Mission Report
Trade Policy Analysis Manual Preparation,
Mentoring, and Training.
TP STE 8A
A Project implemented by
in Consortium with:
Quality Institute, AGRICONSULTING and SGS
Date of Report:
23 February 2012
Reporting Period: August 1, 2011 to February 23, 2012
Author of Report: Ramon L. Clarete – TP STE 8A
Mission Report
1 August 2011 - 23 February 2012
This document has been prepared with financial assistance from the Commission of the
European Communities. The views expressed herein are those of the Technical
Assistance Team of EuropeAid/126687/C/SER/PH and do not represent any official view
of the Commission.
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 2-14
Mission Report
1 August 2011 - 23 February 2012
CONTENTS
1. GLOSSARY OF TERMS ...................................................................................................... 4
2. Executive Summary ............................................................................................................. 5
Training................................................................................................................................. 5
Training 1: Introduction to Trade Policy Analysis…………………………………………….…5
Training 2: Selected Topics in Trade Policy Formulation……………………………………...6
TPA Manual Preparation and Mentoring .............................................................................. 6
Expert’s Observations and Recommendations .................................................................... 7
3. Background and Context ...................................................................................................... 8
4. Purpose of the Mission ......................................................................................................... 9
5. Description of Mission Activities .........................................................................................11
6. Findings and Recommendations ........................................................................................ 12
LIST OF ANNEXES
Annex 1.
Annex 2.
Terms of Reference.
TRADE POLICY ANALYSIS COURSE SERIES II
Training Programs 1 and 2
List of Participants.
Annex 3.
TRADE POLICY MANUAL .
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 3-14
Mission Report
1 August 2011 - 23 February 2012
1. GLOSSARY OF TERMS
AIM
ASEAN
BOI
BPI
CGE
DOH
DOLE
DTI
EC
EU
FTA
NEDA
OP
PRC
PTTC
TC
TBT
TPA
TRTA 2
UPSE
Asian Institute of Management
Association of Southeast Asian Nations
Board Of Investments
Bureau Of Plant Industry
Computable general equilibrium
Department of Health
Department of Labor and Employment
Department Of Trade And Industry
European Communities
European Union
Free Trade Area
National Economic Development Authority
Office of the President
Professional Regulatory Commission
Philippine Trade Training Center
Tariff Commission
Technical Barriers to Trade
Trade Policy Analysis
Trade Related Technical Assistance Phase 2
University of the Philippines School of Economics
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 4-14
Mission Report
1 August 2011 - 23 February 2012
2. Executive Summary
This Mission was designed to assist the Department of Trade and Industry (DTI)
develop, adopt, and implement a coherent and effective international trade strategy in
coordination with the other agencies of the Government of the Philippines. An important
gap towards realizing this purpose is the low level of capacity of the concerned
government officials and employees of these agencies to undertake trade policy analysis
and evaluate the net benefit to the Philippine economy of trade policies and agreements.
DTI Undersecretary Adrian Cristobal, Jr. requested the TRTA 2 project of the
Commission of the European Communities (EC) the services of a short term expert (STE
8A) to assist the government in (a) training government personnel and, if appropriate,
members of research and academic institutions, on policy research methods, economic
evaluation of FTA agreements; and (c) identifying and selecting policy options, taking
account of potential positive and negative impact on different groups with competing
interests; and in creating a core group of technical experts and trade lawyers in the
concerned government agencies.
Besides and in support of its objective to enhance the capacity of government personnel
to undertake trade policy analysis and economic valuation of trade agreements, the TP
STE 8 A was assigned to prepare a TPA manual, to serve as a reference document for
new trade experts across government agencies involved in trade negotiations and one of
the reference documents in trade policy analysis training sessions.
With the intent to sustain the capacity in light of turnover in the bureaucracy, the DTI also
sought from the TP STE 8A recommendations for intra- and inter-agency education and
mentoring programs to train future mentors within the relevant agencies and to be
implemented beyond TRTA 2.
In implementing the assignment, the TP STE 8A received support from Professors and
Researchers at the UP School of Economics (UPSE).
Training
Two training events were planned and conducted in December 2011. One was
conducted at the Asian Institute of Management (AIM) from December 5 to 7, 2011.
Fifty-five mid-level government personnel from about 11 government agencies went
through the training program. Annex 1 shows the respective programs and lists of
participants in the two events.
Training 1: Introduction to Trade Policy Analysis
The first event covered the following training materials. In the first day, the participants
took up (a) the concept and measurement of the gains from trade; (b) analysis of tariff
and quantitative restrictions to trade; (c) concept and analysis of contingent trade
measures; and (d) concept and analysis of preferential trade measures. This phase of
the training is the most rudimentary, but the most structured in terms of trade policy
analysis. However, the trainees recognize that tariff and quantitative trade measures
have gone through a long process of trade liberalization in whatever form (multilateral or
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 5-14
Mission Report
1 August 2011 - 23 February 2012
preferential), such that they may no longer be the most important measures affecting
trade flows, except in a few sensitive products of politically powerful industries.
In the second day, the participants were introduced to the more relevant topic of nontariff measures. Given that tariff restrictions had been reduced through the years either
unilaterally or in the context of trade agreements, the administration of non-tariff
measures has increasingly demonstrated their potential of becoming trade barriers.
Taken up were (a) customs administration, (b) technical barriers to trade (TBTs), and (c)
sanitary and phyto-sanitary (SPS) measures.
Trade facilitation has gained the
ascendancy over tariff reforms. Accordingly trade negotiations have increasingly zeroed
in on harmonizing standards and technical regulations, and streamlining of administrative
procedures.
The last topic taken up in the second day was trade policies and domestic distortions. In
this, the participants took away the message that while import restrictions may be
convenient measures to use address domestic market failures, they may not be
economically efficient. The case in point was attaining rice self-sufficiency for food
security.
Quantitative restrictions to imported rice have been used to increase
incentives for rice farmers to produce more. The participants were trained to understand
that alternative measures to meeting higher productivity objectives, such as production
support, are more efficient than import restrictions (although such production support
measures are by no means without on their own efficiency losses). In the third day, the
topics covered were on the economics of services trade, trade-related measures that
contributed to the recent food crises in 2007/08, and applied general equilibrium
analysis.
Training 2: Selected Topics in Trade Policy Formulation
The second training event was conducted from December 15 to 16, 2011 at the Holiday
Inn Clark, Angeles City in Pampanga. Nearly 50 participants attended the training. The
topics were on (a) trade in goods and rules of origin; (b) trade in services; (c) trade
remedies; and (d) impact evaluation.
As indicated in the Terms of Reference, the
second training caters to training requirements of government officials, who have been
involved in actual trade policy formulation and /or negotiations. In contrast to the first
training event, the second makes use of case studies to illustrate the principles
underlying the formulation of trade policies.
Not included in the original design of the training program, a lecture on the planned
computable general equilibrium (CGE) model of the Philippine economy was given by Dr.
Caesar Cororaton. The TRTA 2 project engaged their services to construct and make
available to the DTI, and conduct training on the use of the model selected officials and
staff from the GOP.
TPA Manual Preparation and Mentoring
The TP STE 8 A used most of the level of effort allocated to for this assignment in
preparing the TPA manual and meeting with selected government officials and staff
involved in trade policy formulation/negotiations.
In preparing the manual, the TP STE 8 A conducted a collaborative workshop at the DTI
International conference room with about 20 government officials and staff from four
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 6-14
Mission Report
1 August 2011 - 23 February 2012
government agencies. The participants took up the appropriate topics to be included in
the TPA manual. The discussion led to the selection of these topics, namely trade in
goods, trade in services, trade remedies, and impact evaluation. In the course of the
workshop, the experiences of some of the participants in undertaking their respective
work assignments provided the team members ideas for cases to develop in preparing
the manual.
The other mentoring activities involved individual team members meeting with several
government staff and officials, where they exchange information with the latter about
specific trade policy work they have been assigned to undertake. These meetings
contributed to shaping parts 2 and 3 of the TPA.
Annex 3 contains the TPA manual as of the time of this report. The TP STE 8A has
continued working to edit the draft TPA manual. This explains why the TP STE 8A has
not been on time in submitting his mission report. This work is similar to writing a
textbook, which ordinarily requires more time. However, upon indications of the service
provider ECA Consortium, the manual is submitted as it is at this point in time.
Expert’s Observations and Recommendations
1. There appeared to be greater interest among the participants to learn more about
trade in services (professionals, telecommunications, etc.) than about trade in
goods. This interest may correlate with the comparative advantage of the
Philippines in services trade. For example, the business process outsourcing
export activities is among the faster growing industry of the country.
In the
discussion on preferential trade agreement, e.g. ASEAN economic community,
the participants were more active. Issues such as harmonization of standards or
mutual recognition of respective national standards and regulations had been a
favorite focus.
2. Between multilateral and preferential trade agreements, the participants likewise
appeared to be more interested with the latter.
This may reflect the
disappointment of many about the slow progress of the current Doha round. It
may also signal that most of the trade negotiations effort of the Philippines is
applied to preferential trade agreements.
3. It was interesting to note that a few participants were thinking of the rules of origin
as instruments for slowing down import flows into the economy particularly in
these times when tariff restrictions are low and quantitative import restrictions had
been dismantled or converted into tariff measures by several agreements. In
preferential trade in goods, rules of origin can be restrictive. This thinking may be
explained by the pressure brought to bear on Philippine policy makers by
domestic industries affected adversely by freer trade rules to provide some form
of protection. The discussion therefore on trade facilitation and trade remedies
turned out to be useful to policy makers looking for appropriate instruments to use
in coping with domestic lobby groups. As for the RoOs, the purpose of entering
into preferential trade liberalization is not only to realize market opportunities for
the country’s exports, but also to the inputs needed by potentially export-oriented
downstream industries.
4. The search for guidance on what products to promote with trade policies and
agreements stood out in the discussions at the training or the workshop. The
measure of revealed comparative advantage to rank industries for the purpose of
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 7-14
Mission Report
1 August 2011 - 23 February 2012
identifying those industries may be useful to discriminate among various goods
and services.
5. The engagement of the trainees in actual trade negotiations or in actual trade
policy formulation (as for example, them being assigned in trade and related
matters work) is important to give them further immersion in trade policy work.
3. Background and Context
This mission was conducted under the second phase of the Trade Related Technical
Assistance Program (TRTA 2). The TRTA 2 program is a development cooperation
initiative by and between the Republic of the Philippines (RP) and the Commission of the
European Communities (EC). Its implementation arrangements, including the role of the
National Economic and Development Authority (NEDA) as requesting authority and
coordinating agency for the project, are prescribed under Financing Agreement
DCIASIE/2007/018-950.
The overall objective of the program “is to support sustainable poverty reduction in the
Philippines through further integration into the international trade system”. The specific
purpose “is to enhance the capacity of selected Government agencies and state actors”
for deeper integration into the system. It has four components, as follows:
1. Capacity building for trade policy and export development – to support
development and implementation of a coherent and effective international trade
strategy; and implementation of international commitments including those to be
made in the framework of the ongoing EU-ASEAN FTA negotiations;
2. Standards harmonization and SPS conformity – to facilitate adoption of, and
compliance with, international standards and regulations for selected product and
service exports;
3. Trade facilitation – to enhance competitive, transparent, and efficient movement
of traded products within the international and regional trade facilitation systems;
4. Rapid response facility – to enable rapid, efficient and effective response to
unforeseen problems and issues in trade related areas through provision of shortterm technical assistance.
The project has an operational implementation period of four years – from 23 August
2008 to 22 August 2012 - and an estimated cost of EUR 7,475,000, of which EUR
6,500,000 and EUR 975,000 are to be contributed by EC and RP, respectively. It is to be
implemented through “decentralized management” under which NEDA will be the
contracting and paying authority for certain expenditures including for training, seminars,
workshops and operating costs.
For technical assistance, EC remains as the contracting and paying authority and for
which ECA has been contracted as Service Provider. The expected period of execution
of the ECECA service contract is 46 months and shall not in any case go beyond 22
August 2012.
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 8-14
Mission Report
1 August 2011 - 23 February 2012
4. Purpose of the Mission
This activity is directed towards the realization of the target result of Component 1 –
Trade policy and export development - as reflected in the Logical Framework of the
TRTA 2 project, which is as follows: “1.1 A coherent and effective international trade
strategy, developed, adopted and being implemented.”
To help realize this target result, one of activity (Activity 1.1.1) envisaged in the revised
Logical Framework is to provide support to trade policy analysis, including but not limited
to expert advice on policy issues, training and mentoring of concerned government staff
and, if appropriate, members of research and academic institutions, on (a) policy
research methods, (b) benefit-cost analysis of FTAs and comprehensive economic
partnership agreements; and (c) identification and selection of policy options, taking
account of potential positive and negative impact on different groups with competing
interests.
In the context of the above activity, the following actions are to be taken in accordance
with the approved work plan for 2011 (AWP3):
•
Action 1.1.1.1. Conduct training for government personnel and, if appropriate,
members of research and academic institutions on: (a) policy research methods, (b)
benefit-cost analysis of FTAs and comprehensive economic partnership agreements;
and (c) identification and selection of policy options, taking account of potential
positive and negative impact on different groups with competing interests; and assist
DTI in creating a core group of technical experts and trade lawyers in concerned
government agencies
•
Action 1.1.1.2. Prepare a trade policy analysis manual, to serve as (1) reference
document for new trade experts across government agencies involved in trade
negotiations and (2) one of reference documents in trade policy analysis training
sessions.
•
Action 1.1.1.3. Develop and recommend intra- and inter-agency education and
mentoring programs to train future mentors within the relevant agencies and to be
implemented beyond TRTA2 for the purposes of sustainability
The expert’s scope of work is as follows:
1. In consultation with DTI, prepare a trade policy analysis manual under Action
1.1.1.2. The manual, which will be used as main reference in Trade Policy
Analysis training and mentoring sessions, will be revised based on feedback
during those sessions. It shall specify application of case studies in the training
and mentoring sessions. The case studies shall be developed and completed
prior to the conduct of training and mentoring.
2. Conduct mentoring sessions during the course of developing the training manual
under Action 1.1.1.3. Mentoring sessions can be more effective when conducted
in the context of a specific simulated or actual problem. The training manual
envisions the use of trade policy case studies, based on past Philippine trade
policy issues. In developing these case studies, the TP STE 8A should interview
and interact with those who were actually involved in the specific trade policy
being studies (and/or their colleagues, especially if they have since
resigned/retired/or been re-assigned). In the course of these interviews and
interactions, the TP STE 8A should already mentor the officials on the alternative
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 9-14
Mission Report
1 August 2011 - 23 February 2012
ways by which the actual policy issue could have been analyzed and what
alternative decisions could have been taken—along with how to study the impact
of these decisions. Annex 1 presents a general idea of the mentoring sessions
and how these are related to the preparation of the “training manual.”
3. Design training modules and conduct training sessions using the manual as main
reference material, under Action 1.1.1.1.
4. Regularly coordinate with the DTI and other STEs assigned in related Actions in
Component 1, e.g. Action 1.1.5.1.1.
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 10-14
Mission Report
1 August 2011 - 23 February 2012
5. Description of Mission Activities
The briefing for this Mission was done on August 1, 2011.
The TP STE 8 A used most of the level of effort allocated to for this assignment in
preparing the TPA manual and meeting with selected government officials and staff
involved in trade policy formulation/negotiations.
In implementing the assignment, the TP STE 8 A received support of Professors and
Researchers at the UPSE.
Although he has received support for the preparation of the manual, mentoring and
training. The TP STE 8 A remains solely responsible for the tasks and outputs specified
by the Terms of Reference of this Mission.
In preparing the manual, the TP STE 8A conducted a collaborative workshop at the DTI
International conference room with about 20 government officials and staff from four
government agencies. The participants took up the appropriate topics to be included in
the TPA manual. The discussion led to the selection of these topics, namely trade in
goods, trade in services, trade remedies, and impact evaluation. In the course of the
workshop, the experiences of some of the participants in undertaking their respective
work assignments provided the team members ideas for cases to develop in preparing
the manual.
The other mentoring activities involved support of professors and researches from UPSE
in meetings with several government staff and officials, on exchanges information about
specific trade policy issues. These meetings contributed to shaping parts 2 and 3 of the
TPA.
Annex 3 contains the draft TPA manual.
Using the earlier drafts of the TPA manual, the TP STE 8 A prepared power point
presentations for the training activities. Annex 2 presents the programs of the two
training events. The first one on the introduction to trade policy analysis was conducted
from December 5 to 7, 2012 at the AIM. The second one was done at the Holiday Inn in
Clark, Angeles City Pampanga. It was on selected topics for trade policy formulation.
After the training, the TP STE 8 A has continued working on editing the draft TPA
manual, and even after the end of Mission de-briefing. This explains why the TP STE 8 A
has not been on time in submitting his mission report. This work is similar to writing a
textbook, which ordinarily requires more time.
The following was the realized work plan of the TP STE 8 A.
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 11-14
Mission Report
1 August 2011 - 23 February 2012
Work Plan
STE on Trade Policy Analysis Manual Preparation, Mentoring, and Training
(TP STE8a)
Trade Related Technical Assistance 2
Date
Activity
1 Aug 2011
13 Oct 2011
Briefing meeting at NEDA
Pre-training meeting(s) with selected participants
Research, interviews, and drafting of the Training Manual
2 Aug 2011
to
30 Nov 2011
2 Aug 2011
to
30 Nov 2011
Research and drafting of Part I of Training Manual,
Introduction to trade policy analysis
Research and drafting of Part II (covering all cases),
including mentoring and meetings with government
officers
1. Trade in Goods and Rules of Origin
2. Trade in Services
3. Trade Remedies
2 Aug 2011 Research and drafting of Part III, ex post assessment of
to
trade agreements
30 Nov 2011
Conduct of Sessions 1 and 2 of the training
Dec. 5 to 7 Conduct of Sessions 1 to 11 of Part 1 of the training at
2011
the AIM
Dec. 15 to Conduct of Sessions 1 to 4 of Part 2 of the training at
16 2011
Holiday Inn Hotel at Clark
8 Dec to 31 Revision of the draft output of the manual
Dec, 2011
1 January to Integration work
22 February,
2012
1 Aug 2011 Progress reporting meetings / coordination meetings with
to 31 Dec other STEs/members of the Trade Policy Research
2011
Network (under Action 1.1.5 of AWP3)/ Report writing
February 23, Debriefing at DTI
2012
Total Workdays
Number of
Workdays
0.5
0.5
15.5
45
18
5
2
15
14.5
8.5
0.5
125
The above differs from the original work plan as stated in the TOR of the TP STE 8a for
two reasons. First, the number of workdays was reduced to 125 from 139 days. This
was because the STE was only available to work on August 1, 2011 and not on July 15,
2011. Secondly, upon the request of the TRTA 2 Team Leader, Dr. Romeo A. Reyes,
and duly concurred by the TRTA 2 Imprest Administrator, Ms. Brenda Mendoza, the end
date of the Mission got extended to January 2012. The extension was to allow the STE
take the weekends and holidays in December 2011.
Due to difficulty in scheduling the de-briefing, the end of Mission de-briefing occurred on
February 23, 2012 at the office of DTI Undersecretary Adrian Cristobal, Jr.
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 12-14
Mission Report
1 August 2011 - 23 February 2012
6. Findings and Recommendations
1. There appeared to be greater interest among the participants to learn more about
trade in services (professionals, telecommunications, etc.) than about trade in
goods. This interest may correlate with the comparative advantage of the
Philippines in services trade. For example, the business process outsourcing
export activities is among the faster growing industry of the country.
In the
discussion on preferential trade agreement, e.g. ASEAN economic community,
the participants were more active. Issues such as harmonization of standards or
mutual recognition of respective national standards and regulations had been a
favorite focus.
2. Between multilateral and preferential trade agreements, the participants likewise
appeared to be more interested with the latter.
This may reflect the
disappointment of many about the slow progress of the current Doha round. It
may also signal that most of the trade negotiations effort of the Philippines is
applied to preferential trade agreements.
3. It was interesting to note that a few participants were thinking of the rules of origin
as instruments for slowing down import flows into the economy particularly in
these times when tariff restrictions are low and quantitative import restrictions had
been dismantled or converted into tariff measures by several agreements. In
preferential trade in goods, rules of origin can be restrictive. This thinking may be
explained by the pressure brought to bear on Philippine policy makers by
domestic industries affected adversely by freer trade rules to provide some form
of protection. The discussion therefore on trade facilitation and trade remedies
turned out to be useful to policy makers looking for appropriate instruments to use
in coping with domestic lobby groups. As for the RoOs, the purpose of entering
into preferential trade liberalization is not only to realize market opportunities for
the country’s exports, but also to the inputs needed by potentially export-oriented
downstream industries.
4. The search for guidance on what products to promote with trade policies and
agreements stood out in the discussions at the training or the workshop. The
measure of revealed comparative advantage to rank industries for the purpose of
identifying those industries may be useful to discriminate among various goods
and services.
5. The engagement of the trainees in actual trade negotiations or in actual trade
policy formulation (as for example, them being assigned in trade and related
matters work) is important to give them further immersion in trade policy work.
TP STE8A
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 13-14
Annexes
Annex 1 – Terms of Reference
Annex 2 – Trade Policy Analysis Courser Series II
Training Programs 1 and 2
List of Participants
Annex 3 – Trade Policy Manual.
TP STE8a
Component 1 - Capacity building for trade policy and Export Development
EuropeAid/126687/C/SER/PH
Page 14-14
ANNEX 1
TERMS OF REFERENCE
EuropeAid/126687/C/SER/PH
Implementing Agency: Department of Trade and Industry (DTI)
Type of Expert: Short-Term Expert (STE) – Intermittent
Title of Expert: STE on Trade Policy Analysis Manual Preparation,
Mentoring, and Training (TP STE8a)
1. General Information
The Trade Related Technical Assistance Project 2 (TRTA 2) is a development cooperation
initiative by and between the Republic of the Philippines (PH) and the Commission of the
European Communities (EC). Its implementation arrangements, including the role of the
National Economic and Development Authority (NEDA) as requesting authority and
coordinating agency for the project, are prescribed under Financing Agreement DCIASIE/2007/018-950.
The overall objective “is to support sustainable poverty reduction in the Philippines through
further integration into the international trade system”. The specific purpose “is to enhance the
capacity of selected Government agencies and state actors” for deeper integration into the
system. It has four components, as follows:
1. Capacity building for trade policy and export development – to support development
and implementation of a coherent and effective international trade strategy; and
implementation of international commitments including those to be made in the
framework of the ongoing EU-ASEAN FTA negotiations;
2. Standards harmonization and SPS conformity – to facilitate adoption of, and
compliance with, international standards and regulations for selected product and
service exports;
3. Trade facilitation – to enhance competitive, transparent, and efficient movement of
traded products within the international and regional trade facilitation systems;
4. Rapid response facility – to enable rapid, efficient and effective response to unforeseen
problems and issues in trade related areas through provision of short-term technical
assistance.
The project has an operational implementation period of four years – from 23 August 2008 to
22 August 2012 – and an estimated cost of EUR 7,475,000, of which EUR 6,500,000 and EUR
975,000 are to be contributed by EC and PH, respectively. It is to be implemented through
“decentralized management” under which NEDA will be the contracting and paying authority
for certain expenditures including for training, seminars, workshops and operating costs.
1
For technical assistance, EC remains as the contracting and paying authority and for which
ECA has been contracted as Service Provider. The expected period of execution of the ECECA service contract is 46 months and shall not in any case go beyond 22 August 2012.
2. Justification and Objective
The target result of Component 1 – Trade policy and export development - as reflected in the
Logical Framework for the project is the following:
“1.1 A coherent and effective international trade strategy, developed, adopted and being
implemented.” To help realize this target result, one of the activities envisaged in the revised
Logical Framework is the following:
Activity 1.1.1 Support to trade policy analysis, including but not limited to expert advice on
policy issues, training and mentoring of concerned government staff and, if appropriate,
members of research and academic institutions, on (a) policy research methods, (b) benefitcost analysis of FTAs and comprehensive economic partnership agreements; and (c)
identification and selection of policy options, taking account of potential positive and negative
impact on different groups with competing interests.
In the context of the above activity, the following actions are to be taken in accordance with the
approved work plan for 2011 (AWP3):
Action 1.1.1.1 Conduct training for government personnel and, if appropriate, members
of research and academic institutions on: (a) policy research methods, (b) benefit-cost
analysis of FTAs and comprehensive economic partnership agreements; and (c)
identification and selection of policy options, taking account of potential positive and
negative impact on different groups with competing interests; and assist DTI in creating
a core group of technical experts and trade lawyers in concerned government agencies
Action 1.1.1.2 Prepare a trade policy analysis manual, to serve as (1) reference
document for new trade experts across government agencies involved in trade
negotiations and (2) one of reference documents in trade policy analysis training
sessions.
Action 1.1.1.3 Develop and recommend intra- and inter-agency education and
mentoring programs to train future mentors within the relevant agencies and to be
implemented beyond TRTA2 for the purposes of sustainability
The STE on Trade Policy Analysis Manual Preparation, Mentoring, and Training (TP STE8a) is
to be engaged to assist DTI in the implementation of Actions 1.1.1.1, 1.1.1.2 and 1.1.1.3.
3. Scope of the Work
In particular, TP STE8a shall perform the following tasks:
3.1 In consultation with DTI, prepare a trade policy analysis manual under Action 1.1.1.2.
Annex 1 presents an indicative definition of a “training manual,” including an indicative
general outline. The STE is expected to improve on the definition of the training manual
and on the outline.
The manual, which will be used as main reference in Trade Policy Analysis training and
mentoring sessions, will be revised based on feedback during those sessions. It shall
2
specify application of case studies in the training and mentoring sessions. The case
studies shall be developed and completed prior to the conduct of training and mentoring.
3.2 Conduct mentoring sessions during the course of developing the training manual under
Action 1.1.1.3. Mentoring sessions can be more effective when conducted in the context of
a specific simulated or actual problem. The training manual envisions the use of trade
policy case studies, based on past Philippine trade policy issues. In developing these case
studies, the STE should interview and interact with those who were actually involved in the
specific trade policy being studies (and/or their colleagues, especially if they have since
resigned/retired/or been re-assigned). In the course of these interviews and interactions,
the STE should already mentor the officials on the alternative ways by which the actual
policy issue could have been analyzed and what alternative decisions could have been
taken—along with how to study the impact of these decisions. Annex 1 presents a general
idea of the mentoring sessions and how these are related to the preparation of the “training
manual.”
3.3 Design training modules and conduct training sessions using the manual as main
reference material, under Action 1.1.1.1. Annex 2 presents a more detailed explanation of
the “training sessions.”
3.4 Regularly coordinate with the DTI and other STEs assigned in related Actions in
Component 1, e.g. Action 1.1.5.1.1
4. Expected Outputs/Results
4.1 A training manual submitted by the STE and approved by responsible DTI senior official.
The separate submissions related to the development of the manual should include:
• A detailed outline of training manual and case study outlines prior to the actual fulldevelopment of the training manual
• The draft of the actual training manual. The number of cases to be included in the
manual to be mutually agreed upon by the DTI and the STE, depending on the depth
of discussion per case as indicated in the proposed outline of the STE.
• The final version of the training manual, as revised, based on feedback from the
training sessions.
4.2 Selected officials mentored (especially those involved in the trade case studies being
developed under this TOR) and the corresponding mentoring report submitted to the DTI,.
• Number of mentoring sessions/meetings between the STE and government officers,
to be mutually agreed by the DTI, STE, and government officers involved. A single
mentoring report can be submitted to summarize the results of mentoring sessions
held.
4.3 Two training sessions undertaken, government personnel trained on and able to conduct
trade policy analysis, and corresponding training reports submitted to DTI.
4.4 Regular reports submitted to the Technical Assistance Team on the progress of the
mission; attendance in meetings of the Trade Policy Research Network, under Action
1.1.5, when required by the DTI.
4.5 Training and Mentoring Report prepared by STE, reviewed and endorsed by KE2, and
submitted to DTI. Training manual and modules annexed to the report.
3
5. Qualifications and skills
1. University degree in economics, preferably at the Master’s level or its equivalent; relevant
experience in trade and policy research and analysis work, preferably with strong
knowledge of and experience in Philippine trade policymaking
2. Thorough knowledge of trade economics and benefit cost analysis
3. Proven ability to work, communicate, and interact with high level officials especially in a
multi-disciplinary and multi-cultural setting
4. Excellent command of the English language verbally and in writing (knowledge of the
Filipino language would be an advantage)
5. Proficient in Microsoft Office (Word, Excel, Power Point) and relevant internet and email
software
General professional experience
6. At least five (5) years professional experience in policy work in government, international
organization, or reputable research institute / consulting firm
Specific professional experience
7. At least three (3) years experience in the design, organization, facilitation and conduct of
seminars, workshops, trainings, or conferences in government, international organization,
or reputable research institute / consulting firm
6. Timing, Logistics and other Arrangements
The selected expert shall be engaged for a maximum of one hundred twenty five (125)
workdays to develop the manual (under Action 1.1.1.2), implement the training sessions
(under Action 1.1.1.1) and mentoring sessions (under Action 1.1.1.3) . These workdays can
be rendered intermittently between 15 July and 31 December 2011. No workdays can be
used beyond 31 December 2011.
The nature of this engagement is such that the expert can continue to perform other
professional, business, consulting and similar endeavours according to the guidelines of the
EC pertaining to the services of Short-Term Experts.
Also, given the breadth of trade policy topics and cases, the STE may constitute a team, on
his own account, to work under his/her supervision in performing the tasks in Section 3. Sole
responsibility over the trade policy manual, mentoring and training lies with the STE.
TP STE8a shall report to, and seek guidance from, duly designated representatives of DTI in
performing the tasks and producing the outputs enumerated in this Terms of Reference.
The expert will be based at the DTI office in Makati City with possible consultation meetings at
NEDA in Pasig City and at the offices of other Component 1 participating agencies, e.g. DA,
DOLE, which are all in Metro Manila. DTI will provide adequate office space and other facilities
to enable the expert to comply with this Terms of Reference.
Should travel outside Metro Manila be required, the cost shall be charged against the budget
for Incidental Expenditures of the EC-ECA contract. The per diem or daily subsistence
allowance covering food, lodging and local transport shall be in accordance with the approved
and published rate in the EC website. The expert shall bear the cost of travel within Metro
4
Manila to be incurred in the performance of the duties and responsibilities spelled out
in this Terms of Reference.
A briefing meeting shall be convened by NEDA on the first day of the mission to discuss and
ensure common understanding of the objective, tasks, expected outputs, and working
arrangements set forth in this Terms of Reference. NEDA shall notify the implementing
agencies, the EU Delegation, and other concerned parties on the date, time and venue of the
briefing meeting.
The detailed schedule of activities and allocation of workdays shall be discussed and
preferably agreed upon at the briefing meeting. If not, it shall be prepared and submitted to the
Team Leader within five (5) workdays after the meeting, as follows:
• For the development of the training manual, it is estimated that 35 workdays are
allotted for the Part I; a total of 60 workdays for all the cases to be included in Part II,
including mentoring of and discussions with government officers/agencies actually
involved in the cases being developed; and 35 workdays are allotted to Part III,
including mentoring of selected agencies involved in the review of the PJEPA (i.e.
actual use of tools and methodologies for conducting ex-Post review of trade
agreements).
•
For the implementation of the training activities, a total of nine (9) workdays are
allotted for the STE. This will include 1 workday for both a pre-training meeting with
selected participants (to discuss training outline) and a mission briefing; five (5)
workdays for the first training session (covering Parts I and II of the training manual)
and two (2) workdays for the second training session (covering Part III of the training
manual); and one (1) workday for mission de-briefing and other post-training
activities.
Date
Total
Activity
Number
Workdays
Briefing at NEDA
0.5
Pre-training meeting(s) with selected participants
0.5
Development of Part I of Training Manual
36
Development of Part II (covering all cases),
56
including mentoring and meetings with
government officers
Development of Part III, including mentoring of
35
officers involved in ex-post PJEPA Review
Conduct of Sessions 1 and 2 of the training
7
Progress reporting meetings / coordination
3.5
meetings with other STEs/members of the Trade
Policy Research Network (under Action 1.1.5 of
AWP3)
Debriefing at DTI
1
139
of
During the said briefing meeting, the schedule will be finalized, with the suggested timetable
as a guide:
• Submission of detailed outline of Training Manual (including outline of cases) – May
(4th week)
nd
• Pre-training meeting with selected participants (on training outline) – June (2 wk)
• Mentoring of and discussion with agencies involved in the four cases (for Part II) –
June
5
•
•
•
•
•
Mentoring of PJEPA agencies (for Part III: methodologies for ex-post analysis of
existing agreements) – June (1st session); July (2nd session); August (3rd session)
Submission of 1st draft of Manual – September
Submission of 2nd draft – October
Actual conduct of training sessions – October / November
Submission of final version of Manual – December
On or before the last day of the mission, the STE shall present her/his substantive findings and
recommendations at a debriefing meeting to be convened and notified by DTI. All concerned
parties shall have the opportunity to react to the findings and recommendations to be reflected
in the expert’s Mission Report at that meeting.
The STE shall prepare the Mission Report in accordance with the guiding principles and
process specified in the Guidelines for Preparation and Review of TRTA Project 2 Mission
Reports.
In accordance with ECA standard operating procedure, the expert will accomplish and sign a
monthly timesheet for approval and signature of KE2 and a responsible official of DTI,
countersignature of the TAT Leader and to be noted by the TRTA 2 Imprest Administrator,
reflecting the actual number of workdays rendered, briefly indicating the place where, and the
task for which, these were rendered.
The following documents are attached to this Terms of Reference for guidance of the expert:
1.
2.
3.
4.
5.
Mission Report Template
Timesheet Template
Guidelines for Preparation and Review of TRTA Project 2 Mission Reports
Guidelines for Preparation of Training/Workshop/Seminar Design
Guidelines for Funding of Training, Workshop and Seminar Activities
6
ANNEX 2
Annex 2. Trade Policy Analysis Manual Preparation and Trade Policy Analysis
Mentoring
A. The Training Manual: its purpose and some reference manuals and materials
As used in this TOR, a trade policy analysis manual is intended as:
- an introduction to trade policy analysis, serving as self-paced reference material for new
government officers being trained for trade policy analysis and/or negotiations
- it can also be used as either a reference material to prepare participants prior to a training,
a handout during training, or a reference material after training
A sample training manual which can be used as a guide by the STE(s) is the UNEP Training
Manual on Integrated Environment Assessment available at
http://www.unep.org/ieacp/iea/training/manual/introduction.aspx,
specifically
Module
5:
Integrated analysis of environmental trends and policies
(http://www.unep.org/ieacp/_res/site/File/iea-training-manual/module-5.pdf). These manuals
also include proposed powerpoint presentations and training modules.
In preparing the manual, the STE is also expected to survey available materials over the
internet, including (at the very least) the following:
1. Papers
- Piermartini, R. and R. Teh (2005) Demystifying modelling methods for trade policy, WTO
Discussion Paper No. 10, available at
- http://www.wto.org/english/res_e/booksp_e/discussion_papers10_e.pdf
- Abler, D. (2006) Approaches to measuring the effects of trade agreements, CATPRN Paper
2006-1, available at
- http://www.uoguelph.ca/~catprn/PDF/Commissioned%20Paper%202006-1.pdf.
- Bowen, H.P., A. Hollander and J.-M. Viaene (1998) Applied international trade analysis,
University of Michigan Press,
available at http://www.uoguelph.ca/~catprn/PDFCP/Commissioned_Paper_2007-2_Evenett.pdf
- Taylor, L. and von Arnim, R. (2006) Modelling the Impact of Trade Liberalisation: A Critique
of Computable General Equilibrium Models, (New School for Social Research, New York),
available at
- http://www.oxfam.org.uk/resources/policy/trade/downloads/research_trade_liberalisation.pdf
?m=234&url=http://www.oxfam.org.uk/resources/policy/trade/downloads/bp92_afghanistan.p
df
2. Local Capacity-building materials
- Philippine Global Trade E-Learning Program (PGTEP) funded by the USAID (training
materials now lodged with the Philippine Trade Training Center (PTTC) [this will be
facilitated by DTI and the KE2]
3. Foreign Capacity-building/ Instructional materials
- applicable E-Learning programs of the World Bank
- Modules
of
the
Institute
for
Commercial
Diplomacy
and
Trade
(http://www.commercialdiplomacy.org), specifically the instructional module on “Using
Economic Data in Commercial Diplomacy: Making Rule Of Thumb Calculations on the
Economic
Effects
of
Trade
Policy
Decisions”
(http://www.commercialdiplomacy.org/pdf/manual/EconDataFinal.pdf)
The STE(s) is expected to comply with applicable copyright laws.
1
B. Developing Trade Policy Case Studies and Conduct of Mentoring Sessions
To ensure effectiveness, the training manual should include local case studies of actual trade
policy analyses or negotiation episodes. In preparing the case studies, the STE should actively
interact with government officers who were directly involved in the case studies / or whose
agencies served as the lead institutions for these cases.
In this interaction between the government officers and the STE, using the specific case study
as an example, (a) the STE will mentor the government officers on the alternative analytical
tools that may used to analyze the policy issue; while (b) the government officers will ground
the STE on the realities of trade policymaking, including the actual issues surrounding the
specific case being studied. The mentoring session(s) can focus on discussion of case facts
and on alternative ways by which analyses could have been undertaken.
C. General Outline of the Training Manual
An indicative general outline of the training manual is given below. The STE is expected to
improve on this and submit a detailed outline (including of the cases) for approval of the DTI.
Part I – Introduction to Trade Policy Analysis
- What is Trade Policy?
- What are the tools for Trade Policy analysis?
- How do you analyse trade policy? What are the alternative approaches, theories and
methodologies?
(include
“rules
of
thumb”
approaches,
e.g.
from
http://www.commercialdiplomacy.org/pdf/manual/EconDataFinal.pdf)
- What are the pros and cons of these approaches? What are the data requirements of
these approaches?
Part II - Case Studies of Trade Policy Analyses in the Philippines (oriented to
policymakers)
Using actual case studies, this portion will illustrate: (1) for the benefit of government officers,
how particular tools can be used to analyze specific trade policy issues; and (2) for the benefit
of academic/research institutions, how academic studies can be made more useful for
government.
The cases should include examples across various contexts: multilateral, regional and
bilateral. Given recent trade episodes, it is suggested that the STE consider the following:
• Under multilateral agreements, the cases can focus on dispute settlement
mechanism or the use of trade remedies.
• Under regional agreements, the cases can focus on:
o Analysis, implementation, and consequences of using exception windows For
example, a good case is the PHL’s invocation of the Protocol on the
Implementation of the CEPT Scheme Temporary Exclusion List in order to
suspend tariff concessions on petrochemical products. This case will illustrate
not only the need to consider consequences of non-implementation of
commitments (e.g. compensation) but also the linkage between trade policy with
investment and industrial policy.
o Development of negotiating position in the services sector (e.g. a particular
AFAS package).
• Under bilateral agreements, the focus can be on the PJEPA. This is a particularly
interesting case given that (a) it is a recent episode, (b) data are relatively available,
(c) a set of studies was actually undertaken by academic and research institutions
prior to negotiating the agreement, and (d) it illustrates a full-range of trade and
economic issues.
o As a learning instrument, the PJEPA can clearly illustrate how PIDS (and any
other academic/research institutions, if any) analysed issues related to the
PJEPA—including use of general equilibrium models, assumptions behind
models and their implications on results and recommendations (e.g. dynamic vs.
static); use of partial equilibrium models; how government made use of the
2
analyses; what other analytical tools did the government use; what are the other
ways of undertaking the analyses.
o Specifically, cases can be developed on the following set of PJEPA issues,
situated at the time before the agreement was finalized and implemented:
Impact of the PJEPA on output, employment, prices, income distribution,
key sectors;
PJPEPA Chapter on Trade in Goods; how the government decided on
Categories of Tariff Elimination/ Reduction/ Exclusion; Impact of
exports/imports output and employment, fiscal revenues; ROO-related
decisions, specifically on garments;
Trade in Services, including setting of level of ambition for negotiations,
consistency with local laws, structure of negotiations with respect to
commercial presence, and decisions related to movement of natural
persons; and
Decisions with respect to legal and Constitutional Issues, including text of
the Agreement, process of legal scrubbing, Dispute Settlement,
reservations on investments, among others.
The cases suggested above are only indicative. The expert may recommend other case
subjects, depending on the viability of developing the case (e.g. data and information
availability) and appropriateness of the example.
The actual number of cases to be developed under Part II will be mutually agreed on by
DTI and the STE, depending on the depth of discussion per case as indicated in the
proposed outline of the STE.
Part III - Ex-post analysis of existing trade agreements
This portion of the manual will cover the following:
• How do you analyze existing trade agreements? How do you measure their impact on
output, employment, prices, income distribution, key sectors, etc.?
• What are the alternative approaches and methodologies?
• What are the pros and cons of these approaches? What are the data requirements of these
approaches?
• How do you separate implementation issues of the agreements (e.g. effect of the agreement
per se vs. operational capacity constraints to take advantage of the agreement)?
• How do you account for “soft impacts” of the agreement (e.g. increase in trade and
investments owing to increased confidence in PHL as a partner—and not due to specific
concessions in the agreement)?
- As the government is currently undertaking a review of the PJEPA implementation, it is
suggested that a case study be developed in terms of applying the questions above to
the PJEPA Review (i.e. use the PJEPA as a clear example in developing Part III).
Again, this suggestion is only indicative.
- It is expected that the STE will provide mentoring to government agencies involved in
the review of the PJEPA (especially those directly involved in the cases being
developed); if possible, the STE may also draw inputs from research project on PJEPA
review in Action 1.1.5.1.1)
Part I of the manual is directed to new recruits (or those with no trade policy background);
while Parts II and III should target specialists.
3
The Training Sessions
There are two (2) training sessions expected under the TOR, using the Training Manual as
basic reference. The STE, in consultation with the KE2 and DTI, will design the actual
training calendar; sessions may be integrated or spread across a given period of time.
- First session is for five (5) days, to cover theoretical foundations; methodologies and
approaches, including “rules of thumb in economic analysis of trade policy; application to
case studies of trade policy analyses episodes (i.e. Parts I and II of the Training Manual).
- Second session is for two (2) days, to cover methodologies for reviewing existing
agreements including, as suggested examples (indicative only): the case of the PJEPA
Review, the implementation of agreements related to the ASEAN, and the impact of the
WTO on PHL.
4
Work Plan
STE on Trade Policy Analysis Manual Preparation, Mentoring, and Training (TP
STE8a) - Trade Related Technical Assistance 2
Date
1 Aug 2011
13 Oct 2011
2 Aug 2011
to
30 Nov 2011
2 Aug 2011
to
30 Nov 2011
Activity
Briefing meeting at NEDA
Pre-training meeting(s) with selected participants
Research, interviews, and drafting of the Training Manual
Research and drafting of Part I of Training Manual,
Introduction to trade policy analysis
Research and drafting of Part II (covering all cases),
including mentoring and meetings with government officers
1. Trade in Goods and Rules of Origin
2. Trade in Services
3. Trade Remedies
2 Aug 2011 Research and drafting of Part III, ex post assessment of
to
trade agreements
30 Nov 2011
Conduct of Sessions 1 and 2 of the training
Dec. 5 to 7 Conduct of Sessions 1 to 11 of Part 1 of the training at the
2011
AIM
Dec. 15 to Conduct of Sessions 1 to 4 of Part 2 of the training at
16 2011
Holiday Inn Hotel at Clark
8 Dec to 31 Revision of the draft output of the manual
Dec, 2011
1 January to Integration work
22 February,
2012
1 Aug 2011 Progress reporting meetings / coordination meetings with
to 31 Dec other STEs/members of the Trade Policy Research
2011
Network (under Action 1.1.5 of AWP3)/ Report writing
February 23, Debriefing at DTI
2012
Total Workdays
Number of
Workdays
0.5
0.5
15.5
45
18
5
2
15
14.5
8.5
0.5
125
5
TRADE POLICY ANALYSIS COURSE SERIES II
Training 1: Introduction to Trade Policy Analysis
5-7 December 2011 – AIM Conference Center, Manila
Day 1 - 5 December 2011
TIME
ACTIVITY
8:00 – 8:30 am
Registration
8:30 – 8:45 am
Philippine National Anthem
EU Hymn
Welcome Remarks
8:45 – 9:00 am
Executive Director Efren V. LeaГ±o (TBC)
Board of Investments
Special Message
9:00 – 9:15 am
Director Brenda Joyce R. Mendoza (TBC)
TRTA Imprest Administrator
NEDA-TIUS
9:15 – 9:30 am
AM Snacks
9:30 – 10:30 am
Concept and Measurement of Gains from Trade
10:30 – 11:00 am
Open Forum
11:00 – 12:00 nn
Tax and Quantitative Trade Restrictions
12:00 – 1:00 pm
Lunch
1:00 – 1:40 pm
Contingent Trade Measures
1:40 – 2:10 pm
Open Forum
2:10 – 4:10 pm
Preferential Trade Measures
4:10 – 4:30 pm
PM Snacks
4:30 – 5:00 pm
Open Forum
5:00 pm
End of Day 1
6
Day 2 – 6 December 2011
TIME
ACTIVITY
8:00 – 8:30 am
Registration
8:30 – 10:15 am
Customs policies and practices
10:15 – 10:30 am
AM Snacks
10:30 – 11:00 am
Open Forum
11:00 – 12:00 nn
Technical barriers to trade
12:00 – 1:00 pm
Lunch
1:00 – 2:00 pm
Sanitary and phyto-sanitary measures
2:00 – 2:30 pm
Open Forum
2:30 – 4:30 pm
Trade policies and domestic distortions
4:30 – 5:00 pm
Open Forum
5:00 pm
End of Day 2
Day 3 – 7 December 2011
TIME
ACTIVITY
8:00 – 8:30 am
Registration
8:30 – 10:00 am
Trade measures affecting services trade
10:00 – 10:15 am
AM Snacks
10:15 – 10:40 am
Open Forum
10:40 – 12:00 nn
Food trade policies and the 2008 rice crisis
12:00 – 1:00 pm
Lunch
1:30 – 2:00 pm
Open Forum
2:00 – 4:00 pm
4:00 – 4:30 pm
General equilibrium analysis of trade policies
Open Forum
4:30 – 4:45 pm
PM Snacks
Closing Remarks
4:45 – 5:00 pm
Director Luis M. Catibayan
Bureau of Import Services
DTI
5:00 pm
End of Training 1
7
TRTA
TRADE POLICY ANALYSIS COURSE SERIES II
Training 2: Selected Topics in Trade Policy Formulation
15-16 December 2011 – Holiday Inn Clark, Pampanga
Day 1 (Thursday, 15 December 2011)
ACTIVITY
TIME
6:00 am
ETD from Manila
Meeting Point: DTI International Building
(There will be a Shuttle provided by TRTA to transport the
participants and resource speakers from DTI International Building to
Holiday Inn, Clark, Pampanga.)
8:00 am
ETA in Holiday Inn, Clark
(Participants are asked to proceed immediately to the designated
Function Room to settle down)
8:30 – 9:00 am
Registration
9:00 – 9:15 am
Philippine National Anthem
EU Hymn
9:15 – 9:30 am
Welcome Remarks
Executive Director Efren V. LeaГ±o
Board of Investments
9:30 – 9:45 am
Special Message
Director Brenda Joyce R. Mendoza
TRTA Imprest Administrator
AM Snacks
9:45 – 10:00 am
10:00 – 11:30 am
Selected Topics on Trade in Goods: Rules of Origin
Ms. Elizabeth Tan
Expert, UP School of Economics
11:30 – 12:00 nn
Open Forum
12:00 nn- 1:00 pm
Lunch
1:00 – 2:30 pm
2:30 – 3:00 pm
Selected Topics in Trade in Goods: Tariff Calibration
Ms. Elizabeth Tan
Expert, UP School of Economics
Open Forum
3:00 – 3:20 pm
PM Snacks
3:20 – 5:00 pm
Selected Topics in Trade in Services
Dr. Ramon Clarete
8
5:00 – 5:30 pm
STE 8a
Open Forum
5:30 pm
7:00 pm
End of Day 1 / Check-in
Dinner
Day 2 (Friday, 16 December 2011)
ACTIVITY
TIME
8:00 – 8:30 am
Registration
8:30 am – 10:00 am Selected Topics on Trade Remedies
Dr. Ramon Clarete
STE 8a
10:00 – 10:20 am
AM Snacks
Open Forum
10:20 – 10:50 am
10:50 – 12:00 nn
Impact Analysis of Trade Agreements
Dr. Geoffrey Ducanes
Expert, UP School of Economics
12:00 nn – 1:45 pm
Lunch
Check-out
1:45 – 2:30 pm
Impact Analysis of Trade Agreements (Continuation)
Dr. Geoffrey Ducanes
Expert, UP School of Economics
Open Forum
2:30 – 3:00 pm
3:00– 4:00 pm
Overview of PHL CGE Modeling Project / Open Forum
Dr. Caesar Cororaton
Virginia Polytechnic Institute and State University (Virginia Tech)
4:00 – 4:20 pm
Closing Remarks
Director Luis M. Catibayan
Bureau of Import Services, DTI
4:20 – 4:40 pm
5:00 pm
PM Snacks
Participants’ Departure from Clark
9
ATTENDANCE
Component:
TRADE POLICY AND EXPORT DEVELOPMENT
Activity Number:
1.1.1.1
Activity Title:
TRADE POLICY ANALYSIS COURSE SERIES II – SELECTED TOPICS IN TRADE POLICY FORMULATION
DATE
NUMBER OF
DAYS
VENUE
15-16 December 2011
2
Holiday Inn, Clark Freeport Zone, Pampanga
GENDER
NAME
#
DESIGNATION
OFFICE
M F
CONTACT
NUMBERS
EMAIL ADDRESS
SIGN IN
ATTENDANCE
15 Dec
1
Clariza Mae A. Columna
X
Technical Staff
DA
9200925
clarizamae.columna@g
mail.com
2
Anna
Padua
X
Planning Officer
DA
9267439
[email protected]
National Agricultural
and Fishery Council,
DA
9201788/9203995
[email protected]
DA
9201788
[email protected]
m
Christine
de
Asst. Chief,
Agriculture &
Fisheries
Modernization
Coordination
Office
Chief, Poultry,
Livestock, &
Feed Crops
Section, National
Agricultural &
Fishery Council
3
Susana B. Puentebella
X
4
Diana M. delos Santos
X
5
Garland
Cuarteros
X
Economist III
DAR
9268961
[email protected]
om
6
Julieta I. Dimalanta
X
Economist III
DAR
9268961
[email protected]
7
Denise
Marie
Encarnacion
X
Economist I
`DENR
9251183
dmiencarnacion@yahoo.
com
8
Nenita R. Zabala
X
Economist II
DENR
9251183
Leila
A.
I.
USB with
Handouts
Received
16 Dec
10
GENDER
#
NAME
DESIGNATION
OFFICE
M F
CONTACT
NUMBERS
EMAIL ADDRESS
SIGN IN
ATTENDANCE
15 Dec
9
Christine Co
X
1
0
Raymond
Garcia
1
1
Bianca Pearl Sykimte
1
2
Jeremiah C. Reyes
1
3
Arlene P. Ligad
1
4
Madeleine
Almazora
1
5
Nestor P. Arcansalin
1
6
Evariste Cagatan
1
7
Elvin
M.
X
X
X
X
Joy
X
Team Leader,
Policy & Network
Investment
Specialist
Trade & Industry
Development
Specialist
Trade & Industry
Development
Specialist
Supervising
Trade & Industry
Development
Specialist
DOH
6517800 loc. 4251
[email protected]
DTI-BIS
4031417
[email protected]
DTI-BITR
8953993
[email protected]
om
8978292
[email protected]
m
[email protected]
m
[email protected]
[email protected]
h
Legal
DTI-BOI
Director III
DTI-BOI
X
Director
DTI-BOI
Madonna N. Clarino
X
Legal
DTI-BOI
1
8
Fe L. del Rosario
X
Division Chief
DTI-BOI
8973082
[email protected]
1
9
Efren V. LeaГ±o
Executive
Director
DTI-BOI
8965167
[email protected]
2
0
Lucita P. Reyes
DTI-BOI
8953983/8953978
[email protected]
2
1
Homer A. Bunyi
DTI-BTRCP
7510384 loc. 2222
odyssey041278@yahoo.
com
[email protected]
2
2
Joyce Ria B. Estares
DTI-BTRCP
7513233/7510384
loc. 2227
[email protected]
h
X
X
X
X
X
Executive
Director
Senior Trade &
Industry
Development
Specialist
Trade & Industry
Development
16 Dec
[email protected]
om
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CONTACT
NUMBERS
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Analyst
2
3
Rizza
Mae
Valenzuela
2
4
Christine dela Cruz
X
2
5
Magnolia Uy
X
2
6
Patricia M. Abejo
X
2
7
Emmy
Delfin
X
2
8
Jazzie Di S. dela Cruz
2
9
Rommel F. Rome
3
0
Aileen C. Salvador
X
3
1
Ma. Josefina Villena
X
3
2
David
Michael
Amparo
3
3
Christian M. Castillo
Lou
C.
X
Versoza-
X
X
C.
X
Trade & Industry
development
Specialist
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Officer
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Director III
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NEDA
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NEDA
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NEDA
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NEDA
6313739
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Executive
Assistant III
Economic
Development
Specialist II
Economic
Development
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Senior Economic
Development
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Development
Specialist II
Technical
Assistant
Office of the Deputy
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Undersecretary
Office of the
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OP
3
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William M. Varias
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Legal
Counsel/Assista
nt Secretary
3
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Mark Dennis Y.C. Joven
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Technical
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Marie
Cecille
Fernando
3
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Lord Louis Valera
3
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Nydia O. Cometa
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3
9
Lynly P. dela Cuesta
X
4
0
Gerry P. Gebela
4
1
Elvira C. Ignacio
4
2
Jennifer
Ragma
4
3
Ma. Lourdes M. Saluta
4
4
Rolan Ynion
X
4
5
Dr. Erwin Corong
X
Primrose
P.
X
X
X
C.
Professional
Regulation
Officer I,
International
Affairs Division
Head,
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Affairs
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13
ANNEX 3
PART 1. INTRODUCTION TO TRADE POLICY ANALYSIS
1
Mission Report
1 August 2011 - 23 February 2012
1. Gains from trade
1.1 Concept and elements
Every day, goods and services cross borders, coming from countries that export them to countries
that import them. Trade, commerce or the buying and selling of products across international
borders have gone as far back as time. Familiar old pathways of commerce include the Silk Road and
the Spice Road that span between
Western Europe and Asia, as well as
the maritime trade routes as that
taken by the Galleon trade between
Mexico, the Philippines and the
Moluccas. Unlike the largely single
commodity trade of the past,
today’s trade allow countries to
exchange with one another an
increasing variety of goods and
services such as (a) food, feeds and
beverages; (b) industrial supplies
and materials; (c) capital goods; (d)
finished consumer goods; and (e)
Philippine exports grew on average by 9.6 % each year from 1990 to
2010, despite Asian financial crisis in the late 1990s and the global
services.
economic slowdown in 2008. During the same period, the average
annual growth of imports was 7.75 %. In 2010, the country’s exports
reached 51.5 bln USD, while the country’s imports were reported to be
58 bln USD, resulting in a trade deficit of 7.0 bln USD in 2010.
Countries trade products with one
another because they gain from
doing so. If a country can buy a
good from another country at a lower price than what it pays for the same product it produces, it
saves the price difference. The more units of the product it buys, the larger its gain from trade. For
trade to occur, both partners must benefit from the exchange. There has to be a product that one
country can buy from her trading partner at a relatively lower cost, and different product that the
latter can buy less expensively from the former.
The gains from trade are independent of the direction of international trade. If the Philippines
exports bananas to Japan, and imports from the latter finished vehicles and their parts, both
countries will still benefit from their bilateral trade. International price differences set what country
will export what product to other countries. Japan in this example is unable to grow bananas there
due to the fact that it is in the temperate zone. While it is possible for Japan to grow the fruit by
simulating a tropical environment in green houses especially designed for the purpose that raises its
cost for producing the bananas that the Philippines can efficiently produce. The Philippines as well
will have a cost disadvantage if it produces cars.
In recent years, the top traded commodities of the Philippines include (see Tables 1 and 2) the
following: electronic integrated circuits and micro-assemblies (HS code 8542), automatic data
processing machines and units thereof (HS code 8471) and parts and accessories for use with
2
Mission Report
1 August 2011 - 23 February 2012
machines of heading 84.69 to 84.72 (HS code 8473) (see table 1). These products were exported to
her major partners including Japan, USA and Singapore in 2010 (see Fig. 2).
Her top 10 imports include electronic integrated circuits and micro-assemblies (HS code 8542),
petroleum oils, crude (HS code 2709), parts and accessories for use with machines of heading 84.69
to 84.72 (HS code 8473) and rice (HS 1006) (see table 2).
Table 1. Top 10 exported commodities, Philippines, 2008 to 2010
HS
Code
Value (million US$)
4-digit heading of Harmonized System 2002
All Commodities
2008
2009
2010
49077.5
38435.8
51497.5
8471
Automatic data processing machines and units thereof
13771.1
9607.4
13954.6
8473
Parts and accessories for use with machines of heading 84.69 to 84.72
6852.0
5753.1
8207.0
8541
Diodes, transistors and similar semiconductor devices
2013.4
2346.9
1981.7
8708
Parts and accessories of the motor vehicles of headings 87.01 to 87.05
1801.6
1459.3
2591.7
8504
Electrical transformers, static converters (for example, rectifiers)
2052.0
1422.7
1670.5
1513
Coconut (copra), palm kernel or babassu oil
1254.6
948.2
1248.8
8544
Insulated (including enamelled or anodised) wire, cable
1039.6
594.5
1266.3
7403
Refined copper and copper alloys, unwrought
926.3
771.7
1144.8
4418
Builders' joinery and carpentry of wood
1309.2
688.1
807.0
8542
Electronic integrated circuits and microassemblies
895.0
802.1
1008.9
65.0
63.5
65.8
Top ten exports share (%)
Source: UN Comtrade
Table 2. Top 10 imported commodities, Philippines, 2008 to 2010
HS
Code
4-digit heading of Harmonized System 2002
All Commodities
Value (million US$)
2008
2009
2010
60419.7
45877.7
58467.8
8542
Electronic integrated circuits and microassemblies
13702.1
9620.2
12267.4
2709
Petroleum oils, crude
7683.6
3354.6
5541.2
8473
Parts and accessories for use with machines of heading 84.69 to 84.72
4409.8
3644.7
4082
2710
Petroleum oils, other than crude
3875.1
3268.3
3237.2
1006
Rice
1956.8
1048.9
1652.5
8703
Motor cars and other motor vehicles principally designed for the transport
983.2
955.9
1507.1
2603
Copper ores and concentrates
403.1
909.7
1326.2
8479
Machines and mechanical appliances having individual functions
851.2
521.7
917.1
1001
Wheat and meslin
724.4
825.3
547.2
8517
Electrical apparatus for line telephony or line telegraphy
724.8
716.9
593.9
58.4
54.2
54.2
Top ten imports share (%)
Source: UN Comtrade
3
Mission Report
1 August 2011 - 23 February 2012
Majority of Philippine exports
go to East Asia. Japan has
the largest share at 15 % of
total exports. The USA and
Singapore are near second
and third. China and Hong
Kong,
taken
together,
account for the largest share,
20 %. Less than 25 % of the
country’s exports go to nonAsian destinations.
Gains from exchange
Gains from trade has two components, gains from exchange and those from specialization. The
former comprises savings of one country, say the Home country, by selling to its trading partner, say
the Foreign country, what it has relatively more of and buying from the Foreign country what is
relatively in scarce supply in the former. The incentive to undertake the exchange is provided by the
differences of the respective prices of the products to be exchanged in both countries. Before the
exchange happens, the good that the Home country has relatively more of fetches a lower price in
the Home country and a higher price in the Foreign country. On the other hand, the other good that
is scarce in Home country is relatively valued there higher than its value in the Foreign country. The
exchange continues until the prices of the same product in both countries equalize or the incentive is
fully exploited by both trading partners.
The following numerically illustrates the savings that both countries can enjoy from the mutual
exchange of goods. The equalization of respective prices of the two traded goods in both countries
is key to realizing the gains from exchange. Moreover, the initial differences of the prices in turn can
be explained by the relative abundance one country may have in one good and its relative scarcity of
the other.
Prices Before
Exchange
Cars
Bananas
Savings per
unit
Prices After
Exchange
Endowment of
Goods
(quantity)
Home
Foreign
100
50
300
-20
500
100
Home
Foreign
Home
Foreign
Home
Foreign
500
200
300
300
-200
40
100
80
80
40
Total Savings
Home
Foreign
10,000
28,000
Gains from specialization
The equalization of prices of goods has in turn implications on the amounts produced in each
country of the two traded goods. The highest profit that can be generated from producing a good is
obtained by producing a quantity of it at which the cost of producing the last unit exactly matches its
price. When Home country in the example above sees the price of banana doubling, it is not
4
Mission Report
1 August 2011 - 23 February 2012
generating its highest profit by not increasing its production of the good. If the price of banana
went up while the Home country continues to produce the same quantity, the higher price exceeds
the incremental cost of the last unit. To increase its profit from producing bananas, it has to increase
its output of bananas since doing so brings in additional profits to the country. In the case of cars,
the Home country’s price goes down from 500 to 300. Producing the same level of cars results in a
financial loss to the Home country. It is better off cutting its losses by reducing its production of
cars.
The same processes driven by the pursuit of higher profits in producing goods are happening with
respect to the Foreign country in the case of cars, the local price of which went up from 200 to 300,
and bananas whose price declined.
Reallocating the country’s productive resources from a production activity that is currently losing to
one that is generating profits is the process called specialization. The added revenues to the country
from specializing in producing the good that generates more profits and by scaling down its output
of the product that is causing it financial losses comprise the gains from specialization. The driver of
this change is the pursuit of higher profits by the each of the country’s producers and the changes in
the prices of the traded products as a result of trade. This is illustrated numerically below:
Prices Before
Exchange
Cars
Bananas
Prices After
Exchange
Output Before
Exchange
Home
Foreign
300
20
450
100
700
50
Home
Foreign
300
50
80
500
Home
Foreign
Home
Foreign
500
200
300
40
100
80
Output After
Exchange
Total Added
Revenues
Home
Foreign
17,000
69,000
The sum of the gains from exchange and specialization indicates the gains from engaging in free
trade. These are graphically described in Fig. 3.
The production possibilities of the Home economy are
described by the graph PPFH. Before trade, the point AH (A for
autarchy or no trade), indicates the production and
consumption points of the Home economy of the two
products, cars and bananas. The slope of the line tangent to
AH indicates that cars are relatively more expensive than
bananas. After trade and in response to the world prices of
the two products as represented by the slope of the line
tangent to QH,T, the producers in Home produce more
bananas and fewer cars, and consumers use more cars and
bananas, as indicated by QH,T and CH,T. Accordingly, Home
exports bananas and imports cars. The consumers in Home
are better off with trade and this is indicated by the higher
collective utility, UH,T in contrast to UH,A. The gain from trade is
indicated by the income at world prices required to make
consumers as well off as after trade (B3 in terms of units of
bananas) less B1 or the income required for consumers to be
as well off as before trade. The gain from trade is made up of
the gain from exchange, (B2 less B1) and gain from
5
Mission Report
1 August 2011 - 23 February 2012
1.2 Origin and Distribution
Sources of comparative advantage
That one country tends to be relatively abundant in some goods, and to have relative scarcity in
others reflects its production advantage or disadvantage relative to her trading partners. A superior
production technology is one obvious source of her edge. If an average worker of one country can
produce more units of one good compared to her counterpart in another country, all the things
remaining the same, then her country is said to have the absolute advantage over the other in
production.
It is more useful to assess a country’s comparative advantage considering that she produces several
goods. The concept is determined by comparing the productivity of workers in producing one good
relative to her labor productivity in another good. If a country has a lower opportunity cost of
producing a good than another country, she has the comparative advantage in the product over the
latter. Opportunity cost is defined as the units of one good that the country has to give up in order
to produce a unit of another good, which in turn is the ratio of the labor productivity of the country
in one good divided by her labor productivity in the other product.
A country may have absolute advantage in both goods. However, she can have the comparative
advantage in only one of the two.
Besides the difference in production technology, two other sources of comparative advantage
include:
(a) Relative difference of the respective productive resources of the two trading partners. If a
country has relatively more of a productive input, say labor, that is intensively used in
producing a given product, compared to her trading partner, then she can produce the
product at a lower cost. In the course of trade, the country is able to specialize in this
product, export it to her trading partners, and to import those products that it does not have
the comparative advantage.
(b) Relative abundance in productive resources that are specific to producing a given product. If
the country has more of this productive resource, then she is able to produce this product at
a lower cost compared to her trading partners, which may not have this productive factor at
a quantity comparable to the former. Philippine mangoes are known for their unique taste
and texture, and some of her trading partners tried to grow this variety of the fruit in their
respective territories. However they have found that they could not replicate the
characteristics of the fruit if it was grown in the Philippines. This illustrates some productive
input that is specific to growing the fruit that can only be found in the country.
Distribution of the gains from trade
Given certain conditions of the economy such as the absence of price distortions, the country is
assured of gains from participating in international trade. However, the gains will not be equally
distributed among the various stakeholders. This is because the stakeholders vary in terms of their
taste preferences or in terms of their ownership of the productive factors. Suppose that the country
is presently into autarchy. Without access to goods that she is not able to produce at low cost, the
country is compelled to produce them at a higher price. The owners of the productive factors that
are intensively used in producing these goods will be compensated relatively well because of the
scarcity in the country of these factors. These fetch a relatively high price in the country.
6
Mission Report
1 August 2011 - 23 February 2012
When trade occurs, the Home country is expected to import these goods from her trading partners
that are able to produce them at relatively low prices. Thus, the country’s producers of these
expensive goods will find themselves unable to compete and will lose entirely or at least part their
share of the domestic market of the product concerned. The owners of the productive factors that
went into producing the same product will expect a cut of their factor incomes.
The companies engaged in the export business are expected to receive a proportionately larger
share of the gains from trade. The owners of the productive factors used intensively in producing the
country’s exports are expected to benefit as well..
The country’s consumers are the consistent beneficiaries of opening the country to international
trade. Although the prices of exported products go up because of international trade, their losses
are more than offset by their gains from reduced prices of the locally produced goods, which
compete with imports.
It follows that free trade will have friends and opponents in a given country. The losers are expected
to fight any move towards freer trade, unless they are provided some level of financial
compensation. In theory, there are enough gains from trade to fully compensate the losers, i.e. the
gains from trade are positive. The government can collect taxes on the gains received by the
winners, compensate losers using the tax revenues, and will find some positive net gains going to
the winners. In reality, implementing compensation programs to producers that are adversely
affected by trade can be costly. However, governments who do so implement such programs in
order to mitigate the adverse implications of opening the country to free trade.
Measures of Economic Welfare
The analyst may wish to track the distribution of the gains from trade in terms of how the trade
policies affect the producers, consumers or the government. In the following, the partial equilibrium
model is used in order to assess the impact on the economic well being of the above economic
agents, as illustrated in Fig. 4. But before this, the following measures need to be defined.
When the country sources all its rice consumption
locally at the price, PA, higher than the world price of
rice at PT, the country forgoes gains from trade. At
the equilibrium point E, local production of rice is QA,
which is all consumed locally, or the country is selfsufficient. However, if the country imports rice,
consumers are able to consume more rice (CT) at the
lower price PT at the expense of local farmers who
reduce their output to QT. The country imports CTQT units of rice. Consumer surplus increases by area
b+c+d., and producers lose b. The country has a net
gain of c+d.
The total benefit of consumers in monetary terms of consuming a given amount of a good is the area
under the demand curve up to the level of consumption of the good. Subtracting the amount of
7
Mission Report
1 August 2011 - 23 February 2012
money the consumers ended up paying the suppliers for the amount of the good they used up
results in a consumer surplus, or the area under the demand curve above the level of the price.
A related measure applies for the well being of producers. The cost of producing a given level of
output is the area under the supply curve up to the output level. If those goods are sold in the
market, then the sales revenues are graphically represented by the rectangular area bounded by the
price and quantity of the product bought and supplied in the market. The difference between the
revenues and the cost is the producer surplus, and this is represented as the area above the supply
curve up to the price line.
With the two concepts, the analyst tracks the changes in consumer and producer surplus, which
reforms of trade policies may induce. A positive net change indicates that the economy is made
better off by the policy as illustrated in Fig. 4. In it, the changes in consumer surplus and producer
surplus from a situation where the country does not trade at all, and to the alternative scenario
where it opens its borders to international trade.
1.3 Alternative approaches to the measurement of gains from trade
The measurement of the gains from trade is needed to guide policy makers when they set trade or
other policies that directly or indirectly affect the flow of trade into their country. Whether policies
are set in order to increase or decrease the flow of trade, their analysis has to do with the
measurement of the gains from trade given such policies. Policy makers need information on how
trade policies will affect the economy and their various constituents.
Two modeling approaches are alternatively used in estimating the gains from trade. These are the
partial equilibrium and the general equilibrium models.
The following takes up the relative
strengths and weaknesses of both frameworks.
Partial equilibrium analysis
In evaluating the impact of a trade policy such as an import tariff, the analyst uses a representation
of the economy or parts of it that are likely to be affected by the policy. The representation is called
the economic model, and depending upon how much of the economy it covers, it may be either
called a partial or a general equilibrium model of the economy.
A partial equilibrium model has a limited representation of the economy, and accordingly is
constrained to provide a narrower set of answers compared to a general equilibrium model. A
typical model will provide answers on the impact of the policy on prices and quantities purchased
and produced in the economy of the products covered by the model. A rather basic version of this
model will have to have one market of the economy representing the interaction of domestic buyers
and sellers, and if the model is to be used for trade policy analysis it will include as well foreign
buyers and producers.
The extensive version of this supply and demand model may include several markets, and such a
framework does so because these markets are usually interrelated with one another. For example,
the markets of hogs, chicken and corn are interrelated. Corn is used as feeds for hogs and chicken,
both of which are close substitutes. The model can also be applied in analyzing the impact of trade
policies on markets of production inputs, capital and labor markets.
8
Mission Report
1 August 2011 - 23 February 2012
This model is useful in cases where the trade policy being analyzed applies to only one market. The
spillover effects of the policy on the rest of the economy are assumed to be negligible and are
excluded from the analysis. There may be cases where simultaneous changes of related trade
policies such as for example lowering the tariffs on imports of pork, chicken meat and corn, in which
case a multi-market partial equilibrium model will be employed. How such simultaneous change of
the tariff protection on corn and livestock will affect the rest of the economy is presumed to be
small.
In addition to analyzing the impact of a trade policy on the price and quantity of the product or
input, the partial equilibrium can likewise provide answers to how the policy can change the income
of stakeholders, or economic wellbeing. This is discussed pursued further below.
One important advantage of the partial equilibrium model is that it lends itself relatively easily to
statistical estimation giving the analyst a higher level of confidence on the reliability of the impact
estimate. Because there are only few parameters to be estimated, it is likely that the analyst is able
to find economic data large enough to allow an appropriate estimation of the underlying supply and
demand curves of the model.
Another benefit is that it can provide quick answers to questions on the impact of trade policies,
especially if the policy maker is only interested in knowing about the direction of change rather than
its magnitude. In this Handbook, the partial equilibrium model is used extensively because it is
relatively easy to draw a graphical representation of it, compared to a general equilibrium model.
General equilibrium analysis
General equilibrium models of the economy are used when the analyst has to assess the impact of
simultaneous introduction of trade policies in several markets, particularly if the interdependencies
of these markets are important to consider in the analysis. When a country enters into a trade
agreement, it will have to consider changing many of its import tariff rates. Before policy makers are
able to firm up their country’s offer, they need information as to how various configurations of tariff
changes will affect the economy and therefore the income of their constituents.
The analyst needs a broader representation of the economy than what partial equilibrium models
cover -- a requirement met with general equilibrium models. These economy-wide models are
designed to fully account for the total spending and incomes in the country, and thus can track the
impact of simultaneous changes of policies on a wider set of economic variables than partial
equilibrium models. A useful feature of these models is that they allow for the mutual interaction of
various markets of products and production inputs and adjust the prices and quantities of output
and use of these until general equilibrium is reached.
The basic conditions that define general equilibrium comprise the clearing of the respective excess
demands of the markets of products and inputs in the model. At the same time, none of the profits
in all production activities in the model is positive, otherwise there is incentive still to re-allocating
resources towards the activity with the positive profit.
The use of the general equilibrium model comes in either form. One, the framework is used as a tool
for policy analysis paying attention more on the direction of the changes of the economic variables.
In Fig. 1 above for example, the figure compares two general equilibrium situations, one without
trade or autarchy, which point A represents, and the other with trade. Two points indicate the
9
Mission Report
1 August 2011 - 23 February 2012
latter, QT and CT . In both situations, the twin conditions of market clearing and zero profit
conditions hold. The analyst then tracks the changes of production, consumption, exports, imports,
prices, well being of the consumer or utility, the and gross domestic product as a result of opening
the country to international trade.
The other use of the model is when it represents the economy of a real country such as the
Philippine economy. With this use, the model is referred to in the literature as a computable general
equilibrium model or CGE model. It is named so because the conditions to attain alternative equilbria
are actually solved using mathematical computer programming software such as the General
Algebraic Modeling System or GAMs.
It can be used in solving for general equilibria given
alternative policies.
Before the analyst gets to use the CGE model for any simulation of trade policy changes, she will
have to calibrate the model with real economic data of the economy in the baseline year. The set of
data is set up such that they are consistent with the general equilibrium conditions of the model.
Known as the social accounting matrix (SAM), this database comprises various sets of data including
the national income accounts, income and expenditure data, and foreign trade data. One wellknown database is the Global Trade Analysis Program (GTAP) database1, which is a worldwide social
accounting matrix of the major trading countries in the world. GTAP Center at Purdue University
maintains and continuously updates the database.
The analyst likewise needs to introduce parameters into the model to define how the consumers and
producers may respond to changes in prices. Depending upon the complexity of the CGE model in
terms of number of production activities, markets, and trading partners, the set of behavioral
parameters can become so large that these cannot be estimated statistically due to lack of an
appropriate size of data. The parameters therefore are gathered from unrelated effort of estimating
them, and in a few parameters where she has been unable to find any statistical estimates, the
analyst is compelled to assume the values.
Before the model is actually used in policy simulation, it goes through a replication test. The analyst
solves the model given the SAM and the trade policies in the baseline year. A successful replication
implies the CGE model is ready now for trade policy reforms analysis.
CGE analysis in percentage changes
Alternatively, the CGE analysis can be done in terms of percentage changes. Instead of doing the
analysis by asking for how the level of the economic variables, say the GDP, will change if trade
policies were liberalized, the analyst can calculate for the respective percentage changes of the
economic variables using a software package called GEMPACK2 .
1
Hertel, T. Global Trade Analysis: Modeling and Applications. Cambridge: Cambridge University Press, 1997
Harrison, W., and K. Pearson. An Introduction ot GEMPACK. GEMPACK Document No 1
[GPD-1], Sixth Edition. Melbourne: Monash University, 2002, a.
2
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Mission Report
1 August 2011 - 23 February 2012
2. Tax and Quantitative Restrictions to Trade
In this section, the implications of applying tax and quantitative barriers to trade are analyzed using a
partial equilibrium model. Governments raise taxes in order to generate revenues, but when they
tax trade flows, they also reduce imports or exports of the taxed product, lowering the country’s
gains from trade. Quantitative restrictions to trade similarly dampen trade flows. Their analysis and
the effects of how these are administered are taken up in this section.
2. 1. Trade taxes
Import tariff
Import tariffs are taxes on imported goods. Governments impose these taxes for a variety of
reasons including to raise tax revenues. The more important objective of these taxes is to
encourage the production of local products, which generates jobs for the local population. It is a
policy measure designed to protect or give some relief to local producers whose outputs may not be
as competitive in terms of price and quality as imported products.
There used to be a period before that import tariff restrictions were relatively high. However, the
average tariff rates worldwide have gone down due to several rounds of trade negotiations under
the World Trade Organization, a variety of preferential trade agreements that usually prescribe zero
or low preferential tariff rates, and to unilateral reduction of these taxes by governments, which aim
to make their countries more internationally competitive. In 2010, about half of global trade flows
crosses international borders without any import taxes. However, there continues to be products,
and agricultural and food products are an example, that are being imported with relatively high
import taxes.
A tariff on an imported good raises its price by the amount of the tax. It gives an advantage to local
substitute, increasing the share of the latter in the domestic market. The additional share the local
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producers get is proportional to the rate of the tax imposed. A very high tax rate has the potential
of driving out all imported goods from the market, making the entire country fully self sufficient in
the good itself.
It is not just the price of the imported good that rises because of the import tariff. The price of the
local substitute is expected to go up as well. The higher price of the imported good makes
consumers switch to the untaxed and thus cheaper local substitute, which is assumed to be perfectly
substitutable with the imported good. The shift to local substitute pushes up its production costs, as
more of it needs to be produced to meet the added demand. This process continues until it marches
the price of the imported product.
The resulting equilibrium increases the output of the local substitute but reduces the consumption
of the good itself. Because of these, fewer units of the good is imported. Figure 5 illustrates these
changes and the implications of these on the economic well being of local producers, government
and consumers.
The import tariff favors the local producers, giving them additional share in the market and producer
surplus. But this is at the expense of consumers, who facing the higher price of rice have to reduce
their consumption and accordingly lose some income or consumer surplus. Some of that loss is what
producers receive as their extra income or producer surplus. Another part of what consumers give
up represents the revenues from the import tariff, which goes to the government. Both parts, the
added income to producers and the tax revenues are merely transfers of income from consumers to
producers and the government. However, the remainder after producer surplus and tax revenues
goes to nobody in the economy, and is thus wasted.
This amount is referred to as the deadweight loss due to the import tariff. One part of it and this is
the triangular area c in Figure 5, highlights the inefficiency in production. That is the additional
outputs (QT’-QT) are being produced at above the world average cost of rice. The country could have
purchased this amount in the world market and save, if not for the import tariff.
The other part of the loss, and this is the triangular area a, represents consumption inefficiency.
Consumers could have consumed more if rice was valued at its world price. Because of the tariff,
they are consuming where their benefit from consuming rice exceeds its world price. Consumers
would have been best off if they consumed where the benefit is just equal to the lower world price
of rice.
In Box 1, the impact of undoing an import tariff is illustrated. The case involves the shoe industry of
Marikina. It highlights the adjustment costs involved in exposing a local industry to more import
competition.
Export taxes
Countries use export taxes for a variety of reasons including raising tax revenues. The more
important applications of these taxes relate to keeping local prices of important goods such as food
affordable to the population and to extract rents from exports of natural resources. When food
prices in the world market go up, the incentive to export the commodity is high. Food exporting
countries ensure there are adequate stocks of it in the local market and to keep out
Box 1. Tariff reforms and the shoe industry of Marikina*
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In this illustration, we show how import tariff policies can make or unmake the shoe industry. For a long
period of time, import tariffs were set high to support import-substituting industries. These are local
industries that produce products in competition with their respective import substitutes in the domestic
market. In addition, high tariffs tend to be used to encourage the production of finished consumer
goods over intermediate and capital goods.
In the 1980s, the Philippines reformed its tariff policies in order to encourage export-oriented industries,
wherein lies the comparative advantage of the country. This was so because the protection accorded to
import-substituting industries comes at the expense of export-oriented industries. The tariff reforms
were set so as to reduce overall trade protection, to narrow the range of tariff rates from 0 to 100% to 050%, and to phase in tariff adjustments in fourteen sectors, which included textiles, garments, leather
and leather products.
Based on the data from the Tariff Commission, the reforms reduced the weighted average tariff rate to
3.56 % in 2006, which was slightly lower than 3.78 % in 2005. By sectors, the weighted average tariff rate
of agricultural products and foodstuffs was 9.22 %, chemical products 4.16 %, textiles, paper and leather
6.84%, mineral products 2.79% and finished industrial products 2.97 %. The average nominal protection
rate (NPR), which is the percentage increase of the domestic price of a product from its world price, was
reduced from 34.6 % in 1981 to 27.9 % in 1985.
How did the change affect the shoe industry of the country? From the 1950s to the 1980s, the Philippine
shoe industry experienced a boom due to strong local demand. Many Filipinos wore locally made shoes
such as the “Ang Tibay and “Mabuhay brands. The shoe producers in Marikina sold these to local
retailers not only in Manila but also in the provinces.
Following the lowering of tariff rates on imported shoes in the 1980s, the industry had to compete with
imported shoes. The entry of competitively priced imported goods makes it difficult for inefficient local
shoe firms to make a profit. Philippine imports of footwear rose from $34.25 million in 1995 to $70.17
million in 1997, but fell to $50.94 million in 2003. Despite the 27 % drop, the market share of imported
shoes from China in the domestic market reached 80 % in 2005. Filipino shoemakers compete for the
remaining 20% of the market with imports from other countries.
Local shoemakers were unable to compete due to high production costs. About 75% of their
manufacturing costs came from the sourcing and processing of raw materials such as leather hides,
which they had to import since local tanneries were not developed, big enough to meet large-scale
demand. About 80% of the materials used to produce leather footwear for export are imported.
The adjustment of the industry may be tracked as follows. From 513 registered manufacturers in 1994,
only 145 remained in the country's shoe capital. More than 600,000 shoe workers lost their jobs every
year and average production has dwindled from 105,000 pairs of shoes a year in 1994 to 42,000 pairs in
2003.
The adjustments were relatively more burdensome to small-scale and cottage industries. At least 80 % of
registered shoe manufacturers in the country may be regarded other than large. They tended to be
family-owned and produced handcrafted shoes using only sewing and trimming machines, which made
their products relatively expensive. Thus, they needed high tariff barriers to protect them from
competitively priced shoe imports. However with the tariff reforms in the 1980s, the industry became no
longer viable, having failed to upgrade to survive its competition with imported shoes.
__________________
* Based on Daez, E. (2011), “Tariff reforms and the Marikina Shoe Industry” Unpublished paper.
food price inflation in the world market. One tool they use is the export tax. The tax reduces exports
and thus secures food stocks for the local population. For example in the 2008 rice crisis, the
governments of Vietnam and India regulated exports using minimum export prices, which have a
similar effect as imposing an export tax.
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With the tax, the price of the taxed exported good in the local market has to fall. This result assumes
that the country is a price taker in the world market. Exporters are unable to pass on the tax to their
importers in the rest of the world. Hence, the price received by exporters of the exported product
has to fall by the amount of the tax.
In their attempt to avoid the tax, producers shift their sales towards the untaxed domestic market.
Their move creates an excess supply of the good in this market, which causes the local price to fall.
It continues to decline until it is equal to the export price less the tax. At this point, producers have
no longer the opportunity of avoiding the tax. With reduced prices, producers cut output of the
product, but consumers increase their use of it. As a result, the country exports less.
Producers lose income because of reduced prices. Their loss is partly the gain of consumers who
increase their consumption of the product and the government, which receives the tax revenue.
However, not all of the loss of producers are received by anybody in the economy and is therefore
wasted as Figure 6 illustrates.
This deadweight loss of the tax has two parts. The first part accounts for the inefficiency in
consumption. Local use of the product is at a price lower than in the rest of the world. That is, the
benefit of local use is less than the opportunity cost of the product in the world market. The country
is thus better off if it reduces local use and values the product destined for the local market at the
world price. The other part of this loss is due to the fact that the local output is being produced
where their cost of production is less than the world price. The country can increase its revenues by
increasing output, but the export tax prevents producers from raising production.
If the objective of the government was to keep the price of the exported product low and keep out
of the country the inflated price in the world market, then the export tax has been effective, albeit
with a deadweight loss.
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The mechanism of reducing local price of the exported product with an export tax depends upon the
assumption that the country is a price taker in the world market. However, if this assumption is then
a portion of the tax falls on world importers.
This result may apply to natural resources such as minerals that are high in demand in world markets
particularly in periods of robust global economic expansion. Importing countries that badly need
these materials in production activities are open to paying a premium on the price of these products
in world markets. Imposing an export tax enable the exporting country to extract rents from natural
resource exports (see Figure 7).
Export Subsidy
The WTO defines export subsidies as “any payments contingent on exports, producer-financed
export subsidies, export marketing subsidies, export-specific transportation subsidies, and
subsidies on goods incorporated into exports.3 Current estimates place export subsidies at around
$6 billion each year. Countries pay export subsidies in order to dispose of their surplus agricultural
production in world markets distorting prices and trade. These payments impose substantial costs
on taxpayers in the subsidizing countries and reduce the world prices of several temperate and
competing products to the detriment of producers in developing and least developed countries.
However, they also benefit consumers in food-importing countries, many of which are developing.
Box 2. Use of export tax to industrialize Kenya’s leather industry *
In this illustration, the export tax was utilized to attain the competitiveness of the leather industry of
Kenya. When the government of Kenya reduced trade protection, among other objectives it aimed to
accomplish with tariff reforms was to make its leather industry competitive. However, its program
backfired. Imports of finished leather products surged, forcing local tanneries to go out of business. In
3
See Article 9, WTO Agreement on Agriculture.
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about 2004, Kenya was exporting rather than processing raw hides and skins.
In response, the government raised its export tax on raw hides and skins to 20 percent on June 2006 and
doubled it after one year to 40 percent. That was in order to slow down exports of raw hides and skins
and to give the local leather industry cheaper supply of their raw material. (Curtis, 2010a).
The impact of the export tax was remarkable. One, it boosted the processing of raw hides and skins. As
expected from theory, the export tax caused most of the unprocessed, raw hides and skins available for
the local leather industry. About 98 per cent of the skins produced in the country were processed to wet
blue or finished leather. This used to be 56 per cent in 2004. About 96 per cent of hides were processed
to wet blue (Lusaka, 2010 cited in Curtis, 2010a, p. 4). Two, the cost of these materials went down as a
result of the tax.
Accordingly, the growth of Kenya’s leather exports rose to 54 percent (Wahome, 2008 cited in Curtis,
2010a, p. 4). Production of finished leather had increased by over four-fold during the same period.
Accordingly, Kenya produced 20,000 metric tons of leather in 2007, compared to 5,000 in 2003 and
10,000 in 2005 (Muthee, 2008 cited in Curtis, 2010a, p. 4).
Another major benefit was increased tax income of the Kenyan government. The total earnings of
Kenya’s leather industry rose by Shs 870 million, or by 21 percent in the period from 2005 to 2008. The
expansion enlarged the tax base of the government. Curtis cited an expert on the leather sector, who
estimated that the tanneries of Kenya increased their tax payments by tenfold, i.e. from around Shs 10
million before, to SHS 100 million after the export tax was increased.
Furthermore, the export tax rate had boosted employment in the tanneries, leather goods, and related
industries in the supply chain. The number of tanneries increased from 9 in 2005 to 13 in 2009 (Lusaka,
2010 cited in Curtis, 2010a). Moreover, the leather goods and footware industries expanded, which
created new job opportunities. Curtis noted that “around 1,000 direct jobs and 6,000 indirect jobs have
been created since the introduction of the export duty.” Incomes of the workers in the peripheral
industries that benefited from the boost to the leather sector had increased.
__________________
* Based on Aure, M. (2011), “Developing Kenya’s Leather Industry”. Unpublished paper.
** Curtis, M., 2010a., Developing the Leather Sector in Kenya through Export Taxes: The Benefits of Defying the EU.
[online] Available at:<http://www.curtisresearch. org/pubs.ph p?filter=all> [Accessed 29 September 2011]
The export subsidy is a negative export tax, and accordingly does the reverse of what an export tax
can do on trade. The subsidy serves as in incentive for exporters to produce more exportable
products, which may increase exports.
Consider two trading countries, Country H and Country F. Suppose Country H exports milk to
Country F and it is a large country with some capability of influencing the world price with its policies.
Let the price of milk be Pw before the tax. At this price H will export its excess supply to Country F,
which in this case is importing milk from F. In this equilibrium, the amount exported of milk by H is
equal to the imports of F of the same product.
The subsidy on exports of H initially will shift milk away from domestic market towards the export,
where exporters receive the subsidy. This process raises the domestic price of milk in H, and it will
settle when the amount of imports of F given the effect of the subsidy is equal to the amount of
exports of H. The difference between Pd and PW’ is paid for by the government and is assessed on
the volume of milk exports.
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Since Country H is a large country, this implementation of an export subsidy will also affect the
importer of X, which in this case is Country F. Since Country F now has a larger supply of X, the price
of all X sold will fall. This reduction will in turn cause an increase in Country F’s import demand. Figure
8 illustrates the effect on the world market of the export subsidy.
2.2. Quantitative trade restrictions
Import Quota and Prohibition
Like import tariff, an import quota protects domestic producers from competition with foreign made
products. With it, the government fixes the quantity of a particular product that foreign producers
may bring into a country over a specific period. Like any protective measure, the measure aims to
save local jobs in the protected industry. It raises local prices of the protected product.
In the WTO’s trade rules, the use of import quotas and prohibition is disallowed except in specified
cases. The organization recognizes the importance of following open and liberal trade policies, and
while it permits its members to protect domestic production from foreign competition, it instructs
them that such protection is extended only through tariffs, preferably at low levels. To this end, it
prohibits countries from using quantitative restrictions. The rule against the use of quantitative
restrictions has been strengthened in the Uruguay Round.
By restricting the quantity of imports of a given product, a shortage of it develops which then raises
the price. In the case of a price taking country, importers desired imports under free trade is the
excess demand of the product at its given world price. In order for the restriction to have a binding
effect on the market, it has to be at a level lower than the desired free trade imports. World prices
fluctuate and in certain levels of it, the restriction itself may be redundant. The desired free trade
imports may actually fall because of higher world prices relative to the import quota, making the
latter redundant.
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Total supply is made up of the local supply and the import quota and the equilibrium price is that
which equates it with the domestic demand for the product. This price exceeds its world price,
which could have been the local price if not for the import quota. If one takes the proportionate
difference between the domestic price and the world price, the resulting rate is the tariff equivalent
rate of the quota. A tariff of this rate will have the same effect of allowing imports of the product
equal to the quota.
Those who import the rice quota get above normal returns or economic rents. The product can be
bought in the world market at the lower free trade price and sell the stock in the domestic market at
a higher price. It is expected that there will be more demand for permits to import the quota than
the available quota. The government has to get the importers applying for permits accredited and
given license, ration among these traders the available permits to import the quota, and see to it
that such permits are actually are used up and rice is brought into the country. That is, it has to
administer the quota.
The following are the possible ways of rationing the quota to the licensed traders. One, the
government may choose to auction the quota. In this mechanism, the traders make a bid for the
permit to import a specified allocation of the import quota, and the permit goes to the trader who
bids the highest. In this case, the government is the one to receive the rents associated with the
import quota. It is as if the government sold the rights to the quota, and its total revenue from
doing so cannot exceed the rents from the quota.
A second approach is on a first-come, first-served basis. The government apportions the quota into
several discreet parts and announces that it will distribute these permits, for as long as supply of
permits last, to those who are first in line. In this instance and assuming that there are no costs
associated with queuing, the rents go to the importer.
A third mechanism is to apportion the quota based on some allocation rule such as for instance
based on import shares of the licensed traders or even producers. The meat quota in the Philippines
in the second half of the 1990s was allocated to producers, since there was hardly any importation of
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meat before. Allocating the import quota to producers raises the concern that the quota may be
underused since imports compete with the products of local producers. The government addressed
this concern by penalizing underutilization and giving the unused quota to traders wanting to go into
the meat import business.
There is still another approach, but it is discretionary. The government regulator has unclear
allocation mechanism how the quota will be distributed among the traders. This non-transparent
mechanism is vulnerable to conflict of interest and if such a situation leads to payoffs then the
allocation of the quota is tainted with corruption. The government and the traders share of the
import quota rents.
Discretionary licensing and allocation of the quota rights may eliminate the rents from the quota
itself through rent seeking. Rent seeking behavior had been observed among traders, who want
larger allocation of the import quota. Traders invest resources including their time in order to gain
more favor from the regulators. This investment cannot exceed the amount of rents being sought
out. If the time and resources used up in lobbying for more quota allocation were at the expense of
lower productivity in the respective businesses of these traders concerned, then the rents at the
limit will be fully dissipated. The deadweight loss associated with the quota becomes even larger
and includes area d itself in Figure 9.
Import prohibition is equivalent to a zero import quota (see Figure 10.) The protective effect of an
import prohibition is more compared with a positive import quota. Prohibition of imports had been
banned by the WTO, except in a few specified cases. One of this is if the imported product fails to
meet some sanitary regulations, and importing it may cause health problems to the population or
the country’s livestock and plant population. From time to time, one may observe departures from
this general rule. For example, the Philippines banned the importation of beef from Australia in the
context of a trade friction between the two countries (see Box 3).
Box 3. Philippines at �war’ with the Australia *
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In this illustration, an import ban was used in an apparent trade war between Australia and the Philippines. In
2000, Philippine mangoes, pineapples and bananas had not been allowed entry into Australia, which claimed
that these tropical fruits were contaminated with fruit flies. Fruit flies do not exist in Australia, and from the
face of it Australia’s action was simply enforcing a sanitary and phyto-sanitary measure. Australia determined
that the Philippines had not come up with effective measures to ensure that these tropical fruits are free of
fruit flies.
On the other hand, Philippine tropical fruit exporters claimed they have taken these actions, and have been
requesting the Australian government to undertake import risk analysis. The latter had not act upon their
request, and Philippine exporters determined that the delay was unreasonable.
"We want Australia to first proceed with the import risk analysis (IRA) for bananas and pineapples before we
can start encouraging our cattle importers to buy 100 percent of their volume," Philippine Agriculture
Secretary Ed Angara said in one of his statements on this problem.
In that year, then President Estrada approved a recommendation from the Philippine Department of
Agriculture to discourage local traders from importing Australian farm products until such time Australia
opened its market to Philippine fruit exports. He specifically directed the DA, Department of Foreign Affairs,
and Department of Trade and Industry to take action to protect the Philippine fruit industry.
In 2000, the DA Secretary directed Bureau of Animal Industry to order cattle importers to reduce the country’s
cattle imports by 20 % each year for five years starting that year.
The unilateral action of the Philippines to restrict imports of these products drew support in the Philippine
Congress and the business organizations. Then House agriculture committee chairman, Rep. Angelito
Sarmiento called on Australia to undertake the necessary steps to allow the entry of Philippine tropical fruits.
Moreover, the Chamber of Agriculture and Food Inc. (CAFI) and the Philippine Food Processors and Exporters
Organization (Philfoodex) joined the uproar for fair trade. Interestingly, the Philippine Association of Meat
Processors, Inc. (PAMPI) and the Cattle Feedlot Association of the Philippines (CFAP), adversely affected by
the BAI guideline, closed ranks and called on the Australian government to allow the entry of Philippine
agricultural products.
The Philippine government filed a formal complaint with the World Trade Organization (WTO) against
Australia's alleged unfair trade practices.
The Philippines and Australia were caught in a �trade war’. At stake was the annual export revenue for
Australia of $110 million from its cattle and meat exports to the Philippines. The import reduction imposed a
cost as well to the Philippines. It is largely dependent on Australia as source for feeder stock cattle. These are
imported, fattened, slaughtered and later sold in wet markets as beef. With the import reduction, of cattle
imports, beef consumers would have to pay more for the beef that they eat.
Australia first blinked. Australian Trade Minister Mark Vaile, agreed to conduct simultaneous risk assessments
for bananas and pineapples. The action was mainly due to the pressure applied by Australia’s cattle producers,
who felt the loss of its Philippine market. Vaile said that they had agreed to commence an import risk analysis
(IRA) for Philippine bananas, and in a few months time a "generic," or global IRA for pineapples. " The IRA for
bananas would take 18 to 24 months, and for pineapples 12 to 18 months. This means both would be completed
within a two-year period," he said. Moreover, the issue for mangoes had already been completed and awaited
the signature of the Philippine government.
Sec. Angara noted that both the Philippines and Australian sides have agreed to work with their respective
business communities to enhance trade and narrow the huge trade gap. He added that this would be the first
step towards fairer and more effective quarantine procedures by Australia.
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_____________________
* Based on Docena, A. (2011), "From Foes to Friends, The Philippine-Australian Trade War in Agriculture Sector and the
Better Trade Relationship thereafter". Unpublished paper. Se also Reyes, M. (2000), "RP declares trade war vs. Australia".
Philippine Start, February 29, 2000.
Tariff quotas
Tariff quotas permit the importation of a specified volume or quota at a zero or low import tariffs,
and unlimited volume at the higher tariff rate. The measure has been widely applied to agricultural
products, which before 1995 when the WTO was founded were subjected to quantitative import
restrictions. The Agreement on Agriculture of the WTO prohibited the use of quotas or other forms
of quantity restrictions and in their place it ordered the conversion of the protection these measures
accorded respective local producers into import tariff measures. Tariff quotas became useful
measures to an organization aiming to at least preserve the agricultural trade before 1995.
The concern arose from the tariffication procedure for the agricultural quotas, which if taken too far
may introduce prohibitively high import tariffs and drain what little agricultural trade that went on
before the reforms. Therefore, the agreement required member countries to set aside a quota of
agricultural products that are allowed entry into their respective territories at zero or very low
import duties. Any amount beyond the quota may come in at a higher tariff rate. Through time,
both the quota is expanded and the import tariff rate is reduced.
The European Union also uses tariff-quotas to allow limited amounts of a commodity to be imported
(sometimes from specific countries) at a rate of duty lower than would otherwise apply. According
to their official Notice on Tariff Quotas (375), these quantities may be expressed in units of the
product or in value, volume, weight or length, and the period in which the Tariff-Quota is available is
specified.
Given this nature, most Tariff-Quotas operate on a first come, first served basis in which the
consumer of the imports must make a claim to the quota on the customs declaration covering the
release of goods to free circulation in the domestic market. However, other Tariff-Quotas in the
European Union can be licensed based. This means that access to them is dependent upon the
consumer obtaining an import license before importing the goods concerned. The European Union
also has a strict means of classifying if a certain good can be traded under the Tariff-Quota policy. In
the case of the Philippines, we will be assuming that rice can be traded under a Tariff-Quota for the
sake of analysis.
The United States also used tariff quotas on their steel imports in March 2002. The tariff rate they
imposed was around 30% for quantities of steel imported above the set quotas. The tariff rate was
imposed with the goal of reducing steel exports from East Asian countries like Japan and Korea.
However, the US also expected the US automobile industry or other industries dependent on steel
goods and other related products became expensive.
The analysis of the tariff quota is illustrated in Figure 11. Because of the combined import restrictions
of the quota and the tariff, the local price of the product goes up, it being determined by the out of
quota tariff rate. That is being the case, the tariff rate is the binding import restriction and the
importers of the quota enjoy extra profits from purchasing the commodity at the low price in the
world market and selling it at the higher local price. The government can tax the extra profits with
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an in-quota tariff rate, which has to be lower than the out-quota tariff rate, otherwise the tariff
quota collapses into a ordinary import tariff policy regime. If the out-quota tariff is set at a very high
level, then it becomes redundant and the tariff quota policy is reduced into an ordinary import quota
measure.
The administration of the quota as in the ordinary import quota policy is integral step in
implementing the tariff quota measure. The government has to provide import licenses to traders
who are eligible to acquire import permits for the quota. The import permits can be auctioned,
served at a first come, first served basis, or based on some allocation rule as may be determined fit
by the government. Discretionary, non-transparent allocation of the quota is possible but may be
susceptible to integrity problems. Monitoring of the performance of the licensed traders given an
allocation of the import permits is also needed in order to ensure the volumes are brought into the
country, and therefore users of the product are spared unnecessary increases in the local price of the
product.
Box 4. Effects of the tariff quota on Philippine corn industry
As a founding member of the World Trade Organization, the Philippines had committed to undertake several
policy reforms in agriculture. It undertook legal obligations in the WTO to 1) the remove quantitative import
restrictions and convert these measures into tariffs; 2) reduce tariff rates on agricultural products; 3) bind all
agricultural tariff rates to no more than the specified ceiling rates; 4) not to introduce additional non-tariff
measures and 5) implement a tariff-rate quota system on agricultural products, which in the country is referred
to as the Minimum Access Volume (MAV) System.
Accordingly, the Philippines currently maintains tariff rate quotas for 14 agricultural products for which
quantitative restrictions were lifted, one of which is corn.
The size of the quotas for corn reflects the Philippines’ commitments during the Uruguay Round. The outquota tariff rate was initially set at 100 % and following the country’s obligations, this rate slid down to 35 %.
The in-quota tariff rate was initially set at 50 % and this declined to 5 % through the years. The Tariffication Act
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of 1996 of the Philippine government enabled these commitments. Moreover, the government expanded the
quota when corn harvest was low in order to ensure there is adequate feeds for the country’s pigs and chicken
populations.
The administration of the quota Eligibility for the quota licenses in corn had evolved since its implementation.
The larger allocation went to existing importers. The residual is set aside for new entrants. Non-performance,
i.e. not bringing in the quota allocation assigned to an importer is a ground for the cancellation of the quota in
the following year. If that occurs, the allocation forgone is added to the pool of new entrants.
Estimates of corn utilization suggest that in normal production, demand for feed accounts for two-thirds of the
corn crop. During the pre-Agreement on Agriculture period (1985-1994), corn output increased at about 1.8% a
year. In the period between 1995 and 2000, the Philippines imported 7.8% of corn production to supply
livestock and poultry sector needs. With an in-quota tariff rate of 35 % and a Most Favored Nation out-quota
tariff rate of 65%, imports have displaced the domestic market for locally produced corn.
At respective wholesale markets in the production areas, imported corn was highly competitive at the in-quota
and over-quota tariff rates. It was found that domestic corn was barely competitive with imported corn at the
in-quota tariff rate specifically in the Manila wholesale market. This could be explained by the high distribution
and transportation cost of bringing corn to Manila. However, at the over-quota tariff rates, domestic corn was
price-competitive with imported corn and import quantity was large. This implies a greater demand for corn in
Manila or there was not enough corn from the high corn-producing provinces.
The analysis of the Philippine corn market reveals that the effects of tariff-rate quotas are similar to that of
traditional quantitative restrictions. Depending on the regime being allowed, an increase in the import quota
or decrease in the out-quota tariff rate would have different effects. With imported corn being more
expensive at the out-quota tariff rate, the increase of the in-quota volume when domestic production is low
has spared the livestock industry from high costs of feeds and the meat consumers from high costs of meat.
An alternative strategy of livestock producers to keep feed costs down has been to substitute feed wheat with
yellow corn. Since 2000, importation of feed wheat has grown.
__________________
* Based on Pablo, I. (2011), “Tariff rate quotas on Philippine corn”. Unpublished paper.
2. 3. Contingent Trade Measures
Even though the members of the WTO have taken longer strides towards freer trade, they
nonetheless have agreed to provide a capacity to respond to unusual situations such as a surge in
imports, an exporting firm dumping its exports in a country, or another contracting party subsidizing
its exports. The members see these as unfair situations, particularly since they potentially cause
unnecessary displacements of local businesses and loss of employment. And if the trigger is
transient as during an import surge or the result of a business or policy decision abroad, members
have agreed on rules how they can avoid adjustment costs with contingent trade measures.
There are three types of trade remedies. The first is the anti-dumping duty. A foreign company is
said to be �dumping’ its product in a given country, if it exports to that country at a price lower than
the price it charges in its home market. The second is the countervailing duty, which is designed to
undo the effects of an export subsidy of the government of the exporting country. Thirdly, a
safeguard measure is used to restrict imports temporarily given certain conditions like there is a
surge of imports of a given commodity, which injure the domestic industry.
23
Mission Report
1 August 2011 - 23 February 2012
With tariffs down after years of trade negotiations and generally the prohibition to impose new
quantitative import restrictions, member states see the importance of contingent trade protection
measures particularly in dealing with the lobbying usually from local producer groups for new trade
barriers. In the Philippines for example, the Supreme Court argued that the WTO provisions of nondiscrimination and freer trade are not in violation of the Filipino first policy enshrined in the
Philippine constitution.1 The highest court reasoned that the WTO has provided safety valves
against dumping, subsidization and import surges which local industries may avail of.
Dumping is defined as the selling by a firm of a product in its home market at one price and in a
foreign market at a lower price. The activity reflects a market price setting capability of the firm in
the home market, but not in the export market. Figure 13, illustrates how a monopolist in the home
market is able to charge a higher price of the product but the competitive price or its actual
production cost in the foreign market, where it is a price taker.
The application of the anti-dumping duty is contingent upon specified conditions including (a) there
is dumping, (b) the domestic industry competing in the domestic market with the dumped product
faces material injury; and (c) the injury is due to the dumping action. The anti-dumping duty has the
same effect as the import tariff rate. If there is an existing import tariff, then the anti-dumping duty
is added on to it.
Countervailing duties are designed to protect domestic producers from competition with subsidized
exports. Export subsidies, export marketing subsidies, export-specific transportation subsidies, and
any other subsidies on goods incorporated into exports are actionable measures. Importing
countries facing subsidized exports may opt to take actions against the subsidy. The subsidy
artificially lowers the price of the exported product relative to its world market price.
Given certain conditions that the export is being subsidized and the subsidy has caused injury to the
domestic industry, the importing country may apply countervailing duties following prescribed
procedures on the subsidized exports. The duty is added on to the import duty, if there is any, on
the same imports.
24
Mission Report
1 August 2011 - 23 February 2012
The safeguard duty is used to give local producers relief in the face of a surge of imports, which has
caused injury or adjustments to the affected local industry. While the duty is in place, producers are
given time to adjust their business and effectively compete with imports. Like an import duty, the
safeguard duty increases the price of both the imported and locally produced product, giving local
producers added income to make the needed adjustments.
Import surges are difficult to identify. Loosely defined, an import surge is said to occur when the
quantity or value of imports suddenly exceeds a normal level. To make the definition more precise,
there has to be added definition of what “normal’ is, how much “excess” has to be realized, and
how “sudden” the increase is. One methodology is to use statistical trends, such as a 3-year moving
average of imports. A 30 % deviation of actual imports from this trend is considered to be an import
surge.
Import surges may be caused collapse of a market somewhere in the world, which causes a
movement of stocks of a commodity elsewhere in the world. They could be policy induced such as
the lifting of an export restriction such as what India did in 2002 in the case of rice. Whatever the
cause, the next important hurdle is to determine the surge has caused serious injury on the domestic
industry. Injury is indicated by a substantial, rapid loss of the share in the domestic market of the
local industry. Finally, there is the causality that needs to be established: the surge caused the injury.
The use of trade remedies has to be compliant with the agreements under the WTO prescribing for
their use. The rules governing their application are needed in order to prevent abuse, which may
adversely affect global trade and growth. The WTO agreements on the use of trade remedies are the
Anti-dumping Agreement (ADA); the Agreement on Subsidies and Countervailing Measures (ASCM);
and, the Agreement on Safeguards (ASG). These agreements provide WTO members with guidelines
on how to conduct the investigation before a trade remedy is imposed. They outline the designation
of a local body that administers the investigation; the kinds of evidence sought; the level and
duration of the remedy; and, the exceptions to the imposition of a trade remedy.
There are three stages of the investigation: initiation, preliminary stage and formal investigation
stage. The agreements provide specific periods for each stage so as to avoid investigations that take
too long. The WTO agreements also provide mechanisms to minimize nuisance cases. There are
three rules to be observed: the like/competitive-product rule, the domestic industry rule and the de
minimis/negligible rule. Under the first rule, the product must be alike or directly competitive to the
contested imported product. Under the second, the local industry must account for a major
proportion of the total domestic production of the product. Under the third rule, the investigation
must be terminated if the injury is negligible.
Sufficient evidence of a petition must first be determined to justify the initiation of an investigation.
Once sufficient evidence is established, an initial investigation is conducted and on its basis the
authority makes a preliminary determination whether delaying the trade remedy causes damage and
thus a provisional measure is needed immediately. Finally, a formal investigation is conducted to
justify the imposition of a definitive trade remedy.
At every stage of the investigation, it must be proven through due process that one, there is
evidence of unfair trade practice (i.e. dumping or subsidization) or there is a surge of imports; two,
there is evidence of a serious injury or threat of it to the local industry; and, three, there is a causal
link between the unfair trade practice or the import surge and the serious injury or threat to the
industry.
25
Mission Report
1 August 2011 - 23 February 2012
For dumped imports or subsidized imports, the anti-dumping duty targets the exports of a particular
firm or producers found to be dumping its product while the countervailing duty applies to the
exports of the country found to have subsidized exports. In contrast, the agreement of safeguards
allows the temporary use of the safeguard duty to all imports regardless of origin.
The WTO agreements limit the imposition period of the provisional and definitive duties. Definitive
anti-dumping and countervailing measures should not continue after five years. In the case of
safeguard measures, the duration is four years, extendable for another four years.
The definitive duties should remain in force only as long as and to the extent necessary to counter
the injury. Before any extension can be made, the investigating authorities have to conduct sunset
reviews. They may also self-initiate an interim review upon petition of any interested party to
determine the validity of the grounds and amount of the imposition. Finally, parties not satisfied with
the findings of the investigation can file a petition for review with the appropriate authorities.
Box 5. Trade remedy cases in the Philippines: some trends *
The following Table gives a profile on the application of trade remedies in the Philippines:
before 1995
1995 – 1999
2000 – present
AD
14
21
6
Initiated
CV
n.a.
0
0
SG
0
0
9
AD
7
6
0
Affirmative findings
SG
CV
0
3
0
0
7
0
Legend: AD – Anti-dumping; CV – Countervailing; SG - Safeguard
Anti-dumping appears popular among petitioners before the WTO-consistent RP law on anti-dumping
took effect, that is, during the years before 1995-1999. This may suggest that the procedure necessary for
dumping protection is relatively easier then. Local producers have the incentive to file anti-dumping
cases because as shown in the table there is a relatively high success rate of obtaining protection, as the
ratio of affirmative findings to the initiated cases is 13:35. By its very nature, an anti-dumping
investigation even if unsuccessful is a significant threat to foreign competitors and so imports are likely
to decrease.
Second, countervailing cases are hardly used. a countervailing duty was used. There had only been three
cases since1969. The products involved were: (1) wheat flour from France and Germany, (2) spanners and
wrenches from India and (3) transmission and conveyor belts from India. One plausible reason is that it is
not easy for a complainant to prove that the foreign government subsidizes its export. At risk is the
relationship between the two governments. There’s a possibility that the foreign government would
impose retaliatory countermeasures. Another reason for the dearth in countervailing cases is that by
2003 the WTO has required its members to eliminate all export subsidies.
Third, in the current regime (2000-present) a petition for a safeguard measure is the most likely to
succeed among the three with the success ratio of 7:9. That’s because, unlike in dumping and
subsidization, the evidence that must be proven for a safeguard measure involves a determination of a
serious injury, rather than a material injury. In other words, it is much easier to prove a sudden surge in
imports than to prove dumping or subsidization.
26
Mission Report
1 August 2011 - 23 February 2012
Finally, compared to the global average use, it may be said that the local producers in the Philippines
seldom avail of the protection by trade remedies. This may indicate that the discipline governing the
application of trade remedies works in the Philippines. However, this result may also mean that the
Philippines face difficulties in conducting the investigation and/or applying the trade remedies.
_________________
Based on Prado, A. (2011) “The WTO and Trade Remedies in the Philippines.” Unpublished paper.
Agriculture Special Safeguards
A special safeguard duty was introduced by the Agreement on Agriculture. It applies only to
agricultural products for which the country has declared at the start of the implementation of the
agreement its intention to use the special safeguards. These products are confined however to
those, which previously had quantitative import restrictions. The application of the special
safeguard duty is faster compared to the general safeguard duty, but it is automatically lifted in the
same year it is put into effect. Rules governing the use of the special safeguards include two tests
to determine if their use is warranted. The first is the volume test and the other is the price test.
Benchmark volumes of imports and prices had been prescribed in the agreement, against which
actual import volumes or prices paid are compared. Like the general safeguard duty, the special
safeguard duty is applied on the affected imported product regardless of origin.
Box 6. Philippine onions farmers avail of the special safeguard duties *
Onions are among the major crops grown in the Philippines, mainly in Ilocos Norte, Ilocos Sur, La Union
and Nueva Ecija provinces. Onion farmers plant the crop from October to February and harvest it from
March to April. It is estimated that about half a million farmers and laborers depend on the industry.
As early as 2000, farmers of local onions products had complained about the increase of imported
onions. They claimed that their income levels were adversely affected by what they determined as a
surge of imported onions. Local prices of onions fell substantially reducing farmers’ incomes.
China is the main source of imported onions. Chinese onions are brought into the country legally, but
farmers’ groups alleged that because the onions available in the local market exceeded the official
quantity of imports, many of the onions in the local market from China must have entered illegally. in
the country), which lowered the prices of local onions.
On the average, onion imports constituted roughly eight (8) percent of total domestic consumption over
the period from 1999 to 2004. Using import’s share of domestic consumption as a gauge of import surge,
it can be noted from that onion importation surged in 2001 and in 1999. During these two years, onion
imports comprised 12 percent of domestic consumption, four percentage points higher than the mean
share and three times as much as the smallest. In all the remaining years particularly from 2002-2004,
import’s share of consumption was significantly lower. For every one thousand kilos of onions produced
domestically, there was on the average importation of 136 kilos onions, or roughly a ratio of 14 percent.
Relative to local production, onions imports comprised a bigger portion in 2001 and in 1999. In addition,
the quantity of onion imports fluctuated and that yearly onion imports peaked in 2001. Moreover, sharp
increases in the volume of imported onions were posted in 2001 (from 2000) and 2003 (from 2002).
Importers had denied allegations of increasing importations of onions. They stated that there was a
actually a decline of importation particularly in the year 2003 and 2004 due to “restricted issuance of
import permits” by the Bureau of Plant Industry (BPI). Furthermore, importers asserted that imports
never coincided with peak harvest of March to May (onions from Netherland are imported from October
27
Mission Report
1 August 2011 - 23 February 2012
to February while those coming from China enters the country from June to December). Claims that
most of the onions entering the local market are of different kind from those that are being produced
domestically.
The onion farmers applied for the agricultural special safeguards (SSG). SSG are granted to petitions if
prices of the said goods fell below its trigger price (Php 74.21). The first SSG on onions lasted for 1.5
months (from November 15 2002 to December 31 2002). It was immediately lifted, as there was an
expected shortfall in the local supply of onions. The second SSG was imposed from December 18, 2004 to
January 20, 2005. Onion farmers have requested SSG re-imposition though at present, no SSG duty has
been imposed.
SSGs are easier to invoke compared to the regular safeguards. However, their drawback in so far as the
farmers are concerned, is that they can only be applied for the calendar year that the government
imposed them.
___________________
* Based on Francisco, J. (2011) “Impact of Import Surges in the Philippines. The case of onions and tobaccos”.
Unpublished paper.
Box 7. Safeguard duty on imported steel angle bars *
In 2008, three companies, Cathay Metal Corporation, Dragon Asia Rolling Mills Inc., and Lunar Steel
Corporation, requested the Department of Trade and Industry to impose safeguard duty on imported
steel angle bars. They alleged that a surge of imports occurred from 2003 to 2007, which caused serious
injury to their industry. The complainants also claimed that the imported steel bars were sold at a lower
price than the price of the locally made steel bars, which forced the local companies to lower their prices
as well with the expense of their sales and profits.
In the formal investigation, the Tariff Commission determined whether the product is a like or
competitive product, whether imports were imported into the country in increasing volumes, whether
there is injury to the domestic industry, and whether the increased volume of imports caused the injury.
In order to determine whether steel angle bars are like or competitive products, the locally made steel
angle bars and their imported counterparts should be compared. Under RA 8800, a “like product” is
defined as a product, which is, in all aspects, similar to the imported product in question. Meanwhile, a
“competitive product” is one, which is locally produced and substitutable. After examining and
comparing the characteristics of the steel angle bars, their chemical composition, their use and their
process of manufacturing, the commission concluded that the locally made steel angle bars are like
products of the imported ones.
Year
2003
2004
2005
2006
2007
2008
Average (20032007)
Imports of Steel
Angle Bars (MT)
154
338
1,551
15,193
38,767
19,099
Growth Rate of
Imports (%)
119
359
880
155
-51
Local Output (MT)
88,240
83,195
86,900
71,030
20,740
37,730
Imports to Output
Share (%)
0.17
0.41
1.78
21.39
186.92
50.62
378
Another essential part of the investigation is to provide evidences of increased volumes of imported
steel angle bars. The above table shows the data presented during the formal investigation with regards
28
Mission Report
1 August 2011 - 23 February 2012
to the surge in imports.
Imports of steel angle bars had been rising from 2004 to 2006. The rate of growth of the imports reached
the highest in 2006, when imports were 15,193 metric tons. However, the greatest number of imports
was in 2007 with 38,767 metric tons. Imports only decreased in 2008 because of the enactment of PNS
657, which regulated the standards in manufacturing steel angle bars. Meanwhile, Table B depicts the
share of the imports to the total production. As can be seen, the share of imports had a sudden increase
during 2006 and 2007. Consequently, the share of the domestic production decreased. From the two
tables, the number of imports, the rate of growth of the imports and the share of imports all increased at
the same time. In the end, the commission concluded that the steel angle bars were imported in
increasing volumes.
After determining that a surge of imports occurred in the country, the next task is to show that the local
industry is seriously injured. First, the Commission determined whether the market share of the domestic
industry was affected. Indeed, they were able to prove that the domestic industry lost its leadership in
the market for steel angle bars exactly at the time when imports increased. It was only during 2008, at
the time when PNS 657 was implemented, that the domestic industry was able to recover. And so, as a
result of the decrease in the market share, the complainants cut their production of the said product,
which further caused sales to decrease. More effects were realized from 2006 to 2007, when the
companies incurred losses. This followed the lowering of steel prices in order to be competitive with the
imports. As shown earlier, 2006 and 2007 were the two periods when imports were at their peaks. With
due investigation, the Commission finally concluded that the domestic industry was injured, as shown in
their financial performance.
Safeguard measures cannot be implemented without showing that the increased volume of imports of
steel angle bars caused the injury to the local industry. Therefore, after proving that there was surge in
imports and damage to the industry, the commission must now prove causation. In the end, the
commission concluded that there was causality: the increased volume in the importation of steel angle
bars resulted to the decrease in the market share of the domestic industry. This decrease had the domino
effect on the other injuries, as discussed earlier.
After thoroughly considering all the qualifications needed in the implementation of safeguard measures,
the Commission recommended a definitive safeguard duty to be applied. In the end, a safeguard duty of
Php 7,700.00 per metric ton was applied on all imports of the steel angle bars.
Sales
Cost of Sales
Gross Profit (Loss)
Operating Expenses
Income/(Loss)
from
Operation
Other
Income/(Expenses) Net
Interest Expenses
IncomeLoss
Before
Income Tax
Provision for Income Tax
Net Income(loss0)
2003
1,913,645
1,770,170
143,475
49,625
2004
2,066,100
1,951,585
114,515
54,560
2005
2,257,310
2,109,405
147,905
56,325
2006
2,031,380
1,929,100
102,280
57,805
2007
1,030,470
947,020
83,450
45,890
2008
1,261,655
1,192,485
69,170
40,580
93,850
50,055
91,580
44,475
37,560
28,590
340
81,860
175
54,510
(2,275)
83,690
(1,350)
84,485
315
67,085
(930)
54,830
12,330
3,945
8,385
5,620
4,005
1,615
5,615
2,505
3,110
(41,360)
150
(41,510)
(29,210)
10
(29,220)
(27,170)
0
(27,170)
___________________
* Based on Cabildo, (2011) “Steel Angle Bars: A Case Example on Safeguard Measures in the Philippines”.
Unpublished paper.
29
Mission Report
1 August 2011 - 23 February 2012
3. Trade Facilitation
3.1 What is trade facilitation
Trade costs generate friction in the supply chain, which slows down the flow of the products
through it. In their broader meaning, these costs relate not only to the time and resources
businesses give up in order to comply with laws or executive issuances, but also to the added
logistics costs above what are necessary to move these products through the chain efficiently.
Illegal payments extracted by authorities from businesses are part of trade costs. Trade facilitation
refers to activities and policies designed to reduce these costs with the aim of easing the movement
of goods or intermediate inputs from where they are produced to where they are used.
The WTO refers to trade facilitation to be “the simplification and harmonization of international
trade procedures, including the activities, practices and formalities involved in collecting, presenting,
communicating and processing data and other information required for the movement of goods in
international trade.” It focuses on the streamlining of administrative procedures so that businesses
can efficiently comply with non-tariff measures, which include the product standards and technical
regulations, customs laws, or related issuances applicable to traded goods and services as they cross
international borders.
The UNCTAD has classified NTMs into 16 chapters (denoted by alphabetical letters), each comprising
of "sub-branches" (1-digit), "twigs" (2-digits) and "leafs" (3 digits). Figure 13 illustrates the
classification scheme of NTMs. It starts with the broadest classification into import and export
measures. Two sub-categories are listed under the import measures including technical and nontechnical measures. The technical measures include the sanitary and phyto-sanitary (SPS)
regulations/standards and technical barriers to trade (TBT) in the case of non-agricultural products
and food items for concerns other than safety. The remaining 14 chapters include pre-shipment
inspection and customs formalities; price control measures; administration of licenses, quotas,
prohibition and other quantity control measures; charges, taxes, and other para-tariff measures;
finance measures; anti-competitive measures; anti-competitive measures; trade-related investment
measures; distribution restrictions; ex-post sales restrictions; subsidies (except export subsidies);
government procurement restrictions; intellectual property regulations; and rules of origin.
Non-tariff measures (NTMs) are needed in order to address legitimate public concerns, such as for
example the risk to public health brought about by imported products not meeting their product
standards. They impose a cost not only to importers or exporters but also to the government
agency implementing it. If the cost is what is normally expended in order to implement the NTM,
then the measure is not regarded to be a trade barrier. However, if they are administered in a way
that increases unnecessarily compliance costs of businesses involved in international trade, then
these measures become non-tariff barriers (NTBs) to trade.
Despite rapid growth in international trade in the past decades, trade-processing operations have
generally remained “complex” worldwide4. For every trade-transaction, an estimated “40 business
and government actors” are involved, working on “commercial, transport, and regulatory and
financial procedures”. Grainger cited the findings of a UN study, which discovered a total of “200
4
Grainger, A. (2007) in his working paper: Trade Facilitation: A Review.
http://www.tradefacilitation.co.uk/papers/AGrainger_TradeFacilitation_Review(2007).pdf
30
Mission Report
1 August 2011 - 23 February 2012
data elements” being requested in every trade-transaction. Hummels computed the forgone income
due to such delays. This study claimed that for manufactured goods “each day saved in travel is
worth an average of 0.8 % of its value.”5
International organizations have recognized the adverse effects of red tape on international trade.
The WTO at its first Singapore Ministerial Conference in 1996 had called for an agreement on trade
facilitation. The WTO has already established measures to simplify cargo clearance procedures at
the border, as stipulated in GATT Articles V, VIII and X – which mostly deal with customs valuation
and administration of trade regulations. However, WTO has not yet adopted specific provisions on
customs procedures, documentation, and transparency, and lacks the all-encompassing legal
framework to tackle red tape in its various aspects.
Currently, trade-facilitation and removal of red tape is a highly discussed agenda in the Doha
Development Round. Unlike other controversial points of the DDR agenda, trade-facilitation has
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received significant consensus approval from the WTO members and some countries have already
aggressively adopted trade facilitation programs on their own, e.g. Singapore, Korea, New Zealand
and Australia.
A study supported by APEC determined that trade facilitation programs would generate gains of
about 0.26 % of real GDP – an expected amount that can surpass gains from tariff liberalization.6
Grainger (2007) notes that the European Commission in 2006 estimates a total of 300 Billion euros in
annual savings worldwide, if the cost of bureaucratic procedures were cut in half. The cost to comply
with the various regulations is high enough such that many small and medium enterprises end up not
participation in international trade.
5
Hummels, D. (2001). “Time as a Trade Barrier”, Purdue University, West Lafayette.
APEC. (2006). "Committee on Trade and Investment." Retrieved 6 October,
2006, from http://www.apec.org/apec/apec_groups/committees/committee_on_trade.html.
6
31
Mission Report
1 August 2011 - 23 February 2012
The World Customs Organization (WCO) came up with the Revised Kyoto Convention in 1999 for the
simplification and modernization of cargo clearance procedures. The organization “maintains,
supports and promotes international instruments for the harmonization and uniform application of
simplified and effective customs systems and procedures”. The RKC agreed emphasizes trade
facilitation rather than other concerns such as revenue generation, compared to its earlier version in
the 1974. It requires all members to commit themselves to faster trade-processing, standardized
regulations, and the use of information technology.
The Philippines ratified the RKC on March 16, 2009, with the forthcoming Senate approval
(Resolution No. 220) on February 1, 2010. The Philippines is legally bound to comply with the
agreement’s trade facilitation provisions. As contracting party, the Philippines is required to comply
with the stipulations of the General Annex, and partly with the Specific Annexes. Leeway for full
compliance upon accession is 36 months for implementation of the standards of the General Annex,
and 60 months for “transitional standards”, as per Philippine Customs. This means that all
improvements in Customs should be in place come 2013. Currently, all APEC and Association of
Southeast Asian Nation countries are bound by the RKC.
3.2. Sanitary and phytosanitary measures
An important category of NTMs is the SPS measures. These include prohibitions or restrictions of
products or substances for SPS purposes; tolerance limits for residues and restricted use of
substances; labeling, marking and packaging requirements; hygienic requirements; treatment for
elimination of plant and animal pests and disease-causing organisms in the final product; other
requirements on production or post-production processes; regulation of foods or feeds derived from
or produced using genetically modified organisms; and conformity assessment related to SPS.
Further sub-divisions of each of these are provided for in Table 3.2.
While the use of sanitary and phyto-sanitary measures is necessary to protect the human, plant and
animal populations, the administrative procedures followed in implementing SPS measures can
significantly raise trade costs and thus reduce trade flows. Administered inefficiently, these SPS
measures can become virtual trade barriers. In the case of exports, both the origin and destination
countries contribute to the level of compliance cost. First the importing country prescribes its own
SPS measures on farm or farm-based products, which the originating country implements before the
exports are shipped.
Box 11 below describes the activities, which Philippine SPS agencies have to do before agricultural
exports are cleared for shipment. Box 9 gives an interesting account of how Philippine mangos are
not able to widen its share in the US market because of the way SPS measure in the US is being
implemented. In the account, compliance cost to SPS in the US is a virtual export tax on Philippine
mango exports.
However, Philippine SPS measures and how Philippine authorities implement these likewise have the
potential of inadvertently raising the cost of imported farm products covered by the SPS measures.
In Box 11, there are various activities of enforcement that can possibly lengthen the
Table 3.2 SPS related measures
A100 Prohibitions or restriction of products or substances because of SPS reasons
A110 Temporary geographic prohibition for SPS reasons
A120 Geographical restrictions on eligibility
32
Mission Report
1 August 2011 - 23 February 2012
A130 Systems Approach
A140 Special Authorization for SPS reasons
A150 Registration requirements for importers
A190 Prohibitions or restrictions of products or substances because of SPS reasons n.e.s.
A200 Tolerance limits for residues and restricted use of substances
A210 Tolerance limits for residues of or contamination by certain substances
A220 Restricted use of certain substances in foods and feeds
A300 Labelling, Marking and Packaging requirements
A310 Labelling requirements
A320 Marking requirements
A330 Packaging requirements
A400 Hygienic requirements
A410 Microbiological criteria on the final product
A420 Hygienic practices during production
A490 Hygienic requirements n.e.s.
A500 Treatment for elimination of plant and animal pests and disease-causing organisms in the final product
(e.g. Post-harvest treatment)
A510 Cold/heat treatment
A520 Irradiation
A530 Fumigation
A590 Treatment for elimination of plant and animal pests and disease-causing organisms in the final
product, n.e.s.
A600 Other requirements on production or post-production processes
A610 Plant growth processes
A620 Animal raising or catching processes
A630 Food and feed processing
A640 Storage and transport conditions
A690 Other requirements on production or post-production processes, n.e.s
A700 Regulation of foods or feeds derived from, or produced using genetically modified organisms (GMO)
A800 Conformity assessment related to SPS
A810 Product registration requirement
A820 Testing requirement
A830 Certification requirement
A840 Inspection requirement
A850 Traceability information requirements
A851 Origin of materials and parts
A852 Processing history
A853 Distribution and location of products after delivery
A859 Traceability requirements, n.e.s.
A860 Quarantine requirement
A890 Conformity assessment related to SPS n.e.s.
A900 SPS measures n.e.s.
Source: UNCTAD
time of getting the imported products cleared at the border, cause partial deterioration of the
quality and quantity of the imported stocks, resulting in higher import cost of the product. In this
instance, the SPS measure act like an added import tax, which importers have to shoulder,
particularly if they are simply price takers in the world market.
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1 August 2011 - 23 February 2012
Box 8. How much of Philippine agricultural trade is subject to SPS Measures
A matching of the SPS measures enforced by the Bureau of Animal Industry (BAI), National Meat
Inspection Service (NMIS), the Bureau of Plant Industry (BPI) and the Bureau of Agriculture and food
Product Standards (BAFPS) for animals and animal products and plant and plant products with
commodity codes of agricultural imports was done in 2005.
The NMIS regulates meat imports; the BAI enforces SPS measures on animals, meats, and plant products
used for feeds, while the BPI focuses on plant imports. Thus, meat imports normally go through both BAI
and NMIS while imports of feed materials go through BAI and BPI. The BAFPS is a relatively newer
agency and its mandate is to set the product standards.
About 702 commodity codes were subject to at least one SPS measure by any of the above stated
agencies of the Department of Agriculture. The import value of these commodities from 1995 to 2004
amounted to 21,366 million dollars or 66% of the total value of agricultural imports in that period. The
remaining 34 % either do not have SPS measures or are not plant nor animal products. The BAI and NMIS
had SPS measures on 296 commodities, with a total value of 9,632 million dollars from 1995 to 2004. The
BPI had SPS measures on 432 commodities, the imports of which amounted to 15,009 million dollars
during the same period.
SPS measures on agricultural exports of plant, animal, and processed food products are implemented
through the BAI, NMIS, BPI, BAFPS and FDC. The matching of these SPS measures with commodity codes
of exported agricultural products was also done in 205. A total of 765 exported commodities were
subject to at least one SPS measure by any of the above agencies. These commodities had total exports
worth 16,435 million dollars from 1995 to 2004 or 75% of agricultural exports.
Box 9. SPS hurdle of Philippine mangoes into the US
At the beginning of the Philippine-US mango trade, the Philippine government had difficulty
assisting domestic exporters to comply with the SPS measures imposed by the US because the measures
are quite expensive and the country still lacks administrative and technical capabilities that would have
enabled them to meet exhaustive data collection, certification requirements and building of testing
facilities that normally would have taken years to complete. Examples of initial setbacks experienced
were temporary trade stoppages due to delay in bankrolling the USDA cost supposedly for use by the
agency to carry out quarantine procedures in the Philippines and to enable the country to get clearance
to export its fruit.
According to the Center for International Development at Harvard University, the reason why
developing countries like Philippines have trouble complying with SPS agreement is that they make
intensive use of multilaterally established standards that are determined by a process that is both
politically and economically skewed. Standard-setting has until recently been the exclusive domain of
rich and developed countries. To counter the problem surrounding SPS agreements, the WTO initiated a
program in August 2002 to enhance the capacity of developing countries to participate in negotiations
and implement standards, and they are likewise ensuring that standards do not become de facto barriers
to trade or hide protectionist policies.
In the Philippines, however, there is clearly a need for domestic capacity-building to assist the
compliance of exporters with the regulations. Aware of this, the Philippine government has been giving
support to exporters in, for example, expansion of mango plantations which has helped harvest area for
mango grew significantly at 7.06 percent annually with 92,900 ha in 1998, up from only 53,200 ha in 1990
(Pabuayon, 2000). In addition, the Department of Agriculture has been committed to providing support
programs such as the establishment and rehabilitation of nurseries and foundation scion grove,
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Mission Report
1 August 2011 - 23 February 2012
household and village processing assistance, grants to help exporters defray the costs of USDA
inspection fees, and crop improvement especially for climate change adaptability. The local government
of Guimaras as well started pushing for an ordinance last 2010 that will require all local mango growers to
register with their barangays as a way to document the volume of mangoes being produced in the
province and to prevent unscrupulous people from destroying the industry. Likewise the Guimaras
province has already purchased equipment that will monitor and test the quality of its mango products.
However, given that such support programs are still in their development and early implementation,
there is still a weak coordination between the different standard setting and regulatory bodies
concerning SPS; and the Philippine government is not yet that strong in terms of administrative,
technical and other capacities to comply with more stringent regulations. Because of this, they would
need to ensure the sustainability of their programs and develop capacity-building efforts geared towards
enhancing risk analysis practices, regulatory verification, industry compliance, traceability and
information management, and improving the functioning of SPS/TBT enquiry points as exporters will
certainly directly benefit from improved capability to respond to requirements of trading partners.
When the importation of fresh mangoes from the Philippines (Guimaras only yet) to the US began
in 2001, the marginal increase in exports was largely diminishing since exporters immediately experience
increase in costs as well. As proof, Peter Sgro, chairman of the Pacific Rim Brokers that is a major
importer of Philippine mangoes on Guam, accounted that:
“In our first two years, we easily sold 1,000 cases or one 20-foot container a week on Guam alone.
(In 2005), that dropped to about 500 cases a week since the cost for us in just two years has increased by
about 57 percent. Shipping also creates some issues since there are no direct ships to Guam from Manila.
Air freight is not an option anymore since the cost of the mango alone now will not justify even the
lowest of margins by a retailer and for us as a wholesaler, It also makes no sense to add the cost of air
freight.”
Because of this, Philippine exports are uncompetitive with those coming from Mexico and Latin
American countries, which benefit from economies of scale and close proximity to US. In addition, the
high cost to comply with SPS measures has increased the price of mangoes. The SPS measures are in
effect an export tax and delimit the market potential. Under the current situation, Philippine dried
mango exports have an advantage over fresh mangoes in the US market. Of the total 1,497 tons of
mango exported to the US in 2003, 1,280 tons were dried with a value of $5.5 million. The rest were fresh
mangoes valued at $243 thousand.
In view of this, the Philippine government is initiating programs such as grant to exporters to
hopefully ease and defray the high cost of exporting to US.
Box 10. Assessing the trade impact of red-tape at the border in the Philippines: case of fruit exports
To measure red-tape intensity in the Philippines, proxies in the form of (1) days to export and (2)
days to import for each exporter and importer respectively were used. These two measures are meant to
represent in a very broad manner any form of non-transit, behind-the-border barrier that increases tradetransaction-time. Data on these measures are taken from www.doingbusiness.org, a World Bank project
that ranks 180+ countries in terms of their ease-of-doing-business. This database is what is used in other
behind-the-border studies such as Hernandez and Taningco (2010).
The Philippines is actually of above-average rank in terms of speed of trade-processing. This is a
result of the Customs automation reform from 1995-2000, which per Clarete (2004), reduced importing
time and improved transparency. This implies that if ever the WTO mandates its members to comply with
world-averages of export/import days as the DOHA round concludes, the Philippines can confidently
35
Mission Report
1 August 2011 - 23 February 2012
meet the requirement.
Nonetheless, Philippine performance still falls behind first-world standards, e.g. US, Singapore,
and Germany by a factor of 10 days. Moreover, compared to Thailand, which drastically cut down its
export-time from 2006 to 2011 by 10 days and garnering rank #57 in 2011, Philippine performance
remained almost stagnant, improving by only 2 days from 2006 to 2011 in terms of days-to-export. The
comparative-static exercise simulates what may happen to Philippine trade if this same 10-day
improvement were to occur in the Philippines.
To empirically measure the significance of red-tape effects, an augmented gravity model is used,
following the BV-OLS (Bonus Vetus OLS) specification of Baier and Bergstrand (2009).
The gravity model has long been the workhorse of econometric trade tests. Its origins date way
back to the 1960’s with Tinbergen (1962). Theoretical foundations for the model however had to wait for
some years until laid-out by Anderson (1979) and Bergstrand (1985). Anderson and Van Wincoop (2003)
clarified that traditional gravity models are biased given their failure to account for “multilateral” prices
that affects bilateral variables. Per Feenstra (2004), these “multilateral” barriers can be consistently
accounted for by incorporating fixed effects via dummy variables per exporter and importer. The fixed
effects method however has shortcomings as pointed out by Baier and Bergstrand (2009), since it
renders measuring country specific effects invalid since they are “subsumed” in the fixed effect
variables.
Baier and Bergstrand (2009) proposed another solution by specifying a Taylor-series expansion on
bilateral variables to cover for “multilateral” prices. This generates consistent estimates while allowing
for country-specific variables to remain valid for comparative-statics . This method is what is used in this
paper as red-tape barriers are seen to be country-specific.
Previous literatures have already been written about the effect of red-tape on trade using
augmented gravity models, such as Hernandez and Taningco (2010), which evaluated the negative effect
of import days averaged between exporter and importer on ASEAN commodity trade, together with
other conditions such as credit-standing, port-infrastructures, etc. This study is more limited than
Hernandez’s since it specifically evaluates only the fruit-commodity against one behind-the-border
barrier – red tape. However, it encompasses fruit trade in a global scale, and dissects average days of
import into export-days and import-days to attain a separate view of the two effects.
Other literatures that used the gravity-model for red-tape evaluation is that of Wilson et al. (2003),
which looked into the trade-effects of port efficiency, customs and business environment and e-business
usage. Among these factors, Wilson et al. recognized that port-infrastructure and customs quality exert
positive elasticity to trade, and that too much regulations impair trade. These findings were simulated to
calculate what happens if below-average APEC members improve trade-performance to average-APECstandards. Results predict that around USD 254 billion can be raised through these improvements,
increasing average APEC GDP by 4.3%, and specifically Philippine GDP per capita by 11%.
Vis-à -vis these studies, Grainger (2007) however notes that in the academic world, “very little
substantiated research” has been done to quantify trade-transaction costs other than “indirectly
measuring it” by means of gravity models. In fact, Wilson et. al (2003) themselves acknowledged that
existing papers on trade-costs are quite limited – that is, despite widespread multilateral monetary
support to promote trade-facilitation initiatives.\
The results of the gravity model estimation (not shown) indicate that red-tape variables are both
statistically negative at the 5% significance level, with economically significant coefficients of -0.113 and 0.256 respectively, thereby implying that higher intensity of red-tape does create a trade-deterrent
impact on fruits – in accordance with the findings of Hummels (2001) and Wilson et al. (2003). Moreover,
limpdays, or the number of days-to-import has a larger deterrent-effect on trade compared to lexpdays
or the number of days to export.
Using these estimates of the effect of red-tape on agricultural fruit trade, a simulation was done
36
Mission Report
1 August 2011 - 23 February 2012
to measure the potential additional trade if such red-tape was reduced. Philippine exports in 2009 total
USD 1,959,744,484 in terms of c.o.f. value. 2009 days-to-export total 16 days. An improvement of 10 days
from this level brings down days-to-export to 6 days, which is comparable to the amount of days-toexport of the USA in 2009.
A 10-day improvement in 2009 Philippine days-to-export leads to an estimated 11.68% increase in
Philippine fruit exports, in accordance with the empirically-calculated coefficient for lexpdays. This
amounts to an additional USD 228 million worth of c.o.f. export values or PHP 9.1 billion in terms of
current USD:PHP exchange rates, amounting to 0.12% of 2010 GDP. As of 2011 however, Philippine daysto-export improved by only 2 days to 14 days-to-export, still twice that of the USA or Germany.
Box 11. Philippine SPS Process
The SPS process has three main components, namely, SPS Development, SPS Enforcement, and
SPS Information Dissemination. The figure below is a high-level diagram of the SPS process showing a
continuous flow of information to and from each component.
The four regulatory agencies that are the subjects of this study, namely, the BAI, BAFPS, BPI, and
NMIS, each perform these main components of the SPS process, although in various degrees. The
current work of the BPI and BAI are tilted more on SPS enforcement. The work of the BAFPS, on the
other hand, tends to focus more on SPS
!
development but also involves enforcement
and enforcement monitoring. The NMIS,
meanwhile, gives almost equal attention to
development and enforcement. All four
agencies are involved in SPS information
dissemination.
The delineation of SPS functions at
the DA is largely based on commodity groups and
SPS objectives. The BAI’s focus is on animal health, while that of the BPI is on plant health and food
safety. The NMIS and BAFPS focus on food safety as well as product quality.
! "! #"$%&' ((#) *%+ #
Although the BPI has food safety as an SPS objective, in practice, there is no DA agency
responsible for the enforcement of SPS measures relating to food safety for plant and plant products.
While the importation of all plant-based products passes through the BPI Plant Quarantine Service (PQS),
its mandate is explicit only on protecting plants against pests and diseases. The National Pesticide
Analysis Laboratory (NPAL), meanwhile, only performs food safety monitoring for pesticide residue
levels and has no enforcement mandate. This gives rise to the situation where imported peanuts are not
tested for aflatoxin but dessicated coconut and animal feeds are tested for aflatoxin by the Philippine
Coconut Authority (PCA) and BAI, respectively.
SPS Development
37
Mission Report
1 August 2011 - 23 February 2012
SPS Development involves activities by which the DA evaluates, formulates, recommends,
harmonizes, and monitors science-based international and regional standards, risk assessments, and
industry and market conditions using a team of technical experts to come up with science-based national
standards, issuances, and risk management plans. The Figure to the left shows the overall process flow
!
for SPS development.
SPS development includes standards development and Risk Analysis (RA). One important type of
RA is Import Risk Analysis (IRA), which is required to define regulations on what products can be brought
into the Philippines from where and under what conditions.
With the creation of the BAFPS and the recent reorganization of the NMIS, standards
development is fast becoming an established process in SPS development. However, the standards
developed by both agencies go beyond ensuring product safety, an SPS objective, and include promoting
product quality, which is not an SPS concern and is, by nature, voluntary. Thus, the agencies tasked with
SPS enforcement are unable to use these standards to impose mandatory product safety compliance.
On the other hand, the practice of RA, while done across all agencies, is spotty. The RA process is
supposed to be structured, science-based, guided by a risk analysis handbook, undertaken by a panel of
experts (if required), and uses both quantitative and qualitative methods of analysis. The BPI and BAI
admit to an “informal” process; i.e., with no norms, handbook, or outside experts and little quantitative
analysis and documentation. Thus, these agencies expressed concern that their systems are not at par
with those of the international community. The NMIS, on the other hand, is confident in its use of HACCP
in managing risk associated with the post-production and processing components of the food supply
chain. The BAFPS, meanwhile, has developed the standards for Good Agricultural Practices (GAP) but the
quality of the RA that underpins these standards is not clear. All agencies expressed the need for
improving the RA process, especially in quantitative analysis, and for developing handbooks for pest risk
analysis and insect risk
!
analysis.
SPS Enforcement
The SPS enforcement
process can be viewed as a
continuum of activities that
can be classified in terms of
where, in relation to the
international border, these
take place. In other words,
activities can be classified
into pre-border, border and
post-border
activities.
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Mission Report
1 August 2011 - 23 February 2012
Domestic activities are post-border for imports but become pre-border for exports. The figure below
shows the process flow for SPS enforcement in the context of global trade.
Border quarantine activities include inspection, interception, seizure, and remedial action. These
also include confinement on arrival, checking during confinement, and subsequent action as appropriate.
All three enforcement agencies, namely, the BPI, BAI, and NMIS, have border activities. The BPI
and the BAI are present at the border points of entry to inspect products for plant/animal health
purposes before these are allowed in. Additionally after entry, imported meat is directed to accredited
cold storage facilities where the NMIS inspects the same for food safety before these are released for
processing or sale. Imported livestock are sent to the importers' farms where the same are quarantined
and observed for a month. The BPI requires imported seed to be quarantined at the nurseries.
While the BAI and BPI are present in the international ports and airports to inspect commercial
cargo, courier mail, and passenger baggage, the BAI does not inspect international postal mail, while the
BPI does so but not consistently. Also, unlike in other countries, there is no surveillance at the wharfs
and depots, which as points of backdoor entry could allow the entry of unwanted and unsafe products.
A significant component of borer quarantine is the interface between the BOC and the DA. Under
the current system, the BOC is notified by cargo shipping lines and airlines of shipment arrivals. It then
performs its inspection, and based on its inspection, determines whether or not DA inspection is
required.
The BAI and BPI Quarantine officers expressed concern about how poorly this system works.
Since they have no access to the BOC cargo clearance system and do not receive any copy of the inward
foreign manifest from the shipping and airlines, they are totally dependent on the Customs officer.
Some experienced quarantine officers are able to obtain arrival information by making direct inquiries or
photocopying BOC documents but admit that this is inadequate.
The BAI, BPI and NMIS also undertake export quarantine activities to ensure that Philippine
exports comply with import requirements of trading partners. Depending on the requirements of the
importing country, some kind of product inspection or product treatment inspection is done on the
goods to be exported. The inspection is done prior to the issuance of certificates that are generally
required by the importing countries.
Traceability and operational risk management are principles that lend efficiency to the SPS
enforcement process. Traceability is the capability to identify the origins of a particular product. It is
important for stemming the spread of pests, diseases, and unsafe food. Operational risk management,
on the other hand, is about understanding and appropriately treating varying risks, for example between
points of entry, origins, or establishments. Of the agencies under study, the NMIS observes the principle
of traceability in its quarantine activities for imported, exported, and domestically traded products. The
BAI quarantine activities allow traceability only for exported products from commercial farms, while the
BPI allows traceability only for exported mangoes.
Operational risk management is hardly observed by all agencies. The individual inspectors from
these agencies are able to profile risks through experience and, more often than not, do so in the
conduct of inspection activities. This, however, is not data-based and not formally shared with other
inspectors. The data on breaches and leakages in quarantine is spotty, making formal risk profiling
difficult. Nonetheless, the NMIS is planning to database the performance of their accredited
establishments in order to shorten the processing period for accreditation renewals for the good
performers.
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Mission Report
1 August 2011 - 23 February 2012
!
SPS Information Dissemination
The
SPS
information
dissemination
involves
activities
where the DA promotes, markets,
tracks and informs the government,
industry stakeholders, and the
community
of
SPS
measures,
issuances,
documentations,
lists,
inventories, alerts, notices, reports,
publications,
and
procedures
developed and enforced by the DA.
Information is disseminated through the media, publications, electronic repositories, and meetings or
town hall sessions.
3.3 Technical barriers to trade
Technical barriers to trade (TBT) are measures designed to ensure that technical regulations,
standards, testing, and certification procedures do not create unnecessary obstacles to trade. In an
important way, SPS measures are TBTs for specific sanitary and safety concerns with respect to the
importation of agricultural products and food. Table 4 The WTO agreement on TBT encourages its
members to implement their legitimate technical requirements in a way so as not to limit trade, as
opposed to technical requirements.
Table 3. TBT measures
B100 Prohibitions or restrictions of products or substances because of TBT reasons (e.g. environment, security)
B110 Prohibition for TBT reasons
B140 Authorization requirement for TBT reasons
B150 Registration requirement for importers for TBT reasons
B190 Prohibitions or restrictions of products or substances because of TBT reasons, n.e.s.
B200 Tolerance limits for residues and restricted use of substances
B210 Tolerance limits for residues of or contamination by certain substances
B220 Restricted use of certain substances
B300 Labelling, Marking and Packaging requirements
B310 Labelling requirements
B320 Marking requirements
B330 Packaging requirements
B400 Production or Post-Production requirements
B410 TBT regulations on production processes
B420 TBT regulations on transport and storage
B490 Production or Post-Production requirements n.e.s.
B500 Regulation on genetically modified organisms-GMO (for reasons other than food safety) and other foreign species
B600 Product identity requirement
B700 Product quality or performance requirement
B800 Conformity assessment related to TBT
B810 Product registration requirement
B820 Testing requirement
B830 Certification requirement
B840 Inspection requirement
B850 Traceability information requirements
B851 Origin of materials and parts
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B852 Processing history
B853 Distribution and location of products after delivery
B859 Traceability requirements, n.e.s.
B890 Conformity assessment related to TBT n.e.s.
B900 TBT Measures n.e.s.
Given the range of technical regulations a country may maintain, several agencies of governments or
trade regulators are involved in the implementation of TBTs. For example, most of the SPS are
implemented by the Ministries of Agriculture. Those regulations having to do with national security
are likely implemented by defense or policy authorities, while those intended to protect the
environment by Ministries of Environment. Box 12 gives a profile of what agencies implement TBTs
in the Philippines, while Box 13 describes how they regulate trade.
Box 12. Why and who regulate trade in the Philippines
The reasons for regulating trade include the following: a) consumer protection, b) plant and
animal protection; c) environmental health, d) revenue collection, e) industry protection, and f)
enforcement of other laws/regulations. Consumer protection focuses on the health and safety of the
consumer. The Philippine Food and Drugs Administration, for example, regulates the entry of processed
food items, medicines and the ingredients for making them, as well as cosmetic products. The following
Table lists the agencies that are presently have legal mandates to regulate trade, and these are the
agencies initially identified to be integrated in the country’s national single window system.
List of Philippine Trade Regulatory Agencies
Agency/Department
Agency/Department
Department of Agriculture
Bureau Of Animal Industry (BAI)
1
Bureau Of Fisheries & Aquatic Resources
2
(BFAR)
Bureau Of Plant Industry (BPI)
3
Fertilizer And Pesticide Authority (FPA)
4
Fiber Industry Development Authority (FIDA)
5
Minimum Access Volume Secretariat (MAVSec)
6
National Food Authority (NFA)
7
National Meat Inspection Service (NMIS)
8
Philippine Coconut Authority (PCA)
9
Department Of Trade And Industry
22 Board Of Investments (BOI)
23 Bureau Of Import Service (BIS)
24 Bureau Of Product Standards (BPS)
25 Clark Development Authority (CDA)
26 Philippine Economic Zone Authority (PEZA)
27 Philippine Shippers’ Bureau (PSB)
28 Subic Bay Metropolitan Authority (SBMA)
29 Bureau of Export Trade Promotion (BETP)
Department Of Transportation And Communication
10
Policy Research Service (PRS)
30
11
Sugar Regulatory Administration (SRA)
31
Civil Aviation Authority Of The Philippines
(CAAP)
Land Transportation Office (LTO)
12
Sugar Regulatory Administration (SRA)
32
Maritime Industry Authority (MARINA)
Department Of Environment and Natural Resources
33
13
Environmental Management Bureau (EMB)
National Telecommunications
(NTC)
Other Departments/Agencies
Commission
14
Forest Management Bureau (FMB)
34
Bangko Sentral Ng Pilipinas (BSP)
15
Protected Areas And Wildlife Bureau (PAWB)
35
Philippine Nuclear Research Institute (PNRI)
36
Bureau of Immigration (BI)
16
Bureau Of Internal Revenue (BIR)
37
Firearms and Explosives Division, PNP (FED)
17
One Stop Shop (OSS)
Office Of The President
18
Insurance Commission (IC)
38
Optical Media Board (OMB)
19
Bureau of Customs (BOC)
39
Philippine Drugs Enforcement Administration
(PDEA)
Department Of Finance
Department Of Health
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Mission Report
1 August 2011 - 23 February 2012
20
Bureau of Quarantine (BQ)
21
Phl Food and Drugs Administration (PFDA)
Eight of the agencies under the Department of Agriculture enforce the SPS standards and
technical regulations. The Bureau of Animal Industry, one of the older trade regulators, as well as the
Bureau of Plant Industry ensure that imported animals, plants and product thereof do not inadvertently
introduce plant and animal diseases into the country. The agencies under the DENR focus their
regulatory activities to enforcing the country's laws and regulations designed to protect the
environment. Besides these, the PNRI and the Fertilizer and Pest Authority likewise regulate imported
products to safeguard the environment.
Revenue collection is a major goal of the government, and the agencies under the DOF are tasked
that country's Tariff and Customs Code as well as the Internal Revenue Code are adequately
implemented. Because of fiscal incentives, there are agencies outside of DOF that regulate the trade
likewise to ensure the proper collection of taxes. For example, the BAI of the DA certifies any
importation of feed wheat, which fetches a lower tariff than that on food wheat. Similarly, the BOI, BETP
and BIS under the DTI regulate the importation of fiscal incentives eligible products. The MAVSec is
implementing the tariff quota system, under it a limited volume of eligible agricultural imports may come
into the country at lower tariffs than out-quota importation. Altogether there may be about 12 agencies
in this list that are focused (in the case of the BOC and the BIR) or helping out in the government's
revenue collection.
A few agencies continue to exercise their mandates on regulating trade to protect domestic
industries. The NFA is the only importer of rice in the Philippines, but it has delegated about 200,000
metric tons of what it imports annually for the private sector. This policy is meant to protect the local
rice farmers from imported rice. The MAVsec of the DA administers the country's tariff quota system for
a few agricultural imports, whose quantitative import restrictions had been converted into tariff barriers
by the WTO. The SRA regulates imports for the purpose of enforcing its program of ensuring a viable
local sugar industry and to make sugar affordable to consumers. The BOI and BIS likewise exercise their
mandates to ensure the continued growth of industrial programs such as on motor vehicle development
program.
About six agencies in the list regulate trade for purposes, which may just be referred to as
enforcing other laws and regulations. The OMB regulates trade in order to enforce intellectual property
rights, particularly on creative works that are electronically stored in CDs and DVDs. Overall enforcement
of laws against the use of illegal drugs and control of the use of firearms and explosives are the
respective motivations for regulating imports by PDEA and FED, respectively. The NTC regulates likewise
the importation of radios and broadcasting instruments as well as telecommunication products and
related equipment to ensure the proper business environment for the continued growth of the
infrastructure and services needed for the productive and affordable use of information and
communication technology in the country. The Bangko Sentral ng Pilipinas regulate the trade on the
Philippine currency to ensure financial stability in the economy.
Putting all these in perspective, this analysis places twelve agencies regulating for consumer
protection; three for the protection of plant and animal health; five for environmental protection;
another twelve agencies for revenue collection; six for industry protection; and five agencies for the
enforcement of other laws and regulations. The count exceeds the list of 35 trade regulatory agencies,
indicating that a few of them have multiple reasons for regulating trade.
The BOC is a key agency in the overall implementation of technical regulations for the following
reasons. One of its primary tasks is collecting the import duties and taxes at the border as provided for in
the Tariff and Customs Code. Secondly, many of the other TRAs have partially delegated their respective
regulatory functions to the BOC. This is under the agency’s broad mandate of ensuring that the imported
or exported cargoes comply with the various laws and regulations of the Philippine government.
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Mission Report
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Box 12. How TBTs are regulated in the Philippines at the border in the Philippines
Three milestones or events in this process may be identified, namely pre-border, first border and
second border activities. Border is loosely used to refer to the customs area at the port of entry or exit
of the traded cargoes. In the pre-border event, the primary activity is the application for the required
authority to import or export a regulated product by the trader or his/her broker. A successful
completion of this pre-border process is marked by the action taken by the regulator on the application.
The trader gets the pre-border clearance to import or export the product.
Pre-border event
Pre-border requirements vary across the range of agencies. At one end, a trader may just write a
letter to the head of the agency asking for the authority to import or export. There are agencies, which
have application forms for the permit to import or export, without any further requirements. These
forms are provided to the trader at nominal cost. A rather more complicated procedure requires the
trader to produce supporting documents such as the bill of lading and commercial invoices. These are
usually required in getting sanitary and phyto-sanitary clearances from the DA agencies. The most
complicated of all is that if in addition to getting an SPS clearance, the trader is seeking as well to avail of
any tax incentives, if any. For example, the importation of plants that are covered by tariff rate quotas,
may require not only the SPS clearance from the BPI but also the MAV certificate from the MAVsec. In
turn, the MAVsec requires additional documents.
The pre-border trade clearance or permit in turn is called under various names, reflecting as well
the kind of documentary requirement at the application stage of the process. The authority to import or
export may come in a form a simple letter from the head of agency to the trader allowing the latter to
import or export. Alternatively, a formal document may be issued on pre-printed forms duly signed by
the head of agency for the SPS clearance, import permit, import clearance, or in the case of exports
export permit. In the case of importers who applied to avail of tax incentives, this clearance may come in
the form of a certification saying that the importer is eligible for the tax incentive. Stretching the
concept further, the use of pre-border trade clearance may also include the issuance by the One Stop
Shop of the DOF a certification that the importer who is paying part of his or her tax assessments with
tax credits is doing so with valid and unused tax credits. All these names or forms are simply folded
under their generic name of a pre-border import or export clearance.
Assuming that the importer is given the authority to import, the pre-border trade clearance is
provided to the importer. With it, the trader proceeds to shipping the products its company imported
from the rest of the world to the Philippines. Upon arrival of the vessel, the importer initiates the
process of getting the cargo inspected, assessed and released by the BOC. This triggers the first-border
formalities in the cargo-clearance process.
First border formalities
The filing of the import entry or export exit document with the BOC triggers the first-border
formalities in this cargo-clearance process. In the case of imported cargoes, shipments are grouped by
the selectivity system of e2m as either green, yellow or red lane shipments. All regulated imports are
selected either as yellow or red lane shipments. Under the former, the BOC checks if the shipment
contains all the appropriate and valid pre-border import clearance documents, and if this is the case it
proceeds to do an assessment of the duties and taxes. Upon the payment of the assessed duties and
taxes, the cargo is released to its importer. The importer shows the BOC official the copies of the preborder import clearance and upon the satisfaction of the official, the cargo clearance process proceeds
without inspecting the cargo to assessing the duties and taxes, payment, and release of the imported
cargo to the importer.
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In the case of red lane shipments or those, which require physical inspection, the cargoes are
jointly inspected by the representative of the trade regulator and the BOC at designated inspection areas
within the BOC premises. The container is stripped and a physical inspection of a sample of the cargo is
undertaken in front of the importer or his/her representative.
It is at this point of the first-border
activities that the trade regulator issues the first border import or export clearance after completing the
examination, provided the shipment is compliant with the conditions stipulated in the import permit.
The regulator stamps and signs on the import entry document for the inspected shipment, indicating the
same passed the examination. The release of the first border import clearance closes these formalities
and BOC proceeds to assessing the duties and taxes and the importer paying for the same to get the
goods released.
In the special case where the importers want to pay the assessed duties and taxes with tax
credits, the BOC particularly its cash division has to check the validity of the tax credits presented. For
this process, the BOC official concerned validates the tax credits presented by the importer with the
certifications issued by the One Stop Shop at the DOF. Indeed the same set up will be undertaken by the
BOC in the case of other pre-border import clearances: it validates such documents with the regulator.
Second border formalities for selected products
There is a subset of regulated products that require further examinations, which need to be
undertaken outside of the BOC’s premises. These examinations comprise the activities undertaken
within the second-border event of the cargo-clearance process. Plants or animals, which may require
quarantine procedures to check on their safety, are brought out of the BOC to the designated farms by
the BPI or BAI. Imported meats likewise are examined by the NMIS at their laboratory facilities outside
of the BOC. In the case of non-agricultural products, the BPS requires these products to be brought to
their designated warehouses where they physically check if these meet the safety standards and
technical regulations of the Philippines.
The BOC involves itself in only a subset of these products. In the case of quarantine examinations
at the second border of BAI or BPI, the BOC has determined that the cargo clearance process has been
completed upon its release of the animals or plants. If the BAI or BAI finds adverse findings in the
shipment, then the agency knows how to dispose of the same. However in the case of imported meats,
BOC and NMIS have a standing agreement that the products brought out for laboratory examination are
not released yet by the BOC. Thus, if the examination comes up with an adverse finding the BOC is still
liable for disposing of the same. Otherwise, it releases the imported meats to their importer. The BPS
likewise sends a clearance to the BOC if after its examination in its warehouses it found the shipment
compliant with the country’s standards and regulations. Only then does the BOC fully release the
product to the importer.
Therefore in the case of BPS or NMIS, there are second-border import clearances that the
regulator sends to the BOC to complete the cargo clearance process.
It is difficult to explain why the treatment by BOC of examinations outside of customs premises
such as those by BAI or BPI on one hand, differs from its treatment of those undertaken by the NMIS or
BPS. One possible explanation is that the BOC may have locked itself into agreements with these
agencies at various points in time without a clear policy of how it should handle second border
examinations, i.e. the practice has evolved through time.
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In the case of exported products, the BOC verifies the authenticity of any pre-border export
clearances presented by the exporter and if required may conduct a physical check at the border before
loading the shipment on the ship. There are no second-border events for regulated exported products.
Alternative process models
The
below
additional
table
provides
documentation of the steps within each event depicted by the Figure. At the same time, it presents the
alternative variations of the generic cargo clearance process of regulated traded products. Six variations
or models are identified. Model A has all three events and the BOC is involved at the second border
event. Model B has all three events, but the BOC is not involved with any second border processes, and
thus releases the cargoes to the importer/regulator. There are more than one trade regulators involved
at the pre-border or 1st border events. The implication is that several import permits flow to the BOC,
one for every trade regulator involved. This is clearly a case of overlapping mandates without any
coordination among the regulators concerned. Model C is like Model B, except that there is only one
regulator involved in all three events. Model D involves only the pre-border and 1st border events.
Model’s E and F are the simplest of all. In E, only the pre-border formalities are covered, while only the
second-border event, which involves BOC, falls under Model F.
The events are lightly shaded to distinguish them from those steps that all traders have to do
anyway, such as the filing of the import entry or export exit documents, or the payment of duties and
taxes in the case of imported cargoes.
It is important to note here that the Table does not provide all the steps for the cargo clearance
process. It only highlights the way traded cargoes are treated in the overall cargo clearance process.
From the information that Table I.2 provides, the BOC may have a better idea about the document flow it
may expect from the regulators as it sets up the NSW system.
Alternative Variations of the Cargo Clearance Process for Regulated Traded Products
Models
Events
Pre-border
Upon
arrival of
vessel
Steps
1. Trader applies for import/export permit with supporting
documents if required
2. Regulator processes application, resulting in:
a. Issuance of permit to trader. Proceed to 3.
b. Rejection of application. Process ends.
3. Trader files import entry or export exit document with BOC to
secure the shipments upon its arrival.
4. BOC processes import entry and export exit documents by:
F
A
B
C
D
E
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
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First Border
Payment of
Duties/
Taxes and
Release of
cargoes
2nd border
a. Verifying authenticity of import/export permit/certification,
resulting in:
i. Clearance of documents. If shipment is tagged as yellow lane.
Proceed to 5. If tagged as red lane, proceed to 4b. In case of
exports, clearance of shipment to be loaded to vessel and clearance
process ends. Or:
ii. Processing suspended. Process continues upon satisfaction of
conditions to lift suspension. Go back to 4.a.i. Or clearance not
granted with finality and process ends.
b. Joint physical inspection by regulator and BOC of the shipment
at the designated areas of customs premises, resulting in either: i)
grant of clearance by regulator; or suspension of processing.
Process continues upon satisfaction of conditions to lift suspension
until clearance is granted. Proceed to 5. Or ii) clearance not granted
with finality. Process ends.
5. Routing of documents to cash division for assessment/payment
of duties/taxes, Processing continues like green lane shipments if
not paying with tax credits. Proceed to 7. Otherwise proceed to 6.
6. Verifying authenticity of tax credits against certifications from
regulator, resulting in either: a) BOC acceptance of tax credits; or
b) Processing suspended until conditions for suspension are
satisfied. After 6a or 6b, processing of documents proceeds like
ordinary green lane shipments. Proceed to 7.
7. a) If shipment does not require any 2nd border inspection, BOC
releases the shipment to the importer. Or b) If shipment requires
2nd border inspection and BOC is not involved in it, BOC releases
the shipment to the importer/regulator. Proceed to 8. Or c) if
shipment requires 2nd border inspection and BOC is involved in it,
proceed to 9.
8. Regulator conducts examination/testing/quarantine, resulting in
a) clearance of shipment and regulator releases shipment to
importer; or b) rejection of shipment, which is then destroyed by
the regulator in case of plants/animals, or not given clearance for
sale in the domestic market. Process ends.
9. BOC conditionally releases the shipment to importer/regulator to
be brought to the area designated by the regulator for quarantine,
laboratory examination or inspection.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
10. Regulator conducts examination/testing/quarantine, resulting in
a) clearance of shipment. Regulator sends clearance to BOC, which
x
finally releases the cargoes to importer. Or b) Rejection of x
shipment, and BOC and regulator disposes of the shipment.
Process ends.
* B differs from C in that B involves several regulators in pre-border and 1st border, while C involves only one.
Box 13. Dealing with melamine contamination in Chinese milk
On September 22, 2008, then Philippine Bureau of Food and Drugs (BFAD) banned the importation
and sale of Chinese dairy products in light of the melamine scandal. Melamine is a nitrogen-rich industrial
chemical widely used in plastics. The chemical was used to increase the protein content readings of
watered-down milk. In the middle of this controversy was the state-owned Sanlu Group, 43 % of which is
owned by the New Zealand-based Fonterra Inc., who alerted the Chinese authorities about the incident
in August 2008.
BFAD’s Director Leticia Barbara Gutierrez said in her advisory “...in the interest of protecting
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public health and welfare, directing all licensed importers and/or distributors of registered milk products
sourced from China to immediately stop temporarily from further importing distributing, selling and
offering for sale the aforesaid products. The ban stays “until further notice from BFAD. Under the
Department of Health, BFAD, and now named Philippine Food and Drugs Administration (PFDA), is
responsible to ensure the country’s safety regulations on food and drugs are enforced.
BFAD selected a random sample of dairy products labeled “Made in China.” The collected samples
were tested to determine any melamine contamination. Tests were also conducted on dairy products not
manufactured in China because the possibility of containing ingredients from China. The DTI’s field
offices along with the Department of Health ensured that consumers would not be sold melaminetainted dairy products. At the same time, local government units were asked to assist the agency in its
endeavor by monitoring illegal importation of Chinese dairy products. BFAD directed all licensed
importers and/or distributors of registered milk products sourced from China to immediately stop from
further importing, distributing, selling and offering for sale these products. DTI Undersecretary Zenaida
C. Maglaya asked supermarkets to pull out Chinese dairy products.
The recall and temporary ban of imported dairy products from China have caused revenue loss to
some distributors. MARS, Inc., Philippine distributor of the Snickers chocolates lost 30 million pesos
when the melamine scare unfolded. Nestle Taiwan also faced a similar problem when six of its Chinaproduced products were removed from the shelves. The company estimated a loss of $31.15 million
because of the Taiwan government’s decision. While the Sanlu Group, the center of the melamine
scandal received a bankruptcy order in December 2008.
The Philippines has a weak dairy industry. In fact, according to USDA, Foreign Agricultural Services
(FAS) 2008 Annual Report, the country roughly produces a mere 1 percent of the total dairy
requirements with the gap filled by imports. In fact, dairy products are the country’s second largest
agricultural import after wheat. So, any dent on foreign dairy imports would greatly affect the Philippine
market.
According to the 2008 Philippine Dairy Update, the Philippine local milk production increased, as
milk imports declined. The milk supply stood at 229.36 million kg and was 13 percent lower than the
previous year’s supply of 264.82 million kg. Local production and exports grew by 2.83% and 6.22%
respectively, while imports declined by 11.66 percent.
Box 13. EU slaps stricter TBT rules on carrageenan
Imposing stricter technical barriers to trade measures causes financial losses to both the
exporting and the importing countries, with greater loss falling on exporting countries. Such was the
case of the carrageenan exports of the Philippines to the European Union.
The EU, the largest export market for carrageenan products imposed stricter regulations on such
products. The new measures are to protect their citizens and resources of acquiring diseases that may be
carried into EU by imported Carrageenan products. With this, Philippine exporters had difficulty
complying with these stricter regulations since this would mean additional operating costs.
Seaweed farming is currently the largest and most productive form of livelihood among the
coastal population of the Philippines. Seaweed processing was recognized as an industry in 1996 when
the unprecedented commercial exploitation of the fast growing Euchema seaweeds boosted the
Philippines’ exports. Carrageenan products – “traditionally extracted carrageenan” or “refined
carrageenan” and “semi-refined carrageenan” or “Philippines Natural Grade Carrageenan” are exported
globally. The Philippines was the main producer of these products until 2003, when China started
producing the seaweeds. Nearly 80 percent of global production comes from the Philippines.
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The figure above represents the overall technical infrastructure of conformity assessment. This
explains the procedures that the imported Carrageenan products are likely to be faced with while
entering the export market – the EU. If the imported Carrageenan products would not pass this
conformity assessment, the products would not be distributed to the local EU markets that mean that
the Philippine-exporting companies would not be able to collect profits from the EU.
The new trade rules on Carrageenan are TBT measures, and it is EU’s legal right to impose these.
Having imposed a stricter set of regulations, the EU will not let products inside their territory if the
products have not complied with prevailing technical regulations. The Philippine export products will
then have a hard time entering the European Union territory, raising costs of business to the Philippineexporting companies.
The Philippine-exporting companies and their importers in EU are penalized by the issuance of
these stricter regulations. The EU companies that use Carrageenan products as raw materials had to
temporarily close operations for lack of materials. Since the Philippines is the top producer of
Carrageenan, having 80% share in global production, it had to incur bigger operating costs. They would
rather lose a percent of their profit rather than stop exporting the Carrageenan products to the EU.
3.4 Customs Measures
Customs authorities are responsible for the enforcement of the country’s laws and regulations at the
border. The country’s customs capacity and policies are critical in facilitating trade. The
implementation of all technical barriers to trade, regardless of whether the measures have been
imposed and enforced by customs or not, involves customs authorities. This is so because the
primary responsibility for the clearance of traded merchandise lies with customs. Trade regulatory
agencies, other than customs, delegate completely or partially the enforcement of their respective
TBTs to customs authorities.
When customs duties have gone down to insignificant levels after several rounds of tariff
negotiations, the key role of this public agency has been to facilitate trade. Focus is game is how
much time is needed in order to clear one’s imports or exports through customs. One important
dimension of customs’ contribution to trade facilitation is whether or not its cargo clearance
procedures are streamlined, useful but simple, keeping compliance cost low for the importers and
traders.
The Revised Kyoto Convention (RKC) that entered into force in 1999 has incorporated important
modern concepts, including the application of new technology (particularly the use of IT for
electronic transactions), the implementation of new philosophies on Customs control (such as risk
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management and post-transaction audit) and new cooperative arrangements with private sector
partners. The agreement best practice in key operational fields including risk management; audit
based controls; pre-arrival information; information technology; coordinated interventions;
consultation with trade; information on Customs laws, rules and regulations; system of appeals in
Customs matters. Central to the new governing principles of the revised Convention is the
commitment by Customs agencies to provide transparency and predictability for all those involved in
aspects of international trade.
A second important customs related policy issue is the valuation of goods by customs. Since the
1950s, many countries assessed customs duties on the basis of the Brussels Definition of Value
(BVD), which is "the price that a good would fetch in an open market between a buyer and seller
independent of each other”, or a notional price instead of what the importer had paid for the good.
Traders particularly disliked this method because customs authorities adjusted these notional values
less frequently than actual market price movements. Moreover, the method failed to consider
changes in the relative competitiveness of firms and the prices of new and unusual products.
In 1995, the Uruguay Round Final Act included an Agreement on the Interpretation of Article VII,
which among other provisions mandated all its members to adopt the transaction valuation
procedure by 2000 at the latest for developing countries. The interpretative agreement provided as
well various legally binding rules and procedures for the proper implementation of Article VII. The
report discusses the challenges faced by the Philippine government and its responses when it legally
enabled this agreement.
Revised Kyoto Convention
The Revised Kyoto Convention is regarded as the blueprint for modern and efficient customs
procedures in the 21st century. Once implemented widely, it will provide international commerce
with the predictability and efficiency that modern trade requires. The agreement has three parts,
namely the body, general and the specific annexes. The management of the Convention, including its
scope, ratification, application, dispute settlement and amendment are contained in the body of the
agreement.
The General Annex has 10 chapters of principles covering a wide area of customs concerns. These
principles reflect the overall thrust of the RKC to make customs procedures efficient and simple. In
chapter 3 on the clearance of goods, information needed for assessing and collecting duties or the
application of customs law are limited to what is needed for the task. If physical examinations are to
be undertaken, the samples to be drawn have to be ss small as possible. Customs declarant is
responsible for the accuracy of the information stated in the customs declaration.
Table 4. General annex provisions of the Revised Kyoto Convention
Chapter 1: General Provisions
В· Implementation of provisions in Annex is to be specified in national legislation and is to be as simple
as possible.
В· Customs administrations are to work with the trade community to increase cooperation.
Chapter 2: Definitions
· Definitions provided from “appeal” to “third party.”
Chapter 3: Clearance of Goods
В· Goods declarations to only contain information necessary for assessment of duties and taxes,
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Mission Report
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statistical collection, and application of Customs law.
В· Declarant will be held responsible to Customs for the accuracy of information in the Goods
declaration and the payment of duties and taxes.
В· Samples to be drawn as small as possible.
В· Customs to not impose substantial penalties for inadvertent errors and errors without evidence of
fraud or gross negligence.
В· Customs administrations to coordinate operations at common border crossings (transitional
standard).
В· Customs administrations and other government agencies to coordinate inspections (transitional
standard).
Chapter 4: Duties and Taxes (Assessment, Collection and Payment; Deferred Payment; Repayment)
В· National legislation to specify methods of duty and tax payment.
В· When national legislation specifies that payment due date may be after release of the goods, that
date shall be at least ten days after release. No interest charged between date of release and due
date.
В· Period for deferred payment of duties to be at least 14 days.
В· Repayment to be granted for defective goods or goods not in accordance with specifications at
time of importation/exportation and are returned to supplier, if goods have not been worked,
repaired or used.
· Repayment decisions to be made without “undue delay.”
Chapter 5: Security
В· Customs administrations to determine the level of security required.
· If security is required, amount of security to be “as low as possible,” and, in respect of payment of
duties and taxes, is not to exceed the amount potentially chargeable.
Chapter 6: Customs Control and Risk Management
В· All goods entering or leaving Customs territory are under Customs control.
В· In application of Customs control, Customs Administrations to use risk analysis to determine who
and what should be examined and the extent of examination.
В· Customs administrations to adopt a compliance measurement strategy to support risk
management.
В· Customs control systems to include audit-based controls.
В· Customs administrations to seek to cooperate with the trade and to conclude Memorandum of
Understandings to enhance Customs control.
В· Customs administrations to use information technology and e-commerce to enhance Customs
control (transitional standard).
Chapter 7: Use of Information Technology
В· New/revised national legislation to provide for: e-commerce alternatives to paper-based
documentation requirements; electronic as well as paper-based authentication methods; the right
of Customs administrations to retain information and share it with other Customs administrations
through e-commerce.
В· Customs administrations to develop information technology in consultation with all relevant parties.
В· Customs administrations to apply info technology to support operations, when cost-effective and
efficient for Customs and the trade.
Chapter 8: Relationship Between Customs and Third Parties
В· Persons/entities are to have option of doing business with Customs directly or through a third party.
В· Third parties to have same rights as parties on whose behalf they act.
· National legislation to set out rules/conditions for third parties – should not be different than rules
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Mission Report
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for persons/entities doing business directly with Customs.
Chapter 9: Customs Information, Decisions and Rulings
В· Customs law information to be readily available.
· Customs administrations to provide “as quickly and as accurately as possible” specific information
requested by an interested party.
В· Adverse Customs decisions to provide reasons and to advise of right of appeal.
В· Customs administrations to issue binding rulings upon request.
Chapter 10: Appeals in Customs Matters
В· National legislation to provide for a right of appeal in Customs matters.
В· Time limit to apply to requesting an appeal, and Customs administration to respond as soon as
possible.
В· Customs appeals decisions to be in effect as soon as possible.
In Chapter 4 on duties and taxes, it recognizes the right of a contracting party to spiffy the method
of the payment of duties and taxes through a national legislation. It however made more stringent
standards in favor of the importer. Payment due dates after goods release, if this is provided in the
national legislation, has to be at least 10 days. Deferred payment timeline has to be at least 14 days
from release. There are reimbursement provisions on defective goods or goods not in accordance
with specifications and returned to supplier or if the goods have been worked, repaired or used. Any
reimbursement has tob promptly made. If any security is required, the amount shall not exceed the
amount potentially chargeable.
The provisions in Chapter 6 have the potential of improving substantially customs procedures
through an efficient risk management strategy. Customs control is applied following a risk analysis.
The lane system in many customs areas in the world illustrates this principle. By doing risk analysis
on cargoes entering the customs territory, customs authorities are able to determine the low from
the high-risk cargoes, attaching color codes on them based on the cargo’s risk profile. The low risk
go through the green lane system with hardly any control, while the latter undergoes either a
document check (yellow lane) or document check with physical examination (red lane). In this way,
the low risk cargoes are not necessarily subjected to unnecessary customs control.
Another important innovation is the use of audit-based controls. Customs procedures before this
have front loaded control procedures before releasing the merchandise, which increases the time of
clearing cargoes. Post-release audits are encouraged in order to cut down clearance time. Lastly,
working with the private trade is likewise promoted in order for customs authorities to understand
better the risk involved, and to devise customs control procedures that may not unduly raise
compliance costs.
Automated and paperless customs procedures, as well as the use of e-commerce are the hallmark of
the RKC. Automated customs procedures not only reduce cargo clearance time, they also facilitate
risk analysis for improved customs control. The use of the national single window is an important
innovation, which cuts down the use of paper-based transactions and time for validating the
authenticity of documents supporting a customs declaration.
The right of the importer to use third party to clear imported or exported cargoes is recognized.
Third parties have the same rights as their principal.
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Customs information needs to be easily accessible to parties concerned. Any request for relevant
customs information or rulings needs to be provided promptly. Customs authorities have to provide
reasons for any adverse rulings and advise the concerned traders of their right to appeal. A law has
to enable the appeals procedures, and the appeals process has to have clear timelines from initiation
to implementation of appeals decisions.
Specific annexes
The Specific Annexes contain standards and recommended practices. Contracting parties have the
option to adopt the specific annexes or specific chapters under it. The specific annexes are divided
into ten Chapters and have detailed guidelines for their implementation. If a contracting party
decides to accede to a Specific Annex or a Chapter of a Specific Annex, it is bound to implement any
Standards.
3.4.2 Customs valuation reform
The WTO requires all members to use transaction value as the legal basis in assessing the dutiable
value of imported merchandise. This is the price that importers actually paid or legally bound to pay
for the goods they bring in to the country. Transaction values incorporate as well the other
expenses necessary in making, exporting and bringing the merchandise into the territory of the
importing country, which are not included yet in the price. Such expenses may include commissions
and brokerage fees; cost of containers; and the cost of packing, whether for labor or materials; the
cost of transport of the imported goods from the port of exportation to the port of entry in the
Philippines; loading, unloading and handling charges associated with the transport of the imported
goods from the country of exportation to the port of entry in the Philippines; and the cost of
insurance.
These other components of transaction values that normally are not observed at the point of
importation may include the value of materials, components, parts and items incorporated in the
imported goods; tools, dies, moulds and similar items used in the production of the imported goods;
materials consumed in the production of imported goods; and engineering, development, artwork,
design work, and plans and sketches undertaken elsewhere than in the country of importation and
necessary for the production of imported goods. These cost items may also cover the amount of
royalties and license fees that the buyer must pay, either directly or indirectly, in connection with the
goods being valued, as a condition of sale of the goods to the buyer and the value of any part of the
proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or
indirectly to the seller.
The WTO agreement prescribes a hierarchy of six (6) methods that customs authorities need to
apply sequentially and conditionally in computing transaction values. Under method 1, the
transaction value is the invoice value of the merchandise, as may possibly be adjusted for necessary
expenses such as those described above. This method is inapplicable if: (a) the buyer and seller are
related to each other and the relationship had an effect on the price of the imported merchandise;
(b) there are restrictions as to the disposition of the imported merchandise where such restrictions
influenced the price; (c) there are considerations that influenced the value of the merchandise such
as if the transaction in question is tied to another between the two parties concerned; and (d) part
of the proceeds obtained in the disposal and use of the merchandise by buyer would accrue to the
seller of the good.
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Customs authorities apply Method 1, if it is applicable to do so. Otherwise, they need to use Method
2, which is the transaction value of an identical good. If Method 2 could not be used because there is
no identical good to calculate the value of, WTO members need to apply Method 3, and this is the
transaction value of a similar good. The sequence goes on to Method 4 (Deductive value), Method 5
(Computed Value), and Method 6 (Fallback Value). Under method 6, if this is ever used at all,
customs authorities are obliged to disclose how the fallback value was calculated. The agreement
defines a clear process of computing transaction values. The likelihood is high the transaction value
of an imported merchandise is obtainable under any of the first three methods. In laying down a
clear process and enjoining all its members to abide by these rules, the WTO agreement reduces
discretion, improves transparency and makes customs valuation procedure all over the world
increasingly predictable. Accordingly, the agreement facilitates trade.
Post entry audits are the primary tools of back end customs supervision and complement transaction
valuation reform in reducing transaction cost. Customs supervision before this law entailed
substantial transactions costs on the part of importers. Goods are held at the border until customs
officials would have determined that the relevant laws and regulations had been complied with.
Automation helped reduce these costs by streamlining import clearance procedure. However, the
underlying philosophy of customs management then comprised the use of official minimum values.
The gain for trade facilitation of automation was not enhanced because of valuation related
differences between importers and customs authorities.
While their thrust is to facilitate voluntary compliance, post entry audits serve as well to deter tax
evasion and violations of customs and other regulations. In an audit, tax payment discrepancies may
be discovered and the importer will be asked to settle his remaining obligations to customs
authorities. Unless fraud is established, customs authorities regard these discrepancies as
unintended mistakes and help importers to comply with the regulations.
Post entry audits are a best-practice tool in today’s customs administration all over the world. The
key result areas of this vision cover reduced transaction costs, increased compliance through
voluntary disclosures, lower incidence of customs fraud, revenue assurance, and improved skills of
customs personnel. The situation before the reform is limiting trade expansion in the sense that
customs resources are overly focused on border enforcement with its consequent high transaction
cost. Personnel have inadequate skills in gathering accurate commercial intelligence and managing
risks, an outcome of out-sourcing these services to a pre-shipment inspection service provider. The
costs of keeping the Bureau personnel continued to be expended even as the government paid for
the services of the pre-shipment inspection company. With post-entry audits and the related
modernization of customs administration using information technology, the agency’s personnel
improve their skills and customs administration becomes more cost-effective, sensitive to client
needs, as well highly adaptive to continuous change.
In the present situation, the Bureau is faced with competing demands. On one hand, it is tasked to
increased revenues to help reduce the fiscal deficit. But on the other hand, pressure is rising for
trade facilitation. With post entry audits, the agency is better able to manage competing demands.
Before audits were authorized, resources of the bureau were targeted at the border. Goods are
kept within the customs zone until compliance with taxes and regulations is assured. This approach
to customs supervision is inconsistent with the demand for higher trade facilitation. With post-entry
audits and transaction valuation, resources of the agency are shifted to back-end control and ensure
the accomplishment of revenue assurance and compliance with customs regulations. Importers
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benefit from this shift through quicker release of their goods. Post-entry audits form a preventive
net by undertaking a verification exercise to check the degree of compliance of the Bureau’s clients.
There are at least four items of a transaction value that require a preventive net through post entry
audits. In general, the following items of transaction values are difficult to determine at the border,
as these ordinarily may not be reflected in the invoice. One item includes selling commissions, which
are ordinarily paid after the goods would have been released from the customs zone. These costs
are payable and thus are part of the transaction value of the imported merchandise. A second item
comprises assists such as payment for the use of moulds owned by a third party and used in
manufacturing the imported product. The assists are also integral to the transaction value of the
good, but since typically the manufacturer/exporter is not paying for the assist but rather the
importer, the payment is not reflected in the invoice and accordingly is a potential source of a
revenue loss. Lastly, royalty payments and management fees are integral costs to producing the
merchandise, but are ordinarily excluded in the invoice of the manufacturer/exporter.
The purpose of a customs audit is to assess accuracy of valuation and tariff classification, ensure
internal controls within company are sufficient for customs requirement, and gather commercial
intelligence. Post entry audit is a systems-based type validation procedure aimed at helping
importers or their brokers comply with customs laws and regulations. The compliance check is not
about a particular import transaction but about the importer’s business processes in so far as these
relate to complying with the customs rules and procedures. These processes include the order
processing flow; the receipts and inventory control flow; and the payment flow. Auditors verify if
the importers have adequate controls over their respective business processes of relevance to the
importation of goods, and how consistent these are with customs regulations.
Box 14. Trade facilitation and administrative cost effects of transactions valuation reform, Philippines
Transaction valuation reform is regarded as a trade facilitation reform. By harmonizing valuation
procedures across the world, the WTO, which spearheads the reform globally, sought to reduce
uncertainty and prevent the erosion of market access through customs valuation procedures. In this
section, the effect of the reform on importers’ transaction cost as measured by the time it takes to
process imports through the Philippine Bureau of Customs and on the cost of customs administration
procedures is evaluated.
a)
Effect on Import Processing Time
A study was conducted for the Bureau of Customs with assistance from the Japan International
Cooperation Agency (JICA) to measure the average time taken from arrival to release of cargo and
identifying constraints affecting the implementation of these procedures (UPECON, 2003). The time
required on the part of importers to their imported shipment cleared by the Bureau of Customs covers
the duration from the time the vessel or aircraft carrying the import cargo arrives to the time it is leaves
the customs zone. The framework of the study is pattered after the time measurement on the release of
goods issued by the World Customs Organization in 2000. The sample comprised 16,770 randomly
selected import entries in 3 ports, POM, MICP and NAIA, which were assessed and released from March 1
to 29, 2002, representing 4 percent of the total entries in 2002. Because the data obtained in this study
reflects the post-transaction valuation reform, it is useful in estimating the effect of the reform on import
processing time. Needed to complete the estimation is an estimate of the import processing time before
the reform.
A significant amount of time was required to get imported cargoes processed by the Bureau of
Customs. The Table below shows the average time that lapsed from the arrival of goods to their release,
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tracing the effect on the time interval of transaction valuation reform. The post-reform information of
the Table is taken from UPECON’s benchmark time measurement study. The lapse time applies to all
formal import entry shipments arriving at the Port of Manila, Manila International Container Port, and the
Ninoy Aquino International Port. The import entries reviewed by the authors of the study were for year
2002. As for pre-transaction valuation reform, the interval of time is basically the same except for the
duration between the arrival of the vessel and the lodgment. Under the pre-reform rules, lodgment
could not take place until the CRF was available. Medalla et al. (1993) estimated that the delay from the
time the vessel docked or the aircraft landed to when the import entry declaration is lodged ranged from
a minimum of one day to a maximum of five days. Since the authors did not provide information about
the frequency distribution of the delay, the information is provided as a range of estimates in the Table.
The total lapse time from the arrival to release of goods ranged from 6.43 to 11.43 days before the
transaction valuation reform and when Bureau required pre-shipment inspection. The interval dropped
to 5.43 days when the customs valuation reform was implemented. The time saved ranged from 1 to 5
days, representing the delay in the arrival of the CRF from the time the goods had arrived in the country.
Interval time from arrival to release of imported goods (in no. of days)
Transaction valuation reform
Pre--reform
PostMaximum
Minimum
9.31
4.31
3.31
Arrival of goods to lodgment
Lodgment to assessment
1.01
1.01
1.01
Assessment to cargo clearancecargo
clearance to payment
Payment of arrastre fees to release
Arrival of goods to release
Pre- vs. Post-reform (time saved)
0.23
0.23
0.23
0.5
5.43
0.5
6.43
1
0.5
11.43
5
b)
Administrative Cost Savings
The Bureau of Customs terminated its pre-shipment inspection contract with SGS in March 2000.
While there may have been other reasons for not renewing the contract, the decision was nonetheless
consistent with the shift to transaction valuation in 2000. Even under R.A. 8181, the use of pre-shipment
inspection, which was dedicated to setting the dutiable value of imported merchandise, was inconsistent
with R.A. 8181 and R.A. 9135. If the decision had not been made, the Bureau of Customs was on shaky
legal ground under a transaction valuation law. It is for this reason that one may view the decision to
cancel the pre-shipment inspection as an integral component of the transaction valuation reform, and for
which savings in administrative cost are substantial.
The Bureau of Customs had saved the average of about US$ 68 per trade declaration. The savings
came mainly from terminating pre-shipment inspection. Pre-shipment inspection focused on valuation
issues, although used by many developing countries, is inconsistent with the provisions in the transaction
valuation agreement. Thus the substantial savings in administrative cost can be attributed to the
transaction valuation reform.
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PART II. SELECTED CASE STUDIES
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4. Trade in Goods and Rules of Origin
Trade in goods has been the object of any trade liberalization effort, multilateral or preferential.
Since 1947, the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade
Organization (WTO) have been working towards the lowering and/or removal of barriers primarily to
trade in goods. After 8 rounds of negotiations, the GATT contracting parties had substantially
reduced tariffs primarily on goods. It was only in the Uruguay Round (UR) that the GATT had brought
trade in agriculture, textile and clothing under the disciplines of GATT/WTO. The Doha Development
round (DDR) continues to address issues of tariff peaks, tariff escalation, unbound tariffs and high
applied tariffs.
The relatively slow and difficult multilateral trade negotiations, such as under the DDR, have
motivated individual member countries to advance their trade liberalization agenda using
preferential trade agreements. In East Asia, the surge of free trade agreements or FTAs, which
began in the late 1990s, became part of a post financial crisis recovery agenda and of a push towards
economic cooperation. A decade after, concluding FTAs have become a trade reform policy tool as
well as a mechanism to improve and enhance market access.
This section takes up the major principles, concepts and special agreements in goods trade; analyzes
selected key issues in trade in goods and rules of origin; and concludes with three case studies.
Definition of Terms7
Applied tariffs – the actual tariff that is levied on imports.
Bound tariff – the highest tariff that a WTO member can legally impose on an imported good. It is
documented in the WTO member’s schedule of commitments.
Comparative Advantage (CA) – the capacity of a country to produce goods at lower relative cost compared
to that of its trading partners. It may stem from higher labor productivity and/or relative abundance
of primary factors used intensively in producing the goods in the country.
Change in tariff classification (CTC) – a model for determining transformation in preferential rules of origin
(RoO). A good acquires origin if the non-originating materials used undergo transformation as
shown by changes in its harmonized system (HS) tariff classification: (i) change in chapter (CC) materials used are outside of the chapter under which a good is classified; (ii) change in heading
(CTH) –outside of the heading; and (iii) change in subheading (CTS) – outside of the subheading.
Effective Protection – the proportionate increase of domestic value-added, i.e. the value of primary inputs in
producing a good, due to trade protection relative to its level in the absence of protection.
Free Trade Areas - a group of at least two countries (or customs territories) that have agreed to eliminate
trade taxes and other restrictive regulations of commerce on substantially all the trade between the
constituent parties in products originating in such territories, except, where necessary, those
measures allowed under Articles XI, XII, XIII, XIV, XV, and XX 8.
7
This part draws mainly from information materials, notes and papers of the WTO. Non-WTO sources are
acknowledged individually.
8
Article XI- General Elimination on Quantitative Restrictions; Article XII –Restrictions to Safeguard Balance of
Payments; Article XIII-Non-discriminatory Administration of Quantitative Restrictions; Article XIV – Exceptions
to the rule of Non-discrimination; Article XV- Exchange Arrangements; Article XX- General Exceptions.
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Free Trade Agreements (FTA) - a trade agreement that eliminates or at least reduces down to zero trade
barriers on substantially all trade in products originating among members relative to non-member(s).
There is no standard FTA; so members are free to negotiate and achieve scope in terms of more
areas of liberalization and/or depth in terms of more commitments in one area of liberalization.
The GATT - provided for the rules on world trade from 1947 to 1994 and presided over 8 rounds of trade
negotiations. The first 7 focused mainly on reducing tariffs; the 8th-the UR, aside from reducing
tariffs further, created the WTO, brought agriculture, textiles & clothing under the disciplines of
GATT and secured agreements on services and trade-related aspects of intellectual property rights
(TRIPS). See Appendix 1 for details on all rounds and their respective outcomes.
The Harmonized Commodity Description and Coding System (HS)-an international nomenclature system for
traded-goods for the purpose of standardization and comparison of tariffs, trade data and
information across trading countries. The HS, developed and managed by the World Customs
Organization (WCO), entered into force on 1 January 1988 and was amended 4 times, in 1992, 1996,
2002 and 2007. 5000 commodity groups are organized into 97 chapters using a 6 digit code: first 2
digit refers to a chapter; first 4 digit, a heading; and 6 digit, a subheading that is harmonized
worldwide. The ASEAN Harmonized Tariff Nomenclature (AHTN),based on the HS, harmonizes
ASEAN member countries HS up to 8 digits for better alignment in implementing AFTA’s preferential
tariffs.
Inter-industry trade-trade is an exchange of goods between industries driven by comparative advantage.
e.g. Indonesia exports labor-intensive garments to Japan in exchange for capital-intensive tractors.
Intra-industry trade (IIT) is an exchange of goods within an industry. Germany exports Mercedes Benz to
Italy in exchange for Ferraris. This type of IIT is horizontal: two countries with similar factor
endowments produce differentiated goods; trade is driven by economies of scale (supply side) and
the love of variety (demand side).
Most favored nation (MFN) tariff - the tariff applied by a WTO member country to all imports from all WTO
members and is based on the principle of non-discrimination.
Non-tariff measures (NTMs) - import restrictions other than import tariffs such as quantitative import limits,
import licensing systems, sanitary regulations, prohibitions, etc. Appendix 2 reproduces a
compendium by GATT/WTO. Many non-tariff measures are based on a legitimate goal (such as the
protection of human health) and can be applied in a WTO consistent manner. Agreements such as
the sanitary and phytosanitary (SPS) and technical barrier to trade (TBT) aim at allowing
governments to take due care of these legitimate goals while minimizing the impact on trade and
avoiding the temptation to use them as disguised protectionism.
Non-tariff barriers (NTBs ) - refers to any non-tariff measure which is applied in a manner that protects the
domestic industry from import competition.
Preferential tariff-tariff, lower than the MFN, granted to members only of a preferential trade agreement
such as customs union and FTAs.
Margin of preference (MOP) – the difference between the MFN and preferential tariff.
Revealed comparative advantage (RCA)9 – share of a country’s export of a given product x to its total
exports in proportion to the total export of the world of the same product to total world exports. If
the RCA exceeds one, the country is said to have a CA in the production of product x.
Rules of origin (RoO) - a body of criteria and rules used to determine origin of a product. There are two
types, namely non-preferential and preferential. The former is used in multilateral trade such as
granting quotas, imposing anti-dumping and countervailing duties, safeguard measures, etc.; the
latter is to determine whether or not a good qualifies for tariff preferences under preferential trade
agreements (PTAs).
9
Ng, Francis and Alexander Yeats (2003) “Major Trend in East Asia: What are their Implications for Regional
Cooperation and Growth : World Bank Policy Research Working Paper 3084.
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Tariff - a tax or duty applied by customs authorities on imported goods. It may be specified as (i) a
percentage of the value of an imported good or ad valorem; or (ii) specific, i.e. a fixed amount per
unit, by weight or by piece.
Tariffication – process of converting the protection accorded by a non-tariff measure into its equivalent
tariff protection.
Tariff binding – a legal obligation of a country not to set its tariff rate on a given imported product higher
than a specified tariff or customs duty rate.
Tariff escalation – a pattern of tariff rate protection where the tariff rates on imported products increase
according to their respective degrees of processing, i.e. raw materials are accorded lower tariff
protection than semi-processed products, which in turn are given lower protection compared to
finished products.
Tariff peaks - relatively high tariffs, at least 15 %, applied usually on politically sensitive products, when the
rest of the tariff rates are
Tariff quota/tariff rate quota - when quantities inside a quota are charged lower import duty rates relative to
those outside.
Technical barriers to trade (TBTs) -Technical regulations and standards prescribing specific characteristics of
a product such as its size, shape, design, functions and performance, or the way it is labeled or
packaged before it is put on sale. The difference between a standard and a technical regulation lies
in compliance.
Trade deflection - when a product of a non-FTA member is shipped through a low-tariff FTA partner to a
high-tariff partner
Traded-good – a good that is imported or exported.
Tradable good - a good that can be imported or exported regardless of the trade regime or other
prohibitive costs. e.g. live fish is a tradable good but due to its high perishability and transport cost, it
is not traded or traded volumes are very limited.
Value-added (VA) approach - a model in preferential RoO to determine substantial transformation. It is
specified as value-content (VC) in FTAs: a good acquires origin if the total amount of originating
materials or non-originating materials meets a certain threshold, usually defined as the difference
between the FOB price and the value of non-originating materials expressed as a ratio of price.
Vertical IIT (VIIT) - developing countries with relatively abundant labor using low-technology production,
export the cheaper products in the global production chain. Developed countries with abundant
capital and technology produced the more capital-intensive and/or technology-intensive products.
4.1. Principles, concepts and special agreements
How did trade in goods get to become increasingly freer? After a long debate on the topic that
started some 200 years ago, the theory of comparative advantage has become widely accepted to
be the basis for expanding trade in goods. However, it was only in 1947 that GATT crafted the rules
of the multilateral trading system. Armed with these rules as subsequently amended, improved and
interpreted through the years, the GATT and now the WTO has governed and managed the
multilateral trading system. This section takes up the most important principles, concepts and
agreements applicable to the trade in goods.
The principle of non-discrimination is provided in two articles of the GATT 199410:
10
GATT 1994 is the agreement under the WTO that governs the trade in goods.
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(i) GATT Article I, the General MFN Treatment, provides that if a concession has been granted to any
member, it must be granted to all WTO members, unconditionally and immediately. To all WTO
members, the MFN treatment is obligatory; between a member and non-member(s), it is
discretionary, i.e. a member may or may not grant MFN treatment to a non-member.
(ii) GATT Article III, National Treatment (NT) on Internal Taxation and Regulation provides that when
an imported good enters the customs territory of a WTO member, it must be slapped the same
internal taxes and regulations as its locally produced substitute. The application of internal taxes and
other internal charges, and laws, regulations and requirements affecting the internal sale, offering
for sale, purchase, transportation, distribution or use of products, and internal quantitative
regulations requiring the mixture, processing or use of products in specified amounts or proportions,
should not be applied to imported or domestic products in a manner as to afford protection to
domestic production.
GATT Article II, Schedule of Tariff Concessions, refers to the specific tariff concessions and other
obligations that members have agreed to implement. These respective schedules of trade
concessions are either annexed to the Marrakesh Protocol or to Protocols of Accession in the case of
non-founding members of the WTO. A schedule may be adjusted over time due to technical
modifications, e.g. amendments on the Harmonized System (HS) of tariff nomenclature and/or
withdrawal of concessions.
Article XXVIII, Modification of Schedules11, describes the protocol for renegotiating previous tariff
concessions. Modification or withdrawal of concessions is allowed but affected members should be
compensated with concessions on other products. There are 3 types of members: (i) member with
which the concession was initially negotiated; (ii) a member with the principal supplying interest; and
(iii) members with substantial interest in such concessions. Negotiations should be held with
members in (i) or in (ii) as the case may be and consultations are required with members in (iii). If an
agreement is not reached, the affected members have the right to withdraw substantially equivalent
concessions initially negotiated with the member modifying or withdrawing concessions.
Article XXVIII bis Tariff Negotiations Negotiations may be conducted on a selective product-byproduct or those under multilateral procedures directed at substantial reduction of general level of
tariffs. The following are considered concessions: (i) reduction in tariffs; (ii) binding of tariffs at
existing levels or commitment not to increase beyond specified levels; (iii) binding against increase
of low duties or duty-free treatment are concessions equivalent in value to reduction of high duties.
GATT Article XXIV Territorial Application Frontier Traffic Customs Unions and Free Trade Areas allows
the formation of preferential trading agreements (PTA) among country members given certain
conditions. These include (i) the elimination and/or reduction of tariffs and NTBs on substantially all
trade among the contracting parties of the PTA within a reasonable length of time; and (ii) not
raising trade barriers against non-members after the formation of PTAs.
Following the Interpretation and Understanding of Article XXIV issued by the WTO, the reduction
and/or elimination of duties will be assessed by tariff line (in value and quantities) and by the overall
11
Hoda, Anwarul (2002) Tariff Negotiations and Renegotiations under the GATT and the WTO: Procedures and Practices. The
source is also good reference material on the evolution over several GATT rounds of negotiations of the concept of initial
negotiating rights.
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assessment as indicated by the weighted average tariff rate and of customs duties collected. For
trade barriers that are difficult to quantify and aggregate, the examination of individual measures,
regulations, products and trade flows may be required. While the interpretation is silent on what is
“substantially all trade”, the consensus among the members is that at least 90 % of trade is
substantial12. The meaning of “reasonable length of time” in paragraph 5 (c) is interpreted as 10 years
and should only exceed 10 in exceptional cases.
Special and Differential Treatment (SDT) 13 confers special rights and leniency for DCs and LDCs, in
effect, providing conditions for the exceptions to MFN principles and disciplines. There are about 145
SDT provisions in WTO agreements, interpretations and understanding on rules as well as in
ministerial decisions, around 75 % of which were adopted at the end of the Uruguay Round.
The various manifestations of SDT include: (i) Provisions aimed at increasing relative trade
opportunities of DC members; (ii) members safeguarding the interests of DC members through
actions taken or avoided; (iii) flexibility of commitments, actions and use of policy instruments, e.g.
actions DCs may take through exemptions from disciplines and commitments applicable to members
in general or reduced level of commitments DCs may choose to undertake relative to members in
general; (iv) time bound exemptions from disciplines; (v) technical assistance; and (vi) provisions
relating only to LDC members. SDT provisions permeate WTO agreements. The Agreement on
Agriculture (AoA) together with decisions on net-food importing developing countries tops the list
with 19 SDT provisions. Those on technical barriers to trade (TBTs) and subsidies and countervailing
measures (SCM) tie up in the second place of agreements with 16 SDT provisions (see Appendix 3).
An important SDT came out in November 1979 known as the “enabling clause” through a decision by
the GATT entitled the “Differential and more favourable treatment reciprocity and fuller
participation of developing countries”. The enabling clause is the legal basis for the Generalized
System of Preferences (GSP), which has allowed developed countries to grant on a non-reciprocal
basis special and more favorable treatment to DCs and LDCs. At the discretion of the country
granting the tariff preferences, duties on specific imported goods coming from beneficiary DCs and
LDCs are subject to zero or low tariff rates subject RoO and other conditions. The clause is also the
basis for DCs to form FTAs among themselves and for the Global System of Trade Preferences
(GSTP). The latter allows developing countries to exchange trade concessions among themselves.
The Generalized System of Preferences (GSP) was adopted at United Nation Conference on Trade
and Development (UNCTAD) in New Delhi in 1968. In 1971, the GATT contracting parties approved a
waiver to Article I of the General Agreement for 10 years for the implementation of the GSP scheme.
The scheme essentially contravenes Article 1 of the GATT 1994 on the most favored national
treatment. The waiver to the MFN obligation was made permanent by the 1979 Enabling Clause,
which allowed preference-giving countries to grant preferential tariff treatment to DCs and LDCs.
Under GSP schemes of preference-giving counties, selected products originating in developing
countries are granted reduced or zero tariff rates over the MFN rates. The least developed countries
(LDCs) receive special and preferential treatment for a wider coverage of products and deeper tariff
cuts. There are currently 13 national GSP schemes notified to the UNCTAD secretariat. The following
countries grant GSP preferences: Australia, Belarus, Bulgaria, Canada, Estonia, the European Union,
12
Department of Foreign Affairs and Trade, Australian Government. Negotiating free trade agreements: a guide.
WTO Document WT/COMTD/W/77/ Implementation of Special and Differential Treatment Provisions in WTO
Agreements and Decisions.
13
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Japan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of
America.
Following the AoA, which was a key outcome of the UR, the trade of agricultural products was
placed under GATT disciplines to improve market access and reduce distortions. Prior to the UR,
quantitative restrictions (QRs) and trade distorting subsidies were allowed on farm products. The
AoA prohibits the use of NTBs (with a few exceptions), reduces tariff levels, converted NTBs to
tariffs, and introduces disciplines trade-distorting domestic and export subsidies. It also set an
agenda for continuing the reform of the world’s agricultural trading system.
The Agreement on Textile and Clothing (ATC), another key outcome of the UR, had likewise placed
the textile and garments sector under GATT disciplines. It abolished the network of export quotas in
the sector that the Multifiber Arrangement (MFA) allowed. The ATC phased out the MFA in ten
years ending in 2004.
Information Technology Agreement (ITA 1) entered into force with the first staged reduction in
tariffs occurring on 1 July 1997. The agreement provided for the elimination of tariff protection on all
IT products covered and bound the tariff rates at zero. Existing NTBs on information technology (IT)
trade were excluded in ITA 1, but are part of an on going trade negotiation under ITA 2. Participants
need to satisfy 3 conditions to become a contracting party to the ITA. These are (i) all products listed
in the Declaration must be covered, (ii) tariff protection on all IT products in the Declaration must be
reduced to zero; and (iii) all other duties and charges (ODCs) must be bound at zero.
4.2 Issues in Trade in Goods and Rules of Origin
When countries liberalize trade, reducing and/or eliminating tariffs is the first order of reform. It is
contentious because changes in tariff protection reallocate gains and losses among producers,
consumers and the government. In a small open economy, partial equilibrium analysis shows that
imposing a tariff results in overall welfare loss, i.e. the gains to producers and government from
tariff protection does not outweigh the losses of consumers. The residual loss, called the
deadweight loss of the tariff measure, arises from the inefficiencies in both production and
consumption arising from price distortions. Reducing and/or eliminating tariff protection removes
these distortions and eliminates these inefficiencies.
In FTA, tariff rates on the imports originating from any of the constituent members are reduced to
very low levels and/or eliminated. However, each FTA member retains its set of MFN tariffs on their
respective imports coming from non-members. The welfare gains to FTA members depend on the
relative magnitudes of trade creation, i.e. high cost local production that is replaced by low-cost
imports within the FTA and trade diversion, defined as lower cost imports from non-members that is
substituted by higher cost imports from a member.
There is downside. The rules of origin (RoO) are needed to balance the objective of preventing trade
deflection and encouraging the utilization of preferences. If the RoO are too cumbersome, trade
deflection is prevented but will result in low utilization of preferences. Moreover, RoO compliance
increases transactions and implementation costs of producers and the government, respectively.
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Tariff elimination modalities 14
In several rounds of trade negotiations under the GATT, tariff negotiations were conducted on a
tariff line by tariff line. This changed in the Tokyo Round in the 1980s when the formula approach,
subject to exceptions in favor of some members, was adopted. These exceptions had created the
problem on tariff peaks in current Doha Development Round (DDR) negotiations. Both bound and
applied rates continue to be high. The DDR’s new mandate is to reduce tariffs, and it includes the
reduction of tariff peaks and tariff escalation as well as of NTBs in particular on products of export
interest to developing countries. Product coverage is comprehensive and without a priori exclusions.
More importantly however, the SDT principle in GATT Part IV, Article XXVIII bis - less than full
reciprocity in reduction commitments and the 1979 Enabling Clause and all relevant principle still
apply.
Multilateral tariff negotiations use a “formula” approach for efficiency purposes due to the large
number of members. Calibrating the cuts tariff line by tariff line bilaterally15 requires a long, tedious
process of request and offer, which is disadvantageous to DCs with less bargaining power;
moreover, the use of formula is more transparent since the tariff after the formula has been applied
is known to all.
The results using a formula are assessed using indicators such as (i) the average tariff; (ii) standard
deviation (SD) of tariff rates, or the average deviation of the tariff profile from its mean; (iii) the
coefficient of variation, defined as the ratio the SD and the average/mean, expressed in percentage;
(iv) ratio of post-round to pre-round tariff per line; and (v) the escalation ratio - ratio of 2 tariff lines
in the upper and lower spectrum of the tariff profile. The desired result is some lower the number in
all indicators.
A tariff-reducing formula can be linear or non-linear. Equation (1) illustrates a linear formula; it
proposes to reduce tariff rates in fixed fraction, c, regardless of the initial rate. t0j is the initial tariff
rate on a given import j, which could be the applied MFN rate, bound rate or any designated base
rate on the imported product j; and t1j is the proposed tariff rate to be applied on the said product.
Equation (2) generalizes the linear reduction formula. The parameter, a, is added to equation (1) to
influence the level of percentage reductions. If it is positive, larger percentage reductions in higher
tariff rates are observed, but depending on the value of the parameter, a, lower initial tariff may rise,
which is an unexpected outcome of the tariff reduction process sponsored by the WTO. The formula
nonetheless will reduce the variation of a country’s set of tariffs.
Equation (3) illustrates the Swiss Formula, which is non-linear and was used for the first time during
the Tokyo Round in the late 1970s and early 1980s. The reduction in the tariff on imported product j
depends on a parameter a, which is a ceiling tariff rate, and the initial tariff, t0j.
14
Discussion on tariff elimination formula draws from WTO TN/MA/S/3/rev.2 April 2003, “Formula Approaches
to Tariff Negotiations”, and Francois, Joseph and Will Martin (2002) “ Formula Approaches for Market Access
Negotiations” Tinbergen Institute Discussion Paper. Both papers are suggested for further reading. The WTO
paper contains different country proposals on the formula approach.
15
Prior to the Kennedy Round (see Annex 1), cuts in tariffs were negotiated line-by-line and bilaterally.
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The formula is effective in reducing tariff peaks and can reduce higher tariff rates more in absolute
and relative terms than lower rates. The proportional cuts in higher tariff will be larger relative to
lower tariff - average tariff will decrease and so will the dispersal and tariff escalation ratio. Another
significance of the formula is for countries with lower tariff rates to commit to further reductions.
To implement the formula, countries negotiate over the values of a, and the base tariff rate, bound
or applied. Once they agree on these parameters, members decide the period over which these cuts
are spread to reach t1j.
Tariff reduction in FTAs
In FTAs, trade negotiations are more flexible relative to the WTO rounds because consensus building
is easier in a smaller group. The best practices in Article XXIV is specific only about not raising trade
barriers against third parties, and the time period, usually 10 years, within which tariffs should be
eliminated. However, Article XXIV and its interpretation are silent on what constitute “substantially
all trade”. While countries have some degrees of freedom to decide coverage, it is generally
suggested that it should be as comprehensive as possible to minimize trade diversion while
exemptions should be kept to a minimum to prevent the risk of increasing protection rates (Box1).
What type of tariffs is used as base rates in trade negotiations? In FTA negotiations, the base rate
used is the applied MFN rate but in WTO rounds, they are the bound rates. If bound rates are used,
there are two problems, namely (i) a large percentage of DCs tariffs is unbound; and (ii) given that
bound rates maybe larger than applied, their use as base rates will mean that some countries may
not have to make any reductions at all in products with lower applied rates. DCs also argue that if
applied rates are used as base rates in multilateral negotiations, it would be tantamount to
penalizing them by compelling them to unilaterally reduce their tariff rates in their trade reform
programs. But DCs should bear in mind that as bound rates are reduced, the policy space created
between bound and applied rates will be less effective to pursue price stabilization and/or
preventing inflationary pressures in the domestic economy.
In calibrating tariff elimination in FTAs, the standard of unit used is the HS 6 digit. If substantially all
trade is construed as 90% of total trade, how should 90% of trade be measured? Would that be (i) by
tariff lines; (ii) by trade value, and if so, ex ante or ex post FTA value; (iii) by average applied tariffs;
or (iv) by some combination of the above criteria? If it is by trade value, should the computation of
(ii) be trade weighted?
Box 1. Protection is relative and is never without real cost
Effective protection indicates how the import tariff policies on output and inputs promote or penalize the value added
of a given production activity, say exported processed fruits. Its formula is
The tariff on sugar is 50 percent. Aside from increasing the cost of sugar to millions of consumers and other users, how
does this level of tariff on sugar imports affect processed food (pf) exports? Processed fruits are exportable and the
import tariff on the output is zero. The most important inputs are imported; their respective tariff protection rates and
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percentage shares in the cost of processing fruits, ai,pf , are the following:
Tariff rate (%)
Percent of cost
Sugar (s)
50
20
Paperboard (p)
1
5
Plastic packaging materials (ppm)
10
10
Weighted average tariff of inputs
11
If the tariff protection on fruit exports is zero, and the weighted average tariff on inputs is 11 %, regardless of the level of
domestic or free trade value-added, effective protection, Ej, is less than 0, which indicates that the fruit export industry
is being penalized at the expense of protecting the sugar industry.
Countries may also use a positive list, whereby goods in it are up for cuts, while a negative list
enumerates goods that are exempted from the tariff reduction process.
Tariffs are reduced and/or eliminated using alternative modalities (Boxes 2a, 2b)16. The common
practice in all ASEAN+1 FTAs with the exception of ASEAN-Japan Comprehensive Economic Program
(AJCEP) is to eliminate/reduce tariff using a normal, sensitive and highly sensitive tracks, or even
finer categories and their differences are mainly in the length of time over which cuts are
implemented. A designated number of lines are excluded from the tariff reduction/elimination
process, which is at the discretion of members. A transparent modality involves a positive as well as
a negative list such as modality X in Box 2b. In FTAs with Japan, goods are grouped into more precise
elimination modalities. The modality A in Box 2b, the elimination is upon entry into force. This is
common to all Japan’s FTAs, since about 45 % of Japan’s MFN tariffs are already 0. However, most of
the lines for phased elimination of up to 15 years are mostly in the agricultural and food sectors
(Modality Bn).
In negotiating FTAs, countries must offer concessions when it is requesting for access to a trading
partner’s market due to reciprocity. If two countries have complementary trade structures,
negotiations are easier since the CA of trading partners will lie in different industries and trade is
inter-industry or between industries. If trade structures are competitive, a large portion of bilateral
trade will tend to be in the same industries and both countries will be more hesitant to grant
reciprocal market access. However, there are several types of IIT.
In the mid-80s, production networks relocated from Japan, Korea and Taiwan to middle-income
Southeast Asian (SEA) countries and China and as a result, a type of vertical intra-industry trade
(VIIT)17 grew very rapidly (Box 3). Global competition has resulted in increasingly smaller slices of the
global chain, from low-technology labor-intensive production, to high-tech skill-intensive design, and
technology and capital-intensive production. IT products, electronics and telecommunications
equipment are produced in these fragmented production networks around the world. Although this
type of trade is within an industry, it is still be analyzed as an extension of the CA theory, i.e.,
countries that are labor-abundant and scarce in technology produce the labor-intensive parts while
16
N.B. The provisions in tariff elimination modalities are only similar in different FTAs. The normal track in
ASEAN-Korea FTA (AKFTA) or other Japan FTAs may contain elimination modalities different from the one
defined in Boxes 2a and 2b.
17
Ando, Mitsuyo (2006). The IIT figures in Box 3 is the Grubel and Lloyd Index and does not use the method suggested by
Rahman (1991) to distinguish horizontal from vertical IIT; that it is the vertical type and not horizontal is inferred by its
classification as parts both in SITC 759 and 764.
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capital- abundant countries produce the technology-intensive and/or capital intensive tasks of the
production process. It is highly likely that these products are covered in the ITA 1 where applied tariff
are reduced and bound at zero; NTBs are taken up by an on-going negotiation on IT trade at the
WTO. So, for these products, applied or preferential tariffs can’t be the source of advantage in
market access and as trade approaches free trade conditions, trade will be driven by differences in
costs.
Box 2a. Normal track program of ASEAN 6 and
China*
201
200
200
2005*
0
9
7
Box 2b. Selected tariff elimination modalities in
Japan's FTAs
immediate elimination
A
t > 20%
20
12
5
0
Bn
15% < t < 20%
15
8
5
0
C
10% < t < 15%
10
8
5
0
Q
5% < t < 10%
5
Stand
still
5
0
0
R
phased-elimination from base rate over
n years
tariff is fixed to a base rate
increasing the quotas according to a
schedule
phased-reduction to a floor rate
0
0
X
excluded from tariff cuts
t < 5%
Source: Annex 1, ACFTA
t- MFN applied tariff
Source: Legal Text of JPEPA, AJCEP and JVEPA
Bn – elimination is in equal n installments
ASEAN 6 – Indonesia, Malaysia, Philippines Thailand, Singapore and Brunei
Ranking products for tariff elimination
The group of commodities or sectors likely to be affected by tariff elimination/reduction comprises
the import-substitution and import-competing industries. Past import substitution policy uses high
tariffs, among other things, to protect new/infant local industries. It is argued that CA will be
acquired after a learning period; thereafter, these industries will be ready to compete locally with
imports and/or globally through exports, sans protection.
CA, a condition where the relative price of a good is lower in one country in the absence of trade, is
the basis for production specialization. Stated differently, the differences in pre-trade relative prices,
driven by differences in costs in two countries for two goods is the basis for trade. To test the CA
theory, pre-trade prices are needed but it is not observable; therefore, CA can’t be quantified
directly. The Balassa revealed CA (RCA) goes around the problem by estimating CA as performance
rather than as a measure of prices. It is intuitively appealing as it says a country’s CA is revealed
through its exports rather than in price differentials. The data for estimating the index is also
available in several international databases, one of which is the UN COMTRADE.
Box 3. Intra-Industry Trade* (%) of ASEAN 4 with China
SITC 759. Parts, nes of and accessories for machines of
headings 751 or 752
SITC 764 Telecommunication equipment, nes; parts and
accessories, nes
1987-1993
1993-2000
2001-2007
38
56
86
67
71
78
Source: Tan, E.S. ( 2009); SITC- Standard International Trade Classification
* If IIT < 50% - it is considered inter-industry trade; if greater than 50%, is it IIT.
SITC 751 Office machines; 752 Automatic data processing machines and units, thereof.
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China’s IIT with ASEAN 4 – Indonesia, Malaysia, Philippines and Thailand - in SITC 759 and 764 increased from 56% and
71% to 86% and 78%, respectively from 1993-2007. China sources labor-intensive parts from SEA countries, capitalintensive and/or technology-intensive components from Japan and Korea, assembles them and exports the finished products
to US and Europe.
The indicator can help point out which products, sector(s) can or can’t compete, is “ready” or not,
and/or should be excluded. Goods that are excluded from tariff cuts are generally termed sensitive,
the definition of which may differ from country to country. The common considerations are products
which affect domestic production, employment and incomes. In WTO, exemptions are granted using
non-trade concerns such as food security. For sensitive goods, additional information or indicators
are obviously needed.
An extension of the Ricardian model consisting of n goods arranges CA in a decreasing order. In
similar fashion, RCAs may be grouped into several categories: (i) RCA greater than 1 and increasing;
(ii) RCA greater than 1 but decreasing; (iii) RCA <1 but increasing; (iv) RCA <1 but decreasing. It would
appear that if the RCA is greater than one and increasing, the commodity or group of commodity
belonging to one sector has CA indicates readiness to compete against imports or globally and vice
versa, those with RCA<1 and decreasing should either received longer phased reduction and/or
elimination or excluded from tariff cuts.
Theory is powerful but has its limitations in real life. To bring the RCA closer to reality in the
domestic and export markets, a further step and simple validation can be done by computing the
market shares of the commodity in question in both markets. It’s possible that an increasing RCA
does not translate into gains in market shares because a product, even with a high and/or increasing
RCA, may have been edged out of in both markets partly or completely by other countries exporting
similar products. The RCA’s source of appeal is also its source of weakness: the index is static and
therefore, it does not convey information on changing conditions in trade and markets. The usual
caveat remains - since RCA uses performance, the CA is revealed ex post not ex ante. In other words,
it is a tautology; there is CA because the country was able to export.
Since there are other policy concerns and effects in granting tariff cuts, additional data and
information should be used together with the suggested indicator. Jan Tinbergen18 offers a timehonored credo in policy making: “If there are n objectives, there should be n tools”. An extension of
the rule is suggested here - if there are n objectives without n tools, there should be at least n
indicators to show the trade-off between n objectives.
4.3 Restrictiveness of CTC RoO19
Since the rules of origin (RoO) are known ex ante, their restrictiveness can be assessed based on the
rules20 . The change in tariff classification (CTC) model of RoO confers origin if a good’s tariff
classification changes either at the chapter, heading or subheading level. A CC (change in chapter) is
more restrictive than a CTH (change in tariff heading) which in turn is more restrictive than a CTS
(change in tariff sub-heading), hereafter, CC>CTH>CTS. The restrictiveness ranking is due to the
number of production stages/processes needed to transform an input, with the change at the
18
The first Nobel Laureate in economics, 1969.
Source: Tan , E.S. (2011) “ Comparative Market Access in Japan’s Bilateral FTAs (unpublished) Research
Paper submitted to East Asian Development Network.
20
The argument detracts from ex post restrictiveness analysis, which requires cost and production data.
19
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chapter level requiring the greatest transformation, lesser at the heading level and least at the
subheading level.
The logic of the CTC argument rests upon one assumption: all HS chapters are constructed uniformly,
i.e., a final good and its immediate raw materials/inputs are in the same chapter. Hence, a CC is more
restrictive than CTH because the raw materials that are already in the same chapter will be
automatically excluded. Extending the logic, a CTH is always more restrictive than a CTS if all
headings are uniformly designed, i.e. that is if a final good and all its possible raw materials/inputs are
in the same subheading. If the condition is uniformly true in chapter, heading and subheading, then
the restrictiveness ranking CC>CTH>CTS is true across all chapters of the HS.
The uniformity condition is unlikely to be satisfied for two reasons. (i) Some products are simpler
and some are more complicated to produce; while it may possible for the simpler goods to have all
their input in one chapter, it would not possible for the more complicated goods. (ii) Some HS
chapters contain a finish product and most of its raw materials: e.g. chapter 24, Tobacco; Chapter 50,
Silk; Chapter 51, Wool; and Chapter 52, Cotton. Some HS chapters are devoted entirely to
differentiated finished goods: e.g. Chapters 61-63 Clothing and garments; Chapter 57, Carpets.
An example of a situation where CC>CTH involves the following. If a CC is imposed on cigars (HS
24.02), it would require a producer to use an input outside of Chapter 24, that is Chapter 6 (Live
trees and other plants) and or Chapter 12 (Oil seeds and oleaginous fruits; miscellaneous grains,
seeds and fruits; industrial or medicinal plants; straw and fodder). A CTH is less restrictive because
the producer can just import or buy the leaves, dried and cured (HS 24.01) which is within the same
chapter, then, blends and rolls them into cigars (HS 24.02). CC is more restrictive due to the greater
transformation needed if the raw materials were to come from Chapters 12 and 24 rather than from
HS 24.01.
An example of a situation where both CC and CTH are equally difficult to comply, hereafter CC=CTH,
is HS 0901.22 Roasted coffee, not decaffeinated. Why? All raw materials that may be used for HS
0901.22 are classified in only one heading HS 0901. So requiring HS 0901.22 to change heading and to
change chapter means the same thing, that the raw materials should be wholly obtained or
produced. If the argument is extended, in this particular situation, the CC, CTH and the wholly
obtained RoO are equally restrictive.
The difficulty of comparing restrictiveness of RoO, let alone ranking them, renders the comparison of
multiple preferential market options difficult
Case Studies on RoO
Case A. Comparative Market Access under Different Trading Regimes
Prior to the conclusion of regional and bilateral FTAs, SEA countries have only two market access
options for Japan’s market, that is, through WTO membership and Japan’s GSP scheme21. From early
to late 2000, more options became available after the conclusion of several FTAs. The objective of
this illustration is (i) to analyze the different market access conditions provided by different trading
regimes; (ii) to demonstrate the difficulty of comparing, ex ante, the restrictiveness of RoO among
21
Japan originally established its GSP on August 1971 and since then there has been 4 decennial schemes: (i)
August 1971 to March 1981; (ii) April 1981 to March 1991; (iii) April 1991 to March 2001; (iv) April 2001 to March
2011; and (v) the current scheme which is effective until 31 March 2021. Beneficiaries are broadly grouped into
developing and least developing countries.
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and within models; and (iii) market access gained from FTAs do not necessarily translate to actual
market shares.
Some background information and assumptions are provided to ensure a focused analysis:
(i) As a result of the FTAs, two key factors that affect market access are analyzed: the tariff
elimination modality, the MOP, and the RoO that accompany preferences; an ex ante
analysis is possible because information on factors are given and known in advance.
(ii) A lower preferential rate or higher MOP improves market access while a more difficult or
more restrictive RoO reduces market access.
(iii) All other factors that affect market access are held constant.
(iv) There is no reason to argue that behind the border measures such as SPS and TBTs have
become more difficult to comply as a result of FTAs. If ever these factors come into play,
it will only be known ex post, i.e., during the implementation phase.
(v) Indonesia, Malaysia, Philippines, Thailand and Vietnam are all developing country
beneficiaries of Japan’s GSP and all were WTO members since 1995 except Vietnam
which became a member in 200722.
The commodity for this illustration is HS 0901.22 Roasted Coffee, decaffeinated. Prior to 2008,
Indonesia, Malaysia, the Philippines and Vietnam can export the said good through the MFN tariff 12%
or the GSP rate, 10% with the RoO CTH (Table 4.1). The CTH actually means raw materials used must
be produced in the exporting country, wholly produced or obtained. Why? All raw materials for
coffee and its finished products are classified and grouped into one heading, HS 0901 only.
Therefore, it is not possible for the raw materials of coffee to change heading within Chapter 9. The
only way to comply with the CTH is to grow coffee in the country. Singapore and Brunei are not GSP
beneficiaries, their only option is to export under the MFN rate but they need not comply with the
CTH 23.
Table 4.1. Comparative Market Access Conditions in Japan Under Different Trading Regimes, HS
0901.22.000 (Roasted Coffee, decaffeinated)
MFN
MFN Tariff 20072011
Implementation
Date 1/
Tariff Elimination
Modality
Product specific rule
(PSR)
Base Rate
Preferential Rate
2007
2008
JapanSwitze
rland
EPA
GSP
JPEPA
AJCEP
JVEPA
JMEPA
JTEPA
JIEPA
JapanMexico
EPA
2011
2008
2008
2009
2006
2007
2007
2005
2009
B7
Rt
B15
R
R
R
B4
B3
CC
RVC 40
CC
CC
CTS
10
12
10
10
12
8.75
11.8
na
5
2.5
12
CTH
2/
10
10
22
The illustration excludes Cambodia, Lao PDR and Myanmar to simplify the analysis. Myanmar is a founding
member of the GATT. Cambodia is a recent WTO member, while Lao PDR is completing its accession process
to the WTO. All three have different GSP status from the other ASEAN member countries.
23
Non-preferential RoO in WTO establishes a good’s origin for purposes of imposing countervailing duties but
is not an additional condition that accompanies the MFN tariff.
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2009
2011
2012
2015
2018
2024
10
10
7.5
5.0
3.8
0
11.6
11.3
11.1
10.6
10
9.4
8.1
7.5
5.6
3.8
0
0
0
3/
9
3
0
Source: Tan (2011) and additional author's compilation and computation; All information as of 30 October 2011.
AJCEP - ASEAN Japan Comprehensive Economic Partnership; GSP - Generalized System of Preferences
JPEPA - Japan Philippines Economic Partnership Agreement; JMEPA - Japan Malaysia Economic Partnership Agreement
JIEPA - Japan Indonesia Economic Partnership Agreement; JTEPA - Japan Thailand Economic Partnership Agreement
JVEPA - Japan Vietnam Economic Partnership Agreement;
B7 - tariff is reduced in equal installments until zero from base rate;
B15 - tariffs is reduced in 16 equal installments from base rate to zero.
R (t) Duty is reduced in 11 equal installments from base rate to 10% ;
1/The current GSP scheme started April 2011 but the first decennial started in 1971. In AJCEP, for Japan and Vietnam-December 2008;
For Japan and Malaysia – January 2009; For Japan and Thailand - June 2009; for Japan and the Philippines, July 2010;
For Japan and Indonesia - not yet in force.
2/ Source: Tokyo Customs. Since Chapter 9 was excluded in the list of processed product for which the condition foreign country
acknowledgement is specified, the general rule of CTH applies.
3/ R: JTEPA - parties will negotiate in the 5th year on improving market access conditions
R: JIEPA - parties shall negotiate improving market access conditions on the occasion of the general review
R: JMEPA - parties shall negotiate improving market access conditions
Towards the early to mid 2000, Japan concluded 7 bilateral Economic Partnership Agreement (EPA),
with Brunei (JBEPA), Malaysia (JMEPA), Indonesia (JIEPA), Thailand (JTEPA), Philippines (JPEPA),
Singapore (JSEPA) and Vietnam (JVEPA), and a regional FTA with ASEAN, ASEAN-Japan
Comprehensive Economic Partnership (AJCEP), adding two preferential market access options. An
EPA with Mexico and Switzerland were also concluded in 2005 and 2009, respectively.
For the Philippines, conditions changed in 2008. In JPEPA, the elimination modality for HS 0901.22 is
B7, duty is reduced in 8 equal installments until it reaches 0; in AJCEP, it is R(t) – the base rate is
reduced in 11 equal installments until it reaches the 10% floor rate. In 2011, the Philippines is
confronted with 3 preferential market access options: (i) JPEPA-5% and CC; (ii) AJCEP-11.3% and
RVC40; and (iii) GSP 10% and CTH (Table 4.1). Since JPEPA offers the lowest preferential rate, is the
RoO-CC equally restrictive with CTH and RVC40? Generally, CC is more difficult to comply relative to
CTH which in turn is more difficult relative to CTS, but not in this case. Why? Raw materials for
roasted coffee, decaffeinated are all in one heading 0901; a CTH and a CC means the same thing, that
is, the raw materials must be wholly produced or obtained. Hence, JPEPA clearly provides better
market access relative to the GSP: a lower preferential rate with RoO that are equally restrictive.
AJCEP defines RVC as the difference between FOB price and the value of non-originating materials
(VNM) is expressed as a ratio of FOB.
From equation (4), RVC 40 is attainable if VNM is reduced to its minimum or as much originating
materials are used. Diagonal cumulation in AJCEP allows the importation of HS 0901.11, the major
raw material for HS 0901.22 by an ASEAN country from any ASEAN country and is treated as an
originating good. By processing HS 0901.11 with as little VNM, RVC 40 will be attainable. It is difficult
to compare the CTC approach with the RVC model: both CC and CTH are generally associated with
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transformation qualitatively but RVC is directly associated with the use of more originating materials
rather than transformation. In this particular case, both CC and CTH requires greater transformation:
after coffee (HS0901) has been purchased from a farmer/trader, the producer must roast and
decaffeinate for the finished product to be classified as 0901.22. In RVC40, the producer may import
HS 09011 coffee, not roasted or HS 09012 coffee roasted to comply with RVC40. There is no
guarantee that the RVC40 will require greater transformation relative to CC or CTH in this case.
So a Philippine exporter of coffee will most likely choose JPEPA’s options since it has the best
preferential rate relative to the GSP and AJCEP. Moreover, the preferential rate will be zero by 2015,
substantially higher relative to AJCEP. But this is not all there is to it to market access: preferences in
other bilateral FTAs are relevant because Indonesia, Malaysia, Thailand and Vietnam all produce
coffee and all are Philippine’s competitors in Japan’s market. In JMEPA and JIEPA, the modality is Rfor further negotiations; in JTEPA, the modality R stipulates a negotiation on market access 5 years
after the entry into force of JTEPA, that is 2012. In JVEPA, modality is B15, that is the tariff will be
reduced in 16 equal installments from base rate until 0. The preferential rate under JVEPA will only be
equal to that of JPEPA by 2024. JPEPA has the best market access options among SEA in 2011.
Do market access options translate to actual market shares in Japan’s market? Table 4.2 depicts a
different situation. From 2006 to 2010, Switzerland had the largest market share for HS 0901.22,
before and after the conclusion of its bilateral EPA with Japan. In 2011, Mexico’s preferential rate is
the best -free, followed by Switzerland- 3% and then Philippines-5%. However, the RoO CTS applied on
Switzerland’s exports is the least restrictive-the easiest relative to CC and CTH. Why? It only calls for a
change in a subheading instead of a CTH or CC: this means Switzerland, which does not grow coffee,
can import coffee HS 0901.11 coffee, not roasted, not decaffeinated from any country, process it
and export it under HS 0901.22. It can comply with the RoO of CTS because the non-originating raw
material has changed subheading, from 0901.11 to 0901.22 Does Switzerland’s market access in
Japan’s improve? Yes, through a lower price of HS 0901.22 since the duty is increasingly lowered
from 9% in 2009 to free in 2012. Other exporters gain market access either through MFN and/or GSP.
Table 4.2. World Market Shares in Japan's Imports of Roasted Coffee, Decaffeinated
Trading Regimes/Preferential
Tariff and RoO
Total Imports
(US$ M)
World (% )
2006
2007
2008
2009
2010
0.6
2.7
3.1
2.7
2.9
100
100
100
100
100
51.6
74.8
78.8
71.0
74.7
15.6
7.2
1.2
18.7
17.5
DC GSP-10%/CTH
5.6
5.7
3.6
5.3
6.9
DC GSP-10%/CTH
26.6
-
0.9
1.7
-
7.5
8.0
1.0
0.1
-
0.1
0.9
-
-
0.6
0.7
0.3
0.1
0.2
0.4
-
0.3
0.1
-
0.4
Switzerland
Bilateral FTA/3%-CTS
1/
US
MFN
Brazil
Papua New Guinea
Italy
MFN
Guatemala
DC GSP-10%/CTH
Ethiopia
LDC/GSP/free
Indonesia
JIEPA/AJCEP/GSP10% /CTH
Mexico
Bilateral FTA /free-CC
1/
1/
-
Kenya
DC GSP-10%/CTH
-
Colombia
DC GSP-10%/CTH
0.1
United Kingdom
MFN
0.5
6.6
4.5
Source: Author's compilation and computation
Trade Data - UN COMTRADE; 1/ Details in Table 2.1.1.
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DC- developing countries; LDC- least developed countries
The illustration ends with some questions for further analysis. Why was the Philippines, with the 3rd
best MOP that will eventually increase to 10% in 2015 and by then, at par with Switzerland, not able to
export HS 0901.22 to Japan? What are the export constraints? Why were the preferences not
offered to or not requested by Indonesia and Malaysia?
Case B: Rules of Origin (RoO) for Garments in ACFTA and AKFTA 24
The objective of this case is to show (i) an identical RoO for the same product across two FTAs do
not have the same restrictiveness for the same producer; (ii) a product with an alternative RoO will
ease the difficulty and does not depend on whether or not the alternatives are equally restrictive.
One of the most commonly used RoO in ASEAN regional and bilateral FTAs is the regional value
content (RVC) 40. The ease or difficulty in complying with VC rules depend largely on whether or not
the raw materials structure of a producer uses more originating or non-originating goods and is
partly eased by the leniency provisions of bilateral or diagonal cumulation, as the case may be.
The case uses secondary data from the Philippine Bureau of Customs (BOC). Details were either
altered or omitted to protect the identity of the producer. Local materials are assumed to be nonoriginating, since there was no additional information to determine their source, i.e., if they were
locally produced or locally purchased imported raw materials. Table 4.3 shows the unit production
cost of a Philippine garment producer.
Table 4.3. Unit Production Cost of Philippine Garment Producer
HS 6106.10/Description
Women's/girls blouses and shirts, of cotton, knitted
Concise explanation of the process
Cutting, Sewing, Embroidery, sometimes washing of fabrics
Breakdown of Ex Factory Cost/Price
Ex Factory Price (FOB)
Ex Factory Cost
Materials
Imported
Yarns- China
Fabric – Japan
Fabric – China
Buttons – US
Zipper- US
Local*
Labor
Overhead
Total Factory Cost
10
5.02
0.8
2.5
1
0.3
0.42
1.14
0.79
1.15
8.1
Source: Philippine Bureau of Customs
24
Source: Tan, E. S. (2008).
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If the garment producer wants to export HS 6106.1000 to China to avail of the preferences under the
25
ACFTA, he must pass the RVC40 or the PSR. The formula for RVC40, also defined as ACFTA content
is
The total value of non-originating materials (VNM) is 4.36, materials from US, and Japan and 1.14
local materials. Since there are no additional information on raw materials from China, there is an
implicit assumption that yarns and fabric from China, a total of 1.8 are originating goods. Applying
the above equation (2), the ACFTA content of the Philippine exporter is 56.4%, greater than the 40%
required, with a comfortable lead of 16.4%. The PSR of ACFTA is inconsequential because he has
passed one of the alternative rules. See Table 4.4.
Table 4.4. Simulation Results on Garments, ACFTA
General RoO
Product Specific Rule (PSR)
RVC40%
Manufacture through the processes of cutting and assembly of parts into a
complete article (for apparel and tents) and incorporating embroidery or
embellishment or printing (for made-up articles) from: raw or unbleached
fabric; finished fabric
VNM
Fabric – Japan
Buttons – US
Zipper- US
Local
Total VNM
VOM
Yarns- China
Fabric – China
Total VOM
VNM in ACFTA
ACFTA Content (%) = (1(VNM/FOB))*100%
2.5
0.3
0.42
1.14
4.36
0.8
1
1.8
4.36
56.4
Source: Tan, E. S. (2008)
PSR is from the first package.
If the same producer wants to enjoy the preferences granted in AKFTA, he has to comply with the
PSR, which is a CC plus some process or RVC40 (See Table 4.5). Rule 4 of Annex 3 in AKFTA allows for
two methods to arrive at RVC40. The illustration chooses the build-down method to make it
comparable with equation (1). The RVC formula in AKFTA is shown in equation (4) and must be at
least 40% to qualify for preferences.
All imported raw materials are non-originating under AKFTA: yarns and fabrics from China and Japan
are considered non-originating as well as the rest of the raw materials. Total VNM is 6.16 and RVC is
25
Rule 4, Annex 3, Rules of Origin for the ACFTA.
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38.4% - less than the required 40%. To meet the RVC40%, the producer must limit his VNM obviously
to 6 or increase his use of originating good by .16. He can switch the source of zipper – from the US
to any member of AKFTA. But this requires searching for a new supplier just to comply and or pass
the RVC40% of AKFTA and involves search and transactions costs; the circumstances can be
aggravated if the new supplier within AKFTA has a higher cost. Then, trade diversion, not deflection,
is compounded by additional compliance cost and higher raw materials cost.
What are other options does the producer have? The de minimis rule does not apply to the VC
method but to CTC only. However, in AKFTA, there is an alternative RoO other than RVC40, which is
CC plus the good is both cut and sewn in the territory of any Party. The fabric and yarn used are
classified in Chapter 50, and after the additional process of cutting and sewing in the Philippines, the
finished product for export – garments - is now classified in chapter 61. So he passes the alternative
RoO provided in AKFTA.
The simple simulation demonstrates very clearly that identical RoO of RVC40 - in two FTAs is not
equally restrictive relative to one producer of one product. Two, diagonal cumulation using the RVC
rule may allow the same exporter to pass the RVC rule but may entail an increase in compliance and
raw materials costs. Three, the provision of an alternative RoO in AKFTA allows the same producer to
gain access to Korea’s market without changing his raw materials structure. His only compliance cost
is to secure another CO to certify that he has passed the alternative RoO by meeting the specific
process rule.
Table 4.5. Simulation Results on Garments, AKFTA
RoO: CC+ or RVC40
Cumulation
De minimis
Change to Heading 61.06 from any other Chapter, provided that the good
is both cut and sewn in the territory of any Party; or A regional value
content of not less than 40 percent of the FOB value of the good
Diagonal
For Chapters 50-63, the weight of all non-originating materials used in its
production that do not undergo the required CTC does not exceed 10% of
the total weight of the good.
VNM
Yarns- China
Fabric - Japan
Fabric – China
Buttons – US
Zipper- US
Local*
0.8
2.5
1
0.3
0.42
1.14
Total VNM
6.16
RVC (%) in AKFTA =
(1-(VNM/FOB))*100%
38.4
Source: Tan, E. S. (2008)
Case C: Special and Differential Treatment (SDT) for Philippine Rice in WTO
Case C illustrates (i) that while a developing country can avail of SDT, any changes in its schedule of
commitment must be accompanied by compensatory concessions as provided in GATT’s Article
XXVIII and XXVIII bis; and (ii) and how commodities used for compensatory concessions are decided
upon.
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The WTO AoA, concluded in 1995, required all agricultural QRs to be converted to tariffs and/or tariff
rate quotas (TRQs), albeit with exceptions. When the Philippines acceded to the WTO in 1995, it
committed to eliminate all agricultural QRs and import restrictions, except rice: the government’s
request for exemption is based on special treatment on market access for predominant stapes
provided in Annex 5 of the AoA. Nevertheless, the condition for the exemption is that minimum
access volumes (MAVs) have to be provided equivalent to 1% of domestic consumption with average
of 1986-1989 as base period and such MAVs will be increased to 4% of domestic consumption over in
the final year of implementation. Table 4.6 shows the details of Philippines’ commitment on rice.
In 2005, the Philippine government submits a modification of its schedule for the purpose of
extending the SDT on rice as provided for in Paragraph 9 of Annex 5, AoA. The request was for an
extension of the SDT status of rice up to June 2012. As a result, negotiations with interested WTO
member countries were initiated.
On 15 June 2007, the Philippines reduced the MFN rates on mechanically deboned meats from 40% to
5% as compensatory concessions to WTO member for the requested 7-year extension of the special
treatment on rice (Table 4.7). At present the Philippine government is requesting a second extension
of the SDT status on rice for another 3 years.
Table 4.6. Philippine Commitments on Rice (Section 1 B - Tariff Rate Quotas)
(1) Description
Rice In the husk
(paddy or rough)
Husked (brown) rice
(4) Final Quota
Quantity and
In-quota tariff
rate
Implementation
Period
1006.10.00
(3) Initial
quota
quantity and
in-quota tariff
rate
59, 730 MT
119,460 MT
1995 / 1999
NFA *
* ST –Annex 5
50%
50%
1006.20.00
119,460 MT
238,940 MT
2000 /June 2005
NFA*
* ST –Annex 5
1006.30.00
50%
238,940 MT
50%
350,000 MT
July 2005/2012
NFA*
* ST –Annex 5
1006.40.00
50%
40%
(2) HS
Other Terms
and
Conditions
Semi-milled or wholly
milled rice, whether
or not polished or
glazed
Broken Rice
**
* ST –Annex 5
Source: WTO Document (G/MA/TAR/RS/99) 08 July 2005
* National Food Authority (NFA) has the first right to import minimum market access (MMA) volumes in accordance with the
food security policies of the Philippines.
** Please note that columns (3) and (4) cover all products described in columns (1) and (2).
*** No country was stated with Initial negotiating rights (INR).
Table 4.7. Tariffs Rates on Mechanically Deboned Meat (E.O. 627)
AHTN
DESCRIPTION
Before EO
627
AHTN
DESCRIPTIO
N
EO 627
(2007)
Present 2011
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Table 4.7. Tariffs Rates on Mechanically Deboned Meat (E.O. 627)
AHTN
02.07
Before EO
627
DESCRIPTION
Meat and edible
offal, of the poultry
of heading 01.05,
fresh, chilled or
frozen.
AHTN
02.07
- Of fowls of the
species Gallus
domesticus:
0207.14.90
0207.14.90A
0207.14.90B
- - - Other:
0207.14.90
- - - - Other, In-Quota
- - - - Other, OutQuota
40
0207.14.90
A
0207.14.90
B
40
0207.14.90C
- Of turkeys:
0207.27.90
0207.27.90A
0207.27.90B
DESCRIPTIO
N
Meat and
edible offal,
of the
poultry of
heading
01.05, fresh,
chilled or
frozen.
- Of fowls of
the species
Gallus
domesticus:
- - - Other:
---Mechanically
deboned or
separated
meat
- - - - Other,
In-Quota
- - - - Other,
Out-Quota
EO 627
(2007)
Present 2011
5
5
40
40
40
40
5
5
30
40
40
40
- Of turkeys:
- - - Other:
0207.27.90
- - - - Other, In-Quota
- - - - Other, OutQuota
0207.27.90
A
0207.27.90
B
0207.27.90
C
30
40
- - - Other:
---Mechanically
deboned or
separated
meat
- - - - Other,
In-Quota
- - - - Other,
Out-Quota
Source: Tariff Commission
Two related questions are posed: (i) Should the MFN rates on mechanically deboned meat revert
back to its levels before E.O. 607 in case the Philippines does not get the SDT extension in 2012? (ii) If
it should stay at its post E.O. 607 levels, does it mean the three-year extension on the SDT status of
rice can be had without any additional compensatory concessions?
Appendix 4.1. GATT/WTO Rounds
Name of round
Geneva
Annecy
Torquay
Period/number of
parties
1947
23 countries
1949
33 countries
1950
34 countries
Subjects and modalities
Outcome
Tariffs: item-by-item offerrequest negotiations
Concessions on 15,000 tariff lines
Tariffs: item-by-item offerrequest negotiations
5,000 tariff concessions; 9 accessions
Tariffs: item-by-item offerrequest negotiations
8,700 tariff concessions; 4 accessions
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Geneva
Dillon Round
1956
22 countries
1960-1
45 countries
Kennedy Round
1963-1967
48 countries
Tokyo Round
1973-1979
99 countries
Uruguay Round
1986-1994
103 countries in
1986 117 as of end1993
Doha Round
2001-?
150 countries as of
beginning 2007
Tariffs: item-by-item offerrequest negotiations
Modest reductions
Tariffs: item-by-item offerrequest negotiations, motivated
in part by need to rebalance
concessions following creation
of the EEC.
4,400 concessions exchanged; EEC
proposal for a 20 percent linear cut in
manufactures tariffs rejected
Tariffs: formula approach (linear
cut) and item-by-item talks. Nontariff measures: antidumping,
customs valuation.
Average tariffs reduced by 35 percent;
some33,000 tariff lines bound;
agreements on customs valuation and
antidumping
Tariffs: formula approach with
exceptions. Non-tariff measures:
antidumping customs valuation,
subsidies and countervail,
government procurement,
import licensing, product
standards, safeguards, special
and differential treatment of
developing countries.
Average tariffs reduced by one third
to six percent for OECD manufactures
imports; voluntary codes of conduct
agreed for all non-tariff issues except
safeguards. guards.
Tariffs: formula approach and
item-by-item negotiations. Nontariff measures: all Tokyo issues,
plus services, intellectual
property, pre-shipment
inspection, rules of origin, traderelated investment measures,
dispute settlement, transparency
and surveillance of trade policies.
Average tariffs again reduced by one
third on average. Agriculture and
textiles and clothing subjected to
rules; creation of WTO; new
agreements on services and TRIPs;
majority of Tokyo Round codes
extended to all WTO members.
Tariffs: formula approach and
item-by-item negotiations. Nontariff measures: trade
facilitation, rules, services,
environment,
Source: Hoekman and Kostecki (2001)
Appendix 4.2. WTO/GATT Inventory of Non-Tariff Measures
Parts and
Section
Part I
A
B
C
D
E
Part II
A
B
C
Description
Government Participation in Trade and Restrictive Practices Tolerated by Governments
Government aid
Countervailing duties
Government procurement
Restrictive practices tolerated by governments
State trading, government monopoly practices, etc.
Customs and Administrative Entry Procedures
Anti-dumping duties
Valuation
Customs classification
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D
E
F
G
Part III
A
B
C
Part IV
A
B
C
D
E
F
G
H
I
J
K
L
Part V
A
B
C
D
E
F
Consular formalities and documentation
Samples
Rules of origin
Customs formalities
Technical Barriers to Trade
General
Technical regulations and standards
Testing and certification arrangements
Specific Limitations
Quantitative restrictions and import licensing
Embargoes and other restrictions of similar effect
Screen-time quotas and other mixing regulations
Exchange control
Discrimination resulting from bilateral agreements
Discriminatory sourcing
Export restraints
Measures to regulate domestic prices
Tariff quotas
Export taxes
Requirements concerning marking, labelling, packaging, etc.
Others
Charges on Imports
Prior import deposits
Surcharges, port taxes, statistical taxes, etc.
Discriminatory film taxes, use taxes, etc.
Discriminatory credit restrictions
Border tax adjustments
Emergency action
Source: WTO Document TN/MA/S5, 11 September 2002
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Appendix 4.3. SDT Provisions, by Agreements and Types
Agreement
(i) Provisions
aimed at
increasing
the trade
opportunities
of DC
Members
(ii)
Provisions
that
require
WTO
Members
to
safeguard
the
interests
of DC
Members
(iii) Flexibility
of
commitments,
of action, and
use of policy
instruments
(iv)
Transitional
time
periods
9
1
(v)
Technical
assistance
(vi)
Provisions
relating to
measures
to assist
LDC
members
Agriculture and
Decision on
NFIDCs
Application of
SPS Measures
Textiles and
Clothing
Technical
Barriers to Trade
TRIMS
Implementation
of Article VI of
GATT 1994
Implementation
of Article VII of
GATT 1994 and
Decision on Texts
Relating to
Minimum Values
and Imports by
Sole Agents, Sole
Distributors and
Sole
Concessionaires
Import Licensing
Procedures
SCM
14
1
4
2
1
TRIPS
Understanding
on Rules and
Procedures
Governing the
Settlement of
Disputes.
GATT 1994 Art
XVIII
GATT 1994 Art
XXXVI
GATT 1994 Art
XXXVII
GATT 1994 Art
XXXVIII
Enabling Clause
2
3
1
5
1
5
3
6
1
1
1
2
7
2
6
1
16
1
4
1
1
1
8
2
4
1
2
2
3
2
Safeguards
GATS
Total
8
1
1
1
2
2
7
1
1
4
6
16
1
2
2
1
7
1
3
6
1
2
11
3
3
1
8
4
3
2
6
8
2
5
7
1
2
1
4
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Appendix 4.3. SDT Provisions, by Agreements and Types
Agreement
Decision on
Measures in
Favor of LDCs
Waiver
preferential tariff
treatment of
LDCs
Total
(i) Provisions
aimed at
increasing
the trade
opportunities
of DC
Members
12
(ii)
Provisions
that
require
WTO
Members
to
safeguard
the
interests
of DC
Members
49
(iii) Flexibility
of
commitments,
of action, and
use of policy
instruments
30
(iv)
Transitional
time
periods
18
(v)
Technical
assistance
14
(vi)
Provisions
relating to
measures
to assist
LDC
members
Total
7
7
1
1
22
145
Source: WTO (2000)
NFIDCs - net food importing developing countries
SPS- Sanitary and Phytosanitary; TRIMs - trade related investment measures
GATS - General Agreement on Trade Services
SCM - Subsidies and countervailing measures
TRIPS- trade related aspects of intellectual property rights
There are no SDT provisions on pre-shipment inspection and RoO
Article VI Anti-Dumping and Countervailing Duties
Article XVIII -Government Assistance to Economic Development
Article XXXVI - Part IV Principles and
Article XXXVII -Commitments; XXXVIII - Joint Action
Objectives
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References
Ando, Mitsuyo (2006). Fragmentation and Vertical Intra-Industry Trade in East Asia. The North
American Journal of Economics and Finance, Volume 17 No.3
Francois, Joseph and Will Martin (2002) “ Formula Approaches for Market Access
Negotiations” Tinbergen Institute Discussion Paper.
How to Design, Negotiate, and Implement a Free Trade Agreement in Asia. ADB 2008.
Ng, Francis and Alexander Yeats (2003) “ Major Trend in East Asia: What are their
Implications for Regional Cooperation and Growth : World Bank Policy Research
Working Paper 3084.
Negotiating free-trade agreements: a guide. Department of Foreign Affairs, Australian
Government.
Tan, Elizabeth S. (2008) “RoO Regimes of
(LSR) June 2008.
Two ASEAN + 1 FTAs. Loyola School Review
Tan, Elizabeth S. (2007) “Rules of Origin in Philippine Free Trade Agreements” Project Paper
submitted to PACT (Partnership and Advocacy for Competitiveness and Trade).
unpublished.
Tan, Elizabeth S. (2011) “Japan’s Bilateral and Regional FTAs: Comparative Market Access by
Southeast Asian Countries” Research Paper submitted to East Asian Development
Network (unpublished).
WTO Document “Implementation of Special and Differential Treatment Provisions in WTO
Agreements and Decisions. WT/COMTD/W/77. 25 October 2000.
WTO Document “ Formula Approaches to Tariff Negotiations” TN/MA/S/3/Rev2 11 April
20003.
WTO Document TN/MA/S5, 11 September 2002.
WTO Document (G/MA/TAR/RS/99) 08 July 2005
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5. Trade in Services
Services have become an important part of today’s global trade, and in fact have grown the
fastest compared to that of the trade in goods or that of the global economy. In the Philippines,
remittances by Filipino overseas professionals and workers and the vibrant growth of its business
process outsourcing industries have left an indelible mark of the importance of services trade to
its economy. The country continues to look for new market opportunities for its services
industries, and to take advantage of current multilateral and preferential trade negotiations to
attain this objective. Realizing their importance to the economy, the government has not lacked
in the effort of crafting and implementing innovative approaches to attract foreign direct
investments (FDIs) into the its territory.
In the following, the nature and measurement of services, as well as the principles, disciplines
and rules governing the trade in services are taken up. With the underlying focus to provide
technical assistance towards cultivating a more productive participation in multilateral of
preferential trade negotiations, this paper looks at the procedure followed in services trade
negotiations, and assesses the issues arising in such negotiations.
5.1. Introduction
The Nature of Services
Service is “the action of helping or doing work for someone”26. Being a process or activity,
services are intangible, in contrast to goods, which are tangible. Services are as varied as the
needs they satisfy as well as the creativity of humans that provide them. Most services have to be
consumed and produced at the same time. This simultaneity requires the proximity of user and
provider, which implies that either the user must be at the point of provision or the provider is at
the point of final consumption. Some services facilitate the exchange of goods and are
embedded in them. Other services are specific to or customized for the client.
Noting the difficulty of encapsulating services within a simple definition, the Manual of Statistics
on International Trade in Services (MSITS) 2010 uses the System of National Accounts’ (SNA)27
definition that services are the “result of a production activity that changes the conditions of the
consuming units, or facilitates the exchange of products or financial assets”. (SNA 2008,
paragraph 6.17) The former are transformation services, and the latter, margin services.
Transformation services are outputs produced to order, while margin services occur when the
26
Oxford English Dictionary. Wikipedia captures the various aspects of services in its “generic… concise…
definition” of service as a “set of one time consumable and perishable benefits
• delivered from the accountable service provider,….,
• effectuated by ...distinct activities of individuals, …..,
• commissioned …by the service customer…..,
• rendered individually to an authorized service consumer…..,
• and finally, consumed and utilized by the triggering service consumer...
27
The MSITS is the internationally-agreed conceptual framework for countries to structure their statistics
on international services trade. The SNA is the international statistical standard for the national accounts
adopted by the United Nations Statistical Commission and is also a conceptual framework. MSITS is
described in the section on Measurement.
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supplier facilitates the change of ownership of products, services, or assets between two other
entities. The outputs are not separate entities over which ownership can be established, cannot
be traded separately from their production, and must have been provided to the consumer by
the time their delivery is completed. (SNA 2008, paragraph 6.21)
Services have assumed increasing importance in all economies, as shown in their substantial
contribution to Gross Domestic Product, e.g., 73% in high-income, 54% in middle-income, and 47%
in low-income countries in 2009 (WTO 2010).
Services tend to be subjected to intense regulation, for reasons specific to the nature of the
activity. One particular aspect being addressed is market failure, that is, when the allocation by a
free market is not efficient. There are 4 cases where this usually arises: in a natural monopoly, for
a public good, where there are externalities, or if information is asymmetric28.
A natural monopoly is formed when the costs of establishing the service are such that it is most
efficient for provision to be concentrated in one supplier. This is due to sizeable capital
requirements or a high ratio of fixed to variable costs, creating substantial economies of scale
relative to the size of the market. Prime examples are water or electric utilities, railways, or
pipeline distribution.
A public good29 is a term used in economics to denote that which may be consumed
simultaneously by multiple individuals without diminishing its value to each individual (nonrivalry) and where it is not possible to exclude any individual from enjoying the service whether
s/he pays for it or not (non-excludability). Since non-excludability leads to free-riding, if everyone
free-rides, no one will pay for the good to be produced, leading to a loss in social welfare where
everyone is worse off. With non-rivalrous consumption, no single beneficiary obtains benefits
sufficient to cover costs, resulting in underinvestment. Free markets thus under-supply public
goods and provision is usually done by government. Examples are law enforcement, national
defense, flood control systems, highways, street lights, public parks, sanitation.
An externality is another economic term for the spill-over effect to third parties of the production
or consumption of a good or service, which is not monetized. Positive externalities increase the
utility of third parties at no cost to them, while negative externalities lower the utility of third
parties involuntarily. The outcomes are not optimal from the viewpoint of society as a whole, i.e.,
they create a divergence between private and social costs of production. Since parties to the
transaction may either not bear all the costs or reap all the benefits, too much or too little of the
service is provided relative to the overall costs and benefits to society, resulting in market failure
or no incentive to prevent the inefficiency. Examples of positive externalities come from
infectious disease control, education, research, public safety, or clean-up initiatives; negative
externalities are pollution, congestion, or systemic risk in banking.
Network externalities occur when an additional user of a service affects its value or benefit to
others; it is positive when more users make the service more useful, and negative if the benefits
decrease as the number of users increases. (Network effects are economies of scale on the
28
See N. Gregory Mankiw, Principles of Economics (6th ed., 2011) for full explanations of these.
A public good is not the same as a public service, which is defined as government-provided service. Not
all public services are public goods, as it is possible to exclude users. Public goods are also not necessarily
provided by government only.
29
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demand side in contrast to classical economies of scale, which are on the supply side.) The most
familiar examples of positive network externalities are found in telecommunications such as
telephone systems, software, or social networking websites.
Information asymmetries occur when one party to the transaction has an information advantage
over the other. This imbalance can cause market failure. Either of two behaviours is possible. For
adverse selection, a high-risk party takes advantage of the asymmetry because the disadvantaged
party is unable to screen him out, e.g. purchase of medical insurance. For moral hazard, risky
behaviour takes place because the disadvantaged party is unable to monitor or retaliate, e.g.
recklessness after insurance is obtained.
Regulations are also imposed on services in order to ensure quality, and equity of access. This is
particularly the case for health, education, and other social services. Transport and
telecommunications services are also subjected to universal service obligations.
Trade in services is expanding and deepening. The share in total world trade of commercial
services, i.e. excluding government services, was recently estimated to be 21% (WTO 2010). This is
expected to grow with the movement of goods, information, capital and other resources, as
technology changes, and as processes become more specialized in this increasingly complex and
interconnected world.
Further Readings:
• Copeland, B. and A. Mattoo, “The Basic Economics of Services Trade”, in Mattoo et al. eds.,
A Handbook of International Trade in Services, World Bank, 2008
• Mattoo, A. and R. Stern, “Overview”, in Mattoo et al. eds., A Handbook of International
Trade in Services, World Bank, 2008
The General Agreement on Trade in Services (GATS)
International trade in services became subject to multilateral, legally-enforceable rules under the
General Agreement on Trade in Services (GATS) in 1995, in response to the growth of services
over the previous three decades and the potential for even more trade resulting from
developments in communication. The GATS is a comprehensive yet flexible instrument that
provides a rules-based framework to ensure predictability, transparency, and progressive
liberalization. It has become the reference point for negotiating regional, plurilateral, or bilateral
trade agreements, as it requires such agreements to have substantial sectoral coverage and
eliminate substantially all discrimination in those sectors, that is, observe the “GATS plus”
principle.
The GATS defines trade in services as the supply of a service
• from the territory of one Member into that of another (Mode 1 or cross-border supply)
• in the territory of one Member to the service consumer of another (Mode 2 or
consumption abroad)
• by the service supplier of one Member through commercial presence in the territory of
another (Mode 3 or commercial presence)
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• by the service supplier of one Member through the presence of natural persons in the
territory of another (Mode 4 or movement of natural persons).
Supply of a service includes production, distribution, marketing, sale, and delivery of a service.
The GATS applies to measures of Members affecting trade in services. A measure may be a law,
regulation, rule, procedure, decision, administrative action, or any other form, imposed by
central, regional, or local governments and authorities, and by non-governmental bodies in the
exercise of powers delegated to them by the former. A measure may be in respect of (i) the
purchase, payment, or use of a service; (ii) access to and use of services which are required by
those Members to be offered to the public generally; (iii) the presence, including commercial
presence, of persons of a Member in the territory of another Member.
Excluded by the GATS from coverage are services supplied in the exercise of governmental
authority, that is, supplied neither on a commercial basis, nor in competition with other service
suppliers. On the condition that their manner of application does not discriminate or disguisedly
restrict trade, measures are allowed that protect public morals, maintain public order; safeguard
human, animal, or plant life or health; secure compliance with laws including the prevention of
deception and fraud, protection of privacy of personal and confidential data, or promotion of
safety; protect national security; or are temporarily needed when there is a serious balance of
payments difficulty.
A sector-specific exception to the GATS is specified under the Annex on Air Transport Services,
namely air traffic rights and directly related services. This exception is subject to periodic review.
Otherwise the GATS applies to aircraft repair and maintenance, marketing of air transport, and
computer-reservation services.
The Council for Trade in Services oversees the implementation of the GATS and reports to the
General Council.
State of play
The GATS mandates that Members enter periodic negotiations in order to achieve progressively
greater liberalization. For each round, negotiating guidelines and procedures are first established.
The process of progressive liberalization is then advanced in each round through bilateral,
plurilateral, or multilateral negotiations, thereby increasing the general level of specific
commitments under the GATS itself. Commitments are bound.
The latest round began in 2000. In 2001 the Guidelines and Procedures for the Negotiations on
Trade in Services were adopted; services negotiations also became part of the “single
undertaking” under the Doha Development Agenda (DDA), that is, all subjects under negotiation
were to be concluded at the same time. A March 2003 deadline was set for receiving initial offers.
In 2004 the July Package revived negotiations and reset the deadline to May 2005. The Hong
Kong Ministerial Conference in December 2005 reaffirmed the key principles of negotiations, but
the Doha negotiations were suspended in July 2006. Negotiations resumed in January 2007. A
Services Signalling Conference was held as part of the July 2008 package, for Members to
indicate what they would be willing to include in their revised offers. Negotiations slowed down
in 2009 however, due to the failure to conclude agriculture and non-agriculture market access
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(NAMA) modalities, which were part of the July 2008 package. In 2010 the General Council called
for the intensification of DDA negotiations across all areas. (www.wto.org)
The April 2011 report of the Chairman of the Council for Trade in Services noted the following
achievements and remaining gaps in the four main areas of services negotiations: (a) for market
access, progress has been limited since July 2008; (b) for domestic regulation, intensified
negotiations produced notable progress, even if disagreement lingers on basic issues; (c) for
GATS rules on emergency safeguard measures, government procurement and subsidies, technical
work continues but there seems to be no convergence on the expected outcome; and (d) for
implementation of LDC modalities, Members support a waiver permitting preferential treatment
for LDCs but there are disagreements on the scope of the waiver and rules of origin for services
and service suppliers. (www.wto.org)
Further Readings:
• Background information, documents, analyses, sectoral studies, and developments in the
•
•
•
•
•
•
GATS are available at www.wto.org.
Asian Development Bank, How to Design, Negotiate, and Implement a Free Trade Agreement
in Asia, 2008
Fink, C. and M. Molinuevo, East Asian Free Trade Agreements in Services: Roaring Tigers or
Timid Pandas?, World Bank, 2007
Mattoo, A., R. Stern, and G. Zanini, eds., A Handbook of International Trade in Services,
World Bank, 2008 – a compilation of detailed discussions of the GATS, economics of
services trade, measurement, services sectors, and negotiations.
WTO, “The General Agreement on Trade in Services: An Introduction,” March 2006
WTO, GATS - Fact and Fiction
WTO, “Services Negotiations Under the GATS: Background and Current State of Play,”
Trade in Services Division, Oct 2009
Regional and Bilateral Agreements on Trade in Services
Aside from the GATS, which is a multilateral agreement signed upon the country’s accession to
the WTO, the Philippines is party to a regional trade agreement, the ASEAN Framework
Agreement on Services (AFAS), several agreements between ASEAN and Australia and New
Zealand, People’s Republic of China, Republic of Korea, Japan, and India, as well a bilateral
agreement, the Philippine-Japan Economic Partnership Agreement (PJEPA).
Signed in 1995, the ASEAN Framework Agreement on Services is the enabling legal framework for
ASEAN Members to eliminate substantially restrictions to trade in ASEAN services and expand the
depth and scope of liberalization beyond those undertaken under the GATS (i.e. to be GATS-Plus),
with the objectives of improving the efficiency and competitiveness of ASEAN services,
diversifying capacity, and realizing a free trade area in services. The AFAS is consistent with the
GATS and refers to the GATS provisions when necessary. An “ASEAN Minus x” formula in the
implementation of commitments was adopted in 2003, in which countries could liberalize a
sector without having to extend the concessions to non-participating countries.
(www.asean.org)
In 2003, ASEAN declared economic integration to be its goal through the establishment of the
ASEAN Economic Community (AEC) by 2020. The AEC Blueprint was adopted in 2007 to
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strengthen the institutional framework and achieve a unified legal identity through a rules-based
system; the deadline was also reset to 2015. Priority integration sectors were identified, 5 of
which are in services, i.e. healthcare, air travel, tourism, e-ASEAN, and logistics. (www.asean.org)
Similarly to the GATS, the AFAS requires Members to negotiate on measures affecting trade in
specific service sectors, the results of which are reflected in schedules of commitments. There
have been several rounds of negotiations already, yielding 8 packages of AFAS commitments.
The ASEAN has also signed a number of trade or economic partnership agreements with other
countries that cover services as well.
1.
2.
3.
4.
5.
Agreement on Trade in Services of the Framework Agreement on Comprehensive
Economic Cooperation between ASEAN and the People’s Republic of China, signed in
January 2007. There is a separate agreement on investment. A First Package of
Commitments was signed and a Second Package is ready.
Agreement on Trade in Services under the Framework Agreement on Comprehensive
Economic Cooperation among the Governments of the Member Countries of ASEAN and
the Republic of Korea, signed in November 2007, with an additional annex on financial
services. There is a separate agreement on investment. A first package of commitments is
available.
Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA),
signed in February 2009. There are chapters on trade in services, movement of natural
persons, electronic commerce, investment, and annexes on financial services and
telecommunications. There is a schedule of commitments on specific services, and one on
the movement of natural persons.
Agreement on Comprehensive Economic Partnership among Member States of the
ASEAN and Japan (known as AJCEP), signed in April 2008. Trade in services is covered in
Chapter 6 and Article 50, while investment provisions are found in Chapter 7 and Article
51.
Framework Agreement on Comprehensive Economic Cooperation between the Republic
of India and ASEAN was signed in October 2003. An Agreement on Trade in Goods was
signed in August 2009. Negotiations on services and investment began in 2008 and were
targeted for completion in 2010.
The Philippine-Japan Economic Partnership Agreement (PJEPA) aims to facilitate the free flow of
goods, persons, services, and capital between the Philippines and Japan and strengthen existing
economic relations. It was signed in September 2009. Concessions under this bilateral agreement
are to be annexed to and not re-negotiated under the AJCEP Agreement, since the latter was to
be negotiated as a whole. Trade in services is covered in Chapter 7, Investment in Chapter 8, and
Movement of Natural Persons in Chapter 9. Annex 5 on Financial Services, Annex 6 is the
Schedule of Specific Commitments and MFN Exemptions, Annex 8 gives the Specific
Commitments for the Movement of Natural Persons. PJEPA provides standstill obligations or
liberalization in such services sectors as air transport, maritime transport, health-related and
social services, banking, telecommunications, tourism and travel-related services, and
outsourcing (design, architecture, motion picture production, etc). For investment, PJEPA
guarantees national treatment, most-favored-nation treatment, prohibition of performance
requirements, and transparency through the specification of exceptions to these. PJEPA allows
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the Movement of Natural Persons for short-term business, professionals, skilled workers,
qualified nurses and caregivers. Entry is made easier through language training, guidelines on the
exercise of profession, streamlined processing of applications, and possible extension to other
professions. Mutual recognition of education, experience, licenses and certificates, may be done
through harmonization or granted unilaterally. (ASec 2011)
Further Readings:
• Focus on the Global South, “The Road to JPEPA: How the Philippine Government
Negotiated the Controversial Trade Deal with Japan”, www.focusweb.org, 29 Sept 2008
• Mattoo, A., and P. Sauve, “Regionalism in Services Trade”, in Mattoo, A. et al., eds., A
Handbook of International Trade in Services, World Bank, 2008
• Stephenson, Sherry M., “Regional versus Multilateral Liberalization of Services,” World
Trade Review, Vol. 1 Issue 2, 2002.
Classification of Services Sectors
Although countries are allowed to use any classification system when they submit their schedules
of commitments, two systems are commonly used: the Services Sectoral Classification List
(MTN.GNS/W/120) and the Central Product Classification (CPC).
The CPC was developed by the United Nations Statistics Division in the mid-1970s to provide a
framework for the international comparison of statistics dealing with goods, services, and assets.
It is based on the physical characteristics of goods or the nature of the services rendered, and is
an exhaustive and mutually exclusive system of categories for all products and services that can
be the object of a transaction or entered into stocks. It is the first international classification of
services to cover the whole spectrum of outputs of service industries. (UN 1991)
The CPC consists of sections (first digit), divisions (first 2 digits), groups (first 3 digits), classes
(first 4 digits), subclasses (all 5 digits). The first version of the CPC was approved in 1989 and
Version 2 was completed in 2008. (http://unstats.un.org/unsd)
The Services Sectoral Classification List (hereinafter referred to as W/120) was prepared by the
WTO Secretariat in 1991. It is a comprehensive list of sectors and sub-sectors covered by the
GATS, and was meant to facilitate Uruguay Round negotiations by allowing comparability of
sectors across Members and consistency. W/120 consists of 12 core service sectors that are
further subdivided into 160 sub-sectors:
1.
2.
3.
4.
5.
6.
7.
Business – Professional, Computer and related, Research and development, Real estate,
Rental/leasing without operators, Other
Communications – Postal, Courier, Telecommunications, Audiovisual, Other
Construction and Related Engineering – General construction work for buildings, General
construction work for civil engineering, Installation and assembly work, Building
completion and finishing work, Other
Distribution – Commission agents, Wholesale trade, Retailing, Franchising, Other
Educational – Primary education, Secondary education, Higher education, Adult
education, Other
Environmental – Sewage, Refuse disposal, Sanitation and similar, Other
Financial – All insurance and insurance-related, Banking and other financial, Other
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8. Health Related and Social – Hospital, Other human health, Social, Other
9. Tourism and Travel-Related – Hotels and restaurants, Travel agencies and tour operators,
Tourist guides, Other
10. Recreational, Cultural, Sporting – Entertainment, News agency, Libraries, archives,
museums, other cultural, Sporting and other recreational, Other
11. Transport – Maritime, Internal waterways, Air, Space, Rail, Road, Pipeline, Services
auxiliary to all modes, Other
12. Other Services Not Included Elsewhere
These core sectors are more aggregated than that of the CPC.
Further Readings:
South Centre, “Classification in Services: An Overview of the Main Issues for Developing
Countries,” Analytical Note SC/TADP/AN/SV/11, Jan 2005
UN, Central Product Classification version 2, http://unstats.un.org
UN, “Provisional Central Product Classification,” Department of International Economic and
Social Affairs, Statistical Paper Series M No. 77, 1991
WTO, “Services Sectoral Classification List,” Note by the Secretariat, MTN.GNS/W/120, 10 July
1991
5.2 Principles Used in the Conduct of Trade in Services
GATS Disciplines
The GATS recognizes the growing importance of trade in services in economic development, and
seeks to establish a multilateral framework of principles and rules to expand trade through
transparency and liberalization on a mutually advantageous basis that balances Members’
obligations with their rights to regulate and meet national policy objectives. The GATS takes
particular account of the level of development of Members and seeks to strengthen the domestic
services capacity, efficiency, and competitiveness of less developed Members.
The basic principles are listed as follows. General obligations, which apply automatically to all
Members and services sectors, consist of MFN treatment, transparency, administrative review
and appeals procedures, and the operation of monopolies and exclusive suppliers. The rest are
obligations in specific designated sectors.
1.
Most-Favored-Nation Treatment (Article II) requires that Members extend the same
access conditions equally to services and service suppliers of all Members, and these must
be the most advantageous possible, as the term “most favoured” emphasizes. This
applies to any measure in any sector whether or not specific commitments have been
made. MFN exemptions are those allowed when the GATS came into force and were to
last for 10 years, as well as economic integration agreements that apply the “GATS Plus”
principle.
2. Transparency (Article III) requires Members to publish promptly, or make publicly
available, all relevant measures of general application that affect trade in services. Each
Member must notify the Council for Trade in Services about new or changes to existing
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3.
4.
5.
6.
7.
8.
9.
10.
measures where commitments have been made, establish enquiry points and respond to
requests of any other Member for specific information.
Domestic regulations (Article VI) must be administered in a reasonable, objective, and
impartial manner. Disciplines are to be developed to ensure that measures relating to
qualification and licensing requirements and procedures or technical standards do not
constitute unnecessary barriers to trade, i.e. (a) they are based on objective and
transparent criteria, (b) they are not more burdensome than necessary to ensure quality,
(c) licensing procedures are not in themselves a restriction on supply. Disciplines on
domestic regulations in the accountancy sector will be integrated into the GATS at the
end of the Doha Round. Members are negotiating a set of disciplines on domestic
regulation that will apply to all measures.
Members must maintain tribunals or procedures (Article VI.2) that provide for an
objective review of, and appropriate remedies for, administrative decisions affecting
trade in services.
Members may recognize (Article VII) education, experience, requirements met, or
licenses or certifications granted by other Members. This may be achieved through
harmonization or arrangement, or accorded autonomously, and based on multilaterally
agreed criteria wherever appropriate.
Members shall ensure that monopoly and exclusive services suppliers (Article VIII) do not
act inconsistently with MFN obligations and specific commitments. Upon request,
Members must consult with each other on business practices in order to eliminate those
that restrict trade (Article IX).
Members shall develop disciplines to avoid trade-distortive effects of subsidies (Article
XV).
Where market access commitments are made, the following restrictive measures may not
be adopted (Article XVI), unless specified in a Member’s schedule: limitations on the (a)
number of service suppliers, (b) total value of service transactions or assets, (c) total
number of service operations or quantity of service output, (d) total number of natural
persons that may be employed in a service sector or by a service supplier, (e) types of
legal entity or joint venture, (f) participation of foreign capital.
National Treatment (Article XVII) requires that each Member treat the services and
service suppliers of all other Members in the same way it does its nationals, in the sectors
in its schedule of commitments and subject to the specified conditions.
Members shall enter into successive rounds of negotiations to liberalize and expand
market access progressively (Article XIX). Each shall define its own schedule of specific
commitments that forms an integral part of the Agreement (Article XX). Members may
modify or withdraw any commitment after 3 years from the date it entered into force; at
the request of an affected Member, negotiations shall be conducted on compensatory
adjustment (Article XXI). The compensation consists of more liberal bindings in other
sectors.
Schedules of Commitments
Under the GATS, each Member designates those sectors in which it assumes obligations with
respect to the 4 modes of supply, specifying the (a) terms, limitation and conditions on market
access, (b) conditions and qualifications on national treatment, (c) undertakings relating to
additional commitments. Also given are the time frame for implementation, where appropriate,
and the date of entry into force of such commitments. Such commitments are minimum levels of
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treatment. In addition, Members may make commitments on the use of standards, qualifications
or licenses. Table 5.1 illustrates a sample schedule of commitments.
The schedule contains 8 entries per sector, i.e. commitments to market access and national
treatment for each mode of supply. In the example below, the first column gives the designated
sector or sub-sector, the second gives the limitations on market access based on Article XVI.2, the
third contains limitations on national treatment. Horizontal commitments apply across all sectors
or subsectors that are named in the schedule. (WTO 2006)
A schedule must contain only descriptions of bound commitments, in view of its legal nature. The
levels of commitment are: (a) full commitment, which means no limitations and is entered as
“none”, but horizontal commitments apply, (b) commitment with limitations means the binding
of either an existing situation (“standstill”) or a more liberal situation where some measures
inconsistent with Art. XVI or XVII will be removed (“rollback”), the entry for which must describe
the particular inconsistent elements of the measure; or partial binding of measures affecting
certain categories only and is entered as “unbound except for….”, (c) no commitment means
inconsistent measures may be introduced or maintained and is entered as “unbound”, (d) no
commitment technically feasible is entered as “unbound*” which is footnoted as “unbound due
to lack of technical feasibility”, (e) special cases where there is an advantage to describing a
requirement instead of entering “unbound”. (WTO S/L/92)
TABLE 5.1. Sample Schedule of Commitments
Modes of supply: (1) Cross-border supply; (2) Consumption supply; (3) Commercial presence; (4) Presence of natural
persons
Sector or sub-sector
Limitations on market access
I. HORIZONTAL COMMITMENTS
ALL SECTORS
(4) Unbound, other than for
INCLUDED
(a) temporary presence, as intraIN THIS SCHEDULE
corporate transferees, of essential
senior executives and specialists and
Limitations on national
treatment
Additional
commitments
(3) Authorization is
required for acquisition of
land by foreigners.
(b) presence for up to 90 days of
representatives of a service provider
to negotiate sales of services.
II. SECTOR-SPECIFIC COMMITMENTS
4. DISTRIBUTION
(1) Unbound (except for mail order:
SERVICES
none).
C. Retailing services
(1) Unbound (except for
mail order: none).
(2) None.
(2) None.
(3) Foreign equity participation limited
to 51 per cent.
(3) Investment grants are
available only to companies
controlled by nationals.
(CPC 631, 632)
(4) Unbound, except as indicated in
horizontal section.
(4) Unbound.
Source: GATS 2006
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The contents are confined to measures that are incompatible with the GATS provisions on market
access (Article XVI) or national treatment (Article XVII) and to additional commitments (Article
XVIII). Measures inconsistent with other GATS Articles are not covered such as MFN (Article II), or
characteristics of domestic regulations (Article VI).
Each Member also provides a table of MFN Exemptions describing, for each sector or subsector,
the measures indicating its inconsistency with Article II, countries to which the measure applies,
the intended duration, and conditions creating the need for the exemption. MFN Exemptions
usually come from bilateral agreements on services trade, national laws requiring reciprocal
treatment or extending special preferences, or economic agreements that do not meet the
conditions of Article V.
GATS allows for flexibility in many ways:
• Members may choose the sectors to commit, and exclude a sector or parts of it from their
commitments, define the sector as they wish or refer to the W/120 or CPC
• Members may exclude some modes of supply, or apply special conditions to particular
•
•
•
•
•
modes of supply across all sectors in their schedules
Members may place limits on the market access they offer, provided they list them in their
schedule
Members may discriminate against foreign providers, provided that they list such measures
in their schedule
Members may discriminate among foreign suppliers if they have an MFN exemption for the
relevant service, or if they are party to a regional trade agreement notified under Article V
Members may commit to providing less access than they currently provide in their market
Members may commit to liberalizing at a chosen future date
Under the AFAS, Members are to specify in a schedule commitments that go beyond their
respective GATS commitments, and bestow preferential treatment to each other on an MFN
basis (Article IV). The other ASEAN agreements with Australia and New Zealand, Korea, and China
have similar schedules of commitments.
The AFAS also provides for Mutual Recognition (Article V). As of this year, two Mutual
Recognition Framework Agreement and five Mutual Recognition Arrangements (MRArs) have
been signed for Engineering, Nursing, Architectural services, Surveying, Accountancy, Medical
and Dental Practitioners. (ASec 2011) The concerned government agencies are in the process of
working out the requisites for Mutual Recognition Agreements to be signed.
In addition to the schedule of specific commitments, the AANZFTA requires Members to set out
commitments under Movements of Natural Persons (Annex 4), for the temporary entry and stay
in its territory of natural persons of another Member. The schedules specify the conditions and
limitations, including length of stay, for each category of natural persons covered.
For PJEPA, both the Philippines and Japan specified their schedules of commitments in Annex 6.
Unbound also means that measures may be introduced or maintained that are inconsistent with
market access or national treatment in the affected sector and mode of supply. Unbound* means
unbound for lack for technical feasibility. Annex 8 gives the specific commitments on the
movement of natural persons, i.e. the terms and conditions for a natural person’s entry and
temporary stay in either country.
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Approaches to Liberalization
The Council of Trade adopted the “Guidelines for the Scheduling of Specific Commitments under
the GATS” in 2001 to assist Members in the preparation of offers, requests, and schedules of
commitments. (WTO S/L/92)
Commitments may be scheduled as a positive or negative list. A negative list considers services
liberalized unless otherwise indicated through reservations. This is deemed more transparent
since it reflects status quo policies. Binding such non-conforming measures raises the credibility
of commitments, informs businesses about the openness of the market, and may also provide
incentives for removing unwarranted restrictions. A positive list specifies sectors and modes that
enjoy market access and national treatment subject to the stated limitations. It provides space
for governments that do not have the capacity to take an inventory of all non-conforming
measures or want the flexibility to suit commitments to accommodate regulatory concerns.
Nevertheless the scope and nature of scheduled limitations may be more crucial than the
scheduling approach. (Fink and Molinuevo, 2007)
In the GATS, the positive list or “bottom-up” approach to liberalization, which consists of a
voluntary positive choice of sectors and/or modes in which binding commitments are made, is
used together with a negative list of non-conforming measures to be made in scheduled areas,
hence it is a hybrid. Countries agree to undertake commitments specifying the nature of
treatment or access offered to foreign service suppliers, through reservations in scheduled areas.
Under this, they have the right to undertake no commitments, in which case they are not obliged
to supply information on the nature of domestic regulations. (Mattoo and Sauve in WB 2008)
Negotiation strategies may be (a) outward looking or aimed at the liberalization of barriers to
trade and competition, (b) defensive and make the fewest possible commitments, or (c) a
combination of both. For the first, mercantilist strategy is the most traditional and common; this
seeks to maximize exports through a reduction of trade barriers and minimize increases in
imports, and is usually driven by domestic policies. A domestic reform strategy uses negotiations
to achieve reforms in domestic regulations. A grand bargain stance makes far reaching requests
while a hard-to-get stance makes few requests and resists foreign demands as long as possible.
For the second, a country exercises the right to say no to foreign requests, or asks for
commitments it knows the other country cannot make, or articulates a principle that makes the
foreign request illegitimate. (Feketekuty in WB 2008)
Studies show that domestic regulations should be effective before key sectors are opened up.
That is, liberalization must be carefully sequenced and preceded by the appropriate regulatory
capacity. (EU FTA Manual 2008)
Liberalization measures taken unilaterally by WTO Members are given credit based on modalities
agreed upon in March 2003. An “autonomous liberalization measure” is defined and criteria for
assessing its value are suggested. The liberalizing Member notifies its trading partner and
specifies the credit being sought. The trading partner assesses it and both negotiate.
(www.wto.org)
Negotiation Process
The country’s negotiating position has been the responsibility of the Trade and Related Matters
(TRM) Committee, which was organized under EO 230 of 1987 as a NEDA Inter-Agency
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Committee, to advise the President and NEDA Board on tariff and related matters, coordinate
agencies, and recommend national positions for international economic negotiations. There are 3
levels: (i) Committee Proper (Cabinet-level), chaired by DTI and co-chaired by NEDA, (ii) Technical
Committee (Undersecretaries and Directors), and (iii) 4 Sub-Committees. The Secretariat is from
the NEDA-TIUS.
The special Technical Committee on WTO Matters (TCWM) recommends Philippine positions and
strategies on issues of direct relevance to the country’s WTO commitments. The TCWM is
supported by the DTI-BITR WTO desk. It has 4 subcommittees, i.e. agriculture (chaired by DA),
services (chaired by NEDA), industrial goods (chaired by DTI-BOI), and other rules (chaired by
DTI).
Up until September 2011, other separate bodies took charge of regional and bilateral matters.
ASEAN and APEC matters fell under the Philippine Council on ASEAN and APEC Cooperation
(PCAAC), which also had a Cabinet committee level with NEDA as Secretariat. PJEPA was under
the Philippine Coordinating Committee, created by an EO in 2003, with a Secretariat at the DTIBITR.
PCAAC first started as the Committee on ASEAN Economic Cooperation in 1976, a Cabinet-level
committee on economic matters pertaining to ASEAN. It was superseded in 1986 by the
Philippine Council on ASEAN Cooperation, with a Technical Board for Economic Cooperation
(TBEC) and a Technical Board for Functional Cooperation. In 1994 it was renamed to PCAAC to
cover APEC and EARC, and expanded in 1996 to include Asia-Europe Meeting (ASEM) matters.
NEDA was chair while DFA was vice-chair of the PCAAC. The Technical Secretariat of PCAAC-TBEC
was from NEDA-TIUS.
The consultation process for trade in services is not centralized, although NEDA as the chair of
TCWM subcommittee is the main coordinator. Line agencies handle trade issues in their
respective industries. (Pasadilla and Liao, in Pasadilla, ed. 2006)
In September 2011, the PCAAC was reorganized into the Philippine Council for Regional
Cooperation (PCRC) to facilitate inter-agency coordination in the formulation and
implementation of policy on matters relating to the ASEAN, APEC, ASEM, Forum for East AsiaLatin America Cooperation (FEALAC) and similar regional initiatives, with the DFA as the focal
point. There is a Cabinet-level PCRC under which are 4 Technical Boards, i.e. ASEAN Matters
Technical Board (AMTB), Technical Board on APEC Matters (TBAM), Technical Board on ASEM
Concerns (TBAC), and Technical Board on FEALAC Matters (TBFM). The AMTB members are
organized into 3 Committees, of which the Committee for ASEAN Economic Community (CAEC),
chaired by the DTI, takes charge of economic and financial cooperation. They are to meet
regularly to discuss national concerns and positions in regional and inter-regional organizations,
and provide direction and support. They shall also consult with all sectors on important and
strategic issues when necessary.
The process of negotiation under the GATS generally consists of:
1.
Request by trade partner in areas with good supply and export capacity, removal of
sector-specific barriers
2. Analysis of the request received in consultation with local stakeholders, benefits of
allowing a foreign services provider into a sector
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3. Preparation of an offer that provides the maximum market access to all other members
4. Sector-by-sector determination, then mode-by-mode for each sector
5. Determination of national treatment and market access limitations
Feketekuty (in WB 2008) describes the negotiation process in detail, the main points of which are
summarized in the paragraphs below.
The GATS request-and-offer process is initiated through the bilateral submission of requests by
each member to every other member that is a potential export market for its services. Then
countries schedule bilateral consultations during which the country that receives the requests
asks clarifying questions. An exchange of offers follows, then another round of bilateral
consultations that are the basis for the second round of more precise requests, and subsequent
rounds. Ultimately the WTO Secretariat compiles the consolidated list of offers that becomes the
basis for the final round of negotiations.
Requests can be (i) for national treatment, (ii) for elimination of all market access barriers in
particular sectors, (iii) by mode of supply, or (iv) for the modification of specific restrictive
regulatory provisions. Ideally the requests should follow the format in the country’s schedule of
commitments. In keeping the initial request general, the country may obtain more information
about what the other considers to be reasonable. The feedback enables more precise targeting
of the regulatory changes in subsequent rounds.
Furthermore, the request may cover all or some sectors, modes, and horizontal measures in
which the country has an export interest. This depends on the perceived moves of other
countries that have greater leverage. A country with weak leverage can focus on those sectors,
modes, or measures that are important for it and unlikely to be requested by other countries. In
general it is best to concentrate on services, modes, or measures in which the country has a high
interest. A defensive strategy for countries that are reluctant to undertake major regulatory
reforms, is to request regulatory changes that it’s trading partners will find impossible to meet, to
deter the latter from making difficult requests. Countries unable to liberalize do not make
numerous requests to evade pressure to liberalize sensitive sectors. Countries must put forth its
true interests to increase the possibility of getting favorable offers.
The role of solid research and analysis is crucial. Thus aside from negotiation skills, a good
outcome requires extensive analyses of the (a) commercial issues at stake for all sides, (b)
macroeconomic impact on countries, (c) trade-related domestic policy issues, (d) laws and
international rules that apply, and (e) views and political influence of the stakeholders.
Preparations for the negotiation follow these steps: (1) identify and consult with domestic
stakeholders, (2) compile information on the country’s trade in services, domestic industry’s
strengths and weaknesses, foreign barriers to national exports, and regulatory issues, (3)
understand the negotiating partner’s interests, e.g. strengths and weaknesses of their services
industries, stakeholders, difficulties in meeting requests for liberalization of services, and their
likely requests, (4) analyse the information to identify competitive services, weak services in
which commitments should be precluded, foreign regulatory barriers to target, then frame
requests or offers so as not to undermine social objectives, and develop negotiating strategies
and proposals that are supported, (5) develop negotiating objectives, which should be part of a
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broader economic development strategy, (6) develop a negotiating strategy, i.e. a plan for
building support for the desired negotiating outcome, (7) develop negotiating proposals, i.e, the
opening position to engage negotiators in a dialogue and evoke responses that will help frame
the negotiations.
Aside from commitments, negotiations also cover the development of rules that might be added
to the GATS and the provisions of sectoral agreements. First, the issues are reviewed, then
analytical studies are undertaken. Members submit negotiating proposals that include the
proposed language and underlying rationale. These are then reviewed by the Negotiating
Committee.
Basic Guiding Principles in Negotiations
The government is guided by the following principles in determining national commitments
(NEDA Trade in Services, submitted to the Senate, n.d.):
1.
2.
3.
4.
5.
Constitutional provisions on (a) acquisition of land, (b) limitations on foreign equity
participation in certain activities, and (c) practice of profession
The power to legislate is vested in Congress, hence no commitment is made to amend
existing laws
Local government units are mandated to enact ordinances subject to the limitations
of national law
Small- and medium-scale domestic-oriented enterprises need support and time to
develop, and are reserved to Philippine nationals; foreign capital is to be allowed if
they involve advanced technology or have 50 direct employees
The agreement is used as an opportunity to attract investments, e.g. energy, tourism,
computer and related services
The relevant sections in the 1987 Constitution are:
• Article 12, Section 2 – All lands of public domain are owned by the State.
• Article 12, Section 10 – Certain areas of investment are reserved for citizens or entities with
•
•
•
•
•
at least 60% Filipino ownership.
Article 12, Section 11 – Public utilities shall be operated by citizens or entities with at least
60% Filipino ownership.
Article 12, Section 14 – The practice of profession shall be limited to citizens.
Article 12, Section 19 - The State shall regulate or prohibit monopolies.
Article 14 Section 4 – Educational institutions other than those established by religious
groups shall be solely owned by citizens or entities with at least 60% Filipino ownership;
administration shall be by citizens.
Article 16, Section 11 - Ownership and management of mass media shall be limited to
citizens or entities wholly owned and managed by citizens. Congress shall regulate or
prohibit monopolies in commercial mass media. Only Filipino citizens or entities with at
least 70% Filipino ownership shall be allowed to engage in the advertising industry.
The Foreign Investment Act (RA 7042 of 1991, amended by RA 8179 of 1996) liberalized the entry
of foreign investments. Foreigners may own up to 100% of domestic market enterprises unless
foreign ownership therein is prohibited or limited by the Constitution and existing law or the
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Foreign Investment Negative List. The general rule of ownership of a domestic market enterprise
is 60% Filipino and 40% foreign. More than 40% is allowed if the paid-in capital is at least $200000;
or less than $100000 if there are at least 50 direct employees or advanced technology is used. For
retail trade enterprises, 100% foreign ownership is allowed if paid-up capital is at least $2.5 million
provided investments for establishing a store are at least $830,000, or it specializes in high-end or
luxury products provided the paid-up capital per store is at least $250,000. Two negative lists
show sectors where foreign ownership is limited by law.
•
•
In Negative List A (activities reserved to citizens by mandate of the Constitution and laws)
are services sectors with no foreign equity (mass media except recording, practice of
professions, retail trade with paid-up capital of not less than $2.5 million, private security
agencies, operation of cockpits), up to 20% (private radio network), up to 25%
(recruitment agencies, construction of locally funded public works and defense-related
structures), up to 30% (advertising), up to 40% (exploration and utilization of natural
resources, ownership of private lands, operation of public utilities, ownership and
administration of educational institutions, operation of a project requiring a public
utilities franchise, adjustment of companies), up to 60% (financing companies and
investment houses, unless there are reciprocal arrangements).
Negative List B (activities regulated by law) limits foreign ownership to 40% for reasons of
security, public health and morals (e.g. gambling, saunas, massage clinics), and to protect
small and medium-scale enterprises (those with paid-in capital of less than $200000, or
involve advanced technology or 50 direct employees with less than $100000)
A positive list approach was used in the GATS, AFAS, and PJEPA. Hence only those
sectors/subsectors where commitments were made appear in the schedules. Total reservations,
i.e. current and future, were made on those sectors/subsectors that do not appear in the
schedule, which means that the country has no obligations on them.
Further Readings:
Durano, M., “Trade in Services: An Initial Assessment of the Regulatory System and Directions
for Negotiations,” USAID-AGILE, 2000
Feketekuty, G., “A Guide to Services Negotiations”, Appendix in Mattoo, A. et al., eds., A
Handbook of International Trade in Services, World Bank 2008
Manduna, M., “The WTO Services Negotiations: An Analysis of the GATS and Issues of
Interest for Least Developed Countries”, Trade-Related Agenda, Development, and Equity
(T.R.A.D.E.) Working Paper 23, South Centre, 2004
Mashayekhi, M. and E. Tuerk, “The WTO Services Negotiations: Some Strategic
Considerations,” T.R.A.D.E. Working Paper 14, South Centre, 2003
Saez, Sebastian, ed., Trade in Services Negotiations: A Guide for Developing Countries, World
Bank, 2010.
World Bank, Negotiating Trade in Services: A Practical Guide for Developing Countries,
International Trade Department, 2009
WTO, “Guidelines and Procedures for the Negotiations on Trade in Services,” S/L/93, 29
March 2001
WTO, “Guidelines for the Scheduling of Specific Commitments under the GATS,” S/L/92, 28
Mar 2001
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5.3 Matters to Consider in Determining Negotiation Positions
The GATS is flexible. There is no requirement to allow market access or provide national
treatment, and exceptions may be scheduled on a sector-specific basis. It sealed in policies that
were already being implemented on a unilateral basis by Members. At the same time,
commitments may not necessarily provide a full picture of applied policies, since they only relate
to sectors that were scheduled. (Hoekman and Mattoo 2011).
Furthermore, governments engage in trade negotiations (a) to reduce the impact of trade
restrictions and gain market access, (b) to implement reforms to enhance market
contestability30 in areas opposed by vested interests, or (c) as a commitment mechanism to bind
policies and make domestic reform programs credible. However the impetus has been weaker for
services relative to goods, for many reasons: (i) reduced need for traditional reciprocity-driven
market access negotiations, since inefficient service sectors lead to costs for downstream
industries that generates pressure for unilateral reforms, (ii) contrasting conditions of access
faced by services exporters, so that markets are either already open or irremediably closed,
hence domestic opposition to reform by incumbents cannot be counterbalanced by export
interests, (c) less powerful reciprocity in services because a policy reform requested by one
trading partner will benefit all others, (d) need to complement liberalization with effective
regulatory standards and implementing bodies, (e) disengagement of the business community
because of their diminished incentives and low expectations (Hoekman and Mattoo 2011)
Nevertheless, participation in trade agreements must be used to a country’s advantage.
Preparations for such participation would benefit from the following:
• A national development strategy for services specifying the role of trade and trade
agreements
• Assessment of the requisites for our effective and beneficial participation in trade
agreements such as the readiness of domestic services sectors
• Assessment of the requirements of liberalization such as an inventory of the measures
affecting trade in services and the basis for determining their adequacy or need for change
• Criteria for choosing the measures, modes of supply, and the sectors to commit in the
negotiations
Domestic Regulation
Regulatory autonomy is among the most substantive and complex issues in the GATS, as most
measures affecting trade in services are found not at the border but behind it, and are imposed
for non-trade and public interest reasons.
In general, regulations are meant to: (1) enhance competition or the contestability of markets; (2)
ensure effective regulation to deal with market failures, i.e. efficiency, and (3) meet social or noneconomic objectives i.e. equity (Hoekman and Mattoo 2011). While the GATS promotes
progressive liberalization, it recognizes the right of Members to utilize regulations to attain
30
Characterized as having no barriers to entry or exit, where all have access to the same production
technology, where there is perfect information on prices available to all consumers and firms, and entrants
can enter and exit before incumbents can adjust prices. (OECD Statistics Portal)
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national policy objectives, even in sectors where they have indicated full commitments on market
access and national treatment. Examples of actual objectives are: equity of access to a given
service, consumer protection including through information, job creation in depressed regions,
control of pollution and other environmental externalities, promotion of competition, prevention
of fraud (WTO 2006); also ensuring financial sector stability (Chaitoo 2008). Consumer protection
covers regulations on quality of the service, professional competence, and integrity of the
profession (Delimatsis, 2008).
TABLE 5.2. Rationale for Regulatory Interventions
Market Failure
monopoly/ oligopoly
asymmetric information
Sector
network services: telecoms,
transport, environment, energy
intermediation and knowledgebased: finance, professional
externalities
transport, tourism
social objectives:
health, education, transport,
universal service
telecoms, finance
Source: Mattoo and Sauve, 2004
Possible national policy response
Develop pro-competitive regulation to protect
consumers where competitive market structures
do not exist
Strengthen domestic regulation to remedy market
failure in an economically efficient manner
Devise economically efficient means of achieving
social objectives in competitive markets
In pursuing a policy objective, regulations may severely restrict trade due to excessive,
inequitable, or inefficient intervention. Article VI.4 therefore mandated the formulation of
disciplines to ensure that domestic regulations (i) are based on objective and transparent criteria,
such as the ability to supply the service, (ii) are not more burdensome than necessary to ensure
the quality of the service, and (iii) in the case of licensing procedures, not a restriction on supply.
Aside from the implications on domestic policy autonomy, Article VI.4 is aimed at measures that
are non-discriminatory, are of a qualitative nature since they seek to ensure quality, and mainly
entail minimum requirements.
The Working Party on Domestic Regulation (WPDR) was established by the Council for Trade in
Services to develop the disciplines, and in particular ensure that licensing and qualification
requirements and procedures and technical standards do not undermine commitments. The
disciplines are to be integrated into the GATS at the end of each round of negotiations. The first
set was approved in 1998 for the Accountancy Sector, and applies to Members that scheduled
specific commitments in the sector. They focus on non-discriminatory regulations that are not
subject to scheduling under Articles XVI and XVII. (WTO 2006)
Principles considered by the WPDR for the disciplines consist of (a) necessity - a clear statement
of purpose to enable measurement of the effectiveness of a regulation, (b) transparency information on regulatory principles and processes must be accessible in advance, publicly
available, specify reasonable time to respond to applications, reason for rejection, and allow
review of administrative decisions, (c) equivalence – consider qualifications and experience
obtained abroad, (d) international standards. Others are (e) impartial application, (f)
proportionality, (g) regular review, (h) minimization of administrative burden, (i) objective
criteria. (WTO 2006)
The 2011 draft “Disciplines on Domestic Regulation Pursuant to GATS Article VI.4” contains the
following provisions:
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i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
xvii.
xviii.
xix.
xx.
xxi.
xxii.
Objectives – to ensure that measures (licensing requirements and procedures,
qualification requirements and procedures, and technical standards) are based on
objective and transparent criteria such as competence and the ability to supply the
service, and do not constitute disguised restrictions on trade in services.
Recognition of the right to regulate – to meet national policy objectives, and that the
disciplines do not prescribe particular regulatory approaches or provisions
Recognition of the difficulties of developing country members, i.e. difficulties relating to
level of development, size of the economy, and regulatory and institutional capacity
Scope of application – measures affecting trade in services where specific commitments
are undertaken, and not to those that constitute limitations subject to scheduling under
Article XVI or XVII
General obligations – that measures shall be pre-established, based on objective and
transparent criteria, and relevant to the supply of the services to which they apply
Right to use of universal service policies is recognized
Publication of and prior comment is encouraged
Residency requirements for licensing – where not scheduled, less restrictive means
should be employed; those other than subject to scheduling shall not be a prerequisite
for assessing the competence of a service supplier
Simplicity and licensing and qualification procedures – should not constitute a restriction
on the supply of services
Impartiality of procedures and independence of regulators
Single window/one authority for applications
Submission of applications at any time except when limited, reasonable period, process
without delay, and electronic format where possible
Timeframe for processing must be reasonable
Allow the supply of service after fulfilment of requirements without undue delay
Reasonable fees
Verification and assessment of qualifications is possible
Identification of deficiencies of qualifications, and ability to fulfil these in any jurisdiction
Examinations at reasonably frequent intervals
Transparency of processes for developing and applying standards by non-governmental
bodies
International standards to be taken into account where effective or appropriate for
national policy objectives
Transition period for applying the disciplines
Technical assistance
In principle a necessity test could promote the adoption of economically efficient policy choices
to deal with market failure and pursue non-economic objectives. (Sauve and Mattoo 2004) It is
thought that a horizontal necessity test is crucial for effective and operationally useful disciplines,
as it draws the line between legitimate intervention and protectionist restriction; however it is
controversial since it has implications on regulatory sovereignty. Elements of an effective,
enforceable, and operationally useful necessity test have been suggested: (a) burden of proof –
the complaining party bears the initial burden of proving a violation and once established, the
responding party must refute the charge; (b) justiciability of instruments/level of
protection/legitimate objectives – it is the Member’s choice of means that is examined, not the
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objectives; this requires a clarification of “quality of service”, which Article VI.4 identifies as the
only legitimate objective; (c) less trade restrictiveness/ reasonable availability, and comparison of
alternatives/’third aspect’ of necessity; (d) proportionality/ balancing/means-ends test; (e)
burdensomeness versus trade-restrictiveness (Delimatsis 2008).
The South Centre assessed the 2009 draft of the Disciplines in terms of its implications for
developing countries, which have a generally weaker regulatory capacity and use regulations for
development purposes. The first key discipline, necessity test, can restrain the right to regulate
and be applied in unpredictable ways in dispute settlement. Other provisions could operate as
necessity tests, e.g. (a) avoiding disguised restrictions on trade, (b) that measures be relevant to
the supply of services to which they apply, where “relevant” is not defined, (c) that licensing and
qualification procedures be as simple as possible. On the right to regulate, “Members’ regulatory
….sovereignty ends when the rights of other Members under the GATS are impaired”. The draft
prescribes particular regulatory approaches and provisions, e.g. (a) to base measures on
objective and transparent criteria, but regulatory discretion is sometimes needed to ensure that
critical objectives are met; also, objective can mean not arbitrary, not biased, relevant to the
ability to perform or supply the service, not subjective, or least trade-restrictive, which conflict
with developing country regulations; (b) that measures be pre-established, which is not defined
and conflicts with the right to introduce new regulations, (c) that applicants need only approach
one competent authority, (d) to take existing international standards into account in formulating
technical standards, (e) transparency and prior comment, giving details on 20 types of
information.
It is noted that the Disciplines’ right to regulate for national policy objectives does not extend to
local government regulations. (South Centre 2011)
Further Readings:
• Chaitoo, R., “Services Liberalization and Domestic Regulation: Why Is It Important?”,
•
•
•
•
•
•
•
•
CUTS/FICCI Conference on Global Partnership for Development: Where do we stand and
where to go?, Aug 2008
Delimatsis, P., “Determining the Necessity of Domestic Regulations in Services”, European
Journal of International Law, Vol. 19 No.2, 2008
Hoekman, B. and A. Mattoo, “Services Trade Liberalization and Regulatory Reform,” Policy
Research Working Paper 5517, World Bank, Jan 2011
Karmakar, S., “GATS: Domestic Regulations versus Market Access,” ICRIER, WTO Research
Series No. 7, May 2007
Mattoo, A., and P. Sauve, “Domestic Regulation and Trade in Services: Looking Ahead”, in
Mattoo, A. and P. Sauve, eds., Domestic Regulation and Service Trade Liberalization, World
Bank, 2003
South Centre, “The Draft GATS Domestic Regulation Disciplines – Potential Conflicts with
Developing Country Regulations,” Analytical Note SC/AN/TDP/SV/12, Oct 2009
South Centre, “Domestic Regulation of Services Sectors: Analysis of the Draft Negotiation
Texts,” Analytical Note SC/TDP/AN/SV/13, April 2011
Stumberg, R., “GATS Negotiations on Domestic Regulation,” Forum on Democracy and
Trade and Heinrich Boll Stiftung, draft of 19 May 2010
WTO, “Disciplines on Domestic Regulation Pursuant to GATS Article VI:4”, Chairman’s
Progress Report, S/W/PDR/W/45, 14 Apr 2011
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Determining “Like” Services
In Article II of the GATS, Members must accord to services or service suppliers of other Members
treatment “no less favourable than that accorded to like services and service suppliers of any
other country”.
The GATS does not provide criteria for determining “likeness”, and the concept is more difficult
to establish for services than for goods, owing to the intangibility of services, the blurring
between product and production, the four modes of supply, and the lack of a detailed
nomenclature.
Cossy (2006) examined the concept of “likeness” in the context of the national treatment
obligation or Article XVII. GATS differs significantly from GATT in the national treatment
obligation, which explicitly applies to both products (services) and producers (service suppliers).
Cossy discusses the extent to which criteria developed by GATT case-law (physical properties,
classification, end-use and consumer tastes) can be used to establish likeness of services, and
finds that other parameters may be relevant, such as the regulatory context or an “aim and
effect” type approach.
Further Reading:
Cossy, M., “Determining “Likeness” under the GATS: Squaring the Circle?”, WTO Economic
Research and Statistics Division, Staff Working Paper ERSD 2006-08, Sep 2006
Public Services and Public Utility
Article 1.3 confines the GATS to services in any sector except those “supplied in the exercise of
governmental authority”, that is, they are (i) not supplied on a commercial basis and (ii) not
supplied in competition with one or more service suppliers. Government services are thus
explicitly excluded from the GATS, to allow the provision of publicly-funded services in core areas
of government responsibility.
The coverage of GATS in relation to government services still depends on the interpretation of
the two conditions. Some suggest that services provided not for profit should be included in the
first condition, so that additional criteria would determine whether supply at a price just covering
the costs of the provider would be considered commercial. For the second condition, an
approach could consist of determining if two or more service suppliers provide the same or
comparable service, then establishing if it substitutes or complements the other. In this case, the
size of the market is crucial. (Cassim and Steuart 2005) Moreover, certain public services that are
provided on a commercial basis, are not covered by Article 1.3, such as (i) traditional public
monopolies in infrastructure-related sectors like postal, telecommunications, or rail transport
where no other providers are allowed, (ii) natural monopolies, (iii) open competition where
government participates for public service purposes. Overlaps are common. (Adlung 2005)
The prime concern about the GATS from the start has been its impact on the government’s
sustained provision of social services such as health and education. Some argue that it is not
immediately clear whether the definitional coverage of the GATS affects governments’ scope of
action. While concepts such as MFN, market access, and national treatment extend to
investment, production and employment, there is flexibility to suit a country’s obligations to its
circumstances. (Adlung 2005)
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The GATS does not use the term “public services”, and its definition of governmental services is
subject to uncertainty. Nevertheless similar public services may be provided in different
jurisdictions in diverse settings, and the scope of such services is bound to vary over time.
Common elements of public service are universality, continuity, quality, affordability, user and
consumer protection. What matters are the legal and institutional arrangements governing the
provision of a non-excluded service at a particular time. (Adlung 2005)
A public utility is also a government-supplied service that may not necessarily meet either
condition in Article I.3 of being supplied on a non-commercial basis or in non-competition with
other suppliers. There is no official definition of public utility. Article 12, Section 11 of the 1987
Constitution merely provides that its operation and management shall be limited to citizens or
corporations and associations with at least 60% Filipino ownership.
Commonwealth Act 146 of 1936 or the Public Service Law defines public service by enumerating
the kinds of services covered, in Section 13(b): “The term “public service” includes every person
that now or hereafter may own, operate, manage, or control in the Philippines, for hire or
compensation, with general or limited clientele, whether permanent, occasional or accidental,
and done for general business purposes, any common carrier, railroad, street railway, traction
railway, sub-way motor vehicle, either for freight or passenger, or both with or without fixed
route and whether may be its classification, freight or carrier service of any class, express service,
steamboat or steamship line, pontines, ferries, and water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine railways, marine repair shop, [warehouse] wharf
or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and
power water supply and power, petroleum, sewerage system, wire or wireless communications
system, wire or wireless broadcasting stations and other similar public services.” The same law
requires such public services to obtain a valid and subsisting “certificate of public convenience
and necessity” that their operation will promote the public interest.
A public utility is characterized as providing a vital service or everyday necessity to a large
population, the unavailability of which would adversely affect public welfare. It is usually supplied
through an extensive distribution network, and may be owned and operated by the government
or private sector. Some may have the characteristics of a public good as well. Electricity, gas,
water, communications, transport, garbage collection, sewage treatment, are common examples
of a public utility. Massive capital requirements, also due to the need to have a wide reach, mean
that they tend to be natural monopolies. Government regulation of privately owned utilities is
meant to ensure a reasonable level and quality of service at a fair price, through a public service
obligation and franchising.
The Joint Foreign Chambers of the Philippines in a 19 July 2011 position paper, extracted a
working definition of public utility from Philippine jurisprudence, i.e., that it is a business engaged
in regularly supplying the public with some service of public consequence such as electricity, gas,
water, transport, telephone. Certain sectors are not considered public utilities by virtue of
particular laws, such as power generation and the supply of electricity to the contestable market,
shipyards, or refining of imported crude oil. The Chambers contend that the Constitution imposes
the franchise requirement on the operation but not the ownership of public utilities.
Further Readings:
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• Adlung, R., “Public Services and the GATS”, Journal of International Economic Law, Vol. 9
No. 2, 2006
• Adlung, R., “Public Services and the GATS”, WTO Economic Research and Statistics
Division, Working Paper 2005-03, July 2005
• Cassim, R. and I. Steuart, “Public Services and the GATS”, ICTSD Policy Paper on Trade in
Services, Feb 2005
Rules of Origin
Rules of origin (ROO) are pertinent to plurilateral or bilateral trade agreements, as they
determine the applicability of preferences to parties vis-Г -vis non-parties to the agreement.
The two types of ROO in the GATS are general ROO as described in each mode of supply, and
specific ROO which apply to particular circumstances, e.g. in Article XXVII (Denial of Benefits),
Article V (Economic Integration). The GATS disciplines on ROO found in Article V.6 apply to
juridical persons only: a service supplier from outside the free trade agreement that is a juridical
person shall be entitled to preferential treatment under the agreement if it engages in
substantive business operations in the territory of the parties to the agreement. However under
Article V.3b, if the agreement involves developing countries only, preferential treatment may be
limited to companies owned or controlled by natural persons of the signatory parties.
Since services are embodied in suppliers, ROO arise in three different contexts: (i) origin of
services, (ii) origin of service suppliers in the form of juridical persons, (iii) origin of service
suppliers in the form of natural persons. For the first context, free trade agreements have used
the concept of “service of another party”, i.e. as long as it originates from the territory of
another party, which corresponds to Modes 1 and 2. The GATS does not have ROOs for services
supplied through Mode 3 or 4. Free trade agreements usually extend the benefits to juridical
persons from non-parties that are commercially established under the laws of a party to the
agreement, regardless of ownership or control. Benefits are also extended to natural persons of
signatory parties, provided nationality or residency conditions are met. (Fink and Molinuevo
2007)
There are no prescribed criteria for identifying origin, but some types tend to be used in free
trade agreements: nationality, residency, value-added test, ownership test, intellectual input
control test, and mixed tests. Most use residency or ownership and control of the service
provider or of the essential input without which the service cannot be provided. (ADB 2008) In
five ASEAN countries, ROO is defined along the following criteria for juridical persons or
companies: incorporation, substantive business operations, domestic ownership and control,
domestic employment; for natural persons it is nationality, residency, and center of economic
interest. The case studies suggest that the most restrictive criterion for a ROO is domestic
ownership and control. (Fink and Nikomborirak 2007)
Paragraph 17 of the “Rules of Origin and Services: Conceptual Issues” (MTN.GNS/W/140)
summarized the usual ROO as follows: “The origin of producers (corporations) is usually decided
on the basis of one or more of the following criteria: (1) place of incorporation, (2) nationality of
control, (3) nationality of ownership, (4) principal place of business, (5) location of headquarters
or center of management/decision making, (6) origin of value added, and (7) origin of material
and/or intangible inputs. The first five of these are related in that the focus is on the nationality of
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the producer/firm as reflected in the geographic location of assets or activity. The last two criteria
focus on the product that is produced/sold and are frequently based on product content.”
ROO for services received attention only lately because the concepts of intermediate inputs and
domestic value added are not as developed as they are for trade in goods. ROO in trade
agreements have also focused on the origin of the service supplier. The choice of ROO depends
on the objectives of the free trade agreement. A liberal ROO reduces discrimination and attracts
investments from outside the agreement thereby promoting economic efficiency, but it can
undermine learning-by-doing externalities of the agreement. Moreover a liberal ROO may
weaken the bargaining advantages of regional relative to multilateral negotiations. The relevance
of a ROO depends on the pattern of remaining market access restrictions that parties maintain
against non-parties. Assuming that ROO are binding, their restrictiveness depends on the costs
they impose on service suppliers from non-parties, e.g. tax obligations, business transactions
costs. (Fink and Nikomborirak 2007)
Further Readings:
Fink, C. and D. Nikomborirak, “Rules of Origin in Services: A Case Study of Five ASEAN
Countries,” World Bank Policy Research Working Paper 4130, Feb 2007
Wang, H. “WTO Origin Rules for Services and the Defects: Substantial Input Test as One Way
Out?, Journal of World Trade, vol. 44, no. 5, 2010
WTO, “Rules of Origin and Services: Conceptual Issues,” Note by the Secretariat,
MTN.GNS/W/140, 15 Oct 1991
E. Classification Issues
There are several classification systems for trade in services at the national, regional, and
international levels. These are categorized as transaction-based (e.g. IMF Balance of Payments
statistics), activity-based (e.g. International Standard Industrial Classification of All Economic
Activities or ISIC), production-based (e.g. North American Industry Classification System or
NAICS), and product-based (e.g. W/120, CPC) (South Center 2005).
Although Members are not compelled to use the W/120 or CPC, the “Guidelines for the
Scheduling of Specific Commitments under the GATS” states that “in general the classification of
sectors and sub-sectors should be based on the Secretariat’s Services Sectoral Classification List”
i.e., W/120. Where a Member prefers to use its own classification, this should be in concordance
with the CPC, although there is scope for a Member’s own definitions. Commitments assume a
legal status once made.
Most Members use the CPC, which is a detailed version of the W/120. Inadequacies were found,
however, in certain sections, e.g. double listing, overlaps, inconsistency, ambiguities and blurred
distinctions, use of national or various definitions, exclusions, lack of comprehensive category to
reflect structure of sector, convergence of sectors. (South Center 2005) Examples of
classification concerns (WTO 1991) are listed below. Generally the nomenclature is not always
clear, and the W/120 leaves out many activities, e.g. tourism.
• Computer and related services - software creation as a product or service; computer
services overlaps with telecoms; no uniform definition of IT industry; basic telecoms
provides real time transmission of customer-supplied information while value-added
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•
•
•
•
•
•
•
•
•
telecoms is not real time and transforms the form or content; blurred distinctions due to
new technology for transmission; ability to integrate; and suppliers distinguished according
to market segments; rapid changes render classifications out of date
Engineering service - overlap of architecture and engineering with construction and
business services
Accountancy - wide-ranging and defined differently by countries
Air transport services - new forms of distribution in air travel due to technological changes,
precise identification of ground services;
Distribution services - blurred distinctions between categories of distributors
Energy services - not listed separately
Environmental services - varies across countries, overlaps with business services,
construction (need to preserve mutually exclusive nature of classification but liberalization
based on a narrow definition is unfavourable versus a broader definition in terms of
creating incentives to adopt cleaner technology and manage resources WTO 2001)
Financial services - blurred distinction in financial services e.g. hybrid products, or between
provision and transfer of financial information as a financial or other information service
Maritime transport - river traffic is difficult to schedule since schedules are based on vessel
type
Postal and courier services - scope of “mail” is undefined by CPC; courier services excludes
transport of mail by air
Classification was taken up in the Committee on Specific Commitments due to the need for
improved technical accuracy and clarity of schedules, but selective departures from existing
classification systems and unilateral re-classification have taken place. This raised two concerns,
i.e., the difficulty of assessing the full value and implications of initial offers and requests due to
the use of various classifications, and pressure on developing countries from bilateral rather than
multilateral discussions. Proposals on classification were either to cluster, which does not
distinguish between core and non-core and places services in a broad category, or disaggregate,
which breaks down the elements of sectors and sub-sectors. Developing countries may consider
the following in their approach to classification issues: (i) distinguish between offensive and
defensive market access interests; assess clarity, legal status, and certainty on the scope and
coverage; identify commonalities and differences; assess the effect on existing commitments;
address classification issues before undertaking market access commitments; (ii) ensure that
discussion on classification issues is inclusive, transparent, and multilateral; (iii) take adequate
steps when proposing reclassification to allow for proper assessment of the scope of existing
commitments under proposed changes. (South Center 2005)
GATS Mode 3 and TRIMS
Schedules of commitments specify which sectors, and under what conditions, the basic GATS
principles apply to within a Member’s territory. The market access and national treatment
commitments and limitations and MFN exemptions are with respect to the 4 modes of supply.
Mode 3 describes the conditions under which foreign services suppliers may establish, operate,
or expand a commercial presence, such as a branch, agency, or wholly owned subsidiary, in the
Member’s territory.
For trade in goods, the Trade-Related Investment Measures (TRIMS) Agreement provides that
Members shall not apply any “trade-related investment measure” that is inconsistent with
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GATT Articles III (national treatment), and XI (prohibition of quantitative restrictions). Although
“trade-related investment measure” is not defined, an illustrative list of measures agreed to be
inconsistent is part of the agreement, and includes measures such as local content requirements
(i.e. require particular levels of local procurement by an enterprise) or trade-balancing
requirements (i.e. limit the volume or value of imports that an enterprise can purchase or use to
an amount related to its level of exports).
The disciplines under the TRIMS Agreement focus on discriminatory treatment of imported and
exported products and do not govern the issue of entry and treatment of foreign investment.
(See www.wto.org) In contrast, the GATS principles apply to the entry and operation of foreign
service suppliers in a Member’s territory, or Mode 3, although each Member specifies the sectors
covered and conditions to be applied.
GATS Mode 4 and Factor Mobility
Mode 4 pertains to the temporary movement of natural persons, although the GATS does not
define “temporary”. Mode 4 covers (i) independent or self-employed service suppliers, or (ii)
those employed by a service supplier and sent abroad to supply a service, either as an intracorporate transferee (employed by the same company that has commercial presence in another
Member’s territory) or a contractual service supplier (to the consumer in the territory of another
Member). The GATS does not cover natural persons seeking access to the labor market, nor
measures regarding citizenship, residence or employment on a permanent basis. Governments
may regulate entry and temporary stay, provided these do not impair commitments.
Mode 4 is not limited to those directly rendering a service but also those whose presence abroad
is instrumental to the provision of the service. However it is difficult to delineate coverage under
Mode 4, e.g. (a) the difference between a service contract and employment contract are difficult
to establish, particularly for independent service suppliers, (b) it is not easy to determine what
constitutes a service, e.g. fruit-pickers may be temporary agricultural laborers hence outside of
Mode 4, or as suppliers of fruit-picking services, (c) although Mode 4 applies to suppliers
whatever their skill level, the focus of commitments is on highly-skilled workers. (WTO 2010)
Mode 4 issues that have been discussed include (a) categories of natural persons used in the
GATS schedules of commitments and their consistency with domestic measures, (b)
complementarity of horizontal and sectoral commitments on Mode 4, (c) need to improve the
transparency of Mode 4 commitments and domestic regulatory frameworks, (d) recognition of
qualifications, and (e) administrative procedures relating to visa and work permits. Differential
visa requirements are not considered as nullifying or impairing commitments. (Mamdouh 2004)
TABLE 5.3. Coverage of Mode 4
Duration of stay
Purpose of stay
Included
Temporary presence, non-specified period of
stay
Presence of natural persons for the supply of
Excluded
Permanent migration
Persons seeking to access the
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commercial services
Skill level
Main categories of
natural persons
All
Self-employed service suppliers
Employees of service suppliers sent abroad to
supply a service
Employees of foreign service suppliers
established in host country (Intra-corporate
transferees and directly-recruited foreign staff)
Service sellers/persons setting up commercial
presence
employment market
For the production of goods
Services supplied under governmental
authority
None is excluded
Foreign employees of domestically
owned juridical persons
Source: MSITS 2010
Further Readings:
• Durano, M., “Three Perspectives on Institutions and the Trade in Services,” Ph.D. thesis,
University of Manchester, 2005.
• Mamdouh, H., “Movement of Natural Persons under the GATS”, presentation during
IOM/WB/WTO Seminar on Trade and Migration, 4 Oct 2004
• Winters, L.A., “The Temporary Movement of Workers to Provide Services”, in Mattoo, A. et
al., eds., A Handbook of International Trade in Services, WB 2008
Sectoral Considerations
Efficient allocation of resources is encouraged when markets are open and competitive. In turn,
market-based policies improve the institutional framework for private decision-making. WTO 2001
suggests that initiatives for trade in services include the following, depending on the actual
situation in each sector:
1. pro-competitive policy to abolish traditional exclusivity rights and access barriers, etc.
2. external market opening to confront domestic industries with best international
practice
3. information requirements, and prudential rules to protect public interest
4. institutional reforms providing for independent regulatory supervision
5. measures to incorporate social costs, attributable to environmental impacts and
other externalities, in production and investment decisions
Sectors have distinctive issues due to the nature of the service, structure or organization and
how they evolved, and government intervention. These are tabulated below.
TABLE 5.4. Sectoral Characteristics and Domestic Regulation
SECTOR
PECULIARITY/ISSUES
Accountancy
Qualifications and licensing of individuals,
conditions of ownership, and control of firms
Advertising
An ancillary service hence affected by regulations
covering goods or media
Air transport
A public utility, with 40% foreign equity limits;
OBJECTIVES OF REGULATION
Ensure liability and prevent conflicts of
interest
Consumer protection; national security
Quality and public safety;
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Architecture
engineering
and
Audiovisual
Computerservices
Construction
Distribution
Education
Energy
Environment
Financial
related
auxiliary services are privately provided; high cost
of entry;
Liberalization occurred through “open skies”,
increasing capacity or frequency due to market
demand;
regulations on reservation services have been
determined by the property rights of airlines;
bilateral agreements that control capacities and
frequencies and require fare approval by parties
erode government control; need to clarify
coverage of services not directly related to traffic
rights
Overlaps with construction and business; control
of professional standards is through object-related
regulations and standards; RA 9366 (Philippine
Architectural Law) requires foreign architects to
secure permit and professional liability insurance
Social and cultural content implies large
government role; subsidized to stimulate content
creation; digitalization means content creation is
outsourced; IPRs in music and video; increased
convergence requires competition policy
Overlaps with telecoms since services are supplied
online; industry structure is cross-cutting, as they
sell to and through one another and have
corporate marketing alliances; computer-based
multimedia raises concerns
Supplied through the establishment of the supplier
on site
Stringent requirements on establishment and
ongoing operations; RA 8762 or Retail Trade
Liberalization Act of 2000 allowed foreign retailers
in, subject to a capitalization threshold
Non-recognition of degrees granted by foreign
providers affects market access; labor market test
and reciprocity; detailed regulation is being
replaced by “framework laws” that specify goals
but allow institutions to determine their own ways
to achieve them
A strategic industry with scarce supply of inputs;
sovereignty over natural resource issues;
distribution is a quasi-natural monopoly though
public monopolies were dismantled, vertically
integrated utilities were unbundled
Government is both supplier and regulator;
determine the extent of waste disposal that is
government service or procurement
Complex regulatory framework; liberalized in the
1990s, no evidence of monopoly or collusion;
banking arrangements are more liberal than GATS
commitments; prudential regulations, which are
allowed by GATS, apply to foreign and domestic,
except for bank capital requirements; licensing
requirements may qualify as prudential though
they may constitute trade barriers; ability of both
Franchise is issued by Congress or a
Certificate of Public Convenience and
Necessity is issued by the Civil
Aeronautics Board; cabotage is
prohibited
Quality and public safety
Content regulation e.g. domestic
programming quotas; promote
domestic industry
Online supply of services implies such
issues as contract enforcement,
authentication, privacy, etc.
Safety, environment standards; local
land use plans
Remedy market imperfections or for
economic objectives of health, safety,
environment, urban planning, pricing,
vertical restraints, zoning, scale of
outlets, shop hours
A public good; guarantee access
through public provision; control of
curriculum content
Health and safety, environment,
ensure universal service, consumer
protection
A public good and natural monopoly;
regulated to remedy market
imperfections, ensure no overcharging
or price discrimination, quality
A public good and essential to
development; prone to market failure
due to asymmetric information, moral
hazard from policies aimed at
preventing systemic risk
Prudential measures are meant to
ensure integrity and stability, as it
affects the whole economy, and
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Health and social
services
Legal
Maritime
Postal/courier
Road transport
Telecommu-
regulated and unregulated entities to unbundle,
repackage, and trade financial risks makes it
difficult to identify the distribution of financial risks
across institutions
Consumer and provider cannot contract on an
equal basis, in full knowledge, nor with financial
responsibility for the results; exclusion of
professional services in the nomenclature
disregards the complementarities with hospital
services;
Recognition of foreign qualifications determines
the economic value of GATS commitments, affects
insurance portability, or the possibility of
professionals working abroad
The main obstacle to trade is the national
character of the law and legal education;
Treatment of multidisciplinary practices is
controversial
Only nationals or local entities authorized to
engage in overseas shipping and with a maximum
of 40% foreign equity may register a vessel; must
be manned by Filipino crew except for non-crew
functions requiring foreigner for 6 months;
Government cargo is reserved to Philippine
flagged vessels;
Ports are public utilities, with 40% foreign equity
limits; private operators are under long-term
concessions; PPA functions as regulator and port
developer/ operator as it issues permits to
construct ports, and has joint ventures with private
sector;
Shipping rates and routes were deregulated in
2000, though MARINA issues licenses based on
traffic volumes; operators may set their own rates
provided there is effective competition and the
public interest is served;
Cargo and passenger shipping is still relatively
expensive and concentrated, and competition is
ineffective in major routes;
No foreign equity limits on shipbuilding and ship
repair; all Philippine vessels must be repaired at
domestic shipyards except for emergency; Imports
of vessels will be restricted after 2014 if substitutes
can be built here
Government is both regulator and competitor;
liberalization must draw the line between reserved
and non-reserved sectors; courier services are
affected by customs, postal, transport regulations,
etc.
Diverse subsectors that compete with each other;
mixed or public service, poor scale economies, low
access costs, subsidized, unprofitable
A network industry, i.e., where inequality of
protect clients
Public health objectives are equity,
quality; publicly provided; need
regulations to encourage efficient
resource use
Measures have discriminatory side
effects: (a) licensing and qualification
requirements to ascertain quality, (b)
restrictions on the range of services
professionals and hospitals are
allowed to provide, (c) controls to
ensure adequate provision to all areas
or groups, (d) direct provision of
minimum services to economically
disadvantaged groups
Public welfare
Public safety and security; shipping is
defined as a public utility
Cabotage is prohibited, and national
shipping is limited to Philippine flagged
and owned vessels engaged in
domestic trade;
In shipping, MARINA intervenes where
competition is ineffective and
practices restrain trade; operators
must be financially capable of
providing safe, reliable, and adequate
service and in the public interest
Consumer protection against anticompetitive practices through tariff
setting, cross-subsidization, universal
service obligations, standards
Assure safety and solvency, access
Regulations must complement the
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nications
market shares and high profitability does not imply
anti-competitive behaviour (Economides);
Has a dual role as a distinct sector of economic
activity and as the means of supplying other
economic activities;
A public utility, with foreign equity limited to 40%,
and broadcasting and media reserved for nationals
by the Constitution; foreigners cannot be
executives or managers;
Deregulation in 1990s opened the market; privately
held, with government role confined to issuing
licenses and managing competition;
government provides services in unserved or
underserved areas;
Market forces are transforming structure and the
way services are traded; once-marginal
technologies and practices are now mainstream
and deregulated;
Convergence complicates regulatory
considerations, as the different components come
from different market structures and regulatory
environments
Tourism
Dependent on infrastructure (transport, ports,
roads, telecoms, utilities, food and lodging),
immigration regulations; implies economies of
scope since different sectors must be involved,
hence policies must focus on its vertical nature;
No foreign investment restrictions on ownership
of tourism infrastructure
Sources: WTO 2001; TPR 2005; www.wto.org
competitive environment i.e. public
service obligations, obligations to
specific areas, quality of service
targets, tariff controls, treatment of
customers, competitive behaviour,
obligations to publish
Entities must provide reasonable and
non-discriminatory services and not
impede competition;
Franchise is granted after proof of
viability, efficiency, and being in the
public interest; rates are regulated;
Non-discriminatory interconnection to
network facilities is mandatory;
interconnection charges are
negotiated between parties or by NTC;
Cross-ownership is not allowed
Safety and security, environmental
impact, financial responsibility,
develop local economy; relatively free
from discriminatory practices
Further Readings:
• Alampay, E. A., �Telecom Regulatory and Policy Environment in the Philippines: Results and
Analysis of the 2008 TRE Survey”, IDRC
• Padojinog, W. “The Philippine Information and Communication Technology Sector:
•
•
•
•
•
Evolving Structure and Emerging Policy Issues”, PIDS DP 2005-29, 2005
Pasadilla, G.O. ed., The Global Challenge in Services Trade: A Look at Philippine
Competitiveness, PIDS and GTZ, 2006
Roque, H.S. Jr., “Globalization of Legal Services: Challenges and Possibilities in the
Philippine Setting”, 8th ASEAN Law Association General Assembly Workshop Papers, 2003
Tullao, T.S. Jr. ed., Education and Globalization, Philippine APEC Study Center Network and
PIDS, 2003
Urata, S. and M. Okabe, Towards a Competitive ASEAN Single Market: Sectoral Analysis”,
ERIA Research Project Report No. 3, Mar 2011
WTO, Guide to the GATS: An Overview of Issues for Further Liberalization of Trade in Services,
2001
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Special Access and Flexibilities for Developing Countries
Article IV requires members to facilitate the increased participation of developing country
members through negotiated specific commitments in (a) strengthening their domestic services
capacity and efficiency through access to technology on a commercial basis, (b) improving their
access to distribution channels and information networks, and (c) liberalizing market access in
sectors and modes of supply of export interest to them. Article V allows flexibility to developing
countries that are parties to a trade agreement, with respect to the elimination of existing
discriminatory measures and/or prohibiting new or more discriminatory measures, in accordance
with their level of development. Article XIX ensures that liberalization takes place with due
respect for national policy objectives and the level of development of Members, with flexibility
for developing country Members such as opening fewer sectors or fewer types of transactions,
progressively extending market access, and attaching conditions to market access that they
extend in order to achieve the objectives in Article IV.
WTO does not have a definition of “developing country”. Members are to make that decision,
and others can challenge the decision of a Member to make use of the provisions for developing
countries. For least developed countries (LDCs), WTO uses the designation of the United Nations.
“Modalities for the Special Treatment for LDC Members in the Negotiations in Trade in Services”
(WTO TN/S/13) were adopted in 2003 to provide mechanisms and procedures for ensuring LDCs’
maximum flexibility in negotiations. It requests other Members to exercise restraint in seeking
commitments from LDCs and the removal of conditions as long as these are GATS-compatible. It
allows LDCs to make commitments compatible with their development needs and that are
limited in sectors, modes, or scope. It also requests credit for autonomous liberalization,
recognition of Mode 4 as a most important means of supply for LDCs, technical assistance, and a
review mechanism. Still it requires Members to develop an appropriate mechanism for
implementing Article IV.
Manduna (2004) provides a detailed description of trade in services and GATS from the
perspective of an LDC. Based on the Modalities and Article IV, special treatment may be
interpreted as: (i) facilitation of exports through enhanced and non-reciprocal market access, and
(ii) flexibility for LDCs to pursue development objectives. The first requires strengthening of
domestic services capacities, in turn necessitating an assessment of services sectors and of the
implementation of practical mechanisms prescribed by the Guidelines. These must give policy and
negotiating options, be forward looking and anticipate technological changes.
The Hong Kong Ministerial Declaration of 2005 agreed to develop methods for the
implementation of the Modalities by July 2006, including mechanisms for according special
priority to sectors and modes of export interest to LDCs. This deadline was missed due to the
overall suspension of the Doha round.
In 2006 the LDC Group proposed a mechanism to operationalize this special treatment,
addressing the absence of provisions that allow countries to accord special priority to LDCs
without contravening the MFN principle. The proposal was to accord “non-reciprocal special
priority …only to LDCs” in areas of export interest to them. The mechanism is permanent and
binding, protects against MFN contravention, is mandatory for developed and voluntary for
developing countries, and is only for market access-enhancing purposes; the concessions must be
placed in the schedules of commitments. This elicited mixed reactions and a counter-proposal
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that Members report the extent to which their offers take LDC interests into account, circulate
these to LDCs for collective assessment, and identify best practice that Members could use for
their final schedules of commitments. However reporting still does not help LDCs access markets
on a priority basis, as it requires a legal carve out to the MFN. (South Centre 2006)
Implementation of Article IV is delegated to Members collectively and individually, and there has
been more focus on developed countries measures. Developing countries themselves must
facilitate its implementation through the use of conditions that Article XIX allows them to place
on liberalization commitments to fulfil national policies. Examples are strengthening programs to
promote investment in LDCs to build their capacity, reinforcing trade promotion programs,
promoting the development of LDC infrastructure through training, technology transfer, firmlevel schemes, intergovernmental cooperation, financial resources, or improving access of LDCs
services to distribution channels and information networks. (Borrero 2005)
Further Readings:
• Borrero, E., “GATS Conditions to Achieve Developing Country Policy Objectives,” T.R.A.D.E.
•
•
•
•
•
•
Occasional Paper 13, South Centre, 2005
Chanda, R., “GATS and Its Implications for Developing Countries: Key Issues and Concerns,”
UN Department of Economic and Social Affairs, Discussion Paper No. 25, 2002
EU FTA Manual, The EU’s Approach to FTAs: Services, Feb 2008
South Centre, “Increasing LDC Participation in Services through Special Priority Market
Access in the WTO,” Policy Brief No. 5, Sep 2006
South Centre, “The State of Play in the GATS Negotiations: Are Developing Countries
Benefiting?”, Policy Brief No. 20, Nov 2009
South Centre, “Negotiating Services Free Trade Agreements with the European Union:
Some Issues for Developing Countries to Consider,” Analytical Note SC/AN/TDP/EPA/21,
June 2009
WTO, “Modalities for the Special Treatment of Least Developed Country Members in the
Negotiations on Trade in Services,” TN/S/13, 5 Sep 2003
5.4 Measurement
The Manual on Statistics of International Trade in Services (MSITS) provides the conceptual
framework for the compilation and reporting of statistics on international trade in services. This
was first developed in 2002 and revised in 2010 by the Interagency Task Force on Statistics of
International Trade in Services31. MSITS conforms with the System of National Accounts (SNA)
and the IMF Balance of Payments and International Investments Position Manual (BPM). It
covers the four modes of supply by considering the location of the supplier and consumer of the
traded service, includes Foreign Affiliates Statistics (FATS), and provides a statistical approach for
measuring the value of the international supply of services through the presence of natural
persons. MSITS recommended phased implementation, and although some areas still require
31
The Task Force consists of 7 organizations: the United Nations Statistics Division (UNSD), Statistical
Office of the European Union (Eurostat), International Monetary Fund (IMF), Organisation for
Economic Cooperation and Development (OECD), United Nations Conference on Trade and
Development (UNCTAD), World Trade Organization (WTO), and World Tourism Organization.
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clarification, countries have basically adopted the MSITS framework in compiling data. (MSITS
2010)
The BPM framework includes the definition, valuation, classification, and recording of residentnon-resident trade in services. Transactions are recorded on the principles of residence,
valuation, and time of recording. The residence concept is based on the transactor’s center of
predominant economic interest during a one-year period, and considers the economic territory
the geographical area. Valuation is based on market price, and transactions are recorded at the
time they are rendered. Thus, balance of payments statistics provide much of the data for
measuring a country’s transactions with the rest of the world.
MSITS 2010 builds on the BPM framework and uses the Extended Balance of Payments Services
Classification (EBOPS) for a greater level of detail. The relationships between EBOPS and CPC
Version 2 and W/120 are given in correspondence tables. MSITS consists of 12 main components:
1. Manufacturing services on physical inputs owned by others
2. Maintenance and repair services not included elsewhere
3. Transport – 9 modes (sea, air, space, rail, road, internal waterway, pipeline, electricity
transmission, auxiliary); covers post and courier services
4. Travel – covers expenses for goods and services during a one-year visit; excludes students
and patients
5. Construction – construction abroad or in the compiling economy
6. Insurance and pension services – direct insurance, reinsurance, auxiliary insurance,
pension and standardized guarantee
7. Financial – also covers financial intermediation service charges indirectly measured
8. Charges for the use of intellectual property not included elsewhere – franchises and
trademarks licensing fees for the use of outcomes of research and development, or for
reproduction/distribution of computer software or audiovisual and related products
9. Telecommunications, computer, and information services –telecommunications,
computer (includes software), news agency (provision of news, photographs, feature
articles to media), and other information (database services, web search portals)
10. Other business services – research and development; professional and management
consulting (legal; accounting, auditing; business and management consulting, public
relations, advertising); technical, trade-related and other business services (architectural,
engineering, waste treatment and de-pollution, agriculture, mining; operational leasing;
trade-related services)
11. Personal, cultural, and recreational services – audiovisual and related services (motion
pictures, radio and television programs, musical recordings; artistic related services);
other personal, cultural, and recreational services (education, health, heritage and
recreational, other personal services)
12. Government goods and services not included elsewhere – all government and
international organizations’ transactions not contained in the other items, i.e., embassies
and consulates, military units and agencies, others
FATS allows the measurement of transactions of foreign-controlled affiliates, which are
otherwise not recorded in the BOP, being resident entities in their host countries. The concept of
control is in terms of the majority ownership of voting power. This includes domestic enterprises
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controlled by foreign investors (inward FATS) and affiliates abroad controlled by residents
(outward FATS). This provides indicators for Mode 3, and complement statistics on foreign direct
investments. (WTO 2010) FATS is still at an early stage of use. For FDI data, the main collectors
and disseminators are Eurostat, IMF Balance of Payments Statistics, OECD International Direct
Investment Statistics, and UNCTAD Foreign Direct Investment Database. IMF is conducting the
Coordinated Direct Investment Survey.
Mode 4 covers foreign natural persons entering the host economy to:
a) fulfill directly service contracts (contractual service suppliers) –the self-employed or
employees of a foreign service supplier
b) work in a foreign affiliate that delivers services (intra-corporate transfer or direct
recruit by the affiliate)
c) negotiate a service contract (service seller), or set up a service establishment or
market a service (person responsible for setting up commercial presence)
By international statistical standards, the distinction between temporary and permanent
presence is determined by the one-year rule. MSITS 2010 notes this difference from the GATS, but
information on residents for more than one year may contain elements related to temporary
presence in the GATS sense. (WTO 2010)
Some classifications relevant to the measurement of Mode 4 are CPC Version 2, ILO International
Standard Classification of Occupations, ISIC Rev. 4, and the International Classification of Status
in Employment. (WTO 2010)
The value of Mode 4 trade is almost fully captured within the services components of BOP that
cover transactions relating to international service contracts. The BOP items that include
significant elements of Mode 4 are: telecommunications, computer and information services,
other business services, personal, cultural, and recreational services, and construction.
The number of persons moving under Mode 4 may be found in tourism and migration statistics,
which could become more accurate if duration of stay is included. (WTO 2010)
TABLE 5. 5. Published BOP Trade in Services Data
Publication
IMF Balance of Payments Statistics Database
Eurostat Database
OECD Statistics on International Trade in Services
UNCTAD Handbook of Statistics
UN ServiceTrade database
WTO International Trade Statistics
Source: WTO 2010
Country coverage
IMF members
EU members, candidate
countries
OECD members, HongKong,
China, Russian Federation
~200 economies
~200 economies
All economies
Type of service
BPM5 and EBOPS
EBOPS
EBOPS and additional detail
BPM5 main items
EBOPS
Summary data and analysis
The UN ServiceTrade is the online database compiled in accordance with the MSITS, including
trade by service category and partner country.
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Philippine statistics on trade in services are found in the following (Durano 2001):
• Mode 1 and 2: Data come from the balance of payments, which uses the IMF BPM and the
MSITS. For direction of trade, foreign exchange transactions data from bank reports that
are submitted to BSP may be used. Memorandum items are included, which are earnings
and expenditures that are related to the flow of services but do not directly reflect the
value of services delivered. Remittances are a memorandum item since it is not possible to
identify the service sector of origin
• Mode 3: National Statistical Coordination Board (NSCB) Foreign Investments Information
System, also using the BPM. Covers inward FDI only, i.e. FDI in Philippine corporations,
partnerships or single proprietorships. The value of services that accompanies the
investments is also not known.
• Mode 4: There are numerous statistics on the number of persons entering or leaving the
country, but it is also difficult to estimate the value of services accompanying this
movement. The MSITS suggests that the data should reflect the movements of natural
persons who are (a) independent service providers abroad, and (b) employed abroad by
foreign service companies i.e. either established in the host country or providing services
under contract in the host country. These can come from travel data in the BOP, arrival and
departure cards from the Department of Tourism (DOT), visas granted from the
Department of Foreign Affairs (DFA), endorsement from BOI of managers and personnel of
joint ventures and FDI projects, alien employment permits from the Department of Labor
and Employment (DOLE), registered professionals from the Professional Regulation
Commission (PRC), and deployment of OFWs from the Philippine Overseas Employment
Association (POEA). Indications of values come from POEA data on wages and salaries of
OFWs based on their employment contracts.
Further Readings:
• Deardorff, A.V and R.M. Stern, “Empirical Analysis of Barriers to International Services
Transactions and the Consequences of Liberalization”, in Mattoo et al., eds., A Handbook of
International Trade in Services, World Bank, 2008
• Manual on Statistics of International Trade in Services 2010, jointly published by IMF, UN,
OECD, WTO, UNCTAD, Eurostat, UNWTO, 2011
• Maurer, A. et al., “Measuring Trade in Services”, in Mattoo et al., eds., A Handbook of
International Trade in Services, World Bank, 2008
• WTO, Measuring Trade in Services, a training module, Nov 2010
6.5 Selected Issues
Labor Market Test
A major constraint to market access is the economic needs test, or labor market test, or labor
certification test. In Article XVI, the requirements of an economic needs test are considered as a
form of limitation which are proscribed where market access commitments are undertaken,
unless otherwise specified in a Member’s schedule. The Scheduling Guidelines stipulate that
Members who schedule an economic needs test should describe the criteria in the market access
column. However the absence of a definition of economic needs test in the GATS has resulted in
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scheduling inconsistencies and a lack of transparency in their operation. (WTO 2001, quoted in
Chaitoo 2008)
Under the GATS, the Philippines committed to review Article 40 of the Labor Code on the labor
market test, and under the AEC Blueprint the commitment is to remove restrictions by 2015. The
Department of Labor and Employment (DOLE), which participates in negotiations, was to draft
position papers on the movement of natural persons and other labor market issues.
For this purpose, Stahl (2011) conducted a cross-country study to obtain implications for the
Philippines. Among Stahl’s findings: (a) Labor market test (LMT) and economic needs test (ENT)
are terms used interchangeably. The GATS does not define ENT, however, hence the lack of
criteria for their application. A solution to the lack of transparency and scheduling inconsistencies
is to use a positive list of sectors to which LMT or ENT does not apply. (b) Countries vary
considerably in managing the inflow of foreign workers. Entry regulations have become more
complex and go beyond the LMT procedure of searching from the local labor market. Two
measures are used, (i) compilation of a detailed list of skill shortages by occupation (“positive
list”), and (ii) ensuring a market rate of pay as opposed to a minimum salary level, and providing
work entitlements similar to what a resident worker in the same occupation receives. The
positive list approach ensures that foreign workers contribute to the economy by relieving labor
shortages, and sends signals to educational institutions that specific occupations are in short
supply. (c) A country’s GATS/AFAS obligations not to use LMTs or other methods to regulate the
inflow of skilled labor apply only to certain categories of service suppliers. LMTs apply to a
broader range of sectors and occupations than those of GATS/AFAS. (d) The use of LMTs and
other measures affecting inflows are not inconsistent with Philippine commitments to
GATS/AFAS. Since the free flow of labor is unlikely to take place by 2015, the objective should be
to clarify the use of ENTs and other measures through clear and detailed criteria for their
application. For Mode 4, ASEAN must agree on a common list of natural persons supplying
services within the region, to produce such criteria. (e) AFAS must have a positive list of
occupations open to free mobility. For the Philippines, DOLE’s current methodology of identifying
skill shortages (positive list) for controlling foreign worker inflow can be enhanced with other
measures. For instance, comparable wage and working conditions for foreign workers would
encourage local rather than foreign hiring because it is easier. Also the degree foreign workers
should be bound to their sponsoring employer would give them latitude for rejecting an unfair
arrangement.
According to the DOLE-BLE, there were proposed amendments to the Labor Code but the bill has
not been taken up at Congress. To comply with our 2015 commitments under the AEC, a Positive
List of occupations has also been drawn; however this also requires legislative action.
Further Readings:
• Stahl, C., “A Cross-Country Study of Labour Market Tests and Similar Regulatory Measures:
Implications for Labour Market Test Policy in the Philippines,” prepared for DOLE under EUTRTA2, April 2011
Mutual Recognition Arrangements
Aside from the Constitution, there are 47 laws governing the practice of professions, of which 42
contain reciprocity provisions. Those with no reciprocity cover criminology (RA6506),
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environmental planning (PD 1308), forestry (RA 6239), pharmacy (RA 5921), and radio x-ray
technology (RA 7431), while Supreme Court Rule 138 limits the practice of law to nationals.
Negative List A of the Foreign Investment Act lists 22 major professions. RA 8182 requires
preference for citizens in the hiring of consultants and other professionals necessary for the
implementation of foreign-assisted projects.
PRC Resolution 90-547 of 1998: Exceptions to Article XII Section 14 of the Constitution: Allow
practice through reciprocity; for consultation or for specific assignments whose services are
limited; for employment as professors, technical officers or consultants in specialized branches of
the profession; attached to international bodies assigned to perform definite work here; under
contract with the government as consultants; internationally known specialist whose services are
urgently necessary to promote the advancement of the profession or local experts are lacking.
Also those employed by foreign investors, and under agreements which allow foreign
professionals to practice here.
Under RA 8981 (PRC Modernization Act of 2000), the Professional Regulation Commission
approves the registration and issues a certificate of registration/ license, with or without
examination, upon recommendation of the Professional Regulatory Board, to a foreigner with a
valid certificate of registration from his country, provided that the requirements in his country are
substantially the same as the Philippines’ and allow Philippine citizens to practice the profession
on the same basis. PRC also issues a certificate of registration/license or a special temporary
permit to foreign professionals to practice here under reciprocity and other agreements,
consultants in joint venture or foreign assisted projects of the government, employees of
Philippine or foreign private institutions, or health professionals engaged in humanitarian mission
for a limited time.
Ra 5181: prescribes at least 3 years permanent residency and reciprocity as qualifications for any
examination or registration for the practice of profession. Lists foreign professionals allowed to
take license examinations and/or practice their professions in the Philippines.
Seven Mutual Recognition Arrangements (MRArs) have been signed under AFAS, two of which
are framework agreements and five are arrangements; none are agreements as of yet.
• Framework Arrangement for the MR of Surveying Qualifications (Nov 2007) – establishes
•
•
•
•
the basis and procedures for negotiating MRAs
MRAr on Architectural Services (Nov 2007)– a generic model
MRAr Framework on Accountancy (by May 2009) – provides a structure for the conclusion
of MRAs
MRAr on Medical Practitioners (by Jan 2010), on Dental Practitioners (by Jan 2010), Nursing
(by Jan 2010)
MRAr on Engineering Services (Dec 2005) – a generic model
The MRAr Framework lays down the principles and framework for negotiations, which may be
done bilaterally or multilaterally. The principal elements for recognition are education, licenses,
demonstration of competencies and experience. The professional regulatory authority grants
recognition of compliance with requirements, and monitors the practice of professions. The use
of standards and guidelines of the WTO and international bodies is encouraged. MRArs shall not
prejudice Member’s authority to set domestic regulations.
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MRAr in the medical, dental, and nursing fields already provide for the recognition and eligibility
of foreign practitioners in accordance with domestic regulations and subject to the following
conditions: possess qualification, possess valid professional registration/ license and current
certificate to practice at origin country, in active continuous practice in origin country (5 years for
medical and dental, 3 years for nursing), complies with Continuous Professional Development
policy at origin country, certified as not having violated any local or international standards and
has no pending investigation. The professional regulatory authority may have supplementary
requirements or competency assessment. Those allowed to practice shall be subject to domestic
regulations including codes of conduct in host country, insurance liability, culture and religion.
The MRAr does not prejudice the authority to regulate but this should not create unnecessary
barriers to the practice of the profession. ASEAN Joint Coordinating Committees for each shall
encourage Members to adopt mechanisms and facilitate the implementation of the MRA.
For engineering services, one must be an ASEAN Chartered Professional Engineer (ACPE), after
he completed or has the equivalent of an accredited engineering degree recognized by the
professional regulatory authority whether in the origin or host country, has a current and valid
professional registration or licensing certificate to practice in the origin country issued by the
professional regulatory authority or Monitoring Committee, 7 years experience of which 2 years is
in responsible charge of significant work, complied with Continuing Professional Development
policy of origin country, and is certified as not having violated local or international standards. He
must comply with Guidelines on Criteria and Procedures and satisfy the Assessment Statement,
and may practice only in the specified discipline. An ACPE must then be a Registered Foreign
Professional Engineer (RFPE) in the host country, with a sworn undertaking to abide by the codes
of conduct, laws and regulations, and to work with local professional engineers in the host
country, within his area of competency. A Monitoring Committee in each country shall maintain
an ACPE Register, and also certify qualifications of professional engineers. An ACPE Coordinating
Committee is the oversight body that will have the authority to confer and withdraw the title of
ACPE; it reports to the ASEAN Coordinating Committee on Services. After the MRA enters into
force, any Member that wishes to participate shall notify ASEAN of its effective date of
participation; those who wish to cease participation shall notify ASEAN 12 months prior.
The process is similar for architects, except that they register to be an ASEAN Architect (AA) with
the ASEAN Architect Council (AAC), education is not less than 5 years on a full time basis,
experience is at least 10 continuous years of which 5 are after registration and 2 are in responsible
charge of significant works. An AA must be a Registered Foreign Architect (RFA) at the host
country to work either in independent practice or with local licensed architects. The Monitoring
Committee shall maintain a national ASEAN Architect Register and issue certificates of AA
registration. The AAC is the oversight body that confers and withdraws the title of AA.
The Professional Regulation Commission (PRC) is currently in the process of identifying
competencies and other elements specific to each profession for the purpose of determining
commonalities within ASEAN. Country regulations and structures vary, and professional
associations participate in regulatory boards that formulate core competencies. Specific rules will
be rallied in committee meetings and side undertakings are encouraged to facilitate agreements.
To establish national standards and levels of outcomes of education and training, skills and
competencies, a National Qualifications Framework (NQF) was developed under the TESDA. NQF
is “an instrument for the classification of qualifications according to a set of criteria for levels of
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learning outcomes achieved.” They establish the basis for improving the quality, accessibility,
linkages, and public or labor market recognition of qualifications within a country and
internationally. (TESDA Philippine National Qualification Framework ppt) Work is being done to
align Members NQFs across ASEAN.
The following reasons for the lack of progress with respect to MRAs emerged during DOLE
workshops: (a) protectionism of professional bodies and their non-involvement in negotiations,
(b) absence of international standards, (c) lower quality of training, (d) numerous regulations, (e)
few government initiatives to encourage the movement of natural persons. (Iredale 2011) The
DOH echoed the reluctance to engage in MRAs, non-familiarity, inconsistent domestic
regulations, lack of budgetary support and collaboration with the private sector. (APEC 2010)
Further Readings:
Iredale, R. “Capacity Building for Philippine Tripartite Partners on Movement of Natural
Persons and Mutual Recognition Arrangements,” EU-TRTA2, March 2011
Transport
The Department of Transportation and Communications (DOTC) is the agency in charge of
transport infrastructure and services. Generally, the process of developing a negotiating position
consists of defining the sector/subsector to include, and conducting consultations with the
private sector and other government agencies. The main considerations in determining a final
position are the existing laws and regulations, the willingness and readiness of stakeholders to
compete, and our current infrastructural capabilities.
The scheduled commitments under the GATS are the point of departure for determining offers
under other regional and bilateral trade agreements. DOTC expressed the need to know the
hierarchy, if any, of priorities between multilateral, regional, and bilateral trade negotiations.
In view of the legal basis for the horizontal commitments, it is difficult to improve on them, since
that requires a change in the laws, e.g. foreign equity limits. Domestic regulations are generally
applied on an MFN basis, but LGU regulations must be consistent with commitments. In addition,
there is a need to clarify whether ancillary services are considered part of basic services since this
has implications for the applicability of limitations, e.g. for freight forwarding, more than 40%
foreign equity participation is allowed by the Philippine Shippers Bureau.
In addition to the horizontal commitments on foreign equity limitations, acquisition of land, and
entry and temporary stay of natural persons supplying services, specific commitments in
transport include: operation of public utilities is limited to nationals or corporations with up to
40% foreign capital; limits on the stay of foreign employees; repairs of Philippine-registered
vessels must be done at domestic shipyards; certificate of public convenience is required for
passenger and freight road transport, with new entrants subjected to an economic needs test for
unserved or developmental routes and a route measure capacity32 to determine the number of
vehicles.
32
To verify how many public transport units are needed, Route Measure Capacity is based on the formula
passenger demand/ (utilization ratio x viable load factor x average seating capacity x number of round
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Among the most challenging commitments under the AFAS are the foreign equity participation
threshold targets. The AEC Blueprint requires all Members to “Allow for foreign (ASEAN) equity
participation of not less than 51% by 2008, and 70% by 2010 for the 4 priority services sectors; not
less than 49% by 2008, 51% by 2010, and 70% by 2013 for logistics services; and not less than 49% by
2008, 51% by 2010, and 70% by 2015 for other services sectors”. The 2010 target completion of the
8th AFAS Package was extended to 2011. (ASec June 2011)
The coverage of “public utility” is a recurring issue when determining the subsectors to include,
in view of the foreign equity limits on the ownership and management of public utilities. In
particular, using the W/120, public utilities would appear to cover “Services auxiliary to all modes
of transport”, e.g. cargo handling, storage and warehousing, container yard and depot, freight
forwarding, catering, refuelling, pilotage, etc.
Current classification schemes are not able to accommodate certain services such as express
delivery, or ship classification societies.
Cabotage is excluded from the schedule of commitments. It refers to the transport of goods or
passengers within national territory by a foreign vessel or aircraft, and is restricted in many
countries for national security reasons. Specifically, Section 1009 of the Tariff and Customs Code
provides that passengers or goods on foreign vessels may be carried through any port of entry to
their port of destination in the Philippines, and passengers or goods departing may be carried in a
foreign vessel through a Philippine port. However foreign vessels may not transport passengers
or cargo between Philippine ports, i.e. transhipment, as coastwise trade is a national activity
reserved to vessels of Philippine registry. (Lorenzo 1998) The Maritime Industry Authority
(MARINA) provides exemptions to the cabotage provision by allowing ships to go to ports for
unloading but not for picking up passengers or cargo.
The lack of regulations for the logistics sector is perceived by the DOTC to be putting the country
at a disadvantage compared to other countries that are purposefully developing the sector.
The parameters for offers in AFAS are based on the AEC Blueprint. Some subsectors are offered
though not liberalized (?), while some areas are already liberalized but not offered, e.g. retail
trade. ASEAN is unable to bargain as a block in ASEAN Plus negotiations, since Members do not
have the same offers.
The DOTC has also expressed uncertainty over the coverage of seafarers under the GATS. The
POEA33 defines seafarers as persons employed on board a seagoing vessel that navigates the
foreign seas, excluding government ships used for military or non-commercial purposes, and
including fishermen, cruise ship personnel, and those serving on foreign mobile offshore and
drilling units. Such maritime employment is under a government-approved standard employment
contract, through a licensed manning agency that recruits and deploys seafarers for a foreign
principal. Mode 4 clearly applies to seafarers since they are natural persons supplying services
abroad under contract of a local agency.
trips) (AIM RVR Center for Corporate Responsibility-EMERGE, Land Transport Franchising: #4 of 6 reports
for an Integrated System of Motor Vehicle Registration, Land Public Transport Franchising, Insurance, and
Taxation, March 2007)
33
See POEA Rules and Regulations governing the recruitment and employment of seafarers,
May 2003.
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The country is a signatory to the International Maritime Organization (IMO) Code of Standards on
Training Certification and Watchkeeping (STCW). This requires all professional mariner
certificates (level of mariner certification and capacity and limitations) to be STCW-compliant.
Part A of the Code is mandatory while Part B is recommended. The STCW seeks to establish a
baseline standard for the training and education of seafarers throughout the world, as well as a
structure for the required standard to be met, through quality control and competence-based
training. A mariner’s school must be recognized by the country issuing the license and the flag
state of the vessel must accept licenses or certificates of competency (COC) issued by that
country. Each country must incorporate a statement of compliance with the STCW Code into their
COC. A White List identifies countries that are fully compliant with the STCW Code. A vessel that is
flagged by a non-White List country that desires to enter a White List port can be denied entry,
detained, or inspected. If a mariner has a COC from a non-White List country, he will be denied a
Certificate of Equivalency, rejected for White List flagged vessels, and his sea time and training
may be scrutinized or not accepted. (www.stcw.org)
The Maritime Training Council, PRC, Philippine Coast Guard, Maritime Industry Authority are the
agencies involved in complying with the STCW; TESDA and CHEd are also responsible for training
institutes. Recently the European Maritime Safety Agency gave the Philippines until August 2011
to address the deficiencies or face STCW de-recognition from the EC, “in the areas of functioning
of the maritime administration, insufficient quality procedures, insufficient monitoring of schools,
inaccurate approval and review of courses, level and quality of training, poor quality of inspection
of maritime education and training institutes, and insufficient qualifications of instructors and
assessors.” (Manu’s scripts, 9June2011) Stakeholders are urging the government to designate
one agency to implement the STCW. (www.moimconsulting.com, 29 July 2011)
Further Readings:
• Findlay, C., “Transport Services”, in Mattoo, A. et al., eds., A Handbook of International
Trade in Services, WB 2008
D. Telecommunications
The National Telecommunications Commission (NTC), an agency under the Office of the
President, is in charge of communications infrastructure. Content or value-added services (noninfrastructure) are under the jurisdiction of the Information and Communication Technology
Office of the Department of Science and Technology, which replaced the Commission on
Information and Communications Technology (CICT) under EO 47 of June 2011.
The WTO Agreement on Basic Telecommunications Services is annexed to the Fourth Protocol of
the GATS. Basic telecommunication services are provided through Modes 2 and 3, and cover voice
telephony, data transmission, telex, telegraph, facsimile, private leased circuit services, and other
(fixed and mobile telephony, mobile data, paging, personal communications, satellite based
mobile, fixed satellite, VSAT, gateway earthstation, teleconferencing, video transport, trunked
radio system). Unless otherwise specified, commitments cover local, long-distance, international,
wire-based, radio-based, resale or non-facilities-based, facilities-based supply, public use, nonpublic use. Value-added services are telecommunications for which suppliers add value to the
customer’s information by enhancing its form or content or by providing for storage and
retrieval. Examples are online data processing, database storage and retrieval, electronic data
interchange, email, voice mail. (www.wto.org)
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The Philippine Reference Paper on Regulatory Principles in Telecommunication Services adapts
the WTO principles: (1) competitive safeguard, (2) interconnection, (3) universal service, (4) public
availability of licensing criteria, (5) independent regulators, (6) allocation and use of scarce
resources.
NTC follows the same general process in developing a negotiation position, i.e., determine
sectors based on the CPC and specific requests of trade partners, then examine national laws and
regulations to know what is allowed and what is not. If there are no existing guidelines,
consultations are held with stakeholders. To produce an offer list, the limitations in the current
schedule of commitments are worked out, particularly the “subject to” conditions. NTC
regulations are revised as deemed necessary, in line with commitments, but there is no attempt
to advocate for changes in national law. Currently the pressure under AFAS is to increase the
foreign equity share.
The CPC does not always provide sufficient detail, and requests are usually highly specific or
based on technological advances. In other cases, countries differ in definitions of subsectors,
making it difficult to reach agreement on the acceptability of an offer, e.g. prepaid service is
considered as a marketing tool rather than a subsector unlike in other countries. Certain valueadded services are also too broadly defined or not in the CPC, as technology advances rapidly.
There is a need to have an internationally accepted definition.
Entry into the telecommunications industry requires a congressional franchise that lasts up to 50
years, and foreign ownership is limited by the Constitution to 40%. Furthermore, a Certificate of
Public Convenience and Necessity (CPCN) from the NTC is required for the type of service to be
offered, through which the NTC assigns the area of operation, determines the allowable rate to
be charged, and manages the allocation of the radio spectrum or frequency. Value added and
cable TV services do not require a franchise but only a Certificate of Authority from NTC to
operate, under EO 205 of 1987.
In 1993 EO 59 made interconnection compulsory among public telecoms carriers, while EO 109
required international gateway operators to provide local exchange services in unserved and
underserved areas. RA 7925 or the Telecommunications Law of 1995 formalized policy for
competition and deregulation. In 1997 EO 436 considered the operation of cable TV systems as a
subscriber service undertaking with a unique technology, to be separate and distinct from
telecommunications or broadcast television.
Rapid and revolutionary changes in technology such as microelectronics, digital technology,
optical fiber, satellite communications, facsimile cable TV, electronic mail, and internet telephony
have meant a natural convergence of telecommunications, mass media, electronic commerce,
and data processing. Segments of the information and content industries are thus progressively
integrating into a single economic market based on distributed digital technology.34
Convergence has in turn made interactive multi-media services possible.
Interconnection is a complex issue whose intricacies cannot be defined, and problems associated
with it are usually of a business nature, but it does not require exclusive legislation. However
RA7925 lacks ground rules for interconnection, incentives for interconnection, and sanctions for
34
H.B. 3940, An Act to Promote the Efficient and Effective Delivery of Converging
Communications Services, 12th Congress
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failure to do so. It does not cover cable TV and internet service. Other issues are rate re-balancing,
cross-subsidy, and the privatization of government telecommunication facilities. Legislation is
also needed to provide rules for rationalizing and optimizing the impact of convergence on the
existing communications sector. Other areas are fraud prevention, security of communications,
and updating of generic laws on the practice of electronics and communications engineering.
(DOTC 1998)
While telecommunications companies are moving toward convergence by transmitting voice,
data, and cable through a common medium, common regulations for internet, broadcasting,
telecommunications, and cable, may not be possible due to differences in foreign ownership
allowed in each subsector.35 The Constitution limits the ownership and management of mass
media to Filipinos or entities wholly owned or managed by Filipinos. Foreign ownership is thus
prohibited in broadcast as well as cable TV, which is considered distinct but supplementary to the
former. RA 7925 prohibits an entity from engaging in both telecommunications and broadcasting
either by airwaves or cable. Content services such as TV programs can thus be opened up but
broadcast media cannot be liberalized because there is no convergence law.
Further Readings:
• Cowley, P.F. and J.D. Aronson, “Trade in Services Telecommunications”, in Mattoo, A. et al.,
eds., A Handbook of International Trade in Services, World Bank, 2008
• Department of Transportation and Communication, Philippine Information Infrastructure
Policy Study (PIIPS) Project, Oct 1998
• Molnar, M., “Different Regulations, Different Impacts – What Regulations Affect Trade in
Telecommunications Services?”, OECD Experts Meeting on Telecommunication Services,
Dec 2008
Health Services
The health services sector illustrates several important issues in trade in services. Health is a main
priority of governments, being a basic human right that is essential to welfare and enhances the
productivity of citizens. Services necessary to sustain health are mainly rival and excludable, but
there are aspects of health services that have a public good character aside from large
externalities, such as the prevention of communicable disease. Moreover, the need to prepare
for uncertain but costly treatments has given rise to health insurance services, which is
characterized by information asymmetry and requires measures to prevent fraud and abuse.
As one of the core responsibilities of government, basic health services are publicly-provided to
ensure access especially for the poor. Governments ensure equity of access and quality of care
through (a) licensing and qualification requirements, (b) controls/incentives to enable adequate
provision to all regions and population groups, and (c) direct provision of minimum services to
economically disadvantaged groups, which have discriminatory side effects. (Smith et al. 2008).
Previously considered non-tradeable and usually publicly-provided, technological changes
enabling the electronic transmission of information and increased market orientation have led to
changes in the organization of health services and enhanced their tradeability. International
35
M.A.L. Reyes, “Proposed convergence law faces problems”, Phil. Star, 18 Aug 2001
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movements of health professionals, private domestic and foreign investments in health facilities,
medical travel, and business process outsourcing of medical records, are indicative trends.
The country made no commitments on health services under the GATS. The opportunities for
trade in health services have encouraged an examination of national capabilities and constraints
in pursuing them, in the context of the country’s public health objectives of ensuring access to
quality health care. The DOH thus commissioned a study (Rodolfo 2010) to determine a request
and offer schedule, taking account of the (a) linkages between trade in health services and the
country’s health care system, (b) consistency with national health policies, (c) position of relevant
stakeholders, and (d) consistency across multilateral, regional, and bilateral agreements.
National health policy aims for universal access to quality health services. At present, this is being
pursued through the 2-tiered public-private system that is characterized by resource and quality
differentials. Public provision of health services is not covered by the GATS. Domestic regulations
currently affecting trade in health services are:
Mode 1 – recognition of medical services provided by internet/post, recognition of licenses and
standards, liability concerns
Mode 2 – portability of health insurance, accreditation and licensing
Mode 3 – foreign equity rules, discriminatory tax, quantitative limits
Mode 4 – Constitutional limit and laws on professions, e.g. economic needs test, accreditation
and licensing, residency
Aside from the existing regulations or infrastructural and capacity constraints, the absence of
regulatory frameworks in such areas as malpractice liability, privacy and security of information,
or insurance portability36, as well as existing regulations governing telecommunications,
insurance, or finance, have an impact. (Rodolfo 2010)
Using the WHO Diagnostic Tool on Trade and Health, Rodolfo assesses the country’s trade in
health services for each mode of supply in terms of current level and form of trade, main
strengths and weaknesses, health implications of trade policy and trade implications of health
policy, and existing regulatory framework and key flanking policies under consideration.
For Mode 1, the possibilities are e-health or the use of ICT for clinical, educational, and
administrative purposes, under which telehealth provides diagnosis and treatment
(telemedicine), or organization and management services between 2 or more locations. Since it is
a non-core medical service, it has limited implications on the health sector and is less affected by
health policies than by business and electronic commerce regulations (Rodolfo 2010) such as
connectivity, lack of standards, data privacy policies and third party storage (APEC 2010).
36
This refers to the ability to claim reimbursements for health services provided in countries other
where the insurance policy was purchased, rather than the continuity of coverage when changing jobs.
This requires common standards of care, litigation, and diagnosis-related group system.
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For Mode 2, medical tourism37 is being promoted, concentrating on 4 segments, i.e. hospitalbased services, specialty clinics, health and wellness, and retirement. Cross-cutting issues are
tabulated based on an earlier study. Competitiveness rests on a country’s attractiveness as a
tourist destination and reputation for cost-effective quality medical treatments. Medical tourism
enables providers to generate earnings that can be used to improve capacities, but there are
potential negative effects, such as aggravating the dual market structure (i.e. where a better
organized private hospital system coexists with an underfunded public health system), crowding
out the local population, diverting resources to foreign service providers and patients, and
internal brain drain and cost escalation due to high technology investments. (Rodolfo 2010)
For Mode 3, foreign investments are allowed in health services with a minimum $200,000 set for
those targeting local residents; incentives are also in medical tourism ecozones although these
apply only to those operations serving foreign patients. The operation of health facilities is
regulated by the DOH. Issues affecting business generally affect health sector investments.
(Rodolfo 2010)
For Mode 4, the country is a recognized source of health service providers, while the
Constitutional provision limiting the practice of professions to nationals has limited the inflow of
foreign workers. Overall policy on worker deployment is market-driven owing to the remittances
generated, although public resources used in training health workers are not recouped when
they move. Imbalances caused by the outflow of workers could be temporary or permanent,
while a high turnover rate could affect the quality of domestic health care. Because of the
negative impact of out-migration, the country is adopting a “managed migration” approach
based on the WHO Global Code of Practice on the International Recruitment of Health Personnel,
through bilateral cooperation agreements with recruiting countries. (Rodolfo 2010)
Rodolfo then identifies the risks and opportunities of trade in health services. While trade in
health services can provide additional resources into the country’s health system, the benefits
accrue mainly to the private health system and divert resources away from the public health
system. Risks are concentrated in the public health system, whose mandate is to address public
health needs particularly of the poor. Hence the challenge lies in directing the flow to the public
health system, i.e., trade in health services must contribute to the availability of quality health
care for all. Regulations are a non-market mechanism that can be used to maximize the benefits
from trade in health services while improving the public health system. A regulatory strategy
would consider (a) whether the public health system should have a passive or active role in trade
in health services, (b) whether the government should stop or allow the outflow of resources
from the public health system, including the role of regulation, (c) whether market forces or
government action should maximize the inflow of resources into the public health system.
TABLE 5.6. Classification of Health Services in W/120 and CPC
W/120
1. Business services
A. Professional services
CPC version 2
37
Commitments refer to foreign service providers’ ability to access local markets. Local market refers to
local patients who go abroad for health services. Hence medical tourism requires that foreign countries
allow their nationals to travel here and apply their health insurance coverage to services received here.
Health education for foreign students is yet another area.
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h. medical and dental services
j. services provided by midwives, nurses,
physiotherapists, and paramedical personnel
8. Health related and social services
A. Hospital services
B. Other human health services
9312 Medical and dental services
93121 General medical services
93122 Specialized medical services
93123 Dental services
93191 Childbirth and related services
93192 Nursing services
93193 Physiotherapeutic services
93 Health and social services
931 Human health services
9311 Inpatient services
93111 Surgical services
93112 Gynaecological and obstetrical
93113 Psychiatric services
93119 Other services
9319 Other human health services
93194 Ambulance services
93195 Medical laboratory services
93196 Diagnostic-imaging services
93197 Blood, sperm and organ bank
93199 Other human health services n.e.c.
The study thus suggests that the negotiation position should be based on the following principles
(Rodolfo 2010):
1.
for content, recognition of the primacy of domestic health goals and consistency with
domestic laws and regulations
2. for process, a structured system of stakeholder consultations and ultimate decision by
the government through DOH
3. for strategy, consistency of positions across multilateral, regional, or bilateral discussions,
and preserving policy flexibility while ensuring the effectiveness of commitments
The AEC Blueprint provided for substantial removal of restrictions, i.e. 70% foreign equity, in
priority sectors that includes healthcare by 2010. To see how ASEAN Members have been
complying with their targets, ERIA conducted a survey of current regulations affecting health
services.
TABLE 5.7. Regulations Affecting Health Services
Mode 1
Mode 2
Mode 3
Entry
Form of
establishment; joint
venture with local
partner
Scope of service
Hospitals, medical laboratories
No restrictions
No restrictions
No restrictions
Professional services
Firm may be foreign owned if service providers
are nationals. Constitutional limits on the
practice of profession preclude foreign- owned
partnerships and single proprietorships.
No restrictions
Restrictions depend on category
of hospital, not ownership
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Number and type of
clients
Private ownership
Foreign ownership
Conditions for
licensing
Coverage of
requirements
Restrictions on
operations
No restrictions, except those in
special EZs must have 60%
foreign clients
Allowed, up to 100%
Allowed, up to 100%; but
individual service supplier must
be nationals
Professional qualifications of
key staff, conformity with
quality assurance systems,
service capability
Requirements apply to nationals
and foreigners
Advertising
Fees
Participation in
government contracts
Universal service
obligation
Access to subsidies
Mode 4
Employment of
nationals in foreign
invested firms
Labor market test
Qualifications of
management
Domicile of
management
No restrictions
Allot 10% of bed capacity for
free, to get license
Restricted; must be PEZA- or
Philhealth-accredited
Required. BoD must also be
proportional to the equity share
of nationals
Non-professional investors are allowed up to
100% equity in corporations
For locals, professional exam, internship; for
foreigners, assessment of license and
qualifications
Professional associations may reserve certain
activities for members; PhilHealth reserves
some activities for medical professionals
Prohibit testimonials on drugs, food products,
instruments or objects related to practice in
public media
Code of Ethics proscribes exorbitant fees
Foreign owned professional service firms
cannot be engaged in government projects
None required
Benefits may be claimed only if the foreign
service firm is PhilHealth-accredited
No minimum citizenship requirements for
managers in foreign-owned corporations. 100%
national for partnerships and sole
proprietorships whose managers are also the
professionals.
Yes. BoD with voting rights are
exempted
Must have local professional
license
For 100% foreign owned, the
majority of BoD must be
residents
Entry of professionals
Residency
requirement
Restrictions on exit
Source: ERIA, Competitive ASEAN Single Market 2010
Constitution reserves the practice of profession
to nationals. Foreigners may be given
temporary permits to practice, or admitted
under reciprocity agreements.
Permanent residency of > 12 months
Exit permit required for selected sub-specialties
TABLE 5.8. Horizontal Commitments under the GATS, AFAS, and PJEPA
Limitations on Market Access
Limitations on National Treatment
Horizontal Commitments for All Services under the GATS, AFAS, PJEPA
Mode 3:
Mode 3
In activities reserved to citizens or entities with limited
Access to domestic credit – A foreign firm in nonforeign equity participation – the participation of foreigners
manufacturing and availing itself of peso borrowings,
in the governing body is limited to their proportionate share shall observe the 50-50 debt-to-equity ratio. Foreign
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of foreign capital. Managers must be citizens.
firms covered are (a) partnerships, with 40% foreign
On acquisition of land – All lands of the public domain are
capital, (b) corporations, with more than 40% foreign
owned by the State. Only citizens or entities with at least
subscribed capital stock. (This does not apply to
60% Filipino ownership may own land and acquire public
banks and non-bank financial intermediaries.)
lands through lease. Foreign investors may lease only
private-owned lands.
Mode 4:
Entry and temporary stay of natural persons - Non-resident
aliens may supply a service if no person who is competent,
able, willing to perform the service is available.
Additional Horizontal Commitments for All Services under PJEPA
Modes 1,2,3,4: LGU measures are unbound
Modes 1,2,3,4: LGU measures are unbound
Mode 3:
Mode 3:
In activities with 40% or less foreign equity in capital stock
Banks are prohibited from extending peso loans to
outstanding and entitled to vote – the percentage of
non-residents.
membership in the board of directors is limited to their
proportionate share
In activities with more than 40% foreign equity (a) the
majority of directors must be residents and board secretary
must be a citizen and resident, and (b) paid-in equity must
be at least $200000 for domestic market enterprises, or at
least $100000 if with advanced technology and 50 direct
employees, or exports at least 60% of its output
Mode 4:
Practice of professions is limited to citizens except in cases
prescribed by law
Horizontal Commitments for Professional Services under AFAS and PJEPA
Mode 4:
PRC may, upon recommendation of Professional Regulatory Board, approve the registration and issue a certificate of
registration/license and professional identification card, with or without examination, to a foreigner who has a
certificate of registration from his country that has not been suspended, provided that: (a) the requirements for
registration/licensing in his country are substantially the same as those required/contemplated by Philippine laws and
allow Philippine citizens to practice the profession on the same basis and grant the same privileges; (b) PRC may
authorize the issuance of a certification/ license or special temporary permit to:
(i) foreign professionals who desire to practice their profession here under reciprocity and other international
agreements;
(ii) consultants in foreign funded, joint-venture or foreign assisted projects of the government; or
(iii)employees of Philippine/foreign private firms/institutions pursuant to law, or health professionals engaged
in humanitarian mission for a limited period of time
(c) agencies/organisations/ individuals whether public or private, who secure the services of a foreign
professional authorized by law to practice in the Philippines for the above shall be responsible for securing a
special permit from the PRC and DOLE pursuant to their rules.
TABLE 5.9. Commitments under AFAS for Professional Services
Sector or subsector
Limitations on Market Access
All Subsectors
Hospital services (9311)
Other human health services
n.e.c.
Laboratory services (9319)
(1) Unbound*
(2) None
(3) Up to 100% foreign equity is allowed,
provided paid-in equity capital is (i) is
least $200000 or (ii) not less than
$100000 for domestic market
enterprises with at least 50 direct
Limitations on National Treatment
Specific service outputs shall be
recognized only if the foreign
professional is registered with the
PRC
(1) Unbound*
(2) None
(3) None, except as indicated in the
horizontal section
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Services related to ergotherapy,
speech therapy, homeopathy,
acupuncture provided by
paramedical personnel (93191**)
employees; otherwise only up to 40%
foreign equity is allowed
(4) Employment of foreign professionals: as indicated in the horizontal section
(1) None
(1) None
(2) None
(2) None
(3) Unbound, except that up to 50%
(3) Unbound, except as indicated in
foreign equity is allowed when paid-in
horizontal section
capital is: (a) not less than $200000 for
domestic market enterprises, (b) not
less than $100000 for domestic market
enterprises with at least 50 direct
employees, (c) not less than $100000
for domestic market enterprises
involving advanced technology, or (d)
service provider exports 60% or more of
its output.
(4) Unbound, except as indicated in the horizontal section for professional
services
NOTE: ** indicates that the specific commitment for the code does not extend to the total range of services covered under that
code
TABLE 5.10. Specific Commitments under PJEPA on Health Services
SECTOR
Hospital Services
(9311) SS
MODE 1
M Unbound*
A
MODE 2
None
N Unbound*
T
None
Health Professionals
Medicine (9312**)
M None, except services
SS
A outputs cannot be
Nurses (93191**)
recognized by the
SS
Philippine government
N None, except services
T outputs cannot be
recognized by the
Philippine government
Dentistry (9312**)
SS
Optometry
Midwifery
(93191**) SS
Medical
Technology
Physical and
Occupational
M Unbound*
A
N Unbound*
T
None
None
MODE 3
Up to 100% foreign equity is allowed,
provided paid-in equity capital is (a) at
least $200000, (b) not less than $100000
for domestic market enterprises with at
least 50 direct employees; Otherwise
only up to 40% foreign equity is allowed
None, except as indicated in the
horizontal section
MODE 4
As indicated in
the horizontal
section
None
Corporate practice not allowed
Doctors and Nurses: Foreigners may take exam under
reciprocity arrangement
Nurses: Provided the requirements for registration and
licensing are substantially the same as those in the
Philippine Nursing Act (RA 9173); Certificate of registration/
professional license may be issued without exam to foreign
registered nurses, provided the requirements are the same,
and reciprocity is followed; Special permit may be issued to
a foreign licensed nurse who is an international expert, on
free medical mission, or employed as exchange professor
Corporate practice is not allowed
Dentists: Certificate of registration is not required of
commissioned foreign military dental officers, and
dentists/oral surgeons invited for consultation or
demonstration, provided authority was granted by the
Board of Dentistry
Optometrists: Foreigners may take exam under reciprocity
including recognition of prerequisite degrees, or without
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Therapy (93191**)
SS
Radiologic
Technology
restriction; Special permit granted if international expert or
his services will promote professional advancement here,
whether or not reciprocity exists with his country
Midwives: Rights/privileges under Midwifery Act (RA 7392)
granted under reciprocity, provided requirements for
admission and graduation are substantially the same
Medical technologists: Foreigners may take exam, be given
Certificate of Registration, or granted rights/privileges
under Medical Technology Act (RA 5527) under reciprocity
Physical and Occupational Therapists: Foreigners may take
exam under reciprocity; Registered foreigners may practice
without taking exam if the requirements for their
registration and licensing are substantially the same as the
Physical and Occupational Therapy Law (RA 5680), & under
reciprocity
Radiologists: Exam is not required of foreigners invited to
lecture/consult or as exchange professors, provided they
are licensed to practice, they secure a special permit from
the Board of Radiologic Technology, and follow reciprocity
NOTE: SS indicates that the Philippines is not prevented from maintaining or adopting any measure with respect to the modes
where “Unbound* is entered.
RA 5181 prescribes reciprocity as a qualification for the examination or registration of aliens for the practice of professions, where it
is not limited by law to citizens
TABLE 5.11. Specific Commitments under PJEPA on Movement of Natural Persons (Article 110)
Section and Type
General: Natural
Persons of Japan
Sec. 1 Short-term
Business Visitors
Period of Stay
Purpose
Entry and temporary stay
Requirements
Visa prior to entry
59 days initial, may
be extended every
2 months for a
total of 1 year
1 year, may be
extended
Participate in business
contracts, will not acquire
remuneration from the
Philippines nor supply services
Manager, executive, or person
with special knowledge or
technology employed by a
service supplier or investor in
Japan who is being transferred
to a branch or joint venture
partner in the Philippines
Exempt from the AEP or Alien
Employment Permit from DOLE
(Art. 40 of the Labor Code)
Sec. 3 Investors
1 year, may be
extended
Sec. 4 Natural
Persons of Japan who
Engage in
Professional Services
Sec. 5 Natural Persons
of Japan who Supply
Services that require
Advanced Technology
or Knowledge or
1 year, may be
extended
Those who engage in
investment and management of
such or other business on behalf
of another investor, or conduct
business in which other
foreigners have invested
Engineers who have a contract
with public or private
organizations in the Philippines
Sec. 2 Intra-Corporate
Transferees
1 year, may be
extended
Technical, advisory or
supervisory persons on contract
with a public or private
organization in the Philippines.
(This does not include skilled
(a) Special permit to practice from
PRC (RA 8981) if his position
constitutes the practice of a
regulated profession, and an AEP
from DOLE; (b) AEP from DOLE, if
his position does not constitute
the practice of a regulated
profession
(a) AEP from DOLE;
(b) if the position constitutes the
practice of a regulated profession,
special permit to practice from
PRC
Special permit to practice the
regulated profession from PRC, an
AEP from DOLE
AEP from DOLE
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Special Skills in a
particular field
Sec. 6 Natural
Persons of Japan who
Supply Services as
Nurses or Certified
Careworkers or
related activities
labor nor the practice of
regulated profession)
6 months for
language training,
may be extended
for 6 months to 1
year for
experience to take
Philippine
proficiency exam
Qualified Japanese nurse is
licensed under Japan law,
graduate of a nursing course
equivalent to a Bachelor’s
Degree in Nursing in the
Philippines, with 3 years work
experience;
Those who pass the proficiency
exam may work only in hospitals
identified by the DOH
Language training in English and
Filipino, culture orientation and
related experience prior to
proficiency exam, with
exemptions from language
training possible; exam may be
taken up to 3 times during the 1
year stay;
Those who pass may enter and
stay for a period co-terminus with
contract with a public or private
organization, provided that a
special permit to practice from
PRC and AEP from DOLE are
secured
The importance of careful study prior to committing is highlighted by the inability of Filipino
nurses to take advantage of the liberalized Japanese market because of the language proficiency
problem.
DOH supports trade in health services pursued in the context of public health objectives of
equity, quality or patient safety, and accessibility to the disadvantaged. A medical tourism
program is to be adopted that meets these objectives while enhancing the competitiveness of
health care institutions.
BOX 2.1.1. Issues to consider in developing negotiating positions for health services
Horizontal measures
1. Do any measures directly or indirectly discriminate against foreign providers or impose market access limitations on
foreign providers?
2. What is the nature of the government involvement in the sector: regulator, provider, or a combination?
3. Do domestic and foreign providers receive state support?
Measures affecting cross- border supply (Mode 1)
1. Can nonresidents supply health services from across the borders?
2. Are specific activities restricted (including because they are considered technically unfeasible) in terms of crossborder supply?
3. Are there legal restrictions on the electronic submission of information documentation (for example, for reasons of
data protection or other reasons)?
4. Where and how clearly are restrictions spelled out?
5. What are the policy reasons behind the restrictions?
6. Are there less trade restrictive means of achieving the same objectives?
7. Do any measures support enhanced applications of information and communication technology so as to allow
improved cross-border supply?
Measures affecting commercial presence (Mode 3)
1. Are foreign suppliers of services allowed to establish a commercial presence? Are they required to establish through
particular legal procedures? If so, which ones? What is the prescribed legal procedure for a joint undertaking?
2. Are there any nationality requirements regarding management, the number of workers, or boards of directors?
3. Are there any prior residency requirements?
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4. Are there any foreign equity limitations?
5. Are there any restrictions on the movement of professional, management, or technical personnel?
6. Are there any requirements for the transfer of technology, expertise, management skills?
7. Are there restrictions on the use of the names of international foreign firms?
8. Are established foreign firms subject to specific performance requirements, including local content and
manufacturing requirements, and remittance and foreign exchange restrictions?
9. Where and how clearly are restrictions spelled out?
10. What are the policy reasons behind the restrictions?
11. Are there less trade restrictive means of achieving the same objectives?
Measures affecting the movement of natural persons (Mode 4)
1. Are there limitations on the number of persons that may be transferred as intracorporate transferees?
2. Are there limitations on the number of persons delinked from Mode 3, such as doctors or nurses?
3. Are there specific requirements for providers (educational, qualification, licensing)?
4. Are there prior experience or post-qualification experience requirements attached to the issuance of visas or work
permits?
5. How are entry permits and work permits obtained?
6. Are there time limitations on the presence of foreign providers of services (for example, duration of stay)?
7. Do measures limit the participation of foreign providers in the public sector?
8. Is the entry of foreign providers of services subject to economic needs tests?
Measures relating to domestic regulations
1. Is there an adequate legal framework supportive of the trade in health services?
2. Are there provisions in domestic law that protect service providers from corruption, theft, and accidents?
3. Are there any qualification or licensing requirements or procedures or technical standards that affect (the trade in)
health services?
Issues relating to technical and security standards, professional qualifications, etc.
1. Are technical, industry, and security standards implemented?
2. Are these standards transparent and nondiscriminatory?
3. Is there an independent body monitoring the implementation of these standards?
4. Is there widespread data security in the country?
5. What conditions must foreign providers of services fulfill to meet the requirements of existing mutual recognition
agreements to which the host country is a party?
6. Must foreign providers of services be locally established to participate in mutual recognition agreements?
Universal access
1. What universal service regulations apply?
2. May the government impose obligations relating to universal access on service providers?
3. What measures or mechanisms are in place for the achievement of public service obligations?
4. Are these measures objective and transparent?
5. Are foreign suppliers of services subject to different conditions relative to domestic suppliers in relation to public
service obligations?
Issues relating to adequate technology, equipment, and so on
1. Are there any restrictions on the temporary admission of the equipment necessary to provide services?
Competition issues
1. Are there sectoral exemptions to competition law that affect the conditions of competition? What is the role of
professional bodies in determining the conditions of competition?
2. Are there limitations on competition between domestic service providers and foreigners?
3. Do any licenses grant exclusive rights?
Preferential liberalization measures, most favored nation obligation
1. Do any preferential agreements, including in the regional context, affect the supply of any health services?
2. Do these preferential arrangements apply to the movement of natural persons?
3. Do any preferential access measures favor developing countries?
Source: Saez and Lanoszka, Chapter 4 (WB 2010)
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Further Readings:
• Rodolfo, C., “Development of a Request and Offer Schedule for Trade in Health Services”,
submitted to DOH-BIHC, Nov 2010
• Smith, R., et al., “Trade in Health Services and the GATS”, in Mattoo, A. et al., eds., A
Handbook of International Trade in Services, WB 2008
• Vieira, C. ed., Trade in Health Services: Global, Regional, and Country Perspectives, Pan
American Health Organization, 2002
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6. Trade Remedies
This chapter reviews the economics and disciplines in the use of trade remedies, as established in
the WTO agreements and case law. Trade agreements contain provisions that allow contracting
parties to temporarily suspend or modify their obligations under certain conditions. These actions
are supposed to be taken only to mitigate unforeseen harm that a country incurred because of its
participation in trade. But trade remedies are not only contingency measures; they are also seen
as “safety valves” or “escape clauses” that permit a country to revert to protectionism when it
deems expedient.
Trade remedies take several forms – some are openly sanctioned, while others are implicitly
allowed for lack of expressed prohibition or because they fall outside the scope of existing
agreements. The commonly used measures are the anti-dumping duty (AD), countervailing duty
(CVD) and safeguards38, all of which have well-defined rules for application. The first two
measures are intended to offset the injury to domestic industry caused by unfair trading
conditions due to dumping (price undercutting) of foreign producers and subsidization by foreign
government of its own producers, respectively. Safeguards, on the other hand, are not
prompted by anticompetitive condition or behavior of a trading partner, but by unexpected
surge in imports that inflicted, or threaten to inflict, serious harm to the domestic industry. These
popularly used remedies are governed by separate agreements that all came into force in 1995
following the Uruguay Round, namely: the Anti-Dumping Agreement (ADA), Agreement on
Subsidies and Countervailing Measures (ASCM), and Agreement on Safeguards (ASG).
There are other trade remedies built into the WTO agreement, such as renegotiation of
concessions39, adjustments in applied tariff rates, imposition of export taxes, balance of
payments restrictions, and Article XX general exceptions. These measures though have been
availed sparingly and only by few members because of their stringent requirements.
While all trade remedies reduce or block trade, each has its own set of trigger conditions that also
provide rationale for its application. The nature and degree of domestic injury being redressed is
also different for each of these remedies. Accordingly, the agreements provide for specific
requirements, duration and procedures for application. Therefore, strictly speaking, these
remedies are not alternatives to each other in the sense that a country may choose which to use.
Rather, the circumstances dictate the trade remedy that may be applied.
The rest of the chapter is organized as follows. The first section presents contrasting views on
the role of contingency measures in trade agreements, the trade remedies allowed by the WTO
agreements, and the utilization of these remedies since 1995. Whether one views trade remedies
as necessary flexibility to elicit deeper commitments, or derogation of existing commitments, the
fact remains that they are present in almost all trade agreements. Provisions allowing the use of
trade remedies existed in 1947 GATT, were carried over in the 1994 agreement, and have been
adopted since in almost all preferential trade agreements. Clearly, trade remedies are still
considered indispensable in the present trading system, and will likely remain so in the near
future. For this reason, the rules for their application have to be tightened to prevent abuse.
38
39
In addition, the Agreement on Agriculture provides for a special safeguard.
See Article XXVIII, GATT 1994, and Article XXI, GATS.
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Already, the 1994 GATT managed to plug many loopholes that riddle past application of remedies.
But there still remain some ambiguities in the rules that can be exploited to serve protectionist
ends. The second, third and fourth sections review respectively the key provisions and
contentious issues in the ADA, ASCM and ASG, with the end view of identifying these ambiguities.
The final section pulls together the ambiguities common in the three agreements allowing the
use of remedies for other purposes besides addressing the specific conditions that justify their
use.
6.1. Rationale for and Extent of Use of Trade Remedies
The Case for and Against Trade Remedies
There is nearly general acceptance now on the value of trade remedies in trade agreements. An
apparent minority, however, still opposes trade remedies because they create opportunities for
backsliding in commitments. The issue is whether trade remedies undermine or reinforce the
credibility of the agreement. The balance of arguments seems to weigh in favor of the latter.
Yet the case against trade remedies is simple. A trade agreement reduces a government’s
discretionary power in setting tariffs and returning to trade protection unilaterally. The bind of a
trade agreement shields the government from pressure by protection-seeking domestic groups.
But the availability of trade remedies renders the government vulnerable to pressure from these
groups. So long as it can be shown that domestic producers suffer injury as a result of trade, a
government can exercise its discretion whether to raise duties on imports. This gives producers a
signal that they can compel their government to revert to protection. That perception weakens
the discipline of market competition brought onto them by trade. As a result, the political and
economic value of binding a country to a trade agreement is deemed diminished by trade
remedies.
Since the application of trade remedy is a unilateral action, it is also considered incompatible with
collective action which is the norm in a multilateral system.40 Trade remedies give individual
members license to depart from the set of rules agreed upon by all participants in the trading
system. Consequently, they undermine the credibility of the multilateral agreement.
Proponents of trade flexibilities use the very concerns of the opposing side to bolster their
position. The main idea is that instead of undermining the agreement, the discretion to renege
facilitates the forging of the agreement, and encourages countries to make deeper
commitments. The reasons are as follow. First, giving national governments discretion dispels
false perception that a country loses its domestic policy-making power when it signs into a
multilateral agreement. This makes the agreement more acceptable to domestic constituencies,
and thus lowers the political costs of signing the agreement. Second, trade remedies convey
some kind of assurance that commitments are good only under “normal” conditions, and
therefore, concessions can be taken back when unforeseen conditions make it too costly to
continue adhering to the agreement.41 Without such assurance, a country has to make allowance
for too many unforeseen events, and would tend to be cautious in its commitment. Third, the
40
Ethier (2002).
Related to this point, Sykes (2006) calls it an “efficient breach” of the trade agreement whenever a
country backslides because the cost of observing the agreement exceeds the benefits for its trading
partners.
41
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right to use contingency measure can be seen as compensation for committing to pursue a faster
pace of liberalization.42 If an accelerated pace of tariff reduction causes imports to surge, and
thus harm to domestic producers, a contingency measure can be taken to give time to domestic
producers to adjust.43 Thus, the right to withhold commitments emboldens a country make more
liberal commitments.
Trade remedies serve other purposes as well. They prevent an agreement from breaking apart
when some parties need to renege on their commitments temporarily. In this sense, trade
remedies lend credibility to the sustainability of an agreement because parties have fallback
measure when conditions become difficult to keep up with the intent of the agreement. They
also function as “safety-valve” to dampen fluctuations in trade volumes which can destabilize
incomes and provoke protectionist policies.44 And although trade remedies are supposed to be
temporary measures that must be removed when the conditions that trigger their imposition no
longer exist, they can be employed as tool for domestic industry promotion. This is particularly
relevant when domestic producers are falling behind their foreign counterparts or recovering
from economic difficulties. When a remedy is retaliation against unfair policy or practice by a
trading partner, it could deter future “undesirable” behavior or policies that are inconsistent with
the terms of the agreement such as subsidy to domestic producers. Finally, a trade agreement,
like most others, is necessarily an incomplete contract because it cannot possibly anticipate and
provide for all events affecting trade flows. Trade flexibilities address this deficiency. Since not all
events bearing on the agreement can be anticipated, it makes sense to combine discretionary
policy with rigid and specific commitments.
While the foregoing theoretical arguments are persuasive, the empirical literature does not
provide conclusive support either for or against trade remedies. There is no conclusive evidence
that trade remedies encourage countries to deepen their commitments. Nor is there
demonstration on the effectiveness of trade remedies as contingency measures, i.e., helping
domestic producers cope with gyrations in trade. For example, when the US used safeguards on
steel, it was found that domestic producers were helped more by other economic factors such as
improved macroeconomic conditions and increased demand than by trade remedy.45 Likewise,
the findings of one study on the impact of an anti-dumping action on productivity of domestic
producers are not particularly encouraging to those contemplating to use trade remedies for
industrial promotion. Specifically, producers that have high productivity prior to the measure
incur productivity losses, while others experienced some productivity increases but not enough
for technological catch-up.46 Yet there is also no sufficient evidence to conclude that remedies
are being used to derogate commitments. At best, the trend in anti-dumping action seems to
follow the business cycle and real exchange rate movement, and is affected by industry-level
factors.47
Despite the absence of positive evidence that remedies are trade-facilitating, they certainly affect
trade flow one way or another. One study in the US finds that foreign producers tend to adjust
42
Ethier (2002).
Jackson (1997).
44
Bagwell and Staiger (1990).
45
Liebman (2006).
46
Konings and Vandenbussche (2008).
47
WTO(2009), p. 156.
43
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their prices to avoid anti-dumping duties.48 Another confirms that mere filing of anti-dumping
case can have a chilling effect on trade, i.e., imports decline while domestic production increases.
This happens also when national authorities declare that dumping exists even before a duty is
imposed.49 Domestic production is bolstered more when foreign producers relocate their
production facility in the economy or invest in domestic producers to evade anti-dumping duty.
This so called tariff-jumping foreign direct investment (FDI) benefits consumers, but is a bane for
domestic producers. It has been suggested that the impact on domestic producers of tariffjumping FDI is worse than dumped imports.50 Evidence of tariff-jumping FDI was found to apply
to Japanese investments in the US, and more recently, to investments from other sources as well.
The data also suggest, quite surprisingly, that foreign investments tend to respond more to
threat of safeguards than to threat of anti-dumping measures.51
Trade remedies are also feared to have the trade diverting effects of a protective tariff. This
arises when imports from countries targeted by trade remedy are replaced by imports from other
countries. Since the former are often more efficient producers than the latter, there is loss of
efficiency associated with trade diversion. The empirical evidence on trade diversion is not
however conclusive. Studies in the US market show trade diversion is more significant in the
manufacturing sector than in agriculture.52 However, trade diversion due to EU anti-dumping
measures was found low. This was attributed to: (i) lower market concentration in the EU
compared to US markets; (ii) use of injury margin in EU, instead of dumping margin in US, as basis
for anti-dumping duty; and (iii) uncertainty in the level of actual protection afforded by EU
regulators to their producers.53
Theory suggests that trade remedies, like any other protectionist measure, pit the interest of
domestic producers against those of domestic consumers. Testing this hypothesis requires the
use general equilibrium analysis, of which there are few. One study in the US finds that even
when applied to a small volume of imports, a trade remedy measure can exact huge cost to the
economy.54 Another study, based also on US experience shows that when the protected product
is an intermediate good, while domestic producers are clearly benefited by an anti-dumping
measure, the impact on customers of the protected product is not clear-cut. But in the
semiconductor industry, where technological spillovers between producers and customers are
significant, trade remedy applied in an upstream sector clearly benefits the users in the
downstream sector.55
Menu of Trade Remedies
Under the WTO disciplines, members may temporarily suspend their commitments under a set of
specific conditions, or modify them through some protocols. These conditions include
unexpected and sudden increase in competition, unfair trade, external economic imbalance,
48
Herander and Schwartz (1984).
Staiger et al. (1994).
50
WTO (2009), pp. 154-155.
51
Blonigen and Feenstra (1997).
52
For manufacturing sector, see Prusa (1997), while for agriculture, see Carter and Gunning-Trant (2007).
53
Konings, et al. (2001), cited in WTO (2009), p. 154.
54
The pertinent study is by Gallaway et al. (1999) that estimated the net economic welfare cost of antidumping and countervailing measures in 1993 to be about US$4 billion dollars.
55
Hughes et al. (1997).
49
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development imperative and threat to public interest.
permitted.
•
•
•
•
•
•
The following trade remedies are
In case of an import surge that causes or threaten to cause serious injury to domestic
producers of like or directly competitive products, Article XIX of GATT and ASG
sanction the application of safeguards.
When an exporter dumps (i.e., sets price below the normal value of the good) causing
or threatening to cause material injury to domestic producers of like products, the
country can take anti-dumping action, as stipulated in Article VI of the GATT and ADA.
The grant of subsidies by a foreign government to its producers supplies basis for an
importing country to impose countervailing duties on the subsidized good under the
terms of ASCM.
Faced with imminent balance of payment (BOP) crisis, a developing country may
impose restrictions on imports under Articles XII and XVIII, Sec. B of GATT and Article
XII of GATS.
Developing countries are also allowed to provide temporary protection to an infant
industry, as set forth in Article XVIII, Sections A and C of GATT. The protection may
entail removal of tariff concessions and introduction of quotas and other forms of
non-tariff restrictions.
Finally, trade restrictions may be justified by the need to protect “essential security
interests” (Art. XXI of GATT); to protect public morals, human, animal, plant life or
health and to secure compliance with laws and regulations that are WTO –consistent
(Art. XX of GATT and Art. XIV of GATS); and to preserve natural resources, protect
national treasures and prevent exports of goods in short supply (Art. XX of GATT).
In practice, the BOP measures have become irrelevant because of the general movement
towards flexible exchange rate system, and the new legal framework that subjects the measures
to stringent surveillance by a WTO Committee.56 Yet the surveillance and approval procedures
are even more restrictive for infant industry measures, such that developing countries would
rather apply BOP measures to promote an infant industry.57 As a result, the only accessible
remedies for most countries are anti-dumping, countervailing and safeguards.
But in the absence of specific conditions that justify the use of anti-dumping, countervailing or
safeguard measure, a country may seek to modify its commitments by means of waiver or
renegotiation. The rules governing both measures are however sufficiently stiff to discourage
their use except under really exceptional cases. Concretely, a country may be given a waiver in
any of its obligation only temporarily, and only through a consensus by the Ministerial
Conference. (By comparison, most decisions by the WTO body require only a vote of threefourths of the members.) On the other hand, only tariffs in the GATT (Article XXVIII) and
commitments in the GATS (Article XXI) can be renegotiated.
If renegotiation and waiver are not available to a country, two options remain: adjustment in
tariffs up to bound levels and imposing restrictions on exports. Both options are accessible to
more countries than a waiver or renegotiation. But of course tariff adjustment is only feasible if
there is a wedge between applied and bound tariffs, as is true for many agricultural products.
Export restrictions, on the other hand, are not bound by any discipline. But since they amount to
negative protection to domestic producers, any government imposing such measure would need
56
57
WTO (2004a).
WTO (2009), p. 38.
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a compelling reason to defend its action to its constituencies adversely affected by the measure.
Possible justifications for imposing export tax include controlling inflation, raising government
revenue, supporting an infant or declining downstream industry, and protecting the
environment.58
Use of Trade Remedies
Since 1995, there has been a noticeable increase in the number of investigations (initiations) as
well as actual applications of anti-dumping measures. Is this an indication that while more
countries have improved on their commitments to bring down trade restrictions, more have also
resorted to trade remedies to maintain the status quo level of protection? If this were the case,
then countries apply make trade concessions only to offset them by applying trade remedies,
which suggests simply that decades of multilateral work have been all for naught.
Fortunately, this is not the case. Part of the reason for the increase in the use of anti-dumping
measures is that until the late 1950s, countries relied more on quantitative restrictions, licensing
requirements and foreign exchange controls to cope with trade fluctuations. These measures are
no longer sanctioned by existing rules, hence the shift to anti-dumping measures, and to some
extent to countervailing measures and safeguards. More frequent use of trade remedies is also a
natural consequence of greater trade. But more important, the more recent anti-dumping
measures are less trade restrictive than before. Case in point: the average anti-dumping duty
imposed by the US, which accounts for the most number of initiations and application of antidumping measures, was 41.4% during 1980-1995, but only 5.2% during 1996-2007. EC’s average
anti-dumping duties for the same periods also declined from 17.6% to 6.4%, while China’s, from
21.4% to 13.8%.59 Clearly, the duties are substantially lower now.
Anti-dumping measures are much more frequently utilized than other forms of trade remedies as
shown in the table below. At least a third of the initiations (investigations) do not lead to actual
application of the measure. And less than one-third of WTO membership (total of 153 members)
used any of the measures since 1995.
Table 6.1 Initiations and Application of Anti-dumping, Countervailing and Safeguard Measures, 1995-2010
Initiation
Final Measures
All members
Anti-dumping measure
3, 854 (46 countries)
2,543 (40 countries)
Countervailing duties
254 (20 countries)
163 (19 countries)
Safeguards
216 (45 countries)
101 (29 countries)
Philippines
Anti-dumping measure
12
7
Countervailing duties
0
0
Safeguards
9
6
Source: Based on WTO Integrated Database.
Like most other members, the Philippines availed of the remedies sparingly over the 16-year
period. It initiated only 12 anti-dumping investigations, on which it found sufficient basis for
applying the measure on only 7 cases. On the other hand, anti-dumping investigations were
58
These are the reasons used by governments that imposed export taxes, gathered from WTO Trade Policy
Reviews from 1995 to 2008 (cited in World Trade Report 2009, pp . 111-112.)
59
WTO (2009), p130.
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initiated against Philippine exports 18 times during the same period; duties were applied in 11
cases.60
As the statistics do not suggest that WTO members abuse their right to use remedies, the
concern has now focused on the adoption by an increasing number of preferential trade
agreements (PTAs) of their own trade remedy rules that are tighter than those in WTO
agreements. The implication of stricter, PTA-specific rules is that more trade remedies may be
applied against non-members than members of PTAs. This will increase discrimination in trade
and lead to more serious problem of trade diversion.
A study by Teh et al., (2009) found that PTA-specific rules have higher de minimis volume and
dumping margin requirements, and shorter duration for applying anti-dumping duties than those
provided for in ADA. In addition, some regional bodies are involved in the investigation and final
determination of anti-dumping measure, whereas the national authorities alone conduct the
investigation and final determination under WTO rules. PTA-specific rules on safeguards are
likewise more restrictive than those provided in ASG; the measure can be applied only during the
transition period, for a shorter duration, and conditional on compensation to affected trading
partners.
Nonetheless, the study found that PTAs that disallow the use of trade remedies are rare. Out of
74 PTAs examined, only 9 disallow anti-dumping measure; 5 dispense with countervailing
measure; and 5 prohibit the use of safeguards. Only the European Communities disallow the use
of any form of trade remedy. And for this exceptional PTA, the level of integration is so deep as
to expect the same from other PTAs. This is an indication that trade remedies are needed in most
trade agreements.61
6.2. Key Provisions and Issues in the Application of Anti-Dumping Measures
As tariffs fall, a country’s right to take action against dumped imports that is causing injury to its
domestic industry becomes even more important. This probably explains why in most rounds of
trade negotiations since GATT 1947, the rules on anti-dumping action were the subject of
discussion and negotiation. During the Dillon Round (1960-61), a Group of Experts agreed on a
common understanding of some of the terms in Article VI of GATT. But it was in the Kennedy
Round of 1964-67 that anti-dumping became a significant GATT issue. Signed by 17 countries, an
Anti-Dumping Code came into force. In the Tokyo Round (1964-67), this Code was revised and
subscribed to by 25 countries (counting the European Community as one). And as a result of the
Uruguay Round (1986-94), the ADA was forged and made integral to GATT 1994.
Article VI of GATT 1947 was carried over to GATT 1994, which now reads as follow:
The contracting parties recognize that dumping, by which products of one country are
introduced into the commerce of another country at less than the normal value of the
products, is to be condemned if it causes or threatens material injury to an established
industry in the territory of a contracting or materially retards the establishment of a
domestic industry (para. 1).
60
Anti-dumping duties against Philippines exports were imposed by Korea, Malaysia (2), Hong Kong (1),
Indonesia (1), Russia (2), Taipei, China (1), Germany (1) and China (2).
61
The ASEAN Free Trade Area (AFTA) has no specific provisions for anti-dumping and countervailing
measures, but allow their use against members. It has, however, specific provisions for safeguards.
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The need for a separate agreement focused on anti-dumping is succinctly expressed in
Article 1 of ADA:
An anti-dumping measure shall be applied only under the circumstances provided for in
Article VI of GATT 1994 and pursuant to investigations initiated and conducted in
accordance with the provisions of this Agreement.
ADA therefore lays down the rules and requirements for applying anti-dumping action, the
purpose of which is to make them more transparent and consistent across countries which have
their own national laws on anti-dumping.
This section expounds on the substantive rules of ADA and still unresolved issues in the
application of anti-dumping measure. A major concern is that despite the fact that an antidumping measure may only be applied after adhering to a strict set of transparent procedures,
the sheer threat of anti-dumping action is sufficient to curb imports and achieve its protectionist
goal.
Economic Rationale
Even as anti-dumping action is legitimized by various international agreements and national
legislations, the negative sentiments toward the use of anti-dumping remain. Finger (1991)
articulates the cynicism well:
Antidumping is not [a] public policy, it is [a] private policy. It is a [policy of] harnessing of
state power to serve a private interest: a means by which one competitor can use the
power of the state to gain an edge over another competitor …Antidumping is the fox put
in charge of the henhouse: trade restrictions certified by GATT. The fox is clever enough
not only to eat the hens, but also to convince the farmer that it is the way things ought to
be. Antidumping is ordinary protection with a grand public relations program (pp. 41-42,
underscoring author).
This cynicism has its basis in the history, theory and practice of anti-dumping. According to Viner
(1923), early proponents of anti-dumping enforcement were arguing for import protection, which
was why most dumping charges were hurled against England (the first to undergo Industrial
Revolution) by countries that were then lagging behind England.62 By characterizing dumping as
a form of price discrimination and an exercise of monopoly power by a foreign firm, an action
against it becomes more politically acceptable than ordinary protection, since it is in response to
an “unfair” trade behavior. This is especially so if dumping is viewed as a purely predatory
strategy by a foreign producer, aimed at driving out domestic producers to establish a monopoly.
Yet even Viner (1923) recognized that predation is only one of possible motivations for dumping.
A firm may engage in what is construed as dumping to dispose of a surplus, or create goodwill in
a new market, or take advantage of economies of scale by expanding output and sales, or
retaliate against dumping by a foreign firm. None of these other motivations can be deemed as
unfair or anticompetitive to justify antidumping action by the importing country.
More recent explanations on why firms dump do not also ascribe anticompetitive intent. Ethier
(1982), for instance, argues that dumping is a result of firms having difficulty in adjusting their
62
Finger (1991), pp. 1-3.
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costs as fast as prices. Cost adjustment is more difficult because firms cannot easily lay off
workers or reduce their capital stock, especially if there is uncertainty whether the observed
downturn in demand is temporary or otherwise. Clarida (1993), on the other hand, rationalizes
dumping as a means by which firms are able to scale down the learning curve (and take
advantage of learning-by-doing effects). This means that by producing more, they become more
technically efficient, but as a result, they have to dump their excess production. One inference
that may be drawn from this theory is that an antidumping action has more insidious effects on
producers in developing countries, than on their counterparts from developed countries, as the
former are prevented from moving down faster on the learning curve.
But even if predation were the supposed motive for dumping, several issues may be raised as to
whether it is at all feasible. The prerequisites for successful predation are often lacking, namely,
sufficient market power to drive out all competitors in the market (both domestic and other
foreign producers), and high entry barriers so that losses incurred during predation could be
made up for after competitors leave the market. The later condition is often most difficult to
guarantee because a high price during recoupment invites entry of new firms or reentry of old
competitors unless barriers to entry are difficult to overcome. Absent of an opportunity to
recoup, incurring losses even in transition is not sensible. If this is the case, then predation is
difficult to achieve and should therefore be eliminated among possible motivations for the
pricing strategy.
Newer theories attempt to explain the viability of predatory dumping in case domestic producers
have incomplete information or if credit markets are imperfect. In the former, a high-cost foreign
firm is able to “trick” domestic firms in believing that it is more efficient than them by pricing its
product below cost. In the latter, creditors do not have sufficient information to discern that the
financial losses incurred by domestic producers is not due to their inefficiencies, but it is actually
an “artificial” or temporary situation due to the dumping behavior of a foreign firm.63 The
problem with both theories is that neither addresses the issue of recoupment. That is, even if
domestic producers could be driven out of the market because of incomplete market information
or imperfect credit market, they could not be prevented from reentering the market when the
predator foreign firm attempts to recover losses, if entry barriers are not high enough.
If dumping is not predatory but induced by some other factors, then it is not necessarily an unfair
practice that may justify retaliatory action in the form of antidumping duty. In fact, it bears
asking if consumer welfare is promoted by antidumping measure. Economic theory suggests
otherwise. When dumping is other than predatory, preventing it deprives consumers of the
benefits of enjoying lower import prices. Anti-dumping duty is similar to a protectionist tariff that
favors domestic producers, generates tax revenue for the government, but raises prices of goods
for domestic consumers. The gains of domestic producers and government are less than
consumers’ losses, resulting in overall efficiency losses. In addition, consumers’ losses may be
magnified when they are not only able to reap the benefits of lower prices now, but also in the
future in case dumping was in fact motivated by learning economies.
Whereas the benefits of anti-dumping measure are ambiguous at best, the risks are palpable.
First, since anti-dumping duty is not applied to imports from all sources but rather to a targeted
63
These theories are due to Hartigan (1994) and Hartigan (1996), cited in the World Trade Report 2009, p.
67.
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source, it may cause diversion of trade to less efficient sources. Second, just like tariff protection,
anti-dumping duty may induce foreign firms to set up domestic production in order to evade
application of anti-dumping duty. Domestic producers may find this a less desirable outcome
since foreign direct investment (FDI) is a tougher competition than imports. Third, dumping
protection applied to a specific sector will disadvantage another sector that uses the protected
output as intermediate inputs. This may then compel the government to apply the antidumping
measure to both upstream and downstream industries.64 Fourth, mere presence of anti-dumping
law may facilitate collusion between domestic and foreign firms, thereby keeping prices of
domestic and imported goods high. This happens when domestic firms are able to use the threat
of anti-dumping initiation against foreign producers if the latter do not keep their prices in line.65
In sum, there is enough skepticism on whether anti-dumping measure is different from other
instruments of protection. While the measure is depicted as a necessary action of the
government to offset the supposed anticompetitive behavior of a foreign producer, there are
more plausible explanations, besides predation, on why firms may engage in dumping. These
alternative explanations appear to be “normal” behavior of firms operating in a competitive
environment. If dumping is not predatory or anticompetitive, then a measure to counteract it
amounts to unwarranted intervention in the market.
Conditions justifying anti-dumping measure
Despite the foregoing, anti-dumping measure has gained “legitimacy”, not least in the WTO. The
numerous negotiations concerning anti-dumping measure had not changed its substance – they
have only added clarity to its intent and made the application procedures more transparent.
The apparent intent, which is preserved in the evolution of text in laws and agreements on
dumping, is to afford protection to domestic producers up to the extent of keeping prices of
imported goods to a level that would cover production costs plus a reasonable level of profits.
Any price below this level is deemed “unfair” and prompts a country to take action, if it can be
shown that such pricing caused or threaten to cause material injury to domestic producers. This
principle is well reflected in the complex process of determining the presence of dumping and
calculation of dumping margin, which are discussed in the next sections.
For purposes of Article 2 of ADA, the “determination of dumping” involves comparison of export
price and normal value. Yet it is clear in Article VI of GATT that a demonstration of domestic injury
related to export price is integral to the final determination of whether anti-dumping measure
can be imposed. The process of determining injury is dealt separately in Article 3.
There are reasons for drawing distinction between dumping and injury determination. First, it
highlights the fact that not all instances of dumping merit the application of anti-dumping
measure; only those where domestic injury is also found. Second, some terms commonly used in
both determinations actually refer to different things. For example, “like product” in dumping
determination refers to products sold in exporting country that are “identical” (i.e., alike in all
respects) to the allegedly dumped product. On the other hand, “like product” in injury
determination refers to products sold by the domestic industry that are identical to the allegedly
dumped product. Third, the investigation periods for dumping and injury determination are also
64
65
Hoekman and Leidy (1992).
Prusa (1992).
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different; the former is shorter (about 6 to 12 months), while the longer period in the latter (at
least 3 years) is necessary to distinguish “trends” from fluke.
Dumping Determination
It should be made clear at the onset that the act of dumping is with reference to a particular
product from a particular producer or exporter. Loosely speaking, if a producer or exporter sells
a product to another country at a price below the usual commercial value of such product, it is
considered to have dumped that product. Article 2.1 of ADA refines the concept as follow:
… a product is to be considered as being dumped, i.e., introduced into the commerce of
another country at less than its normal value, if the export price of the product exported
from one country to another is less than the comparable price, in the ordinary course of
trade, for the like product when destined for consumption in the exporting country
(underscoring author).
Dumping is determined therefore by comparing export price and so called normal value
of a like product. Since nothing in this definition alludes to the intention of the exporter;
it may be inferred that the reasons for dumping (or conditions that trigger dumping) are
irrelevant in the determination. However, it is implied in the above definition that
dumping applies only to “products” (i.e., goods), not services.
To be methodical, dumping determination involves four steps: (i) identification of like
product; (ii) determination of export price; (iii) calculation of normal value; and (iii)
comparison of export price and normal value.
Like Product
The starting point is identifying “like product” or product that is alike the allegedly
dumped good. The price of like product in the home market of the exporter would then
be compared with the export price of the good at issue.
Article 2.6 of ADA defines “like product” for purposes of the agreement as:
… a product which is identical, i.e., alike in all respects to the product under
consideration, or in the absence of such a product, another product which, although not
alike in all respects, has characteristics closely resembling those of the product under
consideration.
To implement this definition, investigating authorities (tasked to determine the presence
of dumping) uses the following criteria: physical characteristics, uses, interchangeablity
(substitutability) of products, channels of distribution, customer or producer perception,
manufacturing facilities and production employees, and production processes.66 A
product that shares with the product at issue the same physical characteristics, uses,
channels of distribution, etc., is considered “like” for purposes of this agreement.
In practice, products are considered like when they share the same product code
classification. Where necessary, product codes can be developed to account for very
detailed characteristics. For example, in one anti-dumping investigation conducted by the
66
ADB (2009), p. 12.
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European Commission, it distinguished subgroups of product under the heading of
“Atlantic salmon”, based on the quality of fish (superior, ordinary, or other quality fish),
whether fresh or frozen, cut of the fish (i.e., whole, gutted, with head on or off,
trimmings, etc.) and size of the cut.
Without data to support a detailed classification, however, the like product should at
least belong to the same 6-digit HS code as the allegedly dumped product.
Export Price
The determination of export price is more straightforward. It refers to the transaction value
reflected in the commercial invoice, bill of lading and letter of credit. If there is no such price or if
the quoted price is unreliable due to transfer pricing (i.e., when the seller and buyer are related),
Article 2.3 of ADA stipulates that the export price may be constructed on the basis of the price at
which the imported product is first resold to an independent buyer within the importing country,
adjusting the same for the costs, duties and taxes incurred in, and profits accruing to, reselling
the product. These adjustments, left to the discretion of the investigation authorities, can be
contentious as they could lower the constructed export price and therefore raise the likelihood
of finding a dumping.
Normal value
Once the like product is identified, the next task is to establish its “normal value” or its price “in
the ordinary course of trade.” Normal value is preferably based on the domestic price of the like
product in the home market of the exporter. ADA does not define “ordinary course of trade” but
in practice, sales below cost is treated as not being “in the ordinary course of trade” when they
are made:
(i)
(ii)
(iii)
within an “extended period” (i.e., 6 to about 12 months); or
in substantial quantities (i.e., at least 20% of the volume sold); or
at prices that do not allow recovery of all costs within a reasonable period of
time.
The following examples demonstrate these principles.67
Suppose the domestic prices of a product that is regarded “like” the export product at issue are
as follow:
Date
August 1
August 10
August 15
August 20
Quantity
10
10
10
10
Domestic price
40
100
150
200
Export price
50
100
150
200
From the foregoing, the price on August 1 must be excluded from the consideration of normal
value because it is considered “sales below cost” in substantial quantities (comprising 25% of the
total volume sold). This raises the “normal value” to 150, which is the weighted average of all
domestic prices after August 1, while the “export price” is 125, the weighted average of export
67
ADB (2009), p. 97.
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prices for the same period. Since the export price is below normal value, a finding of dumping is
supported. Ignoring the 20% rule would have led to an opposite finding, since the weighted
average “normal value” and “export price” would have been 122.5 and 125, respectively.
Now suppose that at any time, the same product is sold by the producer-exporter to different
consumer groups in its home market at different prices.
Product
A
A
A
A
A
Quantity
50
650
100
150
50
Domestic price
95
105
95
105
100
Cost of production
100
100
100
100
100
For 20% of total volume sold in the home market, selling price is not above the cost of production.
This is considered “sales below cost” in substantial quantities. Put differently, the weighted
average of domestic prices, 103.5, while above cost of production, cannot be taken as “normal
value in the ordinary course of trade.”
In the preceding example, therefore, domestic price cannot be fairly compared with export price.
It is also not a fair basis of normal value when sales of like product in the home market of the
exporter is too low in that it constitutes less than 5% of total sales. Under these circumstances,
Article 2.2 of ADA requires the normal value to be based on either the export price to a third
country or a constructed value. The first is rarely used in practice, for good reasons. If a product
is dumped in one market, it is likely to be dumped also into a third country market.68 As a result,
normal value is usually constructed using the exporter’s production and sales data.
In constructing normal value, the purpose is to approximate as closely as possible the price of the
exported product if it were sold in the domestic market of the exporter. Such price is deemed
equal to the cost of production of the exported product plus a “reasonable amount” for selling,
general and administrative (SGA) costs and for profits, to be deduced from the actual production
and sales data submitted by the exporter or producer under investigation. However, if the
normal value cannot be determined on this basis, then Article 2.2.2 suggests the use of any of the
following:
(i)
(ii)
(iii)
68
the actual amounts incurred and realized by the exporter or producer in question in
respect of production and sales in the domestic market of the country of origin of the
same general category of products;
the weighted average of the actual amounts incurred and realized by other exporters or
producers subject to investigation in respect of production and sales of the like product
in the domestic market of the country of origin; and
any other reasonable method, provided that the amount for profit so established shall
not exceed the profit normally realized by other exporters or producers on sales of
products of the same general category in the domestic market of the country of origin.
ADB (2009), p. 19.
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When the country of export is only a point of transshipment, or the exporter-producer does not
sell in its home market, normal value can be based instead on the domestic price of a like product
in the country of origin (Article 2.5 of ADA).
Finally, an importing country may reject the price and costs data submitted by exporters from
nonmarket economies (NMEs) in calculating normal value; instead, it may resort to prices and
costs in a third-country market economy. The use of surrogate country data in lieu of those
supplied by NME exporters is observed to have led to significantly more findings of dumping,
which is not surprising since producers in the surrogate country are likely to be competitors of
those from NMEs.69 China and Vietnam are treated as NMEs until 2016 and 2019, respectively,
based on the terms of their respective Protocols of Accession. Significantly, about 24% (590 of
2,495 cases) of anti-dumping measures from 1995 to 2010 were applied against exports from
China.
Comparison of Export Price and Normal Value
Since the essence of dumping determination is finding a difference between export price and
normal value, due care should be taken first, to ensure that the two values are comparable and
second, that the method of comparison is appropriate.
Article 2.4 describes the necessary adjustments on export price and normal value to bring them
to ex-factory level on which basis, the two can be compared.
A fair comparison shall be made between the export price and the normal value. This
comparison shall be made at the same level of trade, normally at the ex-factory level, and
in respect of sales made at as nearly as possible the same time. Due allowance shall be
made in each case, on its merits, for differences which affect price comparability,
including differences in conditions and terms of sale, taxation, levels of trade, quantities,
physical characteristics, and any other differences which are also demonstrated to affect
price comparability. … [In case the export price is constructed on the basis of the price at
which the imported products are first resold to an independent buyer,] allowances for
costs, including duties and taxes, incurred between importation and resale, and for profits
accruing, should also be made…(underscoring author).
The following hypothetical examples reveal the existence of dumping only after
appropriate adjustments are made on normal value and export price. The first case
shows the adjustments in domestic and export prices when the importer is unrelated to
the exporter; the second case, when the two are related parties.
Case 1: Importer is unrelated to exporter70
Normal value
Sales price
Less: Duty drawback
Discounts
Packaging
Inland freight
69
70
100
5
2
1
1
Export price
Sales price
Less: Physical differences
Discounts
Packaging
Inland freight
100
5
2
1
1
Ibid, p. 23.
Ibid, p. 99.
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Credit
Guarantees
Commission
Ex-factory normal value
Ocean freight/insurance
Credit
Guarantees
Commission
Ex-factory export price
3
2
2
84
6
3
2
2
78
Case 2: Importer and exporter are related parties71
Normal value
Sales price
150
Less: Duty drawback
Discounts
Packaging
Inland freight
3
3
1
1
Credit
Guarantees
Level of trade (20%)72
6
2
30
Ex-factory normal value
103
Export price
Sales price to related importer
Sales price to unrelated
importer
Less: Physical difference
Discounts
Packaging
Inland freight
Ocean freight/insurance
Credit
Guarantees
Other SGA
Reasonable profit
Customs duties
Ex-factory export price
110
150
1
9
2
2
5
3
3
18
12
5
88
Without adjustment, domestic and export prices are equal in both cases. But both cases
show dumping at ex-factory values.
Some of the adjustments that are applied to export and domestic prices can be
contentious as there may be no definitive evidence that could support them, and because
they are left to the discretion of the investigating authority. This refers to values ascribed
to “physical differences”, “level of trade”, and “reasonable profits.” In Case 2, for
instance, an adjustment for “level of trade” is made on normal value since the producer is
deemed to act as distributor and retailer in its home market, whereas the “unrelated
importer” acts as retailer for the exporter in the other market. The distributor-retailer
margin, estimated here at 12%, adjusted the normal value, while the assumed exporterdistributor’s margin of 8% reduced the export price.
Using the adjusted values, the dumping margin is then computed as follow:
Dumping Margin =
Normal value - export price
Г— 100
CIF value of imports
71
Ibid, pp. 33-34.
This refers to the margin of the producer selling directly to customer. In case the exporter sells to
“unrelated importer”, the producer adds only a distributor margin, on which the “unrelated importer”
adds further a retailer margin.
72
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The dumping margins are 6% and 15% in Cases 1 and 2, respectively.
A single transaction of export price falling below normal value is however not sufficient
to establish dumping. Rather, dumping determination requires comparison of normal
value and export prices over a particular period of time, referred to as the period of
investigation (POI). The Committee on Anti-Dumping Practices suggested that the POI
“should normally be 12 months, and in any case no less than 6 months, ending as close to
the date of initiation of the investigation as is practicable.”73
Once export prices and comparable normal values have been established, Article 2.4.2
prescribes methods of comparing these prices: either on a weighted average-to-weighted
average basis or on a transaction-to-transaction basis. The former uses sales quantity as
weights, and compares weighted average normal value with weighted average of prices
of all comparable export transactions during the POI. When the comparison is made on a
transaction-to-transaction basis, the difference between normal value and export price
may be positive for some transactions, zero or negative for others. The sum-difference is
the basis of final determination if dumping occurs.
In some cases, however, neither method is appropriate. Article 2.4.2 refers to the
circumstance where weighted average-to-transaction method is recommended.
…A normal value established on a weighted average basis may be compared to prices of
individual export transactions if the authorities find a pattern of export prices which differ
significantly among different purchasers, regions, or time periods, and if an explanation is
provided as to why such differences cannot be taken into account appropriately by the
use of a weighted average-to-weighted average or transaction-to-transaction comparison.
This kind of departure from the two preferred methods is the only variation explicitly permitted
in the ADA, despite the fact that even before the agreement came into force, some authorities
had been using another method of calculating dumping known as zeroing. More significantly,
the Appellate Body, on a number of dispute cases, had consistently rejected zeroing procedures
on ground that it is inconsistent with the requirement to make a “fair comparison” between
export price and normal value.
Zeroing is the practice of replacing negative dumping margins (excess of export price over
normal value) with a value of zero before the sum of dumping margins is calculated. This has the
effect of overstating the dumping amount since negative dumping margins are nullified and
prevented from offsetting positive margins.
Below is a hypothetical example illustrating zeroing procedure74:
Date
1 January
8 January
Normal value
50
100
Export Price
25
100
Transaction-totransaction
25
0
Transaction-totransaction
Zeroing
25
0
73
World Trade Organization Committee on Anti-Dumping Practices, 2000, “Recommendation Concerning
the Periods of Data Collection for Anti-Dumping Investigations, G/ADP/6, cited in ADB (2009), p. 11.
74
ADB (2009), p. 29.
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15 January
21 January
Dumping amount
150
200
150
225
0
-25
0
0
0
25
Assuming that all of the above transactions involve the same quantity of exports, both weighted
average-to-weighted average and transaction-to-transaction comparisons show no evidence of
dumping. By contrast, zeroing results in a positive finding of dumping.
A variant of this practice is known as model zeroing, where the value of zero is applied on
negative dumping margin calculated for a specific product model, instead on the dumping margin
calculated on a transaction basis.
The Appellate Body found both forms of zeroing inconsistent with the ADA – simple zeroing in
US-Softwood Lumber V and US-Zeroing (Japan); and model zeroing in EC-Bed Linen, US-Zeroing
(EC) and US-Softwood Lumber V. It also ruled against the application of zeroing not only in
dumping determination during POI, but also in subsequent procedures after dumping action has
been initiated, such as periodic reviews, new shipper reviews, and sunset reviews.75
Still, the Appellate Body has not rendered a definitive opinion on the permissibility of zeroing in
cases where the “pattern of export prices … differs significantly among different purchasers,
regions or time periods”, i.e., the exceptional case contemplated in Article 2.4.2 of ADA. The US
argued that in those exceptional cases, weighted average-to-transaction comparison would just
yield the same finding as weighted average-to-weighted average comparison. Application of
zeroing procedure, by contrast, could unmask dumping. This is illustrated below based on the
same set of normal values and export prices in the preceding table. The weighted average-totransaction comparison shows no dumping, which is belied by the method that used zeroing.
Based on this, the US argued that the “mathematical equivalence” of weighted average-totransaction and weighted average-to-weighted average methods renders the former “inutile”,
i.e., there would not have been a need for an “exception” from the general methods if zeroing
were allowed.
Date
1 January
8 January
15 January
21 January
Dumping amount
Weighted
average normal
value
125
125
125
125
Export Price
25
100
150
225
Weighted
average-totransaction
100
25
-25
-100
0
Transaction-totransaction
Zeroing
25
0
0
0
25
Without rejecting the fact that dumping is unmasked by zeroing in the above case, whereas the
weighted average-to-transaction method did not, the Appellate Body in US-Softwood Lumber V
argued, however, that:
75
Appellate Body Report, US-Zeroing (Japan), para. 190.
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[o]ne part of a provision setting forth in a methodology is not rendered inutile simply
because, in a specific set of circumstances, its application would produce results that are
equivalent to those obtained from the application of a comparison methodology set out
in another part of that provision.
In US-Zeroing (Japan), the Appellate Body suggested the use of weighted average-to-transaction
method in times when the pattern of export prices is as described in Article 2.4.2, and general
methods in other times. This is seen as an indirect prohibition on zeroing even during periods
when export prices are erratic. Yet despite repeated indictments against zeroing, the European
Communities and US are adamant and still insist in using zeroing in certain cases.76
Injury Determination
It is not sufficient to establish that imports are dumped based on the criteria set forth in Article 2
of ADA and discussed in the preceding section. Whether an action against dumped imports is
warranted hinges on the conditions and significance of the injury caused by imports to the
domestic industry. Article 3.1 states that the injury determination must be
…based on positive evidence and involve an objective examination of both (a) the volume
of dumped imports and the effect of the dumped imports on prices in the domestic
market for like products, and (b) the consequent impact of these imports on domestic
producers of such product (underscoring author).
The rules and principles implied in the foregoing are much more complex and stringent than
those involved in dumping determination. For one, the term “positive” describing evidence
“must be of an affirmative, objective and verifiable character and that it must be credible,” while
“objective investigation” requires unbiased assessment of injury, i.e., it does not favor any party
or group.77 For another, the period of evaluating injury should go further beyond the occurrence
of dumping, presumably to avoid identification, as symptom of injury, events that are merely
temporary and accidental in nature, and recognizing that the effects of imports on domestic
injury may manifest belatedly. It is therefore recommended that the injury determination period
be at least 3 years, including the entire period of data collection for the dumping investigation.78
Moreover, the above provision should be read in conjunction with Article 3.5 which requires a
demonstration that the dumped imports is the cause of injury to the domestic industry.
Like Product and Domestic Industry
In injury determination, the terms “like product” and “domestic industry” are interpreted in a
different context from those in dumping determination. Like product refers to the product in the
home market of the importing country, as opposed to that of the exporting country.
Accordingly, the domestic industry in injury determination refers to the one in the importing
country, not the industry in the exporting country for dumping determination.
As in dumping determination, however, “likeness” means “identical” or close resemblance to the
allegedly dumped product. Injury determination is made in reference to the like product if there
76
ADB (2009), p. 32.
Appellate Body Report, US-Hot Rolled Steel, para. 192.
78
World Trade Organization Committee on Anti-Dumping Practices, 2000, “Recommendation Concerning
the Periods of Data Collection for Anti-Dumping Investigations, G/ADP/6, cited in ADB (2009), p. 36.
77
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is available data on its production process, producers’ sales and profits. If such data is too microlevel and hence not available, Article 3.6 provides that “the effects of the dumped imports must
be assessed by the examination of the production of the narrowest group or range of products,
which includes the like product for which the necessary information can be provided.”
Like product delineates the scope of the domestic industry, but Article 4 qualifies that the
“domestic industry”, for purposes of injury determination, does not have to be comprised of all
domestic producers of the like product. Instead, it may refer only to a segment of that industry
accounting for “a major proportion of the total domestic production of those products.”
While the term “a major proportion” is not defined in ADA, the panel in Argentina-Poultry notes
that the agreement uses an indefinite article “a”, instead of a definite article “the”. The panel
reckoned that 46% of total domestic production is sufficient to satisfy the requirement of “a
major proportion.” Had the article been “the” instead of “a”, more than 50% of domestic
production would be needed to meet the requirement.
As a general rule, if a domestic producer of a like product offers to participate in the injury
investigation, the investigating authority should include such producer. Article 4, however,
allows the investigating authority to exclude producers who, although producing like product
and providing information in a timely manner, satisfy either of the two cases specified. First, if
the producers are “related to the exporter or importer or are themselves importers of the
allegedly dumped product”79, their inclusion may distort the injury analysis. The term “related” is
clarified further in the agreement as follow80:
…producers shall be deemed to be related to exporters or importers only if (a) one of
them directly or indirectly controls the other; or (b) both of them are directly or indirectly
controlled by a third person; or (c) together they directly or indirectly control a third
person, provided that there are grounds for believing or suspecting that the effect of the
relationship is such as to cause the producer concerned to behave differently from nonrelated producers. For the purpose of this paragraph, one shall be deemed to control
another when the former is legally or operationally in a position to exercise restraint or
direction over the latter.
The second exception relates to the existence of market segments. In this case, the injury caused
by dumped imports may be limited to producers of like product belonging to specific market
segment; hence, the investigation can exclude other producers of like product belonging to a
different market segment. Article 4.1(ii) explains:
In exceptional circumstances the territory of a Member may, for the production in
question, be divided into two or more competitive markets and the producers within each
market may be regarded as a separate industry if (a) the producers with such market sell
all or almost all their production of the product in question in that market, and the (b) the
demand in that market is not to any substantial degree supplied by producers of the
product in question located elsewhere in the territory. In such circumstances, injury may
be found to exist even where a major portion of the total domestic industry is not injured,
produced there is a concentration of dumped imports into such an isolated market and
79
80
Article 4.1(i) of ADA.
Footnote 11 of ADA.
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provided further that the dumped imports are causing injury to the producers of all or
almost all of the production within such market.
When only a specific market segment is injured, Article 4.2 stipulates that anti-dumping duties
should be levied only to the imports consigned to that segment. But if such discriminatory levying
of duties is not allowed by the constitutional law of the importing country, then the duties may
be levied uniformly across market segments only after exporters are given opportunity to make
an undertaking or to cease exporting at dumped prices to the injured market segment.
Material Injury
The agreement is not concerned with de minimis dumping. This means that a country’s right to
take action against dumping by another country’s producers arises only when export prices have
fallen below normal values to such degree as to cause material injury to domestic industry. The
agreement does not specify a dumping margin below which dumping may be considered de
minimis. Instead it stipulates that the materiality of injury is to be assessed in terms of the (i)
volume of dumped imports; (ii) effect of dumped imports on prices; and (iii) impact of dumped
imports on domestic producers. And the volume of dumped imports should be assessed “either
in absolute terms or relative to production or consumption in the importing member” (Article
3.2).
Although the finding of dumping is made with reference to a particular exporter or producer,
importing countries usually examine the volume of imports from more than one exporter and
more than one country cumulatively for the purpose of determining if the increase in dumped
imports is significant. Article 3.3 allows cumulation but requires that (i) the dumping margins are
more than de minimis; (ii) the volume of imports from each country is not negligible; and (iii) the
imported products compete with each other and with the like domestic product. A 2% dumping
margin is considered de minimis, while less than 3% share of total imports is considered
negligible.81
Concerning the effect of dumped imports on prices, the ADA provides here a more specific
guideline. In particular, the investigating authority is expected to examine whether dumped
imports (i) price undercut domestic like products; or (ii) depress domestic prices or (iii) suppress
the increase in domestic prices.82
…the investigating authorities shall consider whether there has been a significant price
undercutting by the dumped imports as compared with the prices of a like product of the
importing Member, or whether the effect of such imports is otherwise to depress prices
to a significant degree or prevent price increases, which otherwise would have occurred,
to a significant degree. No one or several of these factors can give decisive guidance.
The last statement in the preceding provision underscores that a finding concerning movement in
prices, i.e., price undercutting, depression or suppression, does not establish the impact of
dumped imports on the domestic industry, which must be sorted out based on the specific
factors enumerated in Article 3.4. The panels and Appellate Body have consistently ruled that an
81
Article 5.8 of ADA gives details on what are considered de minimis dumping margin and negligible volume
of imports.
82
Article 3.2 of ADA.
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impact analysis of dumped imports should involve all 15 factors in Article 3.4, also referred to as
injury factors, namely:
…actual and potential decline in sales, profits, output, market share, productivity, return
on investments, or utilization of capacity; factors affecting domestic prices; the
magnitude of the margin of dumping; actual and potential negative effects on cash flow,
inventories, employment, wages, growth, ability to raise capital or investments.
This list is not considered exhaustive, which means that the investigating authority is expected to
consider other factors relevant to the case on hand. In addition, not all are relevant in all cases, so
the investigating authority has to exercise judgment on which factors it would base its injury
determination. The Panel in Korea-Certain Paper (para 7.268), nonetheless, refers to this list as
“checklist obligation” that an investigating authority must address. But the same Panel
cautioned against mechanical compliance of compiling and presenting data on them. It stressed
that:83
…Article 3.4 requires the IA to carry out reasoned analysis of the state of the industry.
This analysis cannot be limited to a mere identification of the “relevance or irrelevance” of
each factor, but rather must be based on a thorough evaluation of the state of the
industry. The analysis must explain in a satisfactory way why the evaluation of the injury
factors set out under Article 3.4 lead to the determination of material injury, including an
explanation of why factors which would seem to lead in the other direction do not,
overall, undermine the conclusion of material injury.
Threat of Injury and Material Retardation
The injury envisaged in ADA is not limited to actual or realized harm on the domestic industry;
rather, prospective injury, and even retardation of the establishment of a domestic industry are
considered legitimate causes of action.
Since the determination of future injury is inevitably conjectural, the agreement defines specific
parameters in conducting such type of analysis to ensure that it is still based on “positive
evidence” and “objective examination.” For this purpose, Article 3.7 sets out three rules. First,
the determination of a threat of material injury must be “based on facts and not merely on
allegation, conjecture or remote possibility.” This is taken by the panel in Mexico-Corn Syrup to
mean that the injury factors listed in Article 3.4 should also be considered in assessing the
threat.84 Second, the threat of injury should be foreseeable and imminent. The panel in EgyptSteel Rebar interprets this requirement to mean that the threat should be analyzed in the context
of the current industry situation. The panel opined:
…it would be necessary, in order to assess the likelihood that a particular change in
circumstances would cause an industry to begin experiencing present material injury, to
know about the condition of the domestic industry at the outset. For example, if an
industry is increasing its production, sales, employment, etc., and is earning a record level
of profits, even if dumped imports are increasing rapidly, presumably it would be more
difficult for an investigating authority to conclude that it is threatened with imminent
injury than if its production, sales, employment, profits and other indicators are low
and/or declining.
83
84
Cited in ADB (2009), p.p. 43-44.
See Panel Report, Mexico-Corn Syrup, para, 7.131.
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Finally, the agreement enumerates specific factors (in addition to injury factors in Article
3.4) that an investigating authority should consider in assessing threat of injury, namely:
(i)
(ii)
(iii)
(iv)
a significant rate of increase of dumped imports into the domestic market
indicating the likelihood of substantially increased importation;
sufficient freely disposable, or an imminent substantial increase in capacity of
the exporter indicating the likelihood of substantially increased dumped
exports to the importing Member’s market, taking into account the availability
of other export markets to absorb any additional exports;
whether imports are entering at prices that will have a significant depressing
or suppressing effect on domestic prices, and would likely increase demand for
further imports; and
inventories of the product being investigated.
Compared to determining the existence of threat of injury, more speculation is probably
required to establish that an importing country is prevented from nurturing its own
domestic industry which can produce like product to the dumped imports.
Unfortunately, the agreement mentions “material retardation of the establishment of an
industry” only in the footnote clarifying the kinds of injury envisaged in the agreement.85
There is also no panel or Appellate Body report that addresses the issue to date.
Causation
Demonstrating the causal link between dumped imports and injury to the domestic industry,
provided for in Article 3.5 of ADA, is yet a separate, albeit related, activity to investigating the
effects of dumped imports on prices (Article 3.2) and assessing the impact of dumped imports on
the domestic industry (Article 3.4). But establishing causation is not an exact science, and
therefore it is not surprising that the agreement does not set nor recommend any specific
method or approach. From a legal standpoint, however, this puts burden on the investigating
authority (and later to the importing country brought into dispute) to discern which method to
employ.
Article 3.5, nonetheless, provides broad guidelines. First, the causation investigation should be
based on “an examination of all relevant evidence before the authorities.” Second, the
investigating authority should examine “any known factors other than the dumped imports, and
the injuries caused by these other factors." The purpose of expanding the scope of investigation
is for injuries caused by these other factors not to be attributed to dumped imports. This so
called non-attribution test is critical in the calculation of injury margin. Third, it has been
suggested that the investigating authority may consider the following, among others, in
undertaking the non-attribution test:
…the volume and prices of imports not sold at dumping prices, contraction in demand or
changes in the patterns of consumption, trade restrictive practices of and competition
between the foreign and domestic producers, developments in technology and the
export performance and productivity of the domestic industry.
85
See footnote 9 of ADA.
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The foregoing factors, unlike the injury factors in Article 3.4, are not mandatory for the
investigating authority to evaluate. In fact, when Poland accused Thailand of not examining all
“known” factors before imposing anti-dumping duty, the panel in Thailand-H-Beams ruled the
following:86
Article 3.5 refers to "known" factors other than the dumped imports which at the same
time are injuring the domestic industry but does not make clear how factors are "known"
or are to become "known" to the investigating authorities. We consider that other
"known" factors would include those causal factors that are clearly raised before the
investigating authorities by interested parties in the course of an AD investigation. We are
of the view that there is no express requirement in Article 3.5 AD that investigating
authorities seek out and examine in each case on their own initiative the effects of all
possible factors other than imports that may be causing injury to the domestic industry
under investigation. Of course, they would certainly not be precluded from doing so if
they chose to (underscoring author).
Injury Margin
The general principle is to impose anti-dumping duty just sufficient to offset the injury to the
domestic industry. This is the rationale for the non-attribution test, so that the extent of injury
caused by dumped imports can be properly identified. However, the ADA leaves it to the
prerogative of the importing country to impose the full margin of dumping or less. Specifically,
the importing country may levy imports based on the dumping margin, or the lower between
dumping and injury margins. The so-called “lesser duty rule” obviously requires a calculation of
injury margin, to which the ADA does not give any guidance.
Two methods have evolved in calculating injury margins.87 The first is applied when dumped
imports undercut the price of domestic producers in the importing country. In this case, the
injury margin is the difference between the prices of domestic producer and of the exporter,
expressed as a percentage of the exporter’s price.
The second method is appropriate in case the domestic producer undersells. This happens when
the exporter charges a price that is lower than that which would allow the domestic producer to
cover more than its cost of production. Because of competition from imports, the domestic
producer is constrained to set the price at just about the level that would cover its cost of
production. The injury margin is the difference between the domestic producer’s hypothetical
price, if it is not constrained by imports and hence able to cover the cost of production plus
“reasonable profit”, and the exporter’s price, expressed as a percentage of the latter.
Application of Anti-Dumping Duty
Nine of 18 articles of ADA are devoted to procedures in conducting investigation, evaluating
evidence, imposing and collecting anti-dumping duties, designing remedies, reviewing duties and
price undertakings and notifying the public about the anti-dumping measures taken. The detailed
rules contained in these articles are testament to the motivations of the negotiators of the
agreement. Apart from clarifying the intent of Article VI of GATT, the agreement purports to
86
87
Panel Report, Thailand-H-Beams, para. 7.273.
See ADB (2009), pp. 47-48 for illustration.
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ensure transparency in the application of anti-dumping duties and give due process to
“interested parties”.
This section discusses some of the salient principles embodied in these procedures. They are not
all distinct to ADA, as some are also found in ASCM and ASG.
Initiation
The term “initiation” in ADA refers to formal commencement of investigation88 to determine the
existence, degree and effect of alleged dumping. This is considered “day 1” in a time-bound
proceedings to apply anti-dumping measure. The last stage in the proceedings, the imposition of
definitive measures, should be within 12 months and in no case more than 18 months after
initiation.89 The process may be started by a member country motu proprio, but in the usual case,
the designated investigating authority receives “a written application by or on behalf of the
domestic industry” (Article 5.1).
Prior to initiation, the investigating authority is obliged to observe certain procedures stipulated
in the agreement. First, upon receipt of the application, the investigating authority determines if
it is “complete” in terms of supplying evidence of dumping, injury and causal link between
dumped imports and alleged injury. To the extent reasonably available to the applicant, the
application must contain information that will allow the investigating authority to undertake
dumping and injury determination. Thus Article 5.2 enumerates the following information
expected from the applicant:
(i) Identity of the applicant and description of volume and value of the applicant’s domestic
production of like product;
(ii) Complete description of allegedly dumped products, including the names of the country or
countries of origin or export in question, the identity of each known exporter or foreign producer
and a list of known persons importing the product in question;
(iii) Information on prices at which the product in question is sold when destined for consumption in
the domestic markets of the country or countries of origin or export (or, when appropriate,
information on the prices at which the product is sold from the country or countries of origin or
export to a third country or countries, or on the constructed value of the product) and information
on export prices or, where appropriate, on the prices at which the product is first resold to an
independent buyers in the territory of the importing Member; and
(iv) Information on evolution of the volume of the allegedly dumped imports, the effect of these
imports on prices of the like product in the domestic market and consequent impact of the
imports on the domestic industry, as demonstrated by relevant factors and indices having a
bearing on the state of the domestic industry.
Next, the investigating authority reviews “the accuracy and adequacy of the evidence in the
application to determine whether there is sufficient evidence to justify the initiation of an
investigation.” There is nothing in Article 5.3 that could help an investigating authority discern
what would amount as “sufficient evidence”, hence much is left to its discretion. This probably
explains why some observers have commented that the initiation standard in some countries is
too low, i.e., initiation is started too quickly.90 On the other hand, the panel in Mexico-Steel Pipes
and Tubes stated that the evidence submitted by the applicant do not have to be “irrefutable
88
Footnote 1 of ADA.
Articles 9.3.1 and 9.3.2 of ADA .
90
Horlick and Vermulst (2005), p. 69.
89
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proof of dumping or injury” in order to initiate the anti-dumping investigation. This panel
explains:91
…anti-dumping investigation is a process where certainty on the existence of all of the
elements necessary in order to adopt a measure is reached gradually as the investigation
moves forward.
Nonetheless, the panel in Guatamela-Cement II expects the investigating authority to detect if
the domestic and export prices have been appropriately adjusted (or sufficient information is
supplied to make necessary adjustments) so that the prices can be fairly compared.92
Apart from assessing the accuracy and adequacy of evidence, the investigating authority must
also establish that the application was made “by or on behalf of the domestic industry” – a
process known as standing determination.
What makes an application “by or on behalf of the domestic industry”? Here, the agreement is
more helpful. In particular, Article 5.4 stipulates two specific requirements.
…The application shall be considered to have been made “by or on behalf of the domestic
industry” if it is supported by those domestic producers whose collective output
constitutes more than 50 per cent of the total production of the like product produced by
that portion of the domestic industry expressing either support for or opposition to the
application. However, no investigation shall be initiated when domestic producers
expressly supporting the application account for less than 25 per cent of total production
of the like product produced by the domestic industry.
To be clear, the first requirement, “more than 50 per cent…”, is reckoned only in terms of
that segment of domestic industry comprised by producers who submitted the
application, expressed support to the application (whether or not involved in the
submission of application), and expressed opposition to the application. On the other
hand, the second requirement, “less than 25 per cent…”, refers to the whole domestic
industry of like product.
Also prior to initiation, the investigating authority is obliged to notify the government of the
exporting country that an application for the initiation of an anti-dumping investigation has been
received.
It should be stressed that under Article 5.5, the investigating authorities are restrained from
publicizing the application, until they have made a decision whether to accept or reject it. Such
strict rule on keeping the application confidential stems from the nature anti-dumping measure,
i.e., it is producer-specific. Once importers learn that an anti-dumping investigation may be
initiated against a particular exporter, they may divert their business to other exporters since
they may be later asked to pay anti-dumping duties in case the investigation found sufficient
grounds for imposing the trade remedy.
When the foregoing pre-initiation activities are met, the investigating authority can decide either
to reject the application, or to give public notice concerning the initiation of the investigation.
91
92
Panel Report, Mexico-Steel Pipes and Tubes, para. 7.22.
Panel Report, Guatemala-Cement II, para. 8.40.
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The rejection can be due to: (i) insufficient evidence of either dumping or injury, or; (ii) the margin
of dumping is de minimis, i.e., less than 2% of export price, or; (iii) the volume of dumped imports,
actual or potential, or the injury, is negligible, i.e., less than 3% of imports of the like product,
unless countries which individually have less than 3% share collectively account for more than 7%
of imports of like product.
Due Process
As can be inferred from the agreement, it must have been high in the priority of negotiators to
reduce disputes that can arise from the members’ exercise of their rights to apply trade
remedies. One measure to avoid disputes is to enable parties, who may later have incentive to
bring disputeВё participate in the process. These parties, according to Article 6.11, include
exporters, foreign producers, importers, trade or business associations (whose members are
majority producers, exporters or importers of the product at issue); the government of the
exporting member; and producers of like product in the importing country, and their trade or
business associations. The foregoing is not an exhaustive list; other foreign and domestic groups
may be considered interested parties. In fact, most members have considered industrial users
and representative consumer organizations as interested parties.
As soon as the investigation is initiated, the investigating authority shall transmit the full text of
the written application to known exporters and to the authorities of the exporting member. The
same shall be made available to other interested parties upon request.
Besides the right to information concerning the investigation, other due process rights of
interested parties are contained in Articles 6 and 12. The most important is the right to present
written evidence that they consider relevant to the investigation (Article 6.1). When asked by the
investigating authority to supply specific information, interested parties are entitled to
reasonable period to respond. In case of exporters or foreign producers, however, a 30-day limit
is specified in Article 6.1.1. However, this 30-day period is reckoned from the receipt of
questionnaire, which is deemed to be one week from the date on which it was sent to the
respondent or diplomatic representative of the exporting country.
An interested party has right to access the evidence presented in writing by another interested
party, except when the evidence is classified confidential (Article 6.1.2). This right to access
information supplied by others relates to Article 6.4 which gives interested parties the right to
“see all information that is relevant to the presentation of their cases.” But it takes a back seat to
the right of a party disclosing confidential information to have such information treated
accordingly (Article 6.5). Any information supplied by an interested party may by nature
confidential, or treated as one upon request of the submitting party. This is because the
information could provide competitive advantage to a competitor or adversely affect the person
disclosing it. Thus, to balance transparency and fair play, the agreement provides that in case of
confidential information, a non-confidential version of such evidence should also be submitted.
The confidential version is accessible only to the investigating authority, while the nonconfidential version is available to all interested parties.
It is deemed incumbent of the investigating authority to provide interested parties an avenue to
defend their interests and refute arguments offered by others with opposing positions (Article
6.2). Interested parties have also the right to be informed of essential facts under consideration
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by the investigating authority before the latter renders decision to apply definitive measures
(Article 6.9).
On the other hand, if an interested party refuses to provide necessary information within a
reasonable period, the investigating authority is free to make a determination based on the best
information available (Article 6.8 and Annex II).
Finally, interested parties have generally the right to individual determination of dumping. But if
the number of exporters, producers, importers or types of products involved is so large such that
individual determination is infeasible or impractical, the investigating authority may limit its
examination to a statistically valid sample of exporters, producers, importers or types of
products, or to the largest percentage of export volume from the country in question (Article
6.10).
Provisional Measures
No sooner than 60 days but no later than 9 months from date of initiation, the investigating
authority may impose provisional anti-dumping duty if preliminary investigation yields positive
findings on dumping and injury, and the measure is deemed necessary to prevent further injury to
domestic industry. 93 The right to apply provisional measures is also available to authorities in the
ASCM and ASG.
Before imposing the provisional measure, however, the investigating authority is required to
notify the public and give interested parties an opportunity to submit information and comment
on the decision. By its very nature, a provisional measure may be applied only for a period of 4 to
6 months, and must not be greater than the estimated dumping margin. However, when the
provisional measure is set lower than the dumping margin, it may be applied for a longer
duration, i.e., 6 to 9 months (Article 7.4).
A provisional measure may take the form of a provisional duty, but preferably a security – cash
deposit or bond – equal to the amount of anti-dumping duty provisionally estimated. If the final
determination does not support the application of a definitive measure, Article 11.5 requires that
the cash deposit be refunded or the bond be released immediately. In case the definitive antidumping duty is higher than the provisional duty paid or payable, or the amount of security, the
difference shall not be collected. On the other hand, if the definitive duty is lower, the difference
shall be reimbursed or the duty recalculated (Article 10.3).
Alternatively, withholding the appraisement of allegedly dumped imports is an acceptable form
of provisional measure, but the normal duty and estimated amount of anti-dumping duty should
be indicated.
Price Undertaking
An exporter may cause the termination or suspension of investigation by offering to revise its
prices or to stop exporting to the area allegedly dumped, in case of regional dumping (Article
8.1). This provision is distinct in ADA, as there is no similar provision in ASCM or ASG.
93
Article 7.1 of ADA.
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The investigating authority is not obliged to accept a price undertaking (Article 8.2), nor can an
exporter be compelled to enter into one (Article 8.5).
If the undertaking involves revising prices, the adjustment should not be higher than necessary to
eliminate the dumping margin. The agreement states that it is preferable if the price adjustment
is limited to such amount that will eliminate the injurious effect of dumping.
But even if the price adjustment is considered adequate to remove injury, the importing country
may still reject the undertaking if there are too many actual or potential exporters, or as a matter
of policy. However, Article 8.3 requires the investigating authority to provide the exporter with
explanation for non-acceptance of the undertaking, as well as opportunity to comment on the
decision.
Acceptance of the undertaking does not preclude the authorities from continuing on its
investigation, if it so decides, or if requested by the exporter. Now if the investigation yields
negative findings on dumping and injury, the undertaking is deemed to automatically lapse,
unless the negative findings were due to the undertaking. If, on the other hand, the investigation
resulted in positive determination of dumping and injury, the undertaking will continue (Article
8.4).
An exporter from whom an undertaking is accepted may be required by authorities of the
importing country to provide pertinent information that would allow the latter to check on its
compliance. When it is determined that the exporter violated its undertaking, the importing
country has the right to immediately apply provisional measures using best information available.
It may also levy definitive duties retroactively, except that such duties can only be levied on
imports that entered the country within 90 days before the application of provisional measure,
but not before the violation of the undertaking (Article 8.6).
Definitive Measures
Notwithstanding positive findings of dumping and injury, the decision to apply definitive
measures is left to the discretion of the importing country. Some WTO members, the Philippines
included, have a public interest clause in their national anti-dumping law which allows them to set
aside a finding of injurious dumping under certain circumstances.
Definitive measures usually take the form of anti-dumping duty. When a decision to impose antidumping duty is made, the agreement nudges the WTO member to apply the lesser duty rule, i.e.,
imposing a duty equal to the lower between dumping and injury margins (Article 9.1). The
member, however, has discretion not to follow this rule, but the applied duty cannot be more
than the full dumping margin. Such duty shall be collected on a nondiscriminatory basis on
imports from sources found to have engaged in injurious dumping (Article 9.2).
The anti-dumping duty may be assessed on a retrospective basis (Article 9.3.1), or on a
prospective basis (Article 9.3.2). The former is followed by the US; the latter is observed by the
European Communities and other countries, including the Philippines. Under the retrospective
system, the actual anti-dumping duties are determined from annual reviews covering the import
transactions during the preceding one-year period. By contrast, under the prospective system,
anti-dumping duties are based on the determination from the original investigation
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Clearly, the retrospective system is fairer since the duties levied are based on actual dumping and
injury margins incurred on imports during the year, whereas the duties imposed under the
prospective system are based on dumping and injury margins on imports during the period of
investigation. As a result, reimbursements for duties paid in excess of actual dumping margin are
more likely under the prospective system. But the retrospective system requires the conduct of
annual reviews, and is therefore more costly and time-consuming for the importing country.
In principle, an anti-dumping duty may be levied continuously “as long as and to the extent
necessary to counteract dumping which is causing injury” (Article 11.1). But any interested party
has the right to request the authorities of the importing country to undertake a review of the
measure to determine if continuous application is warranted (Article 11.2). Such review may also
be initiated by the importing country on its own. If a prospective and counterfactual analysis
shows that dumping and injury are unlikely to recur if the duty were removed, the measure
should be immediately terminated.94
If no interim review is requested by an interested party or undertaken on own cognizance by the
importing country, Article 11.3 provides, nonetheless, that the definitive measure should be
terminated no later than 5 years from its imposition. An extension beyond the 5-year limit is
allowed if a review initiated before the end of the time limit reveals that dumping and injury will
likely recur if the measure is terminated.
Anti-dumping duties are remedial, not punitive measures. Therefore, the general principle is that
they can only be applied to imports that enter the country after a final determination of dumping
causing injury to domestic industry has been made. However, Article 10 permits retroactive
application of anti-dumping measure in two cases.
First, in case provisional measure was applied and it was later found that in the absence of such
measure, dumped imports would have caused injury to the domestic industry, anti-dumping
duties may be levied retroactively on imports that entered the country during the application of
the provisional measure (Article 10.2). However, the final determination should explicitly state
such finding (i.e., that dumped imports would have led to a determination of injury in the absence
of provisional measure). In the Mexico-Corn Syrup case, the panel found Mexico in violation of
the agreement when it applied definitive anti-dumping duty retroactively although there is no
explicit statement of such finding in the final determination.
Second, Article 10.6 provides for levying definitive anti-dumping duty on imports that entered the
country no more than 90 days before the application of provisional measure if it was determined
that: (i) the exporter or producer has a history of dumping which caused injury; and (ii) the injury
caused by massive dumped imports to such extent as to nullify the remedial effect of the
definitive anti-dumping duty, provided that the importers concerned are given opportunity to
comment.
94
ADA envisages three types of reviews: newcomer, interim and expiry. Article 9.5 provides basis for
newcomer reviews which are applied to producers or exporters that did not export during the original
investigation period. Articles 11.2 and 11.3 make reference to interim and expiry reviews, respectively. It is
worth noting that the importing country is not obliged to undertake any of these reviews unless requested
by an interested party.
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Finally, Article 15 prods investigating authorities from developed countries to consider
constructive remedies before imposing definitive anti-dumping measure on exports of
developing countries. The panels in EC-Bed Linen and EC-Pipe Fittings ruled that the kind of
constructive remedies envisaged by ADA are price undertakings and application of lesser duty
rule. The panel in EC-Pipe Fittings clarified further that other forms of undertakings beside price
are not envisaged in the ADA.95
Both panels ruled that Article 15 does not impose an obligation on developed countries to
propose or accept any constructive remedy. As long as there is evidence that constructive
remedies were “explored” before applying anti-dumping duties that would affect the interest of
developing country members, this is already deemed compliance to Article 15. In the EC-Bed Linen
case, the panel sided with Brazil when it charged the European Communities of violation of
Article 15 because there was no evidence of such “exploration” by the defendant.96
Philippine Anti-Dumping Law
Article 18.4 of ADA obligates all WTO members to bring their laws, regulations and administrative
procedures in conformity with the terms of the agreement before it came into force. To comply,
the Philippine Congress enacted on 25 July 1994, Republic Act No. 7848, also known as the “AntiDumping Act of 1995.” The law amends specific provisions in the Tariff and Customs Code of the
Philippines (TCCP) concerning the application of special duties on dumped imports.
Five years hence, the Philippine Congress passed yet another law, Republic Act No. 8752, also
known as the “Anti-Dumping Act of 1999.” This law, like the earlier one, amends specific
provisions in the TCCP relating to imposition of anti-dumping duties. As is evident in the
discussion that follow, the second amendment was necessary to bring the national law in
conformity with the ADA. Indeed, with only few exceptions, the provisions in the 1999 law
replicate those in the agreement.
This section reviews some of the salient provisions in the 1995 and 1999 anti-dumping laws,
noting the inconsistencies of the earlier version with the ADA, and highlighting the current
governance structure contained in the later version.
Anti-Dumping Law of 1995
The 1995 law designated the Tariff Commission as the investigating authority and created a
Special Committee on Anti-Dumping purportedly to serve as the “judicial, arbitral or
administrative tribunal” as provided for in Article 13 of ADA. The Special Committee is composed
of 3 members: the Secretary of Finance as chair, the Secretary of Trade and Industry, and either
the Secretary of Agriculture, if the product at issue is agricultural, or the Secretary of Labor, when
the product is non-agricultural.
The trigger to an anti-dumping action is described in Sec. 301 of the TCCP as follow:
Whenever the Secretary of Finance or the Secretary of Trade and Industry (hereinafter
called the "Secretary") receives an anti-dumping petition from the domestic industry or the
Secretary has reason to believe, from any invoice or other document or newspaper,
95
96
ADB (2009), pp. 71-72.
Panel Report, EC-Bed Linen, para. 6.238, cited in ADB (2009), p. 72.
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magazine or information or translation thereof by any reputable language translator made
available by any government agency or interested party, that a specific kind or class of
foreign article is being imported into, or sold or is likely to be sold in the Philippines, at a
price less than its normal value, the importation or sale of which might injure, or retard the
establishment of, or is likely to injure an industry producing like articles in the Philippines,
the Secretary shall, within twenty (20) days from receipt of such petition or information,
determine a prima facie case of dumping. Within five (5) days from such receipt, he shall
notify the protestee-importer and require him to submit within ten (10) days from such
notice evidence from the producer of the imported article duly authenticated by the
Philippine consular or trade office to support the normal value of such product. If no such
evidence is submitted within the prescribed period, the Secretary shall base his decision on
the available pertinent data.
On advice from the Secretary of Finance who has determined that there is a prima facie evidence
of dumping, the Tariff Commission is tasked to conduct an investigation to:
(a) “verify if the kind or class of article in question is being imported into, or sold or is likely
to be sold in the Philippines at a price less than its normal value”;
(b) “ascertain the difference, if any, between the export price and the normal value of the
article”; and
(c) “determine if, as a result thereof, a domestic industry producing like articles in the
Philippines suffers, or will be threatened with, injury, or will suffer a material retardation
of the establishment of a domestic industry in the Philippines”.
In the course of investigation, the Tariff Commission is responsible for identifying all interested
parties and requiring them to submit their respective positions within fifteen (15) days from notice.
The Commission conducts public hearings “where the owner, importer, consignee or agent, of the
imported article, the local producers or manufacturers of like article, other parties directly affected,
and such other parties as in the judgement of the Commission are entitled to appear, are given
opportunity to be heard and to present evidence”. The investigation has to completed within 90
days, and the Commission is required tol submit its findings to the Special Committee on AntiDumping within 60 days from the termination of the investigation.
Part of the Commission’s mandate is to “conduct quarterly examination and/or verification of the
normal value to determine the necessity of adjustment” of the anti-dumping duty imposed. Upon
petition from any interested party or on its own motion, the Commission shall conduct interim
review to determine if the conditions found during the original investigation still exist. And on
advice by the Special Committee, the Commission shall conduct an expiry or sunset review “at least
six (6) months before the expiration of the 5-year time limit for the application of anti-dumping
duty.97
Nothing in the foregoing mandate of the Tariff Commission is inconsistent with the terms of the
ADA on the functions of the investigating authority. What is at odds with ADA is the role of the
Special Committee. At the very least, the Special Committee does not have the independence
expected of a judicial tribunal, foremost because it makes the final determination if the antidumping duty is to be imposed.
97
The Commission must submit the results of the expiry or sunset review to the Special Committee 3
months before the expiration date, but no more than 1 month from receipt of advice from the Committee
to conduct such review. The application of anti-dumping duty may be extended for no more than 2 years.
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The Special Committee shall, within fifteen (15) days after receipt of the report of the
Commission, decide whether the article in question is being imported in violation of this
section and shall give due notice of such decision.
And yet, it is the only body to which an interested party can seek recourse.
Any interested party of record who is dissatisfied with a decision in a dumping protest may
file a motion for reconsideration with the Special Committee within thirty (30) days from
notice of such decision: Provided, that no motion for extension of time to file a motion for
reconsideration under this sub-section shall be allowed.
An aggrieved party can also file an appeal to the Court of Tax Appeals but only for the amount of
the duty. Said Court cannot reverse the “findings of fact in a dumping case.”
That the investigating authority acts on the instruction of the Secretary of Finance who also
heads the Special Committee, and the Committee makes final determination and acts as judicial
tribunal at the same time, are clearly inconsistent with Article 13 of ADA which reads:
…Such tribunals or procedures shall be independent of the authorities responsible for the
determination or review in question.
Despite the foregoing, there are some provisions in the 1995 law that are useful to the
investigating authority since they provide more detailed criteria than those found in the ADA.
Concretely, the law prescribes that in determining injury, the following should be considered:
(i)
(ii)
Whether or not the imported articles under consideration are identical or
alike in all respect to articles produced by the domestic industry or
substantially of the same material or although of different composition or
material serves the same or similar purpose such as a substitute as the
articles produced in the Philippines in quantities sufficient to supply at least
ten per cent (10%) of local consumption (arrived at by taking the sum of the
average local production and average importation and subtracting
therefrom average exportation) for the immediately preceding three (3)
months prior to the filing of the dumping protest;
The volume of dumped imports and their effects on prices in the domestic
market for the like articles: Provided, that the Commission shall determine
the consequent impact of these imports on domestic producers by
considering relevant economic factors and indices such as:
(a) Five per cent (5%) decline in sales volume or decline in sales prices of at least
two per cent (2%) as compared to the average monthly sales for the
immediately preceding three (3) months; or
(b) Five per cent (5%) decline in the volume of production as compared to the
average monthly volume of production for the immediately preceding three (3)
months; or
(c) Actual and potential negative effects on employment and inventories of the
subject articles.
This provision helps in identifying domestic like products, and consequently the domestic
industry. Domestic like products can be distinguished as those that serve the same or similar
purpose as imported product, and are able to satisfy at least 10% of local consumption. In
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determining the potential effects of dumped imports on domestic industry, the threshold indices
in the changes in sales volume, prices and production are likewise useful as they reduce, to some
degree, the discretion that the authorities would have otherwise exercised.
Anti-Dumping Law of 1999
In view of the apparent inconsistencies of the 1995 law with the ADA, major changes in the
administration of anti-dumping cases were introduced in 1999. The Anti-Dumping Law of 1999 is
part of the current TCCP.
A major change is the significant reduction in the the role of the Secretary of Finance in antidumping proceedings. Whereas in the 1995 law, the Tariff Commission acts upon instruction of
the Secretary of Finance, and the Special Committee, chaired by the Secretary of Finance, makes
the final determination on the imposition of anti-dumping duty, the role of the Secretary of
Finance in the 1999 law is almost symbolic. The only provision in the law involving the Finance
Secretary concerns the obligation imposed on the Secretary of Departments of Trade and
Industry and Agriculture to “notify” the Finance Secretary about petitions for application of antidumping measure, on which basis, it instructs the Commissioner of the Bureau of Customs to
gather information concerning the allegedly dumped imports. Unlike in the 1995 law, the Finance
Secretary can no longer initiate an anti-dumping investigation motu proprio, while such right is
still retained by the Secretary of Trade and Industry, in case of non-agricultural products, and by
the Secretary of Agriculture, in case of agricultural products. However, the Finance Secretary is
still a member of the inter-agency committee that promulgates rules and regulations to
implement the anti-dumping law, but no longer heads this committee.98
The final determination on the imposition of anti-dumping duty is now the prerogative of the
Tariff Commission, which may decide against imposing the duty despite affirmative finding of
dumping. Section 301 (a), Part 2, Title II of TCCP now reads:
…Even when all the requirements for the imposition have been fulfilled, the decision on
whether or not to impose a definitive anti-dumping duty remains the prerogative of the
[Tariff] Commission. It may consider, among others, the effect of imposing an antidumping duty on the welfare of consumers and/ or the general public, and other related
local industries.
The Commission has also the power to initiate, conclude or suspend investigation, make
preliminary determination, conduct interim and expiry reviews motu proprio, make a decision to
accept or terminate an undertaking, and terminate a definitive anti-dumping duty.
Despite the greater responsibilities bestowed to the Commission, some roles are still reserved to
the Secretaries of Trade and Industry and Agriculture. Apart from initiating investigation motu
proprio, the Secretaries can receive petitions from any interested party for application of antidumping measure and conduct of interim review, and direct the Commission to terminate
investigation or conduct reviews. They can also make a preliminary determination, which findings
they have to transmit to the Commission so the latter can proceed with the formal investigation.
It is important to note that an affirmative preliminary finding automatically shifts the burden of
proof to the importer respondent, and requires it to deposit a cash bond with Customs for the
98
The inter-agency committee is composed by Secretary of the Departments of Finance, Trade and
Industry, and Agriculture, and Commissioners of Bureau of Customs and Tariff Commission.
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amount of the provisionally estimated anti-dumping duty. Any final determination on imposition
of anti-dumping duty as well as termination of a definitive measure is issued as a Department
Order by either Secretary.
Recognizing the need for an independent adjudication body, the 1999 law designated the Court
of Tax Appeals as the judicial tribunal for the purpose of Article 13 of ADA. As in the 1995 law,
petitions from parties opposing the dumping determination can only be heard within 30 days
from official publication of the ruling.
Another new provision in the 1999 law is the setting up of Trade Remedies Fund from the
collected anti-dumping duties. The fund is earmarked to the Tariff Commission and Departments
of Trade and Industry and Agriculture, purportedly to improve their institutional capabilities.
Apart from these nuances on the administrative structure and the defined time-limits for certain
procedures (e.g., completion of investigation by the Commission within 120 days from receipt of
case information), the provisions in the 1999 law are exact replication of the provisions in the
ADA. This avoids inconsistency of the national legislation with the multilateral agreement, but it
also limits the usefulness of the law in providing guidance to authorities and private sector
stakeholders. For example, the definition of domestic like product in the 1995 law is more
instructive than the abstract definition in the ADA, which is replicated in the 1999 law. The injury
threshold indices in the 1995 law were also removed in the current version. To be sure, these
indices are arbitrary and could not be applicable to all industries all the time. There is no reason
to write them into law except to prevent abuse by the granting authority, which, on the other
hand, may be expedient when the governance structure is weak. Similarly, the extension in the
application of anti-dumping duty was limited to 24 months in the 1995 law, but not in the current
version, nor in the ADA. Thus, removing the time limit seems appropriate. But then the
transitional character of the measure conveyed by the time-limit is practical to dispel any
expectation that it can be used as a policy tool for protecting domestic industries.
6.3. Key Provisions and Issues in the Application of Countervailing Duties
Mainly because of the difficulty in defining subsidies and distinguishing policy measures that are
designed more to “protect” than “promote” domestic industries, work on trade agreement on
subsidies and countervailing measures (SCM) had been considerably more protracted and
arduous than in the case of anti-dumping and safeguards.
GATT 1947, Article XVI, while considered too loose to curb protectionist tendencies of contracting
parties, is a useful starting point. Section A of Article XVI read:99
If any contracting party grants or maintains any subsidy, including any form of income or
price support, which operates directly or indirectly to increase exports of any product
from, or to reduce imports of any product into, its territory, it shall notify the
CONTRACTING PARTIES in writing of the extent and nature of the subsidization, of the
estimated effect of the subsidization on the quantity of the affected product or products
imported into or exported from its territory and of the circumstances making the
99
In the so-called Havana Charter (agreed upon during the 1948 UN Conference on Trade and Employment),
the terms “contracting party” and “contracting parties” were replaced by “Member” and “Organization”
(referring to International Trade Organization), respectively. However, the Charter never came into force,
but GATT 1947 was implemented, albeit on provisional basis.
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subsidization necessary. In any case in which it is determined that serious prejudice to the
interests of any other contracting party is caused or threatened by any such subsidization,
the contracting party granting the subsidy shall, upon request, discuss with the other
contracting party or parties concerned, or with the CONTRACTING PARTIES, the possibility
of limiting the subsidization.
The deficiencies of Article XVI were quite ostensible. Foremost, it did not provide a definition of
“subsidy”, but alludes to “any form of income and price support”, and measure “which operates
directly or indirectly to increase exports or of any product from, or to reduce imports of any
product into, its territory” as subsidy. This was considered too broad to be useful for purposes of
the agreement.
Second, the provision did not prohibit any form of subsidy. It merely imposed obligations on the
contracting party: (i) to “notify” other contracting parities concerning the measure; and (ii) in
case the measure is against the interests of the other contracting parties, to engage the
concerned parties to a discussion for possible limiting of the amount of subsidy.
Third, the ad note to Article XVI stated that the exemption of an exported product from duties
and taxes that would have been paid had it been sold to the domestic market shall not be
considered a subsidy.
The exemption of an exported product from duties or taxes borne by the like product
when destined for domestic consumption, or the remission of such duties or taxes in
amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.
It should be noted that this kind of exemption is listed among prohibited subsidies in the ASCM.
Further, Article III of GATT 1947 provided yet another loophole. It stated that as long as
“internal” (domestic) taxes are applied on imported and domestic goods proportionately “so as
not to afford protection” on the latter, then subsidies paid out of internal tax collection to
domestic producers should be allowed. Concretely, Article III 8(b) stipulated:
The provisions of this Article shall not prevent the payment of subsidies exclusively to
domestic producers, including payments to domestic producers derived from the
proceeds of internal taxes or charges applied consistently with the provisions of this
Article and subsidies effected through governmental purchases of domestic products.
Despite the foregoing, GATT 1947 laid down key principles on countervailing duties that were
carried over to GATT 1994. First, a countervailing duty (CVD) is defined as “a special duty levied
for the purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the
manufacture, production or export of any merchandise” (Article VI.3). Second, the duty should
not be “in excess of an amount equal to the estimated bounty or subsidy determined to have
been granted, directly or indirectly, on the manufacture, production or export of such product in
the country of origin or exportation, including any special subsidy to the transportation of a
particular product” (ibid). Third, no product can be subject to both anti-dumping and
countervailing duties “by reason of the exemption of such product from duties or taxes borne by
the like product when destined for consumption in the country of origin or exportation, or by
reason of the refund of such duties or taxes” (Article VI.4). More importantly, no countervailing
(or anti-dumping) duty may be imposed unless the subsidization (or dumping) causes or threaten
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to cause material injury to an existing domestic industry, or materially retards the development of
a domestic industry.
No doubt that then contracting parties of GATT 1947 realized that the terms of the agreement
concerning SCM were too ambiguous, which explains the final provision of Article XVI:
The CONTRACTING PARTIES shall review the operation of the provisions of this Article
from time to time with a view to examining its effectiveness, in the light of actual
experience, in promoting the objectives of this Agreement and avoiding subsidization
seriously prejudicial to the trade or interests of contracting parties.
Negotiations on SCM continued in earnest even before the Uruguay Round. In 1950, a working
party recognized that the exception in Article III.8(b) on the use of domestic taxes to subsidize
domestic producers is not innocuous. Such subsidy is not just a simple flow back to domestic
producers of taxes that they paid. Rather, the working party deemed the measure to nullify or
impair the benefits associated with tariff concessions. But since the measure is explicitly provided
for in the agreement, it could not be considered a breach. Nonetheless, other contracting parties
harmed by the measure have recourse to Article XXIII which allows for suspension or withdrawal
of concessions, after due consultations with the subsidizing party, and after giving the latter an
opportunity to make adjustments in its measure.
Between 1954 and 1955, special provisions on export subsidies were added to Article XVI, with the
view of reducing the use of subsidies. In case of “primary products”, the amendments seek to
limit the amount of subsidy so it would not stimulate production as much as to displace the
exports of other parties. For other products, the intention was to eliminate all subsidies that
result in dumping (i.e., export price for the product that is lower than its domestic price). But
these amendments were not adopted by all signatories to GATT 1947.
xxx
3.
Accordingly, contracting parties should seek to avoid the use of subsidies on the
export of primary products. If, however, a contracting party grants directly or indirectly
any form of subsidy which operates to increase the export of any primary product from its
territory, such subsidy shall not be applied in a manner which results in that contracting
party having more than an equitable share of world export trade in that product, account
being taken of the shares of the contracting parties in such trade in the product during a
previous representative period, and any special factors which may have affected or may
be affecting such trade in the product.
4.
Further, as from 1 January 1958 or the earliest practicable date thereafter,
contracting parties shall cease to grant either directly or indirectly any form of subsidy on
the export of any product other than a primary product which subsidy results in the sale
of such product for export at a price lower than the comparable price charged for the like
product to buyers in the domestic market. Until 31 December 1957, no contracting party
shall extend the scope of any such subsidization beyond that existing on 1 January 1955 by
the introduction of new, or the extension of existing, subsidies.
Yet by 1961, the GATT membership adopted an “illustrative list” of practices that were considered
“prohibited” forms of subsidy because they result in export price for the product that is lower
than its domestic price. Subsidies of these types, when applied on primary products, were still
exempted.
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During the Tokyo Round, GATT members successfully negotiated on the Subsidies Code, also
known as the Plurilateral Agreement on Subsidies and Countervailing Measures. This is
considered the precursor to ASCM. The Code tightened the restrictions on the use of export
subsidies; provided more detailed procedures on the use of CVD; and enumerated criteria to be
used when examining whether imports were causing or threatening material injury.
The Uruguay Round produced the ASCM, but because of the political sensitivity of agricultural
products, the so-called “Peace clause” was inserted in the Agreement on Agriculture (AoA).
Specifically, Article 13 of AoA exempted certain agricultural subsidies from the disciplines of
ASCM up to end of 2003.
ASCM is considered a landmark achievement in the long years of intense negotiations on
subsidies, primarily because it has pinned down the definition of subsidy and made certain forms
of subsidy subject to multilateral disciplines. The next sections expound on the key provisions of
the agreement and the progress achieved to date in restraining countries from the use of
subsidy.
Economic Rationale of Subsidies and CVD
It is quite ironic that for a long time, countries were obstinately holding on to the right to use
subsidy even when they acknowledge that it controverts the objectives of the multilateral
agreement. This recognition is quite plain in Article XVI of GATT 1947:
The contracting parties recognize that the granting by a contracting party of a subsidy on
the export of any product may have harmful effects for other contracting parties, both
importing and exporting, may cause undue disturbance to their normal commercial
interests, and may hinder the achievement of the objectives of this Agreement.
A rich and growing body of theoretical literature is attempting to explain why exporting countries
use subsidies and importing countries countervail them. The theories suggest that when perfect
competition in all markets is assumed, granting a subsidy to one’s producers is irrational, but
imposing a countervailing duty on subsidized imports makes sense under certain conditions. By
contrast, a departure from the assumption of perfect competition illuminates the strategic
reasons behind granting subsidies but raises questions on the appropriateness of using CVD to
negate the market advantage that a subsidizing country would otherwise gain.
Subsidies and CVD under Perfect Market Conditions
Perfect competition is a market condition that exists only in the realm of theory. All
pertinent market information are known to all; there is no scale economies, i.e., cost
advantage from producing more than others, nor externalities, i.e., benefits to other
sectors realizable from the growth of one sector. Under these conditions, an export
subsidy could benefit the importing country, but reduce the welfare of the subsidizing
country. The global welfare is lower as a result, since the gains of the importing country
are less than the losses of the subsidizing country.
This conclusion that makes it absurd for any country to subsidize its producers is amply
explained in any trade economics textbook. The apparent appeal of a subsidy is that it
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allows the subsidized producers to export more and subsequently realize more profits.
But the subsidized producers have to be “large” in the sense of being able to influence
world market price. 100 If the subsidy is given to “small” producers, world market price is
unaffected and the export subsidy results only in a transfer from government to its
producers, without creating benefit for, nor harm to, any other sector. Hence, the only
case of interest is one involving a subsidy to large producers.
When an export subsidy is given to large producers, the subsidy itself creates a distortion
since it is an intervention in the market whose function is to allocate resources so the
economy can produce the optimal amount of output. The subsidy diverts resources to
less efficient producers,101 but nonetheless stimulates production. But despite producing
more, producers are enticed to export more than to sell in the domestic market. Fewer
outputs available in the domestic market raises domestic price, which harms domestic
consumers. Moreover, as more goods are exported, world market price for such good
falls, which then lowers the terms-of-trade102 of the subsidizing country. The exporting
country’s welfare is reduced by the terms-of-trade loss and efficiency losses103 due to the
distortion in resource allocation.104
For the importing country, the subsidy improves its overall welfare. This is despite the
obvious losses to domestic producers whose outputs may be displaced by cheaper,
subsidized imports. However, domestic consumers gain due to lower prices of imported
products, and the importing country’s terms-of-trade improves following the fall in
import prices.
So if importing countries would actually gain from an export subsidy of another country,
why countervail a subsidy? A CVD is, after all, an import tariff that in itself distorts the
allocation of resources, and therefore generates efficiency losses. Moreover, by
increasing the price of imports, CVD nullifies the gains that domestic consumers would
have realized, although, it also mitigates the losses of import-competing domestic
producers.
There are two possible motivations for countervailing other than to protect domestic
producers. First, by countervailing, the importing country’s demand for the subsidized
100
In economic textbooks, the term “large” is used to describe a country, rather than a producer. Strictly
speaking, it is not the behavior of a country itself that influences world market price, rather it is that of the
producer’s. Therefore, it is more appropriate to refer to the producer, rather than to the country, as large
or small in trade. In addition, most trade models in textbooks simplify by assuming one country, one
producer; in this case, it does not matter if one refers to a country as large or small.
101
This assumes that efficient producers do not need a subsidy.
102
Terms-of-trade is the price of exports relative to price of imports. It serves as an index of the benefit
that a country derives from trade as it indicates how much imported goods a country can buy (consume)
using revenues from exports. An increase in a country’s terms-of-trade represents a welfare improvement
for such country.
103
This refers to losses incurred because production resources are diverted from more to less efficient
producers.
104
A production subsidy would have similar effects to those of an export subsidy in so far as both measures
reduce the economic welfare of the exporting country. The difference however is that the domestic price
of the subsidized product falls with the world market price, hence both consumers and producers of the
subsidizing country benefit from the measure. Yet the cost of the subsidy borne by taxpayers is larger than
the gains of domestic consumers and producers combined.
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product falls. If the importing country’s consumption of that product is large enough,
world market price of the subsidized product may be depressed further, which would
enhance the terms-of-trade gain of the importing country. That fall in price could also
weaken the incentives of subsidized producers to divert their production from domestic
market to exports. Domestic prices may be restored at pre-subsidy levels in both
exporting and importing countries. And all distortions created by the subsidy may be
eliminated. The subsidy then becomes a mere transfer of resources in the subsidizing
country to the government of the importing country.
The sheer possibility that a subsidy to one’s producers will amount to a transfer of
resources to a trading partner should be enough to deter any government from giving
subsidy. However, the ability of a countervailing country to trigger the chain of causes
and effects described in the preceding paragraph clearly depends on its size. A small
country runs the risk of being worse off when its countervailing measure does not cause
further decline in the world market price of the subsidized product.
Still, another incentive to countervail arises when producers of the importing country are
competing against subsidized exporters either in a third country or in the subsidizing
country market. If the CVD deters the grant of subsidy, it will help producers of the
countervailing country in exporting to other markets.
If a CVD is not expected to result in terms-of-trade gain significant enough to offset the
losses due to tariff distortion, or if the possibility of CVD does not deter governments
from subsidizing their producers, then an importing country is better off keeping trade
unrestricted.
Subsidies and CVD under Imperfect Market Conditions
It appears that the threat of CVD alone cannot discourage governments from subsidizing
because there are more compelling reasons for subsidizing, which become evident only
when the assumption of perfect market competition is abandoned. Thus, governments
grant subsidy to stimulate research and development or promote environment-sustaining
activities because of their positive externalities to society. Subsidy to so-called infant
industry is rationalized by either the presence of learning-by-doing effects or imperfection
in the capital market. If learning-by-doing is important, start-ups do not stand a chance
against experienced producers. As a result, the government may find it expedient to
subsidize its domestic producers until they earn sufficient production experience. In
addition, recognizing that the capital market may not be able to extend needed resources
to newcomers because of lack of information about their potentials, the government may
be compelled to provide subsidy for their capital requirements.
Newer trade theories offer strategic motives for granting subsidy. Perhaps the most
naked motivation for subsidizing is to enable a national producer prey on its competitor,
by price undercutting or dumping. The objective of predation is to force competitors out
of business by selling at price below cost (alternatively, by dumping to force price down),
gain dominant position, and once successful in driving competitors out, establish a
monopoly price to recover losses incurred during predation.105 This argument for
105
See discussion on predatory dumping in B.1.
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subsidizing is considered more plausible in theory than in practice. If at all predatory
pricing is feasible, it could not be recurrent, mainly because of the difficulty of recouping
losses incurred during predation. It is much less conceivable for a government to finance
predatory pricing by its producers as a matter of policy.
A more plausible strategic motivation for subsidizing is aimed at raising national welfare
by enabling national producers capture a larger share of oligopoly rents. Where market
competition is imperfect, firms compete for a share of market rents (i.e., above-normal
profits). A subsidy affords cost advantage to producers so they could appropriate rents
that would otherwise accrue to their competitors.106 When the production function is
characterized by increasing returns to scale, a subsidy allows a firm to produce more and,
in the process, reduce its costs of production, and gain a larger share of industry profits.
Accordingly, the strategic motive for granting subsidy is to shift profit from foreign to
home firms.
While this profit-shifting argument has been widely invoked as motivation for providing
subsidy, it is not completely persuasive. First, it is not robust; changing the assumption of
the model, which supports the grant of subsidy, reverses its conclusion. In particular, if
one assumes that the basis of competition among firms is prices, instead of market share,
the conclusion would have been that the government should impose an export tax on its
producers, instead of giving them subsidy. Second, if one government recognizes the
value of subsidizing its firms, so should the government of competing firms. If all
governments subsidize their own firms, no one gains advantage over another, in which
case, the subsidies are all for naught. 107
Notwithstanding, governments may still find value in subsidizing if they perceive that
retaliation by a competing government is slow at coming. For some industries,
governments may find it worthwhile to raise employees’ productivity or efficiency above
the rest of the sectors by subsidizing their employers so wages could be raised above
competitive level. Also, a subsidy may spawn first-mover advantage for its recipient that
is difficult to reverse despite belated subsidy of another government.
If the motivation for the subsidy is any of the reasons discussed, there are sufficient
justifications to countervail. Concretely, if the subsidy is meant to allow predation, an
importing country must countervail to prevent monopolization of its domestic market by
foreign producers. If it were intended to shift oligopoly profits or rents, CVD can be used
to “claw” back profits from foreign producers.108 In addition, when producers of the
importing and subsidizing countries are also competing in a third country market, CVD
may be used less as a tool for import protection than for export promotion. That is, the
threat of CVD is aimed at discouraging subsidy that would put the importing country’s
producers at a disadvantage when they compete against subsidized producers in a third
country market.109 Finally, in case a subsidy is designed to raise employees’ wages above
competitive level, the subsidy brings no benefit to consumers of the importing country in
the first place, thus a CVD can be used to negate the harm to domestic producers.
106
Brander and Spencer (1984).
Eaton and Grossman (1986).
108
Dixit (1984).
109
Krugman (1984).
107
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However, the issue is not whether a CVD can be justified, but whether it is enough to
offset domestic injury. One argument is that the maximum duty allowed by ASCM is not
sufficient to offset a direct export subsidy especially if the latter involves a subsidy for the
purchase of capital equipment.110 And even if the subsidy were given only for a short
period of time but sufficient to cause domestic consumers of the importing country to
switch to subsidized imports, a CVD may still not enable domestic producers win back
consumers if switching cost is significant.111 Moreover, if the importing country has a cost
advantage over imports despite the subsidy, a prohibitive tariff (not just a tariff level that
will negate domestic injury) plus a domestic subsidy to eliminate domestic distortion is
needed.112
As a deterrent to subsidization, CVD imposed by one or several countries may not be
enough because the exporting subsidizing country can divert its trade to another that
does not countervail. Indeed, statistics show that CVDs have not been frequently used
and only a small number of countries have availed of it. One reason for this is ASCM’s
requirement that domestic injury test must first be satisfied before a CVD can be used.
Another is that in practice, detection of subsidy and its impact on the domestic market
takes time, hence either the application of CVD is delayed or not taken up at all.
Consequently, since the decision to countervail is to be taken by members individually,
the unilateral and uncoordinated responses to subsidy may only cause trade diversion to
markets where no countervailing action is taken, but not limits its use. For this reason,
bringing a subsidizing country to WTO dispute may be a more effective deterrent.
Subsidies
ASCM does not cover all forms of subsidy but at least those that ostensibly contradict the
essence of GATT. Subsidy, for the purpose of the agreement, is thought of as having three
elements: (i) financial contribution; (ii) by a government or public body within the territory of a
member; (iii) which confers a benefit.
Financial contribution
The term “financial contribution” in the definition of subsidy is used rather broadly. Article 1.1 of
ASCM enumerates measures that are deemed to constitute financial contribution, namely:
(i)
(ii)
(iii)
(iv)
direct transfers of funds such as grants, loans, and equity infusions as well as
potential transfers of funds or liabilities such as loan guarantees;
foregone or uncollected government revenue, such as tax credit;
goods or services (other than general infrastructure) provided by government or the
purchase of goods; and
any form of income or price support, which directly or indirectly to increase exports,
or reduce imports, of the product.
110
Spencer (1988).
Hartigan (1996).
112
Dixit (1984),
111
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The foregoing is considered a closed list by the panel in the US-Export Restraint.113 Thus other
forms of transfers or government measures that also confer benefits fall outside the scope of
ASCM. For example, if a producer is exempted from making mandatory investment in a pollution
device, the measure is not among the measures contemplated in Article 1.1, hence it is not a
financial contribution governed by the agreement.
Government
For a financial contribution to be a subsidy, it must be made “by a government or any public body
within the territory of a member”. The last phrase invites several interpretations that were
clarified by the panel in Korea-Commercial Vessels. First, a “public body” is any entity controlled
by the government, such as an export credit agency. Second, a financial contribution made by a
private entity at the direction of a government or public body is within the scope of the
agreement. Or when functions identified as constituting financial contribution are entrusted by
the government to a private entity, such action is likewise considered to have been made by the
government for purposes of the agreement. As a result, if a private NGO gives technical and
financial assistance to farmers, the assistance is considered to be made by government if it
engaged the NGO to extend such assistance.
Benefit
It is not sufficient that the measure is considered a financial contribution, and that it is made by or
at the direction of government or public body; some benefit must also accrue to the recipient as
a result of the measure. What constitutes a “benefit” for the purpose of the agreement has not
been fully resolved. There are some guidance, however, from the agreement itself, which was
affirmed in a case law.
In Canada-Aircraft, the Appellate Body ruled that a benefit is conferred only if the recipient
receives more than what it could have received in the marketplace. This is consistent with Article
14 of ASCM which lists down circumstances that should not be considered as conferring benefit.
Specifically, the following are not deemed to confer benefit:
(i)
(ii)
(iii)
(iv)
a government provision of equity capital based on an investment decision that a
private investor would have made;
a government loan extended on same terms as a commercial loan;
a government loan guarantee that does not alter what a recipient would pay on a
comparable commercial loan sans government guarantee; and
goods or services provided by government for less than adequate remuneration, or
purchased by government for more than adequate remuneration, where the
adequacy of remuneration is based on the terms that the goods or services could be
acquired from the market.
Comparing the value that an alleged recipient of subsidy would have to pay or return with market
prices is not without problems. For one, domestic market prices in the country providing subsidy
may be distorted if the government is a dominant supplier of the good or service in question. In
which case, one may not find substantial difference between government and private sector
prices because the latter has been influenced by the former. It could then lead to a false
113
Panel Report, US-Export Restraints, para. 8.73, cited in ADB (2009), p. 171.
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conclusion that no benefit was conferred by the government’s provisioning of good or service.
This was the basis of the Appellate Body’s decision to reverse the finding of the panel in USSoftwood Lumber IV. If, on the other hand, prices in a different market are used as benchmark,
they may not relate to the same good or service as those in question. This problem underscores
the difficulty of distinguishing a subsidy from a normal provisioning.
Specificity
Although a measure may be considered a subsidy according to the terms of the agreement, it
could only be subject to multilateral remedies or countervailing measures if it is specific, as
defined in Article 2 of the agreement. The concern for specificity stems from the basis of
objection to the use of subsidy, i.e., it causes distortion in the allocation of resources. If a subsidy
is widely accessible, hence non-targeted or not specific, then it could not distort the allocation of
resources.
Four types of specificity are distinguished: (i) enterprise-specific, in case the target of the subsidy
is a particular company or companies; (ii) industry-specific, if the target is a particular sector or
sectors; (iii) regional-specific, if the target is in identified parts of the member’s territory; and (iv)
prohibited subsidies, if the target is an export good or a good using domestic inputs (i.e., importsubstituting).114 The last type is specific by its very nature.
What makes a subsidy non-specific? Article 2.1(b) stipulates that a measure is made non-specific
by the granting authority establishing objective (i.e., neutral and economically sensible) criteria or
conditions in choosing recipients in a law, regulation or other official document. In addition,
anyone who satisfies the specified criteria or conditions must be automatically eligible to receive
the subsidy.
However, the specificity of a subsidy could not be disguised by mere publication of objective
criteria or conditions. Article 2.1(c) provides that certain conditions could indicate that a subsidy is
de facto specific or targeted, even when the requirements of Article 2.1(b) are satisfied. The
specificity may be inferred from the following:
(i)
(ii)
(iii)
(iv)
limited number of enterprises using or availing of the subsidy;
certain enterprise or enterprises dominating the use of subsidy;
disproportionately large amount of subsidy granted to certain enterprise or
enterprises; and
actual pattern of granting subsidy reveals erratic exercise of discretion by the
granting authority.
When ascertaining if the subsidy is de facto specific, Article 2.1(c) notes that due regard should be
given to the extent of diversification of economic activities in the jurisdiction and length of time
the subsidy program has been in operation.
Types of Subsidy
The agreement distinguishes two types of subsidy: prohibited and actionable. The former refers
to subsidy contingent upon export performance or on use of domestic over imported goods. The
114
WTO (2004b), p. 14.4.
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latter covers all other specific subsidies that do not meet the definition of prohibited subsidies,
but cause adverse effects to the interests of other members.
Prohibited Subsidies
Part II of ASCM elaborates on two types of subsidies that are not permissible in all cases. The first
is an export subsidy, or one that is contingent, solely or as one of several conditions, upon export
performance. The other is an import substitution subsidy, or one that is dependent, wholly or as
one of the conditions, on the use of domestic goods instead of imported (also known as local
content requirement). These subsidies may be de jure, i.e., expressed in a law, regulation or other
legal instrument, or de facto, i.e., their nature can only be inferred from facts constituting or
surrounding their grant and application.
Judging a measure if it constitutes de facto subsidy is not straightforward. It is therefore helpful
that Annex I to the agreement provides an illustrative list of 12 common measures that may
represent export subsidies. The list includes: currency retention schemes; export-related
exemption, remission or deferral of direct or indirect taxes; export credit guarantee or insurance
programs against increases in cost of production or exchange risk; provision of internal transport
and freight charges on export shipments on terms more favorable than for domestic shipments;
provision of goods or services for use in production of exported goods on terms more favorable
than for use in the production of goods for domestic consumption; and remission or drawback of
import charges in excess of those levied on imported inputs that are consumed in the production
of exported product.
When the remission or drawback of duties is exactly equal to, not in excess of, those levied on
imported inputs used in the production of exported goods, the measure is not construed as
export subsidy. Almost all countries, the Philippines included, maintain this kind of scheme. As a
result, Annexes II (Guidelines on the Consumption of Inputs in the Production Process) and III
(Guidelines in the Determination of Substitution Drawback Systems as Export Subsidies) are
particularly relevant to avoid application of measures that may be deemed to constitute export
subsidy.
However, an export subsidy applied to agricultural products is not subject to the disciplines in the
ASCM, but is instead covered by the provisions of the Agreement on Agriculture. They can be
countervailed, nonetheless.
Actionable Subsidies
When a measure satisfies the elements of a subsidy and specificity, but do not constitute export
or import-substitution subsidy, it is considered actionable subsidy. To be clear, actionable subsidy
may be sanctioned when it cannot be shown that it causes adverse effects to the interests of
other members.
Article 5 clarifies that adverse effects refer to the impact of the subsidy on other members,
besides the subsidizing country. They pertain to:
(i)
(ii)
injury to the domestic industry of the importing country;
nullification or impairment of tariff concessions accruing directly or indirectly to other
GATT 1994 members; and
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(iii)
serious prejudice to the interests of another member (i.e., besides the complaining
party).
The first, “injury to the domestic industry”, refers to the same injury that is the basis for antidumping duty in ADA. It is also the sole basis for levying CVD. This means that an actionable
subsidy can be countervailed only if it causes material injury to the domestic industry. Such injury
may be actual or mere threat, so long as it is “material”, and includes “material retardation of the
establishment of an industry” – just like in anti-dumping measure.115
The second adverse effect, nullification or impairment of benefits, is usually invoked in a
“nonviolation complaint.” The course of action arises when the subsidy is not directly in conflict
with the provisions of the agreement, but the complaining party deems that the measure has
impaired or nullified the benefits that it could have enjoyed from the tariff concession given by
the subsidizing country. For example, the defending country may lower its bound tariffs, which
potentially improve the access to its market by other members, yet at the same time imposes an
import-substituting subsidy. GATT Article XXIII prescribes procedures for dealing with cases
involving nullification or impairment of benefits. It requires the complaining party to first seek
consultation with the Member concerned, with the view of persuading the latter to make
adjustments in its measure. If no agreement is reached and the impact of the measure is
considered serious, the complainant may suspend or withdraw its tariff concession toward the
concerned member.
Serious prejudice, like injury, may be actual or mere threat. Unlike injury, however, it refers to the
impact of the measure on another member, not the complaining one. Article 6.3 enumerates
situations that constitute serious prejudice to the interests of other members:
(i)
(ii)
(iii)
(iv)
when imports of a like product of another member is displaced, or its entry impeded,
in the market of the subsidizing member;
when exports of a like product of another member is displaced, or its entry impeded,
in a third-country market;
when the subsidized product significantly undercuts the price of like product of
another member “in the same market” or causes price suppression, price depression
or lost sales “in the same market”;
when the world market share of the subsidized product increased as compared to its
average share during the previous three-year period, and this increase follows a
consistent trend during the period when the subsidy is being given.
The term “in the same market” in (iii) above could refer to some national market or the world
market, according to the panel in Korea-Commercial Vessels.116
It is worth noting that the requirements to establish serious prejudice are less stringent in Article
6.1 which states that in the following cases, serious prejudice is deemed to exist:
(i)
(ii)
115
116
when total ad valorem subsidy of a product exceeds 5 percent (based on calculation
prescribed in Annex IV to the agreement);
when subsidies cover operating losses sustained by an industry;
See B.3.3 and B.3.4.
ADB (2009), p. 179.
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(iii)
when subsidies cover operating losses sustained by an enterprise, except when the
subsidy is a one-time measure and given only to provide time for the development of
long-term solutions and to avoid acute social problems; or
(iv)
when government forgives the debt of the recipient or gives a grant to cover debt
repayment .
Article 6.2 provides, however, that a subsidizing member may be able to defend itself against
claims of serious prejudice by showing that the subsidy does not result in any of the situations
envisaged in Article 6.3.
Articles 6.1 and 6.2 were provisional for a five-year period until 31 December 1999. The SCM
Committee did not vote to extend their application, hence these provisions are no longer in
force.
Non-actionable Subsidies
Both prohibited and actionable subsidies can be challenged through the WTO dispute settlement
mechanism, or the importing country may impose countervailing measure if the subsidy causes
injury to the domestic industry.
A third type of subsidy, labeled “non-actionable”, was included in the ASCM when it first came
into force. Although specific, these measures cannot be brought into dispute nor countervailed.
Subject to detailed conditions outlined in Article 8.2, these measures are:
(i)
(ii)
(iii)
assistance for research activities conducted by firms, higher education or research
establishments on a contract basis;
assistance to disadvantaged regions within the territory of a Member in the context
of regional development; and
assistance to promote adaptation of existing facilities to new environmental
requirements imposed by law or regulation.
However, the exemption of these measures from any form of WTO discipline was meant to be
provisional for five years ending 31 December 1999, unless the SCM Committee voted by
consensus to extend it. But no such consensus was reached, hence these subsidies have now
become actionable.
The next sections discuss the WTO disciplines that may be applied to prohibited and actionable
subsidies.
Remedies
ASCM provides for two tracks of applying disciplines to subsidies: multilateral and unilateral. The
first refers to the use of dispute settlement mechanism, which may result in the withdrawal of
the subsidy or removal of its adverse effects in any export market; the latter pertains to the
application of countervailing measure by affected members. The provisions in Article 4 in Part II
and Article 7 in Part III pertain to multilateral remedies for prohibited and actionable subsidies,
respectively, while Part V contains rules concerning use of unilateral remedy. Both tracks are
subject to special and differentiated treatment for developing countries.
This two-track remedy is unique to subsidies. Dumping cannot be challenged in a WTO dispute;
the only remedy available to a member is to impose an anti-dumping duty. A dispute can be
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brought against a member’s safeguard measure, but it cannot be countervailed. By contrast,
multilateral and domestic proceedings may be initiated against subsidies. A WTO member may
bring another member’s subsidy to the WTO dispute settlement system, while also initiating a
countervailing investigation on its own. Footnote 35 of the agreement states that both tracks
may be pursued simultaneously, but “only one form of relief (either a countervailing duty, if the
requirements of Part V are met, or a countermeasure under Articles 4 or 7) shall be available” to
the affected member.
Are the two tracks necessary? One view is that the two tracks are complementary. The
multilateral remedy is broader since it may cause the withdrawal of the subsidy or removal of its
adverse effects which benefit all members; the unilateral track addresses the injury only to an
individual member, but the proceedings are faster and therefore the effects of the subsidy can be
more quickly neutralized.
Some observers consider the threat of multilateral action more effective than an individual
country’s countermeasure in disciplining members from using subsidies. In this sense, a unilateral
track is redundant, especially because if both tracks are pursued simultaneously, a member that
initiated a countervailing investigation cannot expect to receive separate compensation for the
resources spent on its own proceedings. On the other hand, even while the dispute settlement
mechanism follows a strict time frame, it usually takes more than a year to complete the process
including the pre-initiation activities. And yet bringing a dispute is not only time-consuming, but
also costly and unpredictable. Meanwhile, the injury to the domestic industry could become
irreversible if the subsidy were allowed to continue longer.
From political economy standpoint, a unilateral track has several advantages. Foremost, freerider problem can be expected of any multilateral action, i.e., a member country would hesitate
to bear the costs of bringing dispute against another member when the expected outcome can
benefit all members, including those who did not share in the costs of the proceedings. Second,
a countervailing investigation (just like an anti-dumping investigation) is usually initiated by the
private sector, whereas the filing of dispute is seen as a government initiative. Considering that
the impact of another member’s subsidy depends on whether a domestic industry buys the
subsidized product or sells a like (or competing) product, a national government would not want
to be seen favoring one of its domestic sectors over another by initiating a multilateral action.
Third, if there is strong domestic pressure to take action against the subsidy of another country, it
is easier for a government to placate its domestic groups through the unilateral track because it
has better handle of its own laws and institutions. In addition, a provisional CVD (just like an antidumping duty) may be imposed 60 days after date of initiation of the investigation.
Nonetheless, a trade remedy obtained through multilateral action will always have more
legitimacy and weight, and to that extent, it could more effectively deter any member from using
subsidies.
Multilateral Remedies
A subsidy that is prohibited (coded �red”) or actionable (coded “yellow”) within the context of
the agreement can be referred by any WTO member to the Dispute Settlement Body (DSB). The
dispute settlement proceedings for prohibited subsidy are the same as those for actionable
subsidy, except for time-frames. But in both proceedings, the deadlines are rigidly observed, and
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decisions strictly enforceable. The table below juxtaposes the proceedings for prohibited subsidy
(contained in Article 4) with those for actionable subsidy (Article 7).
Table 6.2 Multilateral Remedies for Prohibited and Actionable Subsidies
Prohibited Subsidies
Actionable Subsidies
1
Request for consultations, including statement of
available evidence regarding the existence and nature
of subsidy.
2
Consultations as quickly as possible
3
If no solution within 30 days, referral to DSB for
immediate establishment of panel.
4
Panel may request assistance from Permanent Group
of Experts for binding advice on whether it is a
prohibited subsidy.
Circulation of panel report within 90 days of date of
composition of panel and establishment of terms of
reference.
If the subsidy is prohibited, panel recommends that
the member withdraw it without delay and specifies
the time period for withdrawal. Thus far, panels have
generally given 90 days.
Within 30 days of circulation, report to be adopted by
the DSB, unless appealed.
Appellate Body must normally issue decision within 30
days from notice of intention to appeal, in no event
more than 60 days.
5
6
7
8
9
10
If DSB recommendation is not followed within time
period specified by panel (which commences from
date of adoption of the panel or Appellate Body
report), DSB grants authorization to complaining
member to take appropriate proportionate
countermeasures.
11
Applicable DSU time-periods for conduct of such
disputes shall be half (except for time periods
specifically prescribed in Article 4).
Source: ADB (2009), pp. 180-181.
Request for consultations, including statement of
available evidence regarding existence and nature of
subsidy and injury caused to domestic industry
(nullification or impairment, or serious prejudice)
Consultations as quickly as possible
If no solution within 60 days, referral to DSB for
establishment of panel; composition of panel and
terms of reference within 15 days.
Circulation of panel report within 120 days of date of
composition of panel and establishment of terms of
reference.
Within 30 days of circulation, report to be adopted by
the DSB, unless appealed.
Appellate Body must normally issue decision within 60
days from notice of intention to appeal, in no event
more than 90 days.
After adoption of panel of Appellate Body report that
finds adverse effects, subsidizing member must take
appropriate steps to remove the adverse effects or
withdraw the subsidy.
If member does not take steps within 6 months from
date of DSB’s adoption of panel or Appellate Body
report, DSB authorizes complaining member to take
appropriate countermeasures commensurate to the
degree and nature of adverse effects.
Apart from differences in deadlines that are evident in the preceding table, there are also
substantive differences in the proceedings. For one, the evidentiary requirements in actionable
subsidy are understandably more than in prohibited subsidy, since adverse effects need to be
demonstrated in the former, but not in the latter. It is sufficient in prohibited subsidy to show
that the measure satisfies the definition of export or import-substitution subsidy. The panel may
rely on the opinion of the Permanent Group of Experts for such determination. By contrast, the
panel’s terms of reference in actionable remedy is more involved as it entails examining evidence
of adverse effects and verifying the existence of causal link between the subsidy and adverse
effects. This explains why the panel is given 120 days in actionable subsidy, but only 90 days in
prohibited subsidy.
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In principle, prohibited subsidy is never permissible; thus the panel can only either recommend its
withdrawal or sustain the member. By contrast, even if the panel find in favor of the
complainant, in case of actionable subsidy, it may not require the member to withdraw the
subsidy, but only to eliminate its adverse effects.
Recognizing however the distortive effects of subsidies on trade, the proceedings for both
prohibited and actionable subsidies are expedited compared to other WTO dispute settlement
proceedings.117
…[In case of prohibited subsidies,] the time periods are half of those in usual dispute
cases. The panel report must be circulated to all Members within 90 days of its
composition and establishment of its terms of reference, rather than the usual 6 months.
Further, the defending Member has no opportunity to delay establishment until the
second meeting of the DSB; rather, the panel must be established immediately. A panel
established under Article 4 may request the assistance of the Permanent Group of
Experts, whose conclusion on whether or not a subsidy is prohibited must be accepted by
a panel without modification. A panel under Article 4 which finds the existence of a
prohibited subsidy shall recommend that the Member withdraw the subsidy without
delay, and shall specify the time-period within which it must be withdrawn. Should the
Member fail to implement the recommendation within the time allowed, the DSB must
authorize the complaining Member to take "appropriate countermeasures".
…[In case of actionable subsidies,] a panel must circulate its report to all Members within
120 days of its composition and establishment of its terms of reference. Where the
complainant alleges serious prejudice, Annex V to the SCM Agreement sets forth specific
and detailed procedures to facilitate information gathering. In the event a panel finds that
a subsidy has caused adverse effects, it must recommend that the subsidizing Member
take appropriate steps to remove the adverse effects or that it withdraw the subsidy. If
the subsidizing Member fails to implement the recommendation within six months of the
date that the DSB adopts the panel or Appellate Body report, the DSB must authorize the
complaining Member to take countermeasures commensurate with the degree and
nature of the adverse effects found to exist.
Notwithstanding that the dispute settlement proceedings are well defined, the rulings of the
panel and Appellate Body have not always been straightforward. For example, the panel in
Australia-Automotive Leather reckoned that when a member is asked to withdraw the subsidy,
the recipient of the subsidy must, in turn, be asked by its government to repay. However, the
panels and Appellate Body in Canada-Aircraft and Brazil-Aircraft asked for withdrawal of subsidy
without requiring repayment from recipients.
Finally, in gathering information to ascertain if serious prejudice exists, Annex V to the agreement
stipulates that failure of a subsidizing or third-country member to cooperate in the investigation,
i.e., to supply the required information, gives the panel the right to draw adverse inferences. The
Appellate Body in Canada-Aircraft ruled that such right of the panel extends in case of prohibited
subsidies, even when serious prejudice is relevant only to actionable subsidy.118 Subsequently,
failure to cooperate by a member in any subsidy case is deemed to give right to the panel to draw
adverse inferences.
117
118
WTO (2004b), pp. 14.11-14.12.
ADB (2009), p. 234.
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Countervailing Duty
The substantive and procedural rules on the use of both CVD and anti-dumping duty are based on
the principles articulated in Article VI of GATT 1994. Thus, Article 1 of ADA that set the scope of
that agreement reads the same as Article 10 of ASCM which states:
Members shall take all necessary steps to ensure that the imposition of a countervailing
duty on any product of the territory of any Member imported into the territory any
Member imported into the territory another Member is in accordance with the provisions
of Article VI of GATT 1994 and the terms of this Agreement. Countervailing duties may
only be imposed pursuant to investigation initiated and conducted in accordance with the
provisions of this Agreement and the Agreement on Agriculture.
As in the case of dumping, a CVD may be levied only when the: (i) imported products are
subsidized (dumped); (ii) domestic industry suffers injury; and (iii) subsidized (dumped) imports
caused the injury. The concept of injury in ASCM is the same “material injury” in ADA; in fact
Article 15 (Determination of Injury) has exactly the same provisions as Article 3 of ADA which
bears the same title. Also, domestic industry in ASCM, as defined in Article 16, has the same
scope as that found in Article 4 of ADA.
A countervailing proceeding, just like an anti-dumping proceeding, is started off by an
investigation, which may be initiated by the authority itself based on sufficient evidence of
subsidy, injury to domestic industry and causal link between subsidy and injury, or by an
application for CVD made by or on behalf of the domestic industry. And similarly as in antidumping, the application is only considered to be made “by or on behalf of the domestic
industry” when (i) it is supported by domestic producers whose collective output constitutes
more than 50 percent of total production of like product produced by the portion of the
domestic industry expressing opinion (in support or against) to the application; and (ii) producers
who expressed supporting opinion must account for at least 25 percent of total production of like
product produced by the domestic industry.
The basis for rejecting an application is also the same in CVD as in anti-dumping duty: (i) the
amount of subsidy (dumping) is de minimis or (ii) the volume of subsidized (dumped) imports,
actual or potential, or the injury is negligible. There are minor differences in details, however. In
subsidy, the de minimis threshold is 1 percent (instead of 2 percent in anti-dumping) of the value
of the good. The ASCM does not stipulate the threshold for negligibility of import volume, but in
terminating an investigation of subsidy by a developing country, Article 27.10 of ASCM requires
that the volume of subsidized imports represents less than 4 percent (instead of 3 percent in antidumping) of total import of like product in the importing country. The exception to this rule is
however the same in ADA and ASCM, namely, when this group of exporting members collectively
account for more than 9 percent of total imports of like product in the importing member.
Like anti-dumping duty, CVD is not applied on all imports; only those subsidized and causing injury
to domestic industry. The level of CVD is likewise capped by Article VI.3 of the GATT 1994,
specifically, no more than the estimated subsidy determined to have been granted directly or
indirectly for the manufacture, production or export of such product. This principle is reflected in
Article 19.4 of ASCM which stipulates that the amount of subsidy should be calculated in terms of
subsidization per unit of the subsidized and exported product.
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CVD is also like anti-dumping duty that can only be maintained as long as and to the
extent necessary to counteract the injury caused by subsidy (dumping). The duties are to
be terminated within five years from date of imposition unless the authorities determine,
through a review, that that their removal would lead to continuation or recurrence of
subsidization (dumping) and injury to domestic industry. Such review may be initiated by
authorities or upon request by any interested party.
The procedural provisions of ASCM replicate those of ADA. The countervailing
investigation is also about 12 to 18 months. Due process rights of the subsidizing member
and other interested parties are observed; so is confidentiality of information. There is
also no difference in the rules on imposition of provisional measures, acceptance of price
undertakings and retroactive application of duties. The authorities have discretion to
determine the amount of CVD as they have for anti-dumping duty, but both agreements
express preference for lesser duty rule – in the case of ASCM, the lower between subsidy
and injury margins, but no more than subsidy margin
Since both CVD and anti-dumping duty are responses to “unfair” trade practices – subsidy
and dumping, respectively, it is not surprising that the provisions in the two agreements
with respect to these measures are consistent with each other. It stands to reason that
the WTO panels and Appellate Body usually cross-check their interpretations of provisions
in ADA with related rulings in subsidy disputes, and vice-versa for ASCM provisions. As a
result, the rulings in ASCM and ADA disputes are also substantially consistent.119
Special and Differential Treatment
Some provisions of ASCM are meant to be applied on a different timeframe for certain
groups of members in recognition of their economic status and the fact that subsidies are
common in many development agenda of these economies. At least four groups are
accorded special and differential treatment in ASCM. Three of these groups are
collectively called “developing countries”, two of which are identified in Annex VII to the
agreement. The fourth group is composed of so-called Transition Economies, i.e.,
members in the process of transformation from a centrally-planned to a market, freeenterprise economy.
The term “developing countries” in ASCM refers to three groups of member countries.
First, Annex VII to the agreement enumerates the developing country members
exempted from Article 3.1(a), prohibiting the use of export subsidies, namely:
•
•
least-developed countries designated as such by the United Nations; and
countries with GNP per capita of less than US$1,000 based on most recent data
from the World Bank at the date the agreement can into force, namely: Bolivia,
Cameroon, Congo, Cote d’Ivoire, Dominican Republic, Egypt, Ghana, Guatemala,
Guyana, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan,
Philippines, Senegal, Sri Lanka and Zimbabwe.
They are referred to as Annex VII(a) and Annex VII(b) developing countries, respectively.
Developing countries not named in Annex VII are referred to as “other developing
119
WTO (2009), p. 99.
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countries”, which comprise the third group. The agreement provides that Annex VII(b)
developing countries are reclassified as “other developing countries” once their per
capita incomes reach US$1,000 per annum.
Thus, the application of rules on use of subsidies and remedies depends on the economic
group of a WTO member, and the date of entry into force of the agreement for that
member.
Table 6.3 Differentiated Application of Article 3.1(a) of ASCM
Export Subsidies
Developed
Must be eliminated within 3 years
countries
from date of entry
Annex VII(a)
Allowed
developing
countries
Annex VII(b)
Allowed
developing
countries
Other
Allowed up to 8 years from date
developing
of entry
countries
Transition
Must be eliminated within 7 years
economies
from date of entry
Import-substitution Subsidies
Must be eliminated within 3 years
from date of entry
Allowed up to 8 years from date of
entry
Allowed up to 5 years from date of
entry
Allowed up to 5 years from date of
entry
Must be eliminated within 7 years
from date of entry
Although other developing countries are permitted to maintain their export subsidies up
to 8 years, the agreement also provides that they cannot increase the level of those
subsidies, and they should in fact endeavor to remove them before the expiry of the 8year period, when their use are no longer consistent with their development needs.120
Moreover those subsidies remain actionable.121
Article 27.4 also provided possibility for extending beyond the 8-year period (which
should have ended 31 December 2002), subject to consultations with the Committee on
Subsidies and Countervailing Measures (Subsidies Committee) one year before the end of
that period. The Subsidies Committee laid down the criteria and procedures for granting
extension in document G/SCM/39, stipulating that the following programs are eligible for
extension:122
(i)
(ii)
(iii)
an export subsidy program in the form of full or partial exemptions from
import duties and internal taxes;
in existence no later than 1 September 2001; and
provided by developing country members whose share of world merchandise
export trade was not greater than 10%, whose total gross national income for
the year 2000 as published by the World Bank was at or below $20 billion, and
who are otherwise eligible for an extension under Article 27.4.
120
Article 27.4 of ASCM.
WTO (2004b), p. 14.6.
122
ADB (2009), p. 200.
121
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When an extension is granted, it needs to be reviewed and renewed annually. As of 2007, about
19 members received approval for extending their subsidies up to 2007.123 When disapproved, the
subsidy must be removed within 2 years.
A developing country that attains export competitiveness on the product it is subsidizing
is also required to eliminate such subsidy. For other developing countries, the phase-out
period is 2 years, while Annex VII(a) and (b) developing countries have 8 years. Export
competitiveness is deemed to have been attained when a country’s share of world trade
for that product is at least 3.25 percent for two consecutive calendar years. 124
With respect to application of remedies, certain special provisions also apply to developing
countries and transition economies. First, Article 27.7 provides that a multilateral action against a
developing country, in case of export subsidy, shall be governed by Article 7 instead of Article 4.
This implies that an export subsidy applied by a developing country is not considered
“prohibited” but rather “actionable”. As a result, the complainant must prove adverse effect,
which would not be necessary if the subsidy were considered prohibited. And the developing
country would only have to remove the adverse effect, instead of withdrawing the measure.
Second, serious prejudice claims cannot be invoked against a developing country or a transition
economy. Consequently, for a non-prohibited subsidy to be considered actionable and be
brought into dispute, the complainant must prove injury or nullification and impairment of GATT
benefits. The panel in Indonesia-Autos affirmed this when it ruled that125:
…[a] Member may only bring a claim that benefits under GATT have been nullified or
impaired by a developing country Member’s subsidies or that subsidized imports into the
complaining Member have caused injury to a domestic industry.
Third, Article 27.13 exempts from multilateral claims a subsidy administered by a developing
country or transition economy when such measure is related to a privatization program. It would
have been considered an actionable subsidy if administered by a developed country.
The provisions of Part III shall not apply to direct forgiveness of debts, subsidies to cover
social costs, in whatever form, including relinquishment of government revenue and other
transfer of liabilities when such subsidies are granted within and directly linked to a
privatization programme of a developing country Member, provided that both such
programme and the subsidies involved are granted for a limited period and notified to the
Committee and that the programme results in eventual privatization of the enterprise
concerned.
Finally, special provisions also apply to developing countries in application of countervailing
measures. Specifically, Article 27.10 applies a different de minimis and negligible import volume
thresholds when the subsidized product originates from a developing country.
123
The Philippines is not among them.
Article 27.6 of ASCM.
125
Panel Report, Indonesia-Autos, para. 14.156.
124
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6.4. Key Provisions and Issues in the Application of Safeguards Measures
Safeguards are described as “extraordinary remedies to be taken only in emergency
situations.”126 It permits a country to renege on its commitment even without any wrongdoing
by other parties, unlike in dumping and subsidization. The rationale for a contracting party to be
allowed to temporarily defect from its obligations was laid out in Art. XIX, para. 1(a) of GATT 1947,
which was carried over to GATT 1994:
If, as a result of unforeseen developments and of the effect of the obligations incurred by a
contracting party under this Agreement, including tariff concessions, any product is being
imported into the territory of that contracting party in such increased quantities and under such
conditions as to cause or threaten serious injury to domestic producers in that territory of like or
directly competitive products, the contracting party shall be free, in respect of such product, and
to the extent and for such time as may be necessary to prevent or remedy such injury, to
suspend the obligation in whole or in part or to withdraw or modify the concession
(underscoring by author).
Despite the leeway given to a country by the foregoing provision, it was observed that most
parties to GATT 1947 preferred to work outside the parameters of Art. XIX, and used so
called grey-area or nontransparent measures (like voluntary export restraints or orderly
marketing arrangements) in the face of an import surge. This led GATT parties to negotiate
on ASG which, among others, explicitly prohibit the use of grey-area measures, clarify the
intent of Art. XIX, and tighten the regulation on the application of safeguard measures.
This section reviews the economics of safeguards, the legal conditions, requirements and
procedures for its application, and finally its applicability to the services sector.
Economic Rationale
In the span of 16 years (1995-2010), safeguard proceedings were initiated only 218 times but the
measure was applied in only 111 cases. This can be taken as an indication that the ASG is effective
in deterring members from abusing the flexibility provided for in the agreement.127 But in
addition, the Appellate Body had also been strict in observing the standards of the ASG. Notably,
none of the 38 safeguard measures challenged to date was decided in favor of the country that
applied them. Still, some analysts believe that the existence of safeguard provisions weakens the
existing disciplines in trade agreements.
Objections to safeguards are both conceptual and practical. Suppose there is a significant
technological change that caused substantial improvement in the productivity of foreign
producers and a spike in imports in one country. If domestic producers of the importing country
cannot adapt quickly to the new competition, they may seek protection from the government. It
may be argued that temporary protection is needed to allow domestic producers catch up with
its foreign competitors and to save employment that would be lost if the domestic industry fails.
The government may be pressured to yield to the lobby of domestic producers and workers,
especially if the import-competing industry is large or strategic to the economy. But does
temporary protection afforded by safeguard mechanism improve the welfare of the importing
country?
126
127
Appellate Bond Report, US-Line Pipe, para. 80
Appellate Body Report, Argentina-Footwear (EC), para. 93.
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Safeguard critics believe otherwise. First, the measure is made to address problems that are not
trade in origin, namely, lethargy of domestic producers in adapting to technological change and
of labor in transferring out of a faltering sector. The appropriate response is to address the
problem at its source and not to create unnecessary distortion in a perfectly functioning market.
In this case, industrial and labor market policies are needed to assist domestic producers in
catching up technologically and workers in searching for jobs in other sectors.
At this point, it is useful to draw a distinction between safeguards on one side, and anti-dumping
and countervailing duties on the other. Where there is dumping by and subsidy to foreign
producers, the market ceases to function “perfectly” because of the distortion created by the
behavior of foreign producers and government, respectively. Trade remedies, i.e., anti-dumping
measure and countervailing duties, purport to “correct” the distortion. In contrast, safeguards
create the distortion in an otherwise perfectly functioning market by stemming the flow of
imports.
On the other hand, if the social cost arising from the contraction of domestic production is too
large, safeguards may be justified as “second-best” policy. Creating a distortion in one market to
address market failure in another is a well accepted policy strategy.128 In this case, since
safeguards create an opportunity for domestic production and labor market to adjust to the new
environment, temporary distortion in the market may be less costly than the displacement of the
domestic industry if it is not given temporary relief.129
It may happen, however, that the safeguard could not avert the decline of the domestic industry,
i.e., that it will nonetheless fold up once the measure is lifted. Even in this situation, safeguards
can still be sensible if it could prevent the abrupt demise of an industry and allow smoother social
adjustments and reallocation of resources.130
Yet another objection to use of safeguards relates to the moral hazard problem of granting
protection. Once protection is accorded, domestic producers may procrastinate in upgrading
their technology, particularly if the government lacks credibility of not succumbing to lobbying
for extended protection. Meanwhile consumers are deprived of the benefits of unfettered trade.
Here is where government’s commitment to remove the measure after a specified period of time
is crucial. If producers perceive the measure as permanent, they may be lulled(?) into
complacency.
Notwithstanding this risk, proponents maintain that if the parameters set by the ASG are strictly
observed, particularly of phasing out the measure after a specified period and of applying the
measure only under extraordinary conditions, the rationale for safeguard measures is essentially
the same as those of other trade remedies, i.e., that a member country needs the flexibility of
having a fallback when the social costs of its participation in international trade become
untenable.
128
This is known as “theory of the second-best”….. say something about the theory in one sentence for the
unfamiliar reader with reference.
129
See for example, Crowley (2006), Miyagiwa and Ohno (1999) and Davidson and Matutsz (2004),
reviewed in the World Trade Report 2009 (pp. 47-49).
130
This is the gist of the papers of Hillman (1982), Brainard and Verdier (1997) and Magee (2002), cited in
the World Trade Report 2009, which all dwell on the political economy of according import protection to a
declining industry.
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Conditions justifying the use of safeguards
While the Appellate Body considers the application of safeguards a right of a WTO member, it
was also emphatic that such right may be applied only under circumstances envisaged in the
ASG.131 There are three prerequisites to justify the application of safeguards: (i) an increase in
imports; (ii) a determination that such an increase is caused by unforeseen developments and
obligations incurred by the member country in the agreement; and (iii) evidence showing that the
increase in imports caused or threaten to cause serious injury to the domestic industry that
produces like or directly competitive products. The Appelate Body interprets these conditions in
several dispute cases, albeit a number of issues still linger, notably on the conduct of causation
analysis.
Increased imports
Article 2.1 of ASG stipulates that imports must be found to have increased in “quantities”, i.e.,
volume, not value, reckoned in absolute terms or relative to domestic production to warrant the
application of safeguard. In practice, however, the investigating authority132 examining the
conditions of safeguards would look at the amount and rate of increase in imports in absolute
terms and as a percentage of domestic production. It is worth noting that the relevant
benchmark here is domestic production, whereas it is domestic production or consumption in
anti-dumping and countervailing cases.
While neither the agreement nor case law specified a threshold for safeguard application, the
Appellate Body in Argentina-Footwear emphasized that the increase in imports “cannot be just
any increase”; rather “the increase in imports must have been recent enough, sudden enough,
sharp enough, and significant enough, both quantitatively and qualitatively, to cause or threaten
to cause serious injury.”133
The Appellate Body also underscored the importance of “examining trends over a period of
time,” not just changes in import volume measured at two or several points in time. The concern
here is that date points might be selected to dramatize the change, even when the volume is
relatively stable for most part of the period. In Argentina-Footwear, for example, the application
of safeguards was justified by Argentina based on the increase in the absolute volume of
footwear imports and ratio of imports to domestic production in 1993 compared to 1991 levels.
Yet imports actually declined thereafter. And if a different base year were used, there was no
significant in increase that would support the application of safeguards. Thus the Appellate Body
rejected Argentina’s evidence in support of its application of safeguard because it was based on
end point-to-end point analysis, i.e., a change in imports calculated only on the volumes at the
beginning and end of the period under investigation.134
Since what matters is the trend, not values at specific points in time, the Appellate Body clarified
that imports need not be increasing consistently during the period when the surge was supposed
131
Appellate Body Report, US-Line Pipe, para. 84.
Before a safeguard measure is applied, the ASG requires that an investigation by a competent authority
be conducted to determine if the conditions warrant the application of safeguards.
133
Appellate Body Report, Argentina-Footwear, para. 131.
134
Appellate Body Report, Argentina-Footwear (EC). It was also noted that the absolute volume and ratio
of imports to domestic production were shown to have increased only in 1993 (compared to 1991 levels),
but they declined continuously thereafter. Moreover if the base year were changed, the imports trend was
w
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to have occurred. Even if imports declined for some part of the investigation period, if it were
increasing for most part, a finding of increased imports is not precluded.
Unforeseen developments and obligations incurred
For increased imports to trigger safeguard application, it is necessary to show that such an
increase was a result of “unforeseen developments” and “the effect of the obligations incurred”
by the member country. There must be a logical connection between the increase in imports,
unforeseen developments and member country’s obligations. But the link between increased
imports and “unforeseen developments” appears to be the more critical element in satisfying
this prerequisite.
The question arises on what constitutes “unforeseen development”. The Appellate Body
clarified that “unforeseen” is “unexpected” rather than “unpredictable”135, and that the
circumstances should be “unforeseen” or unexpected at the time when the concession was
negotiated, i.e., during the Uruguay Round. An example of “unforeseen development” is the
Russian and South-east Asian financial crisis, which the US government cited in its application of
safeguards on steel in the late 1990s. However, surges in imports because of government policy,
mismanagement or oversight, or those caused by reduced domestic production or increase in
demand are not considered “unforeseen” circumstances that justify the use of safeguards.136
There is no required or recommended approach to prove the link between unforeseen
development and increased imports. The onus, however, is on the importing country to
demonstrate that the relationship between the two can be reasonably concluded from the facts
on hand. Thus in US-Steel Safeguards, the Appellate Body opined:
Article 3.1 of the Agreement on Safeguards requires that the competent authority set out
“reasoned conclusions” on all pertinent issues of facts and law. One of those “issues of law” is
the requirement to demonstrate the existence of “unforeseen developments” that have
resulted in increased imports causing serious injury. (underscoring author)137
And if the safeguards were to be applied to imports of several products, the connection
between unforeseen developments and increased imports must be demonstrated in each of
these products. Safeguards can only be justifiably applied to the specific product whose
imports have increased directly as a result of the unforeseen circumstance. The application
on other products, although they may be considered like or directly competitive to the
concerned product, is unwarranted if the imports of these products did not increase or the
increase did not result from the unforeseen developments.138
In the same report, the Appellate Body reminded also the country applying safeguards of
their obligation “to publish a report setting forth their findings and reasoned conclusions
reached on all pertinent issues of fact and law.”139
On the relationship between import changes and member country’s obligations, there is not
much guidance from case law to determine the degree of causality that an importing country
135
Appellate Body Report, para. 84 and 86.
See Horn and Mavroidis (2003).
137
Appellate Body Report, US-Steel Safeguards, para. 326.
138
Appellate Body Report, US-Steel Safeguards, para. 319.
139
Appellate Body Report, US-Steel Safeguards, para. 326.
136
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must find to justify the use of safeguards. It appears sufficient from the Argentina-Footwear and
Korea-Dairy to establish that the importing country incurred obligations, including tariff
concessions, under GATT 1994.140
With respect to the phrase “of the effect of the obligations incurred by a Member under this
Agreement, including tariff concessions…,” we believe that this phrase simply means that it
must be demonstrated as a matter of fact, that the importing Member has incurred obligations
under the GATT 1994, including tariff concessions.141
Serious injury to domestic industry
This third prerequisite is the most complex as it has several elements aimed at precluding the
application of safeguards out of sheer desire to protect domestic producers. Safeguards may be
applied only where the increased imports caused or threaten to cause serious injury to the
domestic industry that produces the like or directly competitive products. Thus, a determination
of injury and causation is required. Such a determination is not different for dumping or
subsidization in that the process involves four stages, namely: (i) identifying like or directly
competitive product to the subject imports; (ii) determining the scope and boundary of the
domestic industry; (iii) assessing the injury or threat thereof; and (iv) establishing the causal link
between increased imports and injury.
Like or Directly Competitive Product
Identifying which products are like or directly competitive to imports is the first crucial
determination and also the most contentious. Subsequent determination hinges on the validity of
the products that have been identified to be competitively related to the concerned imports.
Since the ASG does not define “like” and “directly competitive”, these terms are understood to
have the same meaning as those intended in the national treatment provision (Article III) and
throughout GATT 1994. Like products are understood to be “a subset of directly competitive or
substitutable product.” As such, “all like products are, by definition, directly competitive or
substitutable, whereas not all directly competitive or substitutable products are like.”142
The foregoing interpretation, while helpful, is not definitive; nor does it intend to be. The
Appellate Body, in fact, maintains that the determination of likeness and direct competition has
to be made on a case-to-case basis. There is no single approach of determination that may be
considered appropriate in all cases. But disputes involving violations of national treatment, such
as the Japan-Alcoholic Beverages and Korea-Alcoholic Beverages, use a set of factors to
determine likeness, namely: product’s end-uses, consumers’ tastes and habits, physical
characteristics of the product, and tariff classification. For “directly competitive”, the factors
considered include “the nature of the compared products, the competitive conditions in the
relevant market, physical characteristics of the imported and domestic products, common end
uses, and tariff classifications.”143
140
ADB (2009), p. 316.
Appellate Body Report, Argentina-Footwear (EC), para. 91.
142
Appellate Body Report, Korea-Alcoholoic Beverages, para. 118.
143
ADB (2009), p. 318.
141
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None of these criteria is individually determinative; nor is this set of criteria a closed-list. The final
determination would require value judgment on how each of these criteria is to be considered.
Domestic Industry
For purposes of determining injury, Article 4.1(c) of the ASG defines a “domestic industry” as a
group of “producers…of the like or directly competitive products operating within the territory
of a Member, or those whose collective output of the like or directly competitive products
constitutes a major proportion of the total domestic production of those products.” This
definition of domestic industry that includes producers of both like and directly competitive
products is broader than envisaged in ADM and ASCM where it is limited to producers of like
products.
A further elucidation on the delimitation of the domestic industry arose from the US-Lamb case.
The US defined the domestic industry of lamb meat to include growers and feeders of live lamb,
in addition to lamb breakers and packers. While imported lamb meat was at issue, the US
nonetheless argued that “the four producers comprise the �producers as a whole’ of the like
product, because they constituted a continuous line of production and as such had a substantial
coincidence of economic interests.”144 Not surprisingly, such an expansive definition of the
domestic industry was rejected by both the panel and the Appellate Body. It also prompted the
latter to clarify “that the definition of the domestic industry was not intended to encompass the
whole manufacturing process; rather, only those producers of products that are like or directly
competitive to the concerned imports.
Serious injury
Article 4.1(a) and (b) of the ASG defines “serious injury” as “significant overall impairment in the
position of a domestic industry” and “threat of serious injury” as “serious injury that is clearly
imminent.” Such a threat, while inevitably abstract, must “be based on facts and not merely on
allegation, conjecture or remote possibility.”145
Since safeguards are not a response to unfair trade, the ASG understandably sets a higher
standard for injury compared with that required to justify anti-dumping measures and
countervailing duties. Thus in US-Lamb, the Appellate Body emphasized that “serious injury” is
not the same as the “material injury” in the ADM and ASCM.
More significantly, the ASG in Article 4.2(a) sets out a list of factors that should each be
objectively evaluated (i.e., quantified) and assessed as to the extent they support the finding of
an injury. This include “the rate and amount of the increase in imports of the product concerned
in absolute and relative terms, the share of the domestic market taken by increased imports,
changes in the level of sales, production, productivity, capacity utilization, profits and losses, and
employment.”
The enumerated factors are not meant to be exhaustive. Indeed, the Appellate Body regarded
them as the “minimum” list to consider. A country applying safeguards is obliged to seek out
evidence of other relevant factors. And since serious injury is taken to mean “overall
144
145
World Trade Report 2009, pp. 53-54.
Article 4.1(b) of ASG.
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impairment”, the determination should be based on the evaluation of all pertinent factors.
Although some of these factors may not show serious injury, an overall assessment of serious
injury is still possible.
However, the evaluation should be based on data representative of the domestic industry. In USLamb, the admission by the US that the data it used for injury determination was not
representative of the domestic industry was a basis for the Appellate Body’s finding of breach.
Given the stringent requirement to evaluate all relevant factors for serious injury determination,
it seems ironic that a mere threat of serious injury can be considered sufficient basis to exercise
the right to apply safeguards. The Appellate Body in US-Line Pipe regarded the “threat of serious
injury” a lower threshold for establishing the basis to apply safeguards. Yet the ASG, unlike the
ADA and ASCM, does not provide a specific list of factors to evaluate so that the threat can be
objectively assessed. Nonetheless, it is understood that the determination that a serious injury is
“clearly imminent” should at least include an evaluation of Article 4.2(a) factors. Moreover, in
US-Lamb the Appellate Body recognized that most recent past data are the most relevant and
reliable basis for determining future injury, but they have to be analyzed in the context of overall
data for the period under investigation. Otherwise, short-term trends may distort the view of
longer term prospects. For instance, a recent decline in the domestic industry may be just part of
a normal cycle and is not any indication of its future prospects. 146
Causal Link
It is not sufficient to establish that the domestic industry has suffered serious injury or is under
threat thereof. Rather, such injury must be shown to have been caused by increased imports.
Specifically, Article 4.2(b) reads:
The determination [of whether increased imports have caused or are threatening to cause
serious injury to a domestic industry] … shall not be made unless this investigation
demonstrates, on the basis of objective evidence, the existence of the causal link between
increased imports of the product concerned and serious injury or threat thereof…(underscoring
by author)
The Appellate Body has interpreted the term “causal link” as “a relationship of cause and
effect such that increased imports contribute to bringing about, producing or inducing the
serious injury,”147 but it did not prescribe or recommend any method to establish such
relationship.
Absent specific guideline from the agreement or the Appellate Body, previous safeguard
investigations have only gone to the extent of correlating movement of imports (volume
and market share) and injury factors (i.e., those listed under Article 4.2(a) such as declining
sales, productivity, employment and profits). Clearly, mere statistical correlation does not
establish causation, but the panels and Appellate Body have not required the use of more
rigorous analytical tools to establish causation.
Nonetheless, the panel in Argentina-Footwear noted the need to examine the correlation
between increased imports and injury factors in the context of conditions of competition. A
146
147
ADB (2009), p. 321-322.
Appellate Body Report, US-Wheat Gluten, para. 67.
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statistical correlation might turn out to be spurious if those were considered.148 Concretely, if
imported and domestic products are not in competition in the market, and still a high
correlation is found, no causation should be imputed since the high correlation is a merely
statistical artifact.
Moreover, the pattern of movement of imports and injury factors need not be consistent at
all times during the period being investigated, i.e., the correlation does not have to be
perfect. In US-Wheat Gluten case, for example, domestic industry’s capacity utilization and
sales increased towards the latter part of the investigation period (1996-1997). Despite this,
the panel still concurred with the US finding that the trend during the investigation period
(1993-1997) showed an overall deterioration in these factors.
There could also be time lag between the actual import surge and when the injury becomes
apparent. When this happens, such as in the US-Steel Safeguards, a more sophisticated
quantification technique is necessary to conduct a proper causation.149
In sum, a strong correlation between imports and injury factors is deemed necessary but not
sufficient for causation. If the correlation is too low or not high enough, a country applying
safeguards is expected to have compelling evidence to deduce that imports caused the injury
despite the weak or lack of coincidence.
Non-attribution
To determine if the causation analysis performed by a country applying safeguards is adequate,
the Appellate Body has outlined a three-part non-attribution test. This test is an articulation of
Article 4.2(b) that states:
…When factors other than increased imports are causing injury to the domestic industry at the
same time, such injury shall not be attributed to increased imports.
Thus, the first step is to distinguish the effects of increased imports from those of other factors.
The investigating authority must then determine which, or to what degree, the injury can be
attributed to increased imports, on the one hand, and to other factors, on the other. The third
and final step is to ascertain if a causal link between increased imports and serious injury exists,
and whether the causal link involves a genuine and substantial relationship of cause and effect
between the two.150
Failure to dissect the factors behind the injury may result in ascribing all to imports the injury
incurred by the domestic industry, even as other factors have contributed to the situation. This
clearly has implications on the size of safeguard measure to be imposed, which according to the
agreement, should be limited to the extent of the serious injury caused by imports.
148
In including competitive conditions in the equation, the panel in Argentina-Footwear explained that
Article 2.1 of ASG requires that the increase in imports be “under such conditions” as to cause or threaten
to cause injury. To this panel, the phrase “under such conditions” refers to conditions of competition.
149
The US-Steel case is perhaps one of the few cases where the panel found merit for quantitative
evidence, which the defending party resisted. In most cases, the adjudicating body does not consider it
necessary to have quantitative analysis, especially with respect to de jure breaches, while the parties, both
defending and complaining, would submit quantitative evidence nonetheless.
150
Appellate Body Report, US-Wheat Gluten, para. 69, cited in World Trade Report 2005, p. 202.
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The non-attribution test recognizes other factors, apart from increased imports, that contribute
to causing the serious injury to the domestic industry. From the perspective of the Appellate
Body, it does not matter if the other factors are equally or even more important contributors to
the injury as long their effects are properly identified and not attributed to increased imports.151
In cases where the country failed to make the proper attribution of injury based on the three-part
non-attribution test, the adjudicating body had always favored the complainant. A useful
illustration is the US-Line Pipe where the defendant did not consider the impact of the
contraction in the oil and gas industry, which is a major market for line pipes. As a result, the
decline in the demand for domestic pipes was all ascribed to increased imports, which
consequently magnified the size of the safeguard measure.
Similarly, in the US-Wheat Gluten, the Appellate Body found the defendant remiss in taking into
account the capacity expansion undertaken by domestic producers. If capacities were not
expanded, it surmised that capacity utilization and profits of domestic producers would not have
declined substantially; it might have been even possible for them to operate profitably despite
the increased in imports. On the other hand, if imports did not increase as much, capacity
utilization could still have fallen. Clearly, there were other factors besides the increase in imports
that caused lower capacity utilization and operating losses of domestic producers. Since the US
did not provide explanation for the other factors nor separated their effects on claimed injury, it
was found at fault for not undertaking the causation analysis as provided for in the agreement.
Notwithstanding the fact that the non-attribution test is just a systematic articulation of the
pertinent provisions in ASG, it has invited a number of criticisms – not surprisingly, among
economists. One objection is that the test is “significantly difficult and complicated, if not
completely impossible.”152 In reality, the complex interaction of variables prevents a neat
separation of the effects of increased imports from the effects of other factors at work. This
probably explains why, in almost all dispute cases, the defect in the application of safeguards had
been traced in the way causation analysis was conducted.
To be sure, the investigating national authorities have the discretion to select the analytical tool
that will satisfy the non-attribution test. But as already noted, most countries rely on simple
correlation, supplemented by qualitative analysis, to prove causation. Some have employed
more nuanced tools such as shift-share, variance analysis and Granger-causality test.153 Yet to be
able to do a proper attribution, there may be a need to employ even more advanced tools such as
simultaneous equations modeling.154 The problem here, however, is probably less in convincing
national authorities on the need for more rigorous analysis than on having sufficient data to run
complex analytical tools. In practice, more complex statistical tools require much more and
better quality data than simple techniques such as correlation. These data, which are mostly
micro-level, do not come easily.
151
World Trade Report 2009, p. 57.
Lee, 2005, p. 81, cited in World Trade Report 2009, p. 57.
153
See World Trade Report 2005, pp. 200-201.
154
World Trade Report 2009 (pp. 58) cited Irwin (2003) and Kelly (1988), Prusa and Sharp (2001), Grossman
(1986), and Pindyck and Rotember (1987) among those that proposed the use of more advanced
techniques.
152
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Yet a more fundamental objection to the non-attribution test deals with the relationship between
imports and injury. In many instances, imports, domestic production, profitability and
employment are responding to some other factors affecting demand and supply. A correlation
between increased imports and injury may emerge even as there is no causal link. Put differently,
the observation of simultaneity of increased imports and injury may lead to the conclusion that
the former caused the other, when in fact they are both being influenced by some other events.
The challenge then is to distinguish which instances are imports and injury correlated and causally
linked, and which ones they are correlated but not causally related.
The World Trade Report 2005 (p.203) provides illuminating examples of these cases based on the
work of Irwin (2003):
…(Suppose there is) an increase in the cost of inputs to domestic production…(which) lead(s) to
both increased imports and lowered profitability and employment. … (W)hile there is a
correlation between imports and injury, there is no causal connection, because, by assumption,
the cause of the injury was a negative supply shock…(I)mports can be a cause of injury when
there is increased competition from foreign suppliers…Imports can also be a cause of injury if
there is a reduction in tariffs, or in general, a relaxation of import barriers arising from a
programme of trade liberalization…(T)he task of causation analysis is to distinguish conceptually
the latter case from those other instances when imports and injury are correlated but not
causally linked.
If, as is expected of real-world situation, various factors affecting domestic demand and supply
may change simultaneously with imports, how can the impact of imports be distinguished from
others? Using basic demand-supply framework, Irwin (2003) compares the changes in price and
other market variables as a result of autonomous changes in domestic demand and supply with
those of import surge. What distinguishes the effects of an import surge from those of demandsupply origin are price and domestic production fall as domestic consumption and imports rise.
That is, the surge depresses price, stimulates consumption and displaces sales of domestic output
in the market. In contrast, when demand increases autonomously (caused by growth in incomes,
for example), consumption and imports rise, leaving price and domestic production unaffected.
Although imports also increased, this latter case should not trigger a safeguard application.
Table 6.4. Impact on Market Variables of Changes in Demand, Supply and Imports
Source of Change
Price
Production
Consumption
Domestic demand increases
No change
No change
Increase
Domestic supply reduction
No change
Decrease
No change
More import competition
Decrease
Decrease
Increase
Source: Table 3, World Trade Report 2005, p. 205.
Imports
Increase
Increase
Increase
Application of Safeguard Measures
The previous section underscores the conditions that circumscribe the right of a country to take
emergency action on imports, namely: that, as a result of unforeseen developments and the
effect of obligations incurred by the country, imports increased in such quantities as to have
caused or threaten to cause serious injury to the domestic industry. In addition, the ASG also sets
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parameters on the form, scope and content of safeguard measures to ensure that the application
is not excessive, neutral and time-bound.
Of interest are the following: (i) which type of measure is less trade-restrictive; (ii) what MFN
exemptions in the application of safeguard measures are allowed; (iii) how much compensation
to countries affected by the measure is prescribed in the agreement; and (iv) what guarantees
the temporariness of the measure. These issues are tackled below.
Form and Size of Safeguard Measures
Without an expressed provision in the agreement as to the specific form of the safeguard
measure, it is understood that a country is free to choose between a tariff, quota or tariff-rate
quota (TRQ). Article 5.1, however, sets limit on the size of the measure, i.e., it must be “only to
the extent necessary to prevent or remedy serious injury and to facilitate adjustment.” It also
requires that the measure does not discriminate on the source of imports. The Appellate Body in
US-Line Pipe adds that, consistent with the non-attribute clause, the application of the measure
should be to offset injury caused by increased imports only, and not injury due to other factors.155
Tariff appears to be the choice instrument of protection. Two-thirds of the safeguard measures
notified to the WTO between 1995 and 2009 took the form of tariff; a minority (10%) used quota;
the remainder applied TRQ. 156 This is not surprising and a desirable outcome from a purely
economic standpoint. Foremost, tariffs are more transparent and administratively convenient
compared to other instruments. Second, the revenue generated by a tariff redounds to the
government, whereas the scarcity premium (rents) created by a quota may be captured by
exporters, importers or government, depending on the method employed to allocate quota
shares. Third, a quota creates more market distortion than a tariff since it intervenes on the
supply schedule by artificially limiting the amount of imports. A tariff, on the other hand, merely
creates a wedge between prices of domestic and imported outputs, but otherwise allows the
price system to function.
Theoretically, a quota can be set equivalent to a tariff-induced import level so that the market
price and quantities are the same under the two regimes. However, the difference between the
two instruments emerges when domestic demand expands. Since a tariff does not restrict the
quantities of imports, the additional demand can be filled in by either domestic goods or imports.
In case of a quota, having set an absolute limit on the volume of imports, only domestic output
can satisfy the excess demand. As a result, the market price settles at a higher level in a quota
compared to a tariff regime.
The distortions are even greater in case of a combined tariff and quota. TRQ permits a set of
imports at the normal duty rate (also known as tariff-in quota) and imposes a higher tariff rate on
all imports in excess of the set amount (tariff-out quota). Even if the tariff-in quota is pegged at
the same level as the volume of imports under pure tariff, the resulting market price is higher
compared to a pure quota or pure tariff regime, in case the actual import volume hits or exceeds
the tariff-in quota.
155
Appellate Body Report, US-Line Pipe, para. 99.
WTO Trade Report 2009 (p. 59) cites the following: “Of the 89 safeguard measures notified to the WTO
between 1 January 1995 and 19 February 2009, nine took the form of quotas or quantitative restrictions, 21
took the form of tariff rate quotas, and the remaining measures took the form of tariffs, either specific (27),
ad valorem (27), variable (4), or a combination thereof (1).
156
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From a political economy perspective, however, quotas seem to serve the intention of safeguard
measure better. Since the objective is to provide domestic industry time to adjust to import
competition, a fixed limit on imports provides more guarantee to domestic producers. On one
hand, if the assumed demand elasticity on which the tariff rate is based turns out to be higher
than actual,157 then the import surge may not be stemmed enough by merely raising the effective
price of imports. A quota, however, ensures that imports are maintained at the set limit.
There could also be preference for quota in case more production experience allows domestic
producers to catch up faster to foreign competition. If marginal cost of production decreases
with cumulative production because of learning effect, then quota is preferable because it allows
domestic production to increase at the expense of imports; more so, when domestic demand
increases.
Quotas are also easier to handle politically because under the ASG, quota shares are to be
distributed on the basis of historical market shares (albeit with some exemptions). This gives a
semblance that the safeguard measure is only restoring the status quo previous to the surge,
which is likely to be more acceptable to foreign producers, and hence less vulnerable to dispute.
Still, tariff is seen as a better disciplining device than quota. The incentives to reduce cost in order
to compete against imports are more under a tariff than a quota regime. It follows from the logic
that once domestic producers are able to match the costs of foreign producers, they can enjoy
higher profits based on higher market price set by tariff. They are thus pushed to reduce costs
faster while the high price remains.158 Moreover, if foreign cost of production continues to fall, so
does the effective protection afforded by the tariff. This puts pressure on domestic producers
to work continuously in reducing their costs. In case of a quota, by contrast, there is less
incentive on domestic producers to lower costs further once they have matched the costs of
their foreign competitors, because the effective costs of foreign producers in selling to the
domestic are not changed; only the volume of what they could sell is restricted.159 Also, if foreign
producers continue to innovate, there is less incentive for domestic producers to keep pace with
them because the import volume cannot exceed the set limits anyway.
Despite the foregoing, if a country is more concerned about avoiding disputes, a quota renders it
less vulnerable to dispute than a tariff, only because the ASG defines the allowable quota level,
while there is no such guideline for tariff. Article 5.1 reads:
…If a quantitative restriction is used, such a measure shall not reduce the quantity of
imports below the level of a recent period which shall be the average of imports in the last
three representative years for which statistics are available, unless clear justification is
given that a different level is necessary to prevent or remedy serious injury.
If this provision is observed, a safeguard-applying country is not obliged to provide justification
for the size of the measure.160 On the hand, any tariff rate must be demonstrated by the country
to be set at the level necessary to prevent or remedy serious injury due to increased imports,
which brings the quality of the country’s causation analysis into focus.
157
If import demand is thought to be more sensitive to price than it really is, then a higher tax will not curb
imports as much as intended.
158
Miyagiwa and Ohno (1999), cited in World Trade Report 2009, p. 59.
159
Ibid.
160
Appellate Body Report, Korea-Dairy, para. 99.
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Scope of Safeguard Measure
One important principle in the application of the measure, regardless of form, is
nondiscrimination, i.e., it must be applied to all imports irrespective of source (Article 2.2). This
means that the tariff should be applied on a MFN basis. In case of a quota, the rules for allocation
are stipulated in Article 5.2(a) and (b). The applying country must first seek agreement with “all
Members having a substantial interest in the supplying the product.” Where such an agreement
is not practical or feasible, the allocation will be based on historical market shares, reckoned over
a representative time period.
Departures from the MFN rule, i.e., targeted application of the measure, are permitted in two
instances. One is targeting imports from some sources if these have increased disproportionately
relative to imports from other sources161 Another is exempting imports from developing countries
whose individual shares in total imports are each less than 3 percent, provided that all imports
from developing countries with less than 3 percent share do not account collectively for more
than 9 percent of total imports.
The rationale for nondiscriminatory application is to prevent trade diversion, i.e., a more efficient
foreign source is replaced by less efficient one. It is also to protect smaller countries which are
less able to retaliate when targeted by the measure.
An issue that remains unresolved is whether exemption can be extended to PTA partners. The
panel in US-Pipe Line opined favorably for exclusion, but this ruling was neither affirmed nor
rejected by the Appellate Body.162
Content of Safeguard Measures
An important provision in safeguard application, not found in ADA and ASCM, is the obligation of
the applying country to compensate members affected by the measure. The compensation aims
to restore the level of concessions and other obligations existing under GATT 1994 between the
safeguard-applying country and exporting countries affected by the measure (Article 8.1). If no
agreement concerning compensation is reached within 30 days in the consultations, aggrieved
exporting country may retaliate by suspending the application of “substantially equivalent
concessions or other obligations under GATT 1994 to the trade of safeguard-applying country
(Article 8.2). The retaliation should be undertaken within 90 days from the time the measure is
applied (Article 8.2). However, no retaliation can be taken within the first three years of the
measure if it is triggered by an absolute (not just relative) increase in imports (Article 8.3).
Partly because of Article 8.3 and the fact that the average duration of safeguards is about two
years, there are few instances when retaliation was actually implemented. In fact, of the 11
161
Article 5.2(b) states that departure from MFN application requires the applying country to hold
consultations under the auspices of the Committee on Safeguards.
162
The ruling on exclusion of PTA partners was set aside by the Appellate Body not on the basis of MFN
principle, but because the US failed to comply with the “parallelism” requirement. Parallelism refers to the
condition that the set of imports that was used as basis for determining the appropriateness of safeguards
should also be the same set of imports on which the measure is applied. In the said case, US included the
imports from its PTA partners when analyzing the conditions for safeguard, but later excluded them from
the application of the measure. The Appellate Body found the US in breach of the agreement because it
failed to show that the prerequisites for safeguard application, i.e,, conditions of serious injury and
causation, would still be satisfied even if the imports from its PTA partners were excluded,
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notices of suspension of concessions (retaliation) received by the WTO from 1998 to 2005, only
three suspensions were actually implemented.163
Equally rare are notifications of compensation received by the WTO, which indicates that actual
compensation is also less frequent. This is probably because the affected parties find difficulty in
agreeing on a common compensation scheme. Notwithstanding, the prospect of providing
compensation has probably disciplined the use of safeguards, as the cost of the compensation
may just nullify the benefits of protection.
Duration and Provisional Measures
To underscore that safeguards are intended as “temporary relief”, the ASG outlines time limits
for application and review of the measure. The key principle is that the application should not
exceed the time “necessary to prevent or remedy serious injury and to facilitate adjustment”,
which “period shall not exceed four years” (Article 7.1). Extension is possible, but the cumulative
period should not exceed eight years.
More significantly, the agreement provides that if the application of the measure is more than
one year, a schedule of progressive liberalization at regular intervals is required. A midterm
review should also be part of this schedule if the intended period of application exceeds three
years. And if the application period is to be extended, the measure should not be more
restrictive that it was at the end of the initial application.
It is also possible to re-impose a measure on the same product, but the second period of
application has to be shorter than the first. Moreover, there should be at least a two-year nongap between the initial and next application (Article 7.5). A shorter holiday, i.e., one year, is
required if the initial application is less than 180 days (Article 7.6).
The time limits are even shorter in case of provisional safeguard measures. Safeguards may be
applied even after preliminary determination that the increased imports have caused or are
threatening to cause serious injury, but only under “critical circumstances” where delay in the
application of remedy would cause irreversible damage to domestic industry (Article 6).
Provisional measure cannot be applied for more than 200 days, during which period, the
investigating authorities are expected to make final determination if the requisite conditions for
the application of definitive measure are met.164
Detailed and fixed time limits are intended to make credible the strictly temporary character of
the measure. The set limits may be too long or too short to permit adjustment by domestic
producers. Either case is problematic: the former because of obvious efficiency losses; the latter
because the measure is not allowed to achieve its intended goal.165 Yet this kind of stringency
may be necessary to prevent circumvention of intent of the agreement to limit the use of
safeguards as temporary relief in extraordinary circumstances.
163
World Trade Report 2009, p. 64.
Provisional safeguards must be in the form of tariff to facilitate refund to affected exporters in case
subsequent investigation yields a finding that does not support the application of definitive measure.
165
Crowley (2007), cited in World Trade Report 2009, p. 65.
164
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Safeguard Measures in Agriculture and Services
The foregoing rules govern the application of so-called “normal” safeguards, as opposed to
“special safeguards” (SSG) for agricultural products and “emergency measures” (EMS) for
services. SSG, also referred to as “automatic” safeguards, have limited scope but could be
triggered much easier than normal safeguards, whereas the application of EMS is beleaguered by
several conceptual problems. These issues are briefly discussed below.
Article 5 of the Agreement on Agriculture stipulates the right of some WTO Member countries to
deal with falling prices or import surges in order to provide temporary support for their famers.
SSG may be invoked only by members who converted nontariff restrictions to tariffs (a process
known as tariffication) at the end of the Uruguay Round. To date, only 38 members reserve the
right to use SSG. It can only be applied on products that were subject of tariffication, but not
imports subject to tariff quotas.
SSG can be triggered by either a fall in import price or by an increase in import volume, when
certain price or volume thresholds are breached. Unlike normal safeguards, there is no obligation
on the applying country to demonstrate that serious injury is being caused to the domestic
industry, much less to establish a causal link between imports and serious injury.
Price-triggered SSG is applied on a shipment-by-shipment basis, i.e., when the CIF (cost, insurance
and freight) import price falls below a specified reference price. The size of the measure depends
on the difference between the CIF import and reference prices: the larger the difference, the
greater is the size of the measure. By contrast, volume-triggered SSG is applied on multiple
shipments and maintained over a period of time. It cannot exceed one-third of current tariff
applied on the product.
Considering the limited scope for SSG, the current Doha round of negotiations on agriculture has
taken up the proposal of developing countries for so-called special safeguard mechanism (SSM).
The latter is to be distinguished from the former in that it is meant to be available to all
developing countries, for application to any agricultural product.
As proposed, SSM can be triggered by a fall in price or surge in import volume. The volume
threshold is a rolling average of imports in the preceding three years, whereas the price threshold
is 85 percent of average monthly MFN-sourced price for most recent three-year period.
Unlike SSG, however, the proposed SSM has incorporated a “cross-check” mechanism that
precludes its application if the import surge is not accompanied by price decline. The thinking
here is that imports could not harm farmers’ welfare if prices are still buoyant, in which case SSM
is not warranted.
Proponents of SSM have yet to persuade those who believe that a more stringent mechanism is
needed to avoid its being used for trade protection. But it has gone further than EMS which has
been the object of negotiations for more than a decade now.
Just like normal safeguards in goods, EMS involves temporary suspension of concessions and
obligations. For services, these refer to market access, national treatment and any additional
commitment that members have assumed in individual sectors. A safeguard clause might be
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used to ease adjustment pressures caused by a sudden increase in competition from foreign
suppliers.
The main stumbling block in the application of EMS is the compatibility of safeguards with the
different modes of supply. In the case of mode 3 (commercial presence, i.e., foreign supplier
establishing itself in another country), one issue is who would be protected by a safeguard, and
from whom. Should it be all service suppliers with domestic presence against new foreign
entrants, or only domestically-owned suppliers against new foreign entrants? For modes 1 (crossborder supply) and 2 (consumption abroad), subsidies on domestic service suppliers at the
expense of cross-border imports and consumption abroad are permitted under GATS. Thus, what
role does safeguard have when there are already existing flexibilities? Finally, in the case of mode
4, virtually all existing schedules of commitments already contain too many restrictions on
movement of natural persons, which renders the possibility of import surge almost
inconceivable.
Proponents of safeguards in services are justifying the measure on the same grounds as
safeguards in goods, i.e., that the availability of emergency measures in the event of
unforeseeable market disruption would encourage more liberal commitments. Nonetheless, they
have yet to convince skeptics on the need for safeguards specific to services, in light of the
general perception that the scheduling of commitments in GATS are already much more flexible
than those in GATT.
6.5. Concluding Section
There is now general acceptance on the facilitating role of remedies in trade agreements. Trade
remedies reduce the political costs of making commitment to a liberal trade regime and prevent
the agreement from breaking down when some parties renege on their obligations. They also
help manage concerns about conceding national sovereignty when a country allows itself to be
subjected to multilateral disciplines.
Recent agreements on trade remedies, particularly ADA, ASCM and ASG, have made significant
headways in terms of clarifying the purpose and substance of the measures, and of laying down
transparent, time-bound and detailed procedures for their application. These advances though
have been more useful in preventing countries from whimsically invoking their rights to use
remedies than in curtailing unfair practices that these measures seek to redress. Thus for
example, ADA restrains countries from imposing anti-dumping duty merely to protect domestic
producers, but is less effective in deterring dumping. But even as countries are more cautious in
applying remedies, there are still discernible ambiguities in the agreement that create
opportunities to turn these measures into instruments of protection. Some provisions related to
duration of the measure, discrimination in application, and causation analysis of trade and
domestic injury may allow application longer than necessary, against trading partners that may
not have contributed to the condition that triggered the application of the measure, and under
flimsy evidence that trade caused domestic injury.
Duration of the Measure
As a general rule, trade remedies are contingency measures that must be removed once the
conditions that justify its imposition, e.g., dumping or subsidization, vanish. (The exemption to
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this rule is a tariff renegotiation: once successful and necessary compensation is provided to
affected parties, the renegotiated tariff rates can persist unless adjusted again downwards.) The
temporary nature of the remedy prevents it from being used as an industrial policy instrument –
to promote a domestic industry by reducing import competition. Therefore, there should be no
ambiguity on the permissible timeframe for using the measure. It must be definite and strictly
enforced. Otherwise, any opportunity to prolong the implementation of the measure is likely to
be exploited.
In anti-dumping and countervailing, the statutory time limit – five years – may be waived if a
sunset review shows that the dumping or subsidization has not ceased or is likely to recur. The
agreements (ADA and ASCM) do not provide limits on the length of extension, thus it is possible,
at least theoretically, to prolong the application as long as is needed by the domestic industry.
There is also no restriction on re-imposing the measure, which makes it feasible to apply the
measure continuously. By contrast, the four-year limit in safeguard is more stringent. It may be
re-imposed but the cumulative period should not exceed eight years, and a minimum time break
of two years between applications is observed.
However, there is still no empirical evidence showing that the apparent leniency in extending and
re-imposing anti-dumping and countervailing duties is being exploited, rendering these measures
as industrial policy tools in disguise. One study found that while productivity increases are often
observed following an anti-dumping action, the increases are less than enough to close preexisting technological gaps.166 Such finding suggests that trade remedies are not effective
industrial policy tools, but it does not disprove that they may be used for protectionist ends.
Discriminatory Application
The rationale for stipulating that anti-dumping and countervailing duties may be applied only to
specific producers or countries whose governments engaged in subsidy is to prevent these
remedies from being used to eliminate import competition from all sources. However, the
respective agreements are silent about simultaneous petitions against different trading partners
that may result in the application of the measure against all major (or relevant) trading partners.
When this happens, a country imposing the remedy is able to effectively eliminate all import
competition that matters.
While this loophole opens up opportunity for de facto across-the-board application of remedies,
there is no evidence yet that remedies are being generally applied. On the contrary, antidumping measures appear to be directed against large trading countries such as China, European
Union, Japan, South Korea and US. One advantage of country-specific or discriminatory over
MFN-based application is that it reduces risks of retaliation by countries affected by the measure,
and of having to compensate many countries. Nonetheless, it is reasonable to assume that the
possibility for multi-country application of anti-dumping and countervailing duties must have
been exploited to some degree because of the greater benefits to domestic producers of nondiscriminatory application.
Causation analysis
166
Konings and Vandenbussche (2008).
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All three agreements require a showing that imports caused domestic injury before a country can
impose a measure that would restrict imports. Conceptually, this is the most difficult substantive
requirement to satisfy. Objective evidences are usually available to ascertain if a foreign producer
is selling below cost, i.e., dumping, while data would show whether or not domestic industry’s
sales and profits are plummeting. But establishing the causal link between the behavior of
foreign producer and market performance of domestic producers is not as straightforward; it has
to be inferred analytically from evidences on hand. And yet none of the agreements set a
standard that would determine if the critical requirement of causation is met. In the absence of
rigorous standard, the bar for proving causation is often too low. Strong correlation between
variables of interest is often deemed sufficient to trigger application of trade remedy.167
There are at least three factors explaining why causation analysis is unsatisfactory in most
applications of trade remedy. First, injury is not defined in any of the agreements. At best, the
agreements identify factors that may indicate injury. But ADA cautioned that the 15 injury factors
enumerated is not exhaustive, and a panel in a dispute stressed that some other factors not in
the list may turn out to be more relevant in a particular case. If pinning down factors to
determine the existence of injury is problematic, more so judging the quality of injury. In theory,
the injury that would trigger safeguard measure should be graver than that for other remedies
responding to unfair trade practices, such as dumping or subsidization. The distinction between
“serious” and “material” injury that can be deduced from the agreements is too fuzzy and has
not benefitted from interpretation by any panel or Appellate Body.
The second issue perpetuates the first. It relates to the fact that in anti-dumping, countervailing
and safeguards, it is the relevant national authorities that conduct the investigation and make the
determination on whether dumping, subsidy or import surge occurred and caused injury to
domestic industry.168 And in WTO dispute settlements, panels and the Appellate Body are not
expected to conduct de novo examination of evidence at hand; rather, they are expected to
resolve whether a national authority observed the WTO rules. The panels and Appellate Body
usually do not pass judgment on the national authority’s appreciation of evidences and
conclusion derived from them. It is sufficient, for their purpose, that: (i) the national authority
appears to have considered all relevant factors; (ii) the investigation was unbiased; (iii) there is
adequate explanation for the determination; (iv) the facts do not contravene the conclusion; and
(v) non-attribution test was performed. Since it is difficult to challenge the qualitative judgment
exercised by the national authorities in weighing facts and drawing inferences, most trade
remedy disputes involve claims of violations of procedural requirements. As a result, the panels
and Appellate Body evade rendering opinion on substantive issues, such as whether the injury is
“serious” or “material” enough to consider using trade remedy, and if the injury can be
adequately attributed to imports.
167
For example, Baldwin and Steagall (1994) examine the incidences of trade remedy application by the US
from 1980 to 1990 for anti-dumping and countervailing measures and from 1974 to 1988 for safeguards.
They found that decisions with respect to anti-dumping and countervailing are triggered by findings on
four factors, namely: an increase in import penetration, changes in capacity utilization, recent increases in
dumped or subsidized imports, and whether the product has been the subject of previous anti-dumping or
CVD investigation. Safeguard decisions, on the other hand, are associated with declines in profits and
employment and short-term fall in real GNP.
168
This is not the case for other trade remedies. For example, the WTO Committee on Balance-of-Payments
Restrictions makes the determination on whether trade measures are warranted.
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The third issue relates to the analytical techniques used in establishing the causal link between
imports and domestic injury. It is highly unlikely that any legal text could provide sufficient
guidance in this area, foremost because establishing causation is not a cut-and-dried process.
There is no one technique applicable in all cases; it involves the use of statistics and economic
reasoning. To be sure, a correlation analysis, which is a mere examination of trends, would not
suffice – not even to detect spurious association, much less to establish causal link. A proper
conduct of causation analysis requires the use of quantitative economic analysis. But this is often
too much to handle for many national investigating authorities. In addition, there are also
limitations on available data – the more advanced the quantitative technique, the more rigorous
and exacting its data requirements. There are often not enough micro-level data required for this
kind of analysis. Then there is also intricacy involved in choosing the appropriate technique for a
given case, since there are numerous competing approaches that all appear valid but yield
different results. Because of these, expediency must have often dictated reliance on simple
techniques that are easy to implement and interpret, such as correlation analysis. But this makes
it easier to put up trade restrictions even when available evidence of causation is less than
convincing.
In light of the foregoing loopholes, it is difficult to completely dismiss concerns that trade
remedies can be used to disguise protection. Already, there are evidences that anti-dumping and
safeguard measures can result in trade diversion and tariff-jumping foreign direct investment.
These are the very same consequences of protectionist measures that trade agreements seek to
eliminate. The inevitable harm on consumers due to higher domestic prices should be sufficient
motivation for the multilateral body to vigilantly guard against their use for protectionist ends.
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World Trade Organization (2004b), “Subsidies and Countervailing Measures”, Background
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Appellate Body Reports
Argentina – Safeguard Measures on Imports of Footwear (Argentina – Footwear (EC)),
WT/DS121/AB/R, adopted 12 January 2000.
Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products (Korea-Dairy),
WT/DS98/AB/R, adopted 12 January 2000.
Korea – Taxes on Alcoholic Beverages (Korea – Alcoholic Beverages), WT/DS75/AB/R,
WT/DS98/AB/R, adopted 12 January 2000.
United States – Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan (US – HotRolled Steel) WT/DS184/AB/R, adopted 23 August 2001.
United States – Definitive Safeguard Measures on Imports of Certain Steel Products (US – Steel
Safeguards), WT/DS248/AB/R, WT/DS249/AB/R, WT/DS251/AB/R, AT/DS252/AB/R,
WT/DS253/AB/R, WT/DS258/AB/R, WT/DS259/AB/R, adopted 10 December 2003.
United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line
Pipe from Korea (US – Line Pipe), WT/DS202/AB/R, adopted 8 March 2002.
United States – Definitive Safeguard Measures on Imports of Wheat Gluten from the European
Communities (US – Wheat Gluten), WT/DS166/AB/R, adopted 19 January 2001.
United States – Measures Relating Zeroing and Sunset Reviews (US-Zeroing (Japan)),
WT/DS322/AB/R, adopted 23 January 2007.
Panel Reports
European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India (EC –
Bed Linen), WT/DS141/R, adopted 12 March 2001, modified by Appellate Body Report,
WT/DS141/AB/R.
Guatemala-Definitive Anti-Dumping Measures on Grey Portland Cement from Mexico (Guatemala –
Cement II), WT/DS156/R, adopted 17 November 2000.
Indonesia – Certain Measures Affecting the Automobile Industry (Indonesia-Autos), WT/DS54/R and
Corr. 1,2,3,4, WT/DS55/R and Corr. 1,2,3,4, WT/DS59/R and Corr. 1,2,3,4, WT/DS64/R and
Corr. 1,2,3,4, adopted 23 July 1998.
Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States –
Recourse to Article 21.5 of the DSU by the United States (Mexico-Corn Syrup) (Article 21.5US), WT/DS132/RW, adopted 21 November 2001, upheld by Appellate Body Report,
WT/DS132/AB/RW.
Mexico-Anti-Dumping Duties on Steel Pipes and Tubes from Guatemala (Mexico-Steel Pipes and
Tubes), WT/DS331/R. adopted 24 July 2007.
Thailand Anti-Dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H-Beams
from Poland (Thailand H-Beams), WT/ds122/r, adopted 5 April 2001, modified by Appellate
Body Report, WT/DS122/AB/R.
United States – Measures Treating Export Restraints as Subsidies (US-Export Restraints),
WT/DS194/R and Corr2, adopted 23 August 2001.
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PART III.
EX POST EVALUATION OF TRADE POLICIES
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7. Ex post assessment of trade agreements
7.1. Introduction
Countries enter into trade agreements instrumentally to increase trade but ultimately to increase
national welfare. The most natural questions to ask then after a free trade agreement (FTA) has
come to effect and some time has elapsed are:
•
•
Is trade with the partner countries increased as a result of the FTA? By how much?
Is national welfare increased as a result of the FTA? By how much?
It is important to bear in mind the causal relationship suggested in the questions. The interest is
in the change in trade and welfare that can be attributed to the FTA, and not simply any change
that occurred. For instance, the questions could have been:
•
•
Did trade with the partner countries increase after the FTA?
Did national welfare increase after the FTA?
The problem with these questions is that trade and welfare levels change for a variety of reasons
and not just because of FTAs. For instance, a country’s trade with another may decline because
of a general weakness in the global economy, or some other development that is unrelated to
the FTA. If an FTA came into effect right before the global crisis, for example, it will likely have
been followed by a decline in trade. To infer then that an FTA is ineffective simply because it is
followed by a trade decline is to commit the well-known post hoc fallacy, which is to attribute
cause to one thing simply because it precedes another. It works the other way around of course,
just because increased trade follows an FTA it does not mean the FTA caused it.
The main challenge in the ex post evaluation of trade agreements then is pinning down the effect
that is truly due to the FTA. But how to do this? Or, more realistically, how to come closer to
doing this? To proceed we first require the following tools:
•
•
•
an understanding of the factors that affect trade
the data sets available on trade and the factors that affect trade
some statistical tools, specifically regression analysis
We discuss each in the next section.
7.2 Factors affecting Trade, Data Sources, and Statistical Tools
Factors affecting Trade
The most common method used to evaluate FTAs is a method called the Gravity Model, or more
precisely the Augmented Gravity Model. Here we describe the factors hypothesized to affect
trade implicit in the Augmented Gravity Model. [But note that actual trade theory is more
complicated and theorists do not always agree about the expected effect of a factor.]
Despite its forbidding name, which of course derives from the Law of Gravity in Physics [�the
force of attraction between two bodies is directly proportional to the product of their masses
and inversely proportional to the square of their distance’], the idea underlying the Gravity Model
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is very simple: Trade between two countries will be higher the bigger their individual sizes (as
measured say by Gross Domestic Product or GDP, Population, Land area); and trade between two
countries will be smaller the farther away from each other they are (because of transportation
and other trade costs for one).
What makes an Augmented Gravity Model augmented is that aside from their sizes and the
distance between them, other factors are hypothesized to affect trade. These other factors
include geographical factors such as whether the two countries are adjacent or contiguous, and
whether either is landlocked, an island, or bordered by the sea if not an island. Distance is
expected to be a less important factor in trade for island countries and those bordered by the sea
compared to landlocked countries because of the sea route. The other factors also include
cultural factors including whether the two countries share a common language, and whether they
were ever in a colonial relationship, including if they had a common colonizer. A shared culture is
hypothesized to increase trade because it reduces trade costs. In addition, other factors
considered include (but are not limited to) whether the countries share a common currency
(positive hypothesized effect), and whether they are at war (negative hypothesized effect). The
Augmented Gravity Model also sometimes uses GDP per capita instead of GDP on the argument
that, after controlling for population, what matters to trade is the level of income rather than just
the size.
Data Sources
Bilateral trade data (imports and exports) is available from the United Nations Conference on
Trade and Development website (www.unctad.org) and also from the International Monetary
Fund’s Direction of Trade Statistics (DOTS), which is also available online (http://elibrarydata.imf.org) but by subscription. The UNCTAD data has the advantage that it is more detailed
and allows for disaggregation of trade data by product.
Data on GDP and population can be freely sourced from the World Bank’s World Development
Indicators (http://data.worldbank.org/data-catalog/world-development-indicators).
The other variables will ordinarily be difficult to construct but, fortunately, other people have
already done it and made their data sets publicly available. Note that these other variables either
do not change over time or change slowly over time (e.g. contiguous, landlocked, island, common
language, common currency, etc.). One such possible source is the Centre d'Etudes Prospectives
et
d'Informations
Internationales
(CEPII)
gravity
data
set
(http://www.cepii.fr/anglaisgraph/bdd/gravity.htm).
Table 7.1 below, which was extracted from the CEPII data set, shows a sample of what a typical
gravity model database will look like. In this example, what is shown is the bilateral trade
between the Philippines and some ASEAN neighbors (and also Thailand and Malaysia against
some ASEAN neighbors) for one year (2006), as well as some of the variables that go into the
gravity model. The first column – the numbering is on the topmost row – lists the origin country
of the trade flow (or the exporting country) while the second column shows the destination
country of the trade flow (or the importing country). Column 3 of the data set shows the year
the information in the row (at least the trade, GDP, and population information) refers to.
Column 4 is the size of the trade flow from the origin country to the destination country in million
US dollars. Thus, for instance, the exports of the Philippines to Thailand in 2006 was US$2.143
billion (row 4) while the exports of Thailand to the Philippines was US$2.847 billion (row 8)
212
Mission Report
1 August 2011 - 23 February 2012
Column 5 is the nominal GDP of the origin country in million US dollars while column 6 is the
estimated population of the origin country in millions. Column 7 is the nominal GDP of the
destination country in million US dollars and column 8 is the population of the destination
country in millions. Column 9 shows a measure of the distance between the origin and the
destination countries in kilometers. Column 10 is an indicator variable for contiguity. [An
indicator variable is a variable that takes on the value of 1 if the variable heading is true and 0
otherwise.] Note that the variable indicates that Malaysia and Thailand are contiguous with each
other and that, furthermore, Malaysia is contiguous with Singapore.
Column 11 indicates whether the origin and destination countries share an official language. In
the example that is true for the Philippines and Singapore (English) and for Singapore and
Malaysia (Malay). The last column is an indicator variable for a common currency. Note that it
indicates that Malaysia and Singapore share a common currency. That was true at one point but
not anymore, so we simply assume that what is meant by the variable is that the two countries
shared a common currency at some point in their recent history.
This extracted data is obviously only a very small part of the entire data set. Because there are
more than a hundred countries, and each country will have more than a hundred trading
partners, and that, moreover, often the interest is to look at the pattern of trade over several
decades, the gravity model data set used sometimes run to more than a million rows.
Correlation and Regression
The word correlation in ordinary usage simply means association or link. The statistical term
correlation signifies the same idea. It is a measure of the association between two variables, that
is, whether they move together (such as income and expenditure), in which case they are
positively correlated, or move in opposite directions (such as consumption and savings), in which
case they are negatively correlated.
The problem with simple correlation is that it can only handle two variables at a time, whereas
often our interest is in the more complex case of getting the association between multiple
variables, or at least of one variable with several variables at the same time.
Take the case of trade flows and the gravity model. According to the (augmented) gravity model,
trade flows should be positively related (or correlated) with the sizes of the trading economies,
the distance between them, and geographical and cultural factors, among others. But so many
questions arise. Which factors are most important for trade? Is it enough to just include GDP as
size measure and not population, since countries with large populations tend to have large
economies anyway? In other words, does population have an effect independent of GDP? How
do we know when the relationship between two variables is strong and when it is weak?
Regression analysis provides us answers to such questions. It allows us to relate one variable of
interest (often called the dependent variable) with many variables (often called dependent or
explanatory variables) at the same time and to tease out the independent effect of each variable.
[This will lead us closer later to getting to the true effect of an FTA on trade flows.]
We would not go through the technical details of how to compute for regression coefficients.
Regression estimation is easily done through any of many statistical softwares (Stata, SAS, SPSS,
213
Mission Report
1 August 2011 - 23 February 2012
and even Excel). We would, however, learn how to interpret regression results such as the one in
Table 7.2.
214
Mission Report
1 August 2011 - 23 February 2012
Table 7.1. Sample Gravity Data Set
Origin
Destination
Year
(4)
Trade
flows
(1)
PHL
IDN
2006
400
116931
85
(2)
PHL
MYS
2006
2901
116931
85
2277
26
148940
0
0
0
(3)
PHL
SGP
2006
5650
116931
85
2406
4
132159
0
1
0
(4)
PHL
THA
2006
2143
116931
85
2307
65
206247
0
0
0
(5)
PHL
VNM
2006
390
116931
85
1708
84
60884
0
0
0
(6)
THA
IDN
2006
3670
206247
65
2306
223
364459
0
0
0
(7)
THA
MYS
2006
7322
206247
65
1283
26
148940
1
0
0
(8)
THA
PHL
2006
2847
206247
65
2307
85
116931
0
0
0
(9)
THA
SGP
2006
9252
206247
65
1436
4
132159
0
0
0
(10)
THA
VNM
2006
3403
206247
65
853
84
60884
0
0
0
(11)
MYS
IDN
2006
4481
148940
26
1307
223
364459
1
0
0
(12)
MYS
PHL
2006
2391
148940
26
2277
85
116931
0
0
0
(13)
MYS
SGP
2006
31157
148940
26
506
4
132159
1
1
1
(14)
MYS
THA
2006
9352
148940
26
1283
65
206247
1
0
0
MYS
VNM
Source: CEPII Gravity Data Set
2006
1934
148940
26
1361
84
60884
0
0
0
(15)
(1)
(2)
(3)
(5)
(6)
(7)
(8)
(9)
(10)
Contiguous
(11)
Common
language
(12)
Common
currency
GDP_o
Popn_o
GDP_d
Popn_d
Distance
2609
223
364459
0
0
0
215
Mission Report
1 August 2011 - 23 February 2012
Regression results are presented in different ways in different studies. Table 2 is typically how
regression results will appear when directly copied from the statistical software that generated it
(in this case Stata). The important parts of Table 2 are enclosed in rectangles. The leftmost
rectangle simply gives us the model that was estimated, which in this case was the dependent
variable trade flows (lnflow) against the explanatory variables populations in origin and
destination countries (lnpop_o and lnpop_d), income per capita in origin and destination
countries (lngdpc_o and lngdpc_d), and distance between countries (lndist). The ln in front of
the variable names simply indicates that the variables were transformed to their natural
logarithms and that the coefficients can be interpreted as elasticities. Elasticity is a measure of
the responsiveness of one variable with respect to another. It often defined as the percent
change in one variable associated with a one percent change in another variable. We will go to
coefficients next.
The second rectangle from the left encloses the estimated coefficients, which are the estimated
relationships between the dependent variable (lnflow) and each of the explanatory variables,
holding all the other explanatory variables fixed. We said the coefficients are in terms of
elasticity. Looking at the table, this means that the coefficient of lngdp_o (GDP of the origin
country), which is 0.73, indicates that a one percent change in the GDP of the origin country is
linked with a 0.73 percent change in trade flows, holding all the other variables fixed. [The
phrase “holding all other variables fixed” only means that the effect estimated already nets out
of the effect that is common with the other explanatory variables.] The coefficient on lndist
indicates that a one percent change in the distance between two countries is linked with a 1.5
percent decline in trade flows.
The third rectangle from the left encloses the t-values and the p-values (P>|t|). They contain the
same information: they measure whether the relationship between the dependent variable and
the explanatory variable as embodied in the coefficient estimate is likely a real relationship rather
than just a spurious one. When a t-value is high (say above 2) or when a p-value is low (say below
0.05), then the estimated relationship is more likely to be a real one. We also say that the
coefficient is significant. Otherwise the observed relationship is deemed just accidental. In Table
2, all the explanatory variables have very low p-values.
The horizontal rectangle at the top right of the table encloses the p-value for the test of the
hypothesis (F-test) that all the estimated coefficients are simultaneously zero. As in the p-value
for the t-test described above, a low value leads to a rejection of the hypothesis. From the
example, the value is so low that no nonzero digit appears, which means that at least one of the
explanatory variables really matter.
Finally, the lower rectangle at the top right of the table encloses a statistic called R-squared. Rsquared is a measure of how well the included explanatory variables explain the dependent
variable. It ranges in value from zero to one, where one indicates the model is able to explain all
the variation in the dependent variable, and a value of zero means the explanatory variables
explain none at all of the variation in the dependent variable. In the example, the R-squared of
0.67 indicates that the GDP of the origin country, the GDP of the destination country, and the
distance between them [plus indicator or dummy variables for exporting country, importing
216
Mission Report
1 August 2011 - 23 February 2012
country, and year which were too many too show in the table], were able to explain 67 percent of
the variation in trade flows.
Table 7.2. Sample Regression Results
. reg lnflow lngdp_o lngdp_d lndist exporter* importer* yeard*, robust
Linear regression
Number of obs = 624145
F(449,623695) = 3317.37
Prob > F
= 0.0000
R-squared
Root MSE
=
=
0.6701
2.0008
-----------------------------------------------------------------------------|
Robust
lnflow |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lngdp_o |
.7315413
.0072864
100.40
0.000
.7172601
.7458225
lngdp_d |
.5966139
.0069266
86.13
0.000
.583038
.6101898
lndist | -1.484919
.0036394 -408.01
0.000
-1.492052
-1.477786
_cons | -5.283256
.6504105
-8.12
0.000
-6.55804
-4.008472
------------------------------------------------------------------------------
7.3 The gravity model in practice
Now that we have familiarized ourselves with the necessary tools we examine how FTA
evaluation is actually done in practice using Gravity Models.
A standard Augmented Gravity Model estimating the impact of an FTA agreement is as follows
(just bear with the notation):
LnX ijt = О± 0 + О± 1LnYi t + О± 2LnY jt + О± 3LnPi t + О± 4LnPjt + О± 5LnDij + О± 6 LANGij + О± 7 BORDij
+ О± 8 ISLANDi + О± 9 LANDLOCK i + О± 10 ISLAND j + О± 11 LANDLOCK j + О± 12 FTAij + О± 13 FTAi
+ О± 14 FTA j
Where, as before, the symbol Ln before a variable denotes the variable is used in natural
logarithm, and for the rest:
X ijt = Export flows from country i to country j at time t
Yi t = GDP of country i at time t
Y jt = GDP of country j at time t
Pi t = Population of country i at time t
217
Mission Report
1 August 2011 - 23 February 2012
Pjt = Population of country j at time t
Dijt = Distance between country i and country j
LANGijt = Indicator for whether country i and country j share a common official language
BORDijt = Indicator for whether country i and country j share a border
ISLANDit = Indicator for whether country i is an island
LANDLOCK it = Indicator for whether country i is landlocked
ISLAND tj = Indicator for whether country j is an island
LANDLOCK tj = Indicator for whether country j is landlocked
FTAijt = Indicator for when country i and country j are both in the FTA of interest
FTAit = Indicator for when country i is in the FTA but not country j
FTA tj = Indicator for when country j is in the FTA but not country i
Essentially, this formulation says that trade flows between countries can be explained by the
variables commonly postulated in gravity models, and in addition by the FTA entered into by
countries. The crucial point is that the FTA must explain variation in trade flows that cannot
already be explained by all the other factors included as explanatory variables. As in the earlier
example, for instance, if the FTA accidentally coincided with the economic growth of the
economies involved in the trade (especially relative to economies not in the FTA), and this
economic growth resulted in greater trade flows between the two, then this would be a problem
if you estimate the effect of the FTA by making a simple comparison using the growth of trade
flows by membership in the FTA. You will be misattributing the impact to the FTA.
But this would not be a problem when you estimate the effect of the FTA using the Augmented
Gravity Model with FTA, because you are already controlling for the growth of the economies (as
well as a host of other variables) – that is, the GDPs of the trading economies are already among
the explanatory variables. What you are getting is simply the additional impact on trade flows
contributed by the FTA, which is really your interest.
Why 3 FTA variables (FTAij, FTAi, FTAj) then?
A new FTA has the potential to change both the trade volume and the trade pattern of a country
involved in the FTA, and it can do so in several ways:
•
Increase trade flows to and from the FTA partners without negatively affecting trade
flows to and from non-FTA countries, and thus increase overall trade flows. This is called
trade creation because the FTA essentially created new trade among the FTA countries.
•
Increase trade flows to and from the FTA partners but with an offsetting negative effect
on trade flows to and from non-FTA countries. The net effect on overall trade may be
positive or negative. The negative effect on trade flows to and from non-FTA countries
is called a trade diversion effect, because effectively the FTA simply diverted already
existing trade (from non-FTA to FTA countries). A special case is when the amount of
218
Mission Report
1 August 2011 - 23 February 2012
trade diversion exactly offsets the amount of trade creation, so that the net effect of
the FTA is zero.
•
Not affect trade flows at all, or even negatively affect the trade flows between FTA
partners.
There are 3 FTA variables in our standard Augmented Gravity Model with FTA because they are
measuring both trade creation and trade diversion effects. In particular, FTAij, which is an
indicator variable for when the two countries in the bilateral trade are FTA countries, is there to
gauge trade creation. On the other hand, FTAi and FTAj, which are indicator variables for when
only one of the countries is part of the FTA, are there to test whether there is trade diversion.
It will be useful to see what the data with the FTA indicators looks like. Table 7.3 gives an
example assuming that the FTA of interest is the ASEAN-China Free Trade Area (ACFTA), which
came into force in 2005. Four countries (Philippines, Canada, Thailand, and China) are shown in
the table with values for some variables we already encountered earlier plus the FTA variables,
for the years 2004 and 2006. The year 2004 was chosen because it was prior to the ACFTA, and
2006 was chosen because it was when the ACFTA was already in effect.
The first shaded column gives the values for the variable FTAij for the years 2004 and 2006. As
could be seen, it has the value zero for all rows for the year 2004 because the FTA did not exist
yet at that time. In the 2006 rows, FTAij takes on the value of 1 whenever the origin and
destination countries are both members of ACFTA (in this case any combination of the
Philippines, China, and Thailand).
The second shaded column gives the values for the variable FTAi. It also takes on the value zero
for all rows for the year 2004, again because the FTA did not exist yet at that time. In the 2006
rows, FTAi takes on the value of 1 whenever the origin country is a member of the ACFTA (any of
Philippines, China, and Thailand) but the destination country is not (Canada). The third shaded
column gives the values for the variable FTAj. It is similar to FTAi but instead takes on the value
of 1 whenever the origin country is not a member of the ACFTA but the destination country is a
member.
Table 7.3. Sample Gravity Model Data with FTA variables
Origin
PHL
PHL
PHL
CAN
CAN
CAN
THA
THA
THA
CHN
CHN
CHN
PHL
PHL
Destination
CAN
CHN
THA
CHN
PHL
THA
CAN
CHN
PHL
CAN
PHL
THA
CAN
CHN
Year
2004
2004
2004
2004
2004
2004
2004
2004
2004
2004
2004
2004
2006
2006
Trade
flows
808
9059
1548
7354
353
500
1712
11542
2012
20433
4696
8183
961
17676
GDP_E
86703
86703
86703
976756
976756
976756
161349
161349
161349
1931710
1931710
1931710
116931
116931
GDP_I
976756
1931710
161349
1931710
86703
161349
976756
1931710
86703
976756
86703
161349
1251463
2668071
Common
language
1
0
0
0
1
0
0
0
0
0
0
0
1
0
FTAij/
Trade
Creation
0
0
0
0
0
0
0
0
0
0
0
0
0
1
FTAi/
Trade
Diversion
0
0
0
0
0
0
0
0
0
0
0
0
1
0
219
FTAj/
Trade
Diversion
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Mission Report
1 August 2011 - 23 February 2012
PHL
THA
2006
CAN
CHN
2006
CAN
PHL
2006
CAN
THA
2006
THA
CAN
2006
THA
CHN
2006
THA
PHL
2006
CHN
CAN
2006
CHN
PHL
2006
CHN
THA
2006
Source: CEPII Gravity Data Set
2143
7667
391
526
2185
17962
2847
33478
6312
13801
116931
1251463
1251463
1251463
206247
206247
206247
2668071
2668071
2668071
206247
2668071
116931
206247
1251463
2668071
116931
1251463
116931
206247
0
0
1
0
0
0
0
0
0
0
1
0
0
0
0
1
1
0
1
1
0
0
0
0
1
0
0
1
0
0
Say now that the data is there and properly constructed, and that the Augmented Gravity Model
with FTA was estimated properly using regression analysis. How to interpret the results?
Let us go back to our original questions first.
•
•
Is trade with the partner countries increased as a result of the FTA? By how much?
Is national welfare increased as a result of the FTA? By how much?
To answer these questions, what we need to look at are the last 3 terms in our estimated
Augmented Gravity Model, more specifically:
О± 12 FTAij + О± 13 FTAi + О± 14 FTA j
The answer to the question as to whether trade with partner countries was increased with the
FTA is answered by the sign of the parameter О± 12 . If the sign of the parameter is positive and
significant, then the answer is Yes; if the sign is positive but insignificant or nonpositive (either
zero or negative) then the answer is No. In fact, a significant negative coefficient would denote
the highly irregular result that the FTA reduced trade among partner countries.
By how much did the FTA increase trade among partner countries? To estimate this, we need to
compute for the value of
eО± в€’ 1 ,
12
e is the well-known mathematical constant otherwise known as Euler’s number
О±
(approximately equal to 2.71828). The value of e в€’ 1 gives us the proportionate growth in
where
12
trade flows among partner countries coinciding with the FTA. [Note: This method is also how to
estimate the effect of any other indicator variable in the Augmented Gravity Model, such as
BORD , ISLAND , and LANDLOCK .]
The question of whether the FTA has increased welfare is a more complex one. The general idea
is that an FTA increases welfare if it increases overall trade – the key term is overall. This means it
is not enough that the FTA increases trade with partner countries, but also that this increase
should not be fully offset by reduced trade with non-partner countries. Or, in the language of our
earlier discussions, the trade creation effect of the FTA should not be exceeded by its trade
diversion effect.
220
0
1
1
1
0
0
0
0
0
0
Mission Report
1 August 2011 - 23 February 2012
Whether the FTA results in at least some trade diversion can be seen by looking at the
coefficients
О± 13 and О± 14 .
If either is negative and significant, that means that there is at least
some trade diversion effect of the FTA. The question of how much trade diversion is being
caused is computed the same way we computed trade creation, that is we compute
e О± в€’ 1 and
13
e О± в€’ 1 , where the former gives the proportionate decline (or increase) in the exports of FTA
14
countries to non-FTA countries and the latter gives the proportionate decline (or increase) in the
imports of FTA countries from non-FTA countries.
Operationally, then, the net effect of the FTA on the amount of trade, and thus on welfare, is the
weighted sum of the trade creation and trade diversion effects, where the weights applied are
simply the corresponding pre-FTA volumes of trade.
221

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