that no bloody business people will think about something new and unexpected, which would force us to renegotiate this document’. Trade has been going on for millennia, and it will keep going on. When governments claim they ‘stimulate’ trade with their policies, it means that at best they don’t get in the way.

The third lesson in more complex: if you want to understand how a given regulation works, trade agreements included, try and build various antithetic alternatives for it, i.e. regulations built with provisions logically opposing those actually studied ones. Section 1 of the GATT 1994 starts with a general provision that “The General Agreement on Tariffs and Trade 1994 (“GATT 1994”) shall consist of: […]’, and the […] takes the remaining of the A4 first page of the document, listing all those things that governments had done since 1947. Imagine an agreement starting with “This agreement SHALL NOT consist of […]’, with the […] being rigorously the same as in the original. The first option means that the agreement being signed explicitly incorporates all those past, particular polices. It is usually practiced when the agreement being signed has to deal with, and de facto recognize, deep disagreement between the contracting parties. This is the type of agreement we sign just in order to give some flesh to further negotiations that we know inevitable. The second, antithetic a version means a sharp divide: we do not recognize the validity of those policies. It is being used when a real agreement has been reached, and the new regulations can safely supplant the old ones.

Thus, when a new agreement is being signed in the place of an old one, two big strategies can be followed: the new one can build on the predecessor, or it can completely supplant it. The GATT 1994 is an example of the former, but, for example, consecutive treaties of the European Union bend more towards the latter.