Nontariff Aspects of Contemporary Trade Agreements

By Barbara Dudley

Professor of Political Science

Portland State University

July 5, 200

In 1986, with the opening of the "Uruguay Round," the eighth round of negotiations on the General Agreement on Tariffs and Trade (GATT), a whole new generation of trade agreements was born, and the seeds of a global revolt against "free trade" were planted. GATT had been in existence since the end of World War II when it was first negotiated as one of three legs of the Bretton Woods Accords, along with the World Bank and the International Monetary Fund. GATT was designed to remove the high tariff barriers that were blamed by many for the Great Depression. The first seven rounds of negotiations regarding GATT had been fairly exclusively about tariffs, with the aim of reducing tariffs on specific commodities, and bringing in new member countries. Between 1946 and 1986 the number of participants in GATT had grown from 25 to 90 (the WTO today has 137 members), and tariffs had been reduced on average from 40% to 4%. Tariff reductions were generally accomplished through bilateral agreements within the GATT framework, and were enforceable only by consensus.

The Uruguay Round was a dramatic departure from the earlier GATT negotiations, introducing many extremely far reaching nontariff issues, and dramatically changing the dispute resolution and enforcement mechanism for alleged violations. The Uruguay Round resulted in the formation of the World Trade Organization in 1995, and spawned a number of regional trade agreements which have included many of the same nontariff elements. The Uruguay Round was driven by the United States, the European Union and Japan. The new elements largely reflected the deregulation and privatization agenda of the Reagan and Thatcher Administrations. The new elements also reflected a reaction in the US against a growing consensus among developing countries, manifested in United Nations institutions such as the Center on Transnational Corporations, UN Commission on Trade and Development (UNCTAD), and the UN Commission on Environment and Development (UNCED), which were calling for a "new international economic order" focused on regulatory control of transnational corporations and development of the domestic economies of the formerly colonized world.

Some of the more significant nontariff elements introduced in the Uruguay Round of negotiations were 1) elimination of domestic agricultural subsidies and import controls; 2) inclusion of trade in services; 3) introduction of a host of forbidden nontariff or "technical barriers to trade;" 4) inclusion of rules regarding intellectual property protection, extending patents to seeds and drugs as well as more traditional forms of "intellectual property," and creating a uniform 20 year patent rule for all members; 5) inclusion of investment measures requiring the opening of all enterprises in member countries to investment by foreign capital and competition from foreign corporations; 6) rules regarding government procurement policies; 7) a dispute resolution system which was binding on all members and enforceable through trade sanctions. Some of these proposals are still under negotiation in the WTO, and some are being phased in over a period of years, but all of the elements listed above are either in force or still being negotiated. None have been taken off the table. They are basic elements as well of both NAFTA and the proposed FTAA.

1. Elimination of Agricultural Subsidies, Export Import Controls. Although GATT generally prohibited import and export controls, it created exemptions for agriculture. Under GATT's Article XI, export controls on food or other essential items were permitted in times of "critical shortage," allowing member countries a measure of food security. Import controls were permitted if they were a necessary component of a domestic farm policy, such as a supply management program. The US and many other member countries had such supply management and import control programs in place to protect domestic farm production. The Uruguay Round proposal is to eliminate all such programs, as well as restricting a country's ability to enforce food safety regulations that were found not to be based on "sound science" as determined by an international body (see Paragraph 3 below).

Although the Agreement on Agriculture under GATT/ WTO is still under heated negotiation, it was agreed as part of NAFTA. Under NAFTA, the impact in Mexico, in combination with measures opening domestic farmland to foreign investors, has been to eliminate legal protections and price supports for traditional peasant cooperatives (ejidos), driving up domestic food prices, and driving many small farmers off the land. This has resulted in a dramatic increase in Mexican acreage controlled by multinational agribusiness corporations, which then export food back into the United States, undercutting US farmers' prices because of the considerably lower cost of doing business in Mexico. Testimony on the impacts of NAFTA's agricultural policies on Oregon farmers was given before the Oregon House Agricultural and Forestry Committee on May 15, 2001. Congress needs to hear these voices as well before they expand NAFTA to the entire hemisphere.

2) Trade in Services. GATT did not cover services. The Uruguay Round, and NAFTA, and the proposed FTAA include rules regarding the service sector. These rules are not about tariffs but about investment. They require that a member country open its service sector to ownership by foreign investors, merger or takeover by foreign corporations. Many of the service sector industries have historically been considered to be in the public domain, publicly owned or at least heavily regulated, even in the United States. For example, postal service, water service, telecommunications, electrical utilities, education, transportation, broadcasting and banking have all been subsidized or operated by government entities and heavily regulated throughout our history, precisely because they were viewed as serving the public good or the common welfare. Under the proposed WTO rules, there can be no discrimination between public or private, domestic or foreign providers of these services. This is a backhanded way to privatize currently public services, and needs to be discussed and debated in a democratic and open forum, not behind closed doors with no public debate permitted. The current suit brought by UPS under NAFTA challenging Canada's preference for a publicly owned postal service is but the tip of the iceberg.

3) Nontariff or "technical barriers to trade." The Uruguay Round introduced the notion of a nontariff barrier to trade, which is any law or policy which is not a tariff but which affects trade. It can include, among other things, food safety regulations, environmental regulations, labor regulations, or consumer safety regulations. GATT Article XX contains exceptions that countries may invoke to defend a challenge to a law or policy that otherwise violates GATT rules. For example, Article XX(b) refers to laws that are "necessary to protect human, animal or plant life and health," and Article XX(g) refers to laws "related to the conservation of exhaustible natural resources." But Article XX(b) has been interpreted by the WTO to require that the laws in question be the least trade restrictive method to achieve the stated environmental or food safety goal, a standard that has yet to be met after six years of WTO dispute resolution involving dozens of cases finding various nations' laws or regulations to be unlawful barriers to trade. (See GAO study on "WTO, Issues in Dispute Resolution," prepared for the House Ways and Means Committee in August 2000.)

The WTO also permits a challenge to environmental or food safety regulations based on the "Sanitary and Phytosanitary Agreement" (SPS) which was another of the Uruguay Round additions. The SPS sets strict limits on WTO members' abilities to enact laws pertaining to food safety, contaminants, additives, plant pests, and animal diseases. Article 2.2 of the WTO SPS Agreement declares WTO-illegal measures that are based on "insufficient" scientific evidence. The standards that set the ceiling for all countries' food safety rules are determined by the Codex Alimentarius, an international food standard body which pre-existed the WTO but obviously gained new power and significance after the SPS was agreed. The majority of the 28 member US delegation to Codex Alimentarius are from agrochemical or food industries. While a case can be made for "harmonization of standards," the SPS does not create uniformity but harmonizes downward rather that upward, setting a ceiling rather than a floor. There is no food safety standard too low to satisfy the WTO, only those that are too high.

If anything, NAFTA has been more threatening to environmental and food safety protections than the WTO, despite the environmental "side agreement" (North American Agreement on Environmental Cooperation, NAAEC) tacked on to NAFTA to placate environmental critics. NAAEC created the Commission for Environmental Cooperation (CEC) which could investigate complaints that a member country was not enforcing its environmental laws; it does not cover environmental problems caused by the lack of regulations. The CEC is notoriously slow and to date has not upheld any challenge in a timely enough fashion to prevent the alleged damage from occurring. The labor side agreement, which requires each country to enforce its own existing labor laws, has produced similarly meaningless results. Not one submission to the labor commission has gone beyond the ministerial level or resulted in any changed behavior. (See Report prepared in 2000 for the Department of Labor on the NAFTA Labor Side Agreement; and Human Rights Watch, "Trading Away Rights: The Unfulfilled Promist of NAFTA's Labor Side Agreement")

4) Rules regarding intellectual property protection. The Uruguay Round resulted in an agreement on "trade related intellectual property" (TRIPs), creating a uniform 20 year patent regime for all members, with a ten year phase-in period for developing countries. NAFTA and the FTAA include similar provisions. The most controversial aspect of this section of the agreements is that it extends patents to pharmaceuticals, seeds and gene sequences, none of which have previously enjoyed patent protection in most countries, as these are generally considered classic public goods. Pharmaceutical and biotech corporations argued strongly for the protections, extending even US patent protection from 17 to 20 years through the vehicle of the WTO.

Ironically, intellectual property rights are a classic form of monopoly and protectionism, the very obverse of "free trade." While an international regime on intellectual property rights in this age of global trade is probably advisable, it deserves serious Congressional and public consideration as to its scope, limitations, conditions and applicable sanctions. Given the recent uproar regarding the monopoly control by pharmaceutical companies of access to AIDS medication, especially in poorer countries, surely the subject should not be dealt with as part of a many thousand paged document focused on unrelated issues where it will get no debate and little scrutiny.

5) Investment measures. The Uruguay Round introduced measures requiring the opening of all enterprises in member countries to investment by foreign capital. Although these measures are not yet operational in the WTO, they were replicated in NAFTA as they probably will be in the FTAA. This is the measure which comes under the greatest criticism from UNCTAD and from developing countries in general. It essentially prevents them from building a domestic economy based on the Japanese or "Asian Tiger" model of governmental intervention in industrial policy and planning, and state control over the financial system, or for that matter on the high tariff protectionist model which allowed the early US economy to become strong. The removal of barriers to foreign capital and foreign corporations forces nascent industries in poorer countries to compete with vastly more productive and well capitalized foreign manufacturers, thus consigning developing countries to a perpetual state of economic dependency. (See UNCTAD, Trade and Development Report, 1998; Least Developed Countries Report, 1998).

6) Rules regarding government procurement policies. The WTO Agreement on Government Procurement (AGP) prevents any member country from using its government's purchasing power to accomplish any social or economic ends. All companies, foreign or domestic, public or private, must be equally considered in awarding government contracts or making purchases. It is impermissible to make distinctions among products based on how or where they are produced. This is the provision that Japan and the EU used to challenge a Massachusetts law prohibiting state purchases from companies doing business in Burma because of Burma's deplorable human rights record. (This case was resolved, however, not by the WTO but in a US court pursuant to a suit brought by a group of 550 US corporations.)

Other types of procurement policies which would be prohibited under the AGP and similar provisions in NAFTA include: purchasing of recycled materials (48 out of the 50 states have laws directing state agencies to purchase recycled materials); purchasing from local firms to strengthen regional economies; preference for purchases from minority-owned or women-owned businesses; promotion of fair labor standards through bans on purchases of sweatshop products; living wage ordinances; preference for firms that adopt innovative technologies, such as solar power, non-toxic cleaning compounds, etc.

The AGP was strenuously opposed by developing countries during the WTO negotiations and as a result is one of the few "bottom up" agreements, which applies only to those countries which specifically sign on. To date the US and 26 other mostly industrialized countries have signed the agreement. The US is attempting to push in the next round of WTO negotiations, scheduled for November, 2001, a provision that requires disclosure of all government procurement policies and contracts of all WTO members as a first step toward pressuring developing countries to join the AGP. The global government procurement market is worth trillions of dollars annually.

7. Dispute Resolution. The new generation of trade agreements following the Uruguay Round introduced an entirely new dispute resolution concept and mechanism. The WTO and NAFTA contain the strongest enforcement procedures of any international agreement now in force. The earlier GATT contained the typical sovereignty safeguards found in most international agreements; consensus was required to bind any country to an obligation, and thus enforcement of a ruling could be blocked by the losing party. The WTO has the opposite mechanism; only consensus can block a WTO ruling, and once a WTO tribunal has declared a country's law to be WTO-illegal, the country must either change its law or face serious trade sanctions. A review of the disputes resolved in the WTO's first five years (GAO Study, August 2000), demonstrates vividly that the severity of the trade sanctions imposed means that only the richest countries have been able to defy WTO rulings. The EU and the United States have challenged each other and have lost some very high profile cases (beef hormones; export subsidies). The losers have resisted changing their laws only by being willing to absorb trade sanctions in the billions of dollars. This is not an option available to a developing country, and thus they have routinely rescinded their laws or regulations when faced with a WTO challenge.

NAFTA and the proposed FTAA contain an additional provision which is not found in the WTO which permits a foreign corporation to sue a government directly for alleged violations of any of the terms of the Agreement. This circumvents the moderating influence of diplomatic considerations which comes into play in most WTO disputes. To date, the most significant challenges to national and state environmental laws and regulations under NAFTA have been brought by corporations seeking to eliminate regulatory controls rather than by national governments.

First published in Guild Practitioner, Volume 58, Number 4, Fall 2001. Barbara Dudley is an adjunct professor of Political Science at Portland State University, a former president of the National Lawyers Guild and a member of the Advisory Panel of Guild Practitioner.