BCom International Trade Agreements Notes Study Material

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BCom International Trade Agreements Notes Study Material

INTRODUCTION

The United Nations Conference on Trade and Development (UNCTAD) pressurized countries to give special preferences in tariff duties to developing countries so that they may be able to compete better and export more to developed countries. After great persuasion developed countries agreed to give tariff preference to selected countries for specific goods and all countries for specific goods. When the tariff concession has been provided to selected countries it is called Generalized Special Preference (GSP). When such tariff concessions are provided to all countries (with some exceptions) if the importer is so close it is called Globalised Special Tariff Preference (GSTP).

THE GENERALIZED SYSTEM OF PREFERENCES (GSP)

GSP is an instrument by which the developed countries allow imports originating from developing and least developed countries on a duty-free or preferential duty basis. Presently, 29 preference-giving countries are extending GSP concession through their respective Schemes. These are Australia, Canada, Check Republic, European Union, Japan, New Zealand, Norway, Bulgaria, Hungary, Poland, Russian Federation, Slovakia, Switzerland, the USA, etc. (BCom International Trade Agreements Notes Study Material)

It is a U.S. trade program designed to promote economic growth in the developing world by providing preferential duty-free entry for up to 4.800 products from 129 designated beneficiary countries and territories. GSP was instituted on January 1, 1976, by the Trade Act of 1974. President Obama signed legislation to reauthorize the GSP program through July 31, 2013. GSP trade benefits went into effect 15 days after the President signed the bill (November 5, 2011) and will apply retroactively from January 1, 2011.

As in past circumstances when GSP was reauthorized with retroactive effect, importers of GSP-eligible products may seek reimbursement for tariffs paid during the lapse in GSP coverage. Importers who filed their entries electronically, used the appropriate special program indicator for GSP (e.g. “A” or “A+”), and paid duty on GSP-eligible goods, will receive an automatic refund. For entries made without using the special program indicator for GSP, you will want to contact the port where the goods entered and request your GSP status from U.S. Customs and Border Protection (CBP). (BCom International Trade Agreements Notes Study Material)

OBJECTIVES OF GSP

The objectives of GSP had been noted as below:

1. To increase export earnings of the less developed countries.
2. To promote their industrialization.
3. To assist developing countries in increasing their export earnings.
4. To accelerate their rate of economic growth and
5. To establish of a generalized, non-reciprocal, non-discriminatory system of preferences in favor of less developed countries.

EU GSP SYSTEM

It is now forty years since the EU introduced its scheme of preferential tariffs for developing countries under the Generalized System of Preferences (GSP). The GSP was recommended at the Second Session of the United Nations Conference on Trade and Development (UNCTAD) held in 1968 as a generalized, non-reciprocal, and non-discriminatory system of preferences in favor of developing countries to increase their export earnings, promote their industrialization and accelerate their rates of economic growth.

One feature of the EU GSP scheme from the outset has been that it has been renewed for three years at a time. While this periodicity is better than a yearly review, it must be noted that even this three years life period does not invest the trade regime with the desired level of stability and predictability. A longer period is needed if the improved access given under the GSP is to result in increased investment. The good news is that in its latest report (EU 2011a), the Commission has recommended that the extension of the scheme beyond 2013 should be on an open-ended basis. (BCom International Trade Agreements Notes Study Material)

The current EU GSP scheme is embodied in the EU Regulation of 2008 (EU 2008) which is valid for the period 2009-11. The Proposal for a Regulation of the European Parliament and of the Council (EU 2011 a) envisages that new rules will apply from January 1, 2014. In the meantime, the existing provisions have been rolled over until December 2013 (EU 2011b).

A review of the implementation of the European Union scheme of preferential tariffs for developing countries under the Generalized System of Preferences during the past forty years shows that the scheme has made at brute a modest contribution towards increasing the export earnings of India and other beneficiary countries covered by the standard GSP. The benefits for these countries have been constrained by the shallow cuts in tariffs for important products and the practice of product/sector graduation.

The policy of differentiation among beneficiaries, which is a central pillar of the EU scheme, has resulted in deeper and wider preferences for GSP + countries and LDCs and limited the benefits for other developing countries.

THE GLOBAL SYSTEM OF TRADE PREFERENCES (GSTP)

GSTP was signed on 13th April 1988 at Belgrade among developed countries. The GSTP came into being after a long process of negotiations during the Ministerial Meeting of the Group of 77, notably at Mexico City in 1910 Arusha in 1979, and Caracas in 1981. The Ministers of Foreign Affairs of the Group of 77 in New York set up the GSTP Negotiating Committee in 1982. The New Delhi Ministerial meetings, held in July 1985, gave further impetus to the GSTP negotiation process. (BCom International Trade Agreements Notes Study Material)

The Brasilia Ministerial Meeting held in May 1986 Launched the First Round of GSTP Negotiations. At the conclusion of the First Round in April 1988 in Belgrade, the GSTP Agreement was signed on 13th April 1988. The Agreement entered into force on 19th April 1989. Forty-four countries have ratified the Agreement and have become participants. The GSTP establishes a framework for the exchange of trade concessions among the members of the Group of 77. It lays down rules, principles, and procedures for the conduct of negotiations and for the implementation of the results of the negotiations. (BCom International Trade Agreements Notes Study Material)

The coverage of the GSTP extends to arrangements in the area of tariffs, para-tariff, non-tariff measures, and direct trade measures including medium and long-term contracts, and sectoral agreements. One of the basic principles of the Agreement is that it is to be negotiated step by step improved upon and extended in successive stages. (BCom International Trade Agreements Notes Study Material)

OBJECTIVES OF GSTP

The basic objectives of both GSP and GSTP are the development of trade the developing countries through tariff and non-tariff concessions. Under GSP, the concession is given by a developed country to a developing country whereas, under GSTP, the concessions are given by one developing country to another developing country. (BCom International Trade Agreements Notes Study Material)

The declared objectives of the GSTP are:

1. To promote and sustain mutual trade between developing countries.
2. To develop economic co-operation among developing countries (members of Group of 77).
3. To make special efforts for the development of least developed countries.
4. To enhance production and employment opportunities in developing countries by establishing a New Economic Order.

PRINCIPLES OF GSTP

The GSTP functions according to the following principles:

1. For becoming a participant in GSTP, the developing country has to be a member of G-77.
2. The GSTP is based on the principle of mutual benefit to all the participants, taking into account their respective levels of economic and industrial development. (BCom International Trade Agreements Notes Study Material)
3. The GSTP is not to replace G-77 but to supplement and reinforce it.
4. The least developed countries would not be required to make concessions on a reciprocal basis.
5. GSTP would include all products i.e. raw materials, semi-finished, and manufactured goods.
6. Preferential measures should be given to least developing countries regarding the elimination of tariff and non-tariff barriers and long-term contracts for sustainable growth of exports of these countries. (BCom International Trade Agreements Notes Study Material)

BENEFITS OF GSP AGREEMENTS

A particular item is qualified for GSP benefits only if the following conditions are satisfied:

1. The product must be included in the GSP list;
2. The country exporting the item should be declared under the GSP as a beneficiary country;
3. The value added requirements/process criteria must be complied with;
4. The product must be imported into the GSP donor country from a GSP beneficiary country;
5. The exporter must send to his buyer/importer a certificate of origin in form ‘A’ duly fled in and duly signed by him, and then certified by a designated Government authority;
6. If the import of the GSP item in question is subject to a quota/ceiling, the quota/ceiling of the import from the GSP beneficiary countries has so far not been exhausted in EEC countries. However, in the USA, US imports of articles from India must not have exceeded the US $ 33.442 million and must not have accounted for 50 percent of the total US imports of the article in the previous year (known as the competitive need clause). (BCom International Trade Agreements Notes Study Material)

The main benefits of GSP are as follows:

1. Increased Competitive Power: GSP has increased competitive power in developing countries for the product and facilitates sustainable economic growth through the elimination of tariff barriers. It helps to make enable developing nations to face the challenges of the international market. (BCom International Trade Agreements Notes Study Material)
2. Large Market Opportunity: It has helped in enlarging the size of the market for developing nations by global acceptance of free tariff regulations. The list contains 2,724 categories of products which covers not only dutiable manufactured and semi-manufactured products but also selected agricultural, fishing, and primary industrial products not otherwise duty-free.
3. Better Price Opportunity: GSP facilitates better price opportunities in the international market through reduced or zero tariffs to the exporters. Also, they secure access for least developed countries by better export facilities at the least cost.

LIMITATIONS OF GSP AGREEMENTS

1. Restricted to a limited number of less developed and least developed countries.
2. The schemes have been made available largely to a limited number of products by developed countries.
3. There is no long-term guarantee in case of GSP concession.
4. No country is allowed to export more than 50 percent of the total quota even when other beneficiary countries are not able to fulfill the rest of the quota.
5. The list of items is very limited and restrictive. There are many items that exporting developing countries could like to be included but they have not been included in the scheme. (BCom International Trade Agreements Notes Study Material)
6. Its extension of GSP has quite limited scope. The product producers in LCDs have to face a strong competitive position in the world market.
7. The benefits of GSP have been consistently concentrated among a few of the more advanced developing countries.

COUNTERTRADE

Meaning

Counter Trade is a system of international trading in which goods are exchanged for other goods, rather than for hard currency. It is a modernized form of Barter trade. In other words, it is a bilateral agreement between two countries, that involves the direct exchange of goods and services having an equivalent value, but with no cash settlement. No foreign exchange is required in such types of agreements and hence the countries don’t have to face the balance of payments problem. (BCom International Trade Agreements Notes Study Material)

It helps governments to reduce imbalances in trade between them and other countries. It involves the direct or indirect exchange of goods for other goods instead of currency. Counter trade is often used when a foreign currency is in short supply or when a country applies foreign exchange controls, which are limits imposed on the availability of foreign currencies to importers for the purchase of foreign products. Counter trade is often used by developing countries to control trade and as a development technique.

The necessity of Counter Trade

Countertrade also occurs when countries lack sufficient hard currency, or when other types of market trade are impossible. For example, in 2000, India and Iraq agreed on an “oil for wheat and rice” barter deal, subject to United Nations approval under Article 50 of the UN Persian Gulf War sanctions, that would facilitate 3,00,000 barrels of oil delivered daily to India at a price of $ 6.85 a barrel while Iraq oil sales into Asia were valued at about $ 22 a barrel. In 2001, India agreed to swap 1.5 million tones of Iraqi crude under the oil-for-food program.

Counter Trade is found very beneficial because of the following reasons:

(1) Shortage of hard currency

(2) Lack of credit

(3) BOP problems

(4) Low commodity prices-low export income

(5) Surplus capacity

(6) Arms trade

(7) Lack of a well-developed private sector

(8) Lack of international trading experience

(9) LDCs-low share of manufactured goods.

Types of Counter Trade

1. Barter: Barter is the direct exchange of goods or services having equivalent values without a cash transaction between two parties in a transaction. The principal exports are paid for with goods or services supplied from the importing market. A single contract covers both flows, in its simplest form involves no cash. In practice, the supply of the principal exports is often held up until sufficient revenues have been earned from the sale of bartered goods. (BCom International Trade Agreements Notes Study Material)
2. Counter Purchase: It involves two simultaneous separate transactions between two parties with or without cash. Under counter purchase sale of goods and services to one company in another country by a company that promises to make a future purchase of a specific product from the same company in that country. (BCom International Trade Agreements Notes Study Material)
3. Buyback or Compensation Trade: Compensation trade is a form of barter in which one of the flows is partly in goods and partly in hard currency. It involves repayment in the form of goods derived directly from or produced by, the technology, plant, or equipment provided by the seller. Buyback transactions occur when a firm builds a plant in a country or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant’s output as partial payment for the contract.
4. Offsets: It is an arrangement whereby the seller is required to assist in or arrange for the marketing of products produced by the buying country or to allow some portion of the exported product to be assembled or manufactured by producers located in the buying country. In other words, a company will offset a hard-currency purchase of an unspecified product from that nation in the future. An agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation may be known as Offsets. This practice is often found in the aerospace and defense industries. (BCom International Trade Agreements Notes Study Material)
5. Switch-trading: Switch-trading is a trade practice in which one company calls to another its obligation to make a purchase in a given country. It refers to a switch in the country of destination goods.

Benefits of Counter Trade

A significant deal of international commerce, possibly as much as 25%, involves the barter of products for other products rather than for hard currency. Countertrade may range from a simple barter between two countries to a complex web of exchanges that end up meeting the needs of all countries involved. (BCom International Trade Agreements Notes Study Material)

The volume of countertrade is growing. In 1972, it was estimated that countertrade was used by businesses and governments in 15 countries; in 1979, 27 countries; by the start of the 1990s, around 100 countries. A large part of countertrade has involved sales of military equipment (weaponry, vehicles, and installations). More than 80 countries at the present time regularly use or require countertrade exchanges. Officials of the General Agreement on Tariffs and Trade (GATT) organization claimed that countertrade accounts for around 5% of world trade.

The British Department of Trade and Industry has suggested 15%, while some scholars believe it to be closer to 30%, with east-west trade having been as high as 50% in some trading sectors of Eastern European and Third World Countries for some years. A consensus of expert opinions (Okaroafo, 1989) has put the percentage of the value of world trade volumes linked to counter trade transactions at between 20% to 25%.

Some important benefits of countertrade are:

1. Allows entry into difficult markets
2. Increases company sales
3. Overcomes currency controls & exchange problems
4. Increases sales volume
5. Overcomes credit difficulties
6. Allows fuller use of capacity
7. Allows disposal of declining products
8. Provides sources of attractive inputs
9. Gain a competitive edge over the competition

Disadvantages of Counter Trade

Countertrade was beneficial for all developing nations but it has been criticized by some critics in the following ways:

1. No “in-house” use of goods offered by customers
2. Time-consuming and complex negotiations
3. Uncertainty
4. Increase costs
5. Difficult to resell goods by offsets
6. Brokerage costs
7. Getting businesses in which firm may have no knowledge
8. Risky if commodities are involved.

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