INTERNATIONAL TRADE LAW

Unit-I: Introduction of International Trade Law

a. Economic Theories:-
i. Mercantilism
ii. Adam Smith‟s Absolute Cost Advantage Theory
iii. David Ricardo‟s Comparative Advantage Theory
iv. Hecksher: Ohlin‟s Factor Endowment Theory
v. Raymond Vernon‟s Product Life Cycle Theory
vi. National Competitive Theory (Porter‟s Diamond)
b. Lex Mercatoria and Codification of International Trade Law
c. Sources and Principles of International Trade Law

Unit-II: Development of International Trade: GATT, 1947 - WTO 1994

a. Historical Background of GATT 1947
b. Uruguay Round and Marrakesh Agreement
c. GATT 1994
d. Dispute Settlement Understanding

Unit-III: WTO Agreements

a. Agreement on Agriculture
b. Agreement on Subsidies and Countervailing Measures
c. Agreement on Anti-Dumping d. General Agreement on Trade in Services

Unit-IV: Contemporary Issues: International Trade and Regionalism

a. Trade and SAPTA and SAFTA
b. Trade and Environment
c. Doha Development Agenda
UNIT- 1

International trade : an overview

In layman’s language, international trade is the exchange of goods and services between different
countries. The term “exchange” includes the import as well as export of goods and services. As
quoted by Wasserman and Haltman, international trade can be connoted as transactions among the
inhabitants of different countries. Edgeworth, an Irish-based statistician, defined the term as the
phenomenon of trade between countries. The term ‘international trade’ is an example of economic
linkage and can be referred to as an economic transaction between countries.

International trade stands as a crucial determinant of openness among countries and has been a
remarkable factor in economic growth. In recent years, overseas trade has become a strategy of
paramount importance for the growth of the national economy. However, the significance of
international trade is not just limited to this, it also helps in encouraging social and international
relations among countries. Increased foreign trade has augmented the process of globalisation.

In the early years, political economists like Adam Smith and Ricardo were among the few people
who acknowledged the significance of international trade, which has been practically affirmed by
visible global growth and economic development. Global trade gives consumers the opportunity to
experience and enjoy a variety of goods and services that, for whatever reason, are not available in
their country or which might be a bit costly in their country compared to others. Foreign trade also,
to a great extent, curbs the issue of irregular availability and distribution of resources all over the
world by facilitating a smooth flow of raw materials as well as finished products. The optimum use
of abundant raw materials is one more benefit expedited by trading globally.

A. Economic Theories:

Mercantilism

The Mercantilism theory is the first classical country-based theory, which was propounded around
the 17-18th century. This theory has been one of the most talked about and debated theories. The
country focused on the motto that, on a priority basis, it must look after its own welfare and
therefore, expand exports and discourage imports. It stated that an attempt should be made to ensure
that only the necessary raw materials are imported and nothing else. The theory also propounded the
view that the first thing a nation must focus on is the accumulation of wealth in the form of gold and
silver, thus, strengthening the treasure of the nation.

To put it simply, it can be stated that the classical economists behind the theory of Mercantilism
firmly believed that a country’s wealth and financial standing are largely demonstrated by the
amount of gold and silver it holds. Hence, economists believe that it is best to increase the reserve of
precious metals to maintain a wealthy status. For this theory to work, the aim to be fulfilled was that
a country must produce goods in such a large quantity that it exports more and should be less
dependent on buying goods and other materials from others, thereby strongly encouraging exports
and strictly discouraging imports.

A large number of countries in the past benefited from strictly following the theory of Mercantilism.
History is evident that by implementing this theory, many nations benefited by strictly following the
theory of Mercantilism. Various studies done by economists prove why this theory flourished in the
early period. In the early period, i.e., around 1500, new nations and states were emerging and the
rulers wanted to strengthen their country in all possible ways, be it the army, wealth, or other
developments. The rulers witnessed that by increasing trade they were able to accumulate more
wealth and, thus, certain countries became very strong because of the massive amount of wealth they
stored. The rulers were focused on increasing the number of exports as much as possible and
discouraging imports. The British colony is the perfect example of this theory. They utilised the raw
materials of other countries by ruling over them and then exporting those goods and other resources
at a higher price, accumulating a large amount of wealth for their own country.

This theory is often called the protectionist theory because it mainly works on the strategy of
protecting oneself. Even in the 21st century, we find certain countries that still believe in this method
and allow limited imports while expanding their exports. Japan, Taiwan, China, etc. are the best
examples of such countries. Almost every country at some point in time follows this approach of
protectionist policies, and this is definitely important. But supporting such protectionist policies
comes at a cost, like high taxes and other such disadvantages.

Adam Smith‟s Absolute Cost Advantage Theory

Adam Smith's Absolute Cost Advantage Theory, a foundational concept in international trade theory,
posits that countries should specialize in producing goods in which they have an absolute advantage
and engage in trade to benefit from the production efficiencies of others. This theory is based on the
principle that countries differ in their ability to produce goods efficiently due to variations in factors
such as labor productivity, natural resources, and technological advancements.

According to Smith, a country has an absolute cost advantage in producing a good if it can produce
that good more efficiently, i.e., with fewer resources, than other countries. This means that a nation
can produce a particular good at a lower absolute cost (using fewer resources) than another nation.
By specializing in the production of goods in which they have an absolute cost advantage and trading
with other nations, countries can increase overall economic efficiency and maximize their collective
welfare.

One of the key implications of Adam Smith's Absolute Cost Advantage Theory is that international
trade allows countries to exploit their differences in production efficiencies, leading to mutual gains
from trade. By specializing in the production of goods in which they have the lowest absolute costs,
countries can allocate their resources more efficiently and achieve higher levels of consumption than
would be possible in isolation.

A relevant case illustrating Adam Smith's Absolute Cost Advantage Theory is the example of
Portugal and England in the production of wine and cloth, respectively. In Smith's example, Portugal
was able to produce both wine and cloth more efficiently than England due to its favorable climate
for winemaking. However, Portugal had an absolute advantage in wine production, while England
had an absolute advantage in cloth production. Despite Portugal's ability to produce both goods more
efficiently, it made sense for Portugal to specialize in wine production and trade with England for
cloth, and vice versa. This specialization allowed both countries to benefit from each other's
production efficiencies, leading to increased overall output and welfare.

In contemporary international trade, Adam Smith's Absolute Cost Advantage Theory continues to
provide insights into the benefits of specialization and trade. Countries around the world specialize in
producing goods and services in which they have comparative or absolute advantages, leading to the
global exchange of goods and services and the creation of wealth and prosperity. This theory
underscores the importance of international trade as a mechanism for promoting economic growth,
efficiency, and prosperity on a global scale.

David Ricardo’s Comparative Advantage Theory

This theory was propounded in the 19th Century by David Ricardo. As per this theory, a country
must export that kind of goods in which there is a beneficial and relative cost advantage as compared
to the absolute cost advantage. Even though a country has the resources to produce a certain product,
it can still import the same from other countries if it feels that there is a relative advantage in
bringing in such products.

The modern Theory is also referred to as the Heckscher-Ohlin theory or the factor endowment
theory. It was developed by two Swedish economists, Eli Heckscher and his student Bertil Ohlin at
the Stockholm School of Economics. This theory states that a country’s exports depend on its
resource endowments. A country can either have a capital-abundant economy or a labour-intensive
economy. In case it is a capital-abundant economy, it will produce and export capital goods with
relative ease, whereas, in case of about intensive economy, it will produce and export
labour-intensive goods.

Modern theory is based on the concept of resource or factor endowments. Simply put, factor
endowment means the number of resources that a country has for manufacturing and trading. These
resources could include land, labour, and money, among others. The number of factor endowments is
directly proportional to the number of exports of a country.

Illustration: Consider the factor endowment as ‘iron ores’. Country A is abundant with these, while
country B does not have any iron ores. Hence, country A will specialise in and export iron due to its
endowment of iron ore land.

It further states that comparative advantage is the reason why a country chooses to produce and
export goods. Comparative advantage essentially means taking advantage of the factors present in
abundance in your country. Since these factors are present in abundance, they will be available at a
lower cost due to less demand, while products with more demand but fewer factors in the country
would lead to high prices. The latter is when the country chooses to import the goods.

Under this theory, the absolute amount of capital or labour is not important, but the amount available
per person is what counts. For example, India might have a bigger capital factor than, say, a small
country like Austria. But if counted in capital per person terms, Austria might be higher than India,
and this is what is taken into consideration under this theory.
Hecksher: Ohlin‟s Factor Endowment Theory
Heckscher-Ohlin's Factor Endowment Theory, developed by economists Eli Heckscher and Bertil
Ohlin in the early 20th century, offers insights into the patterns and determinants of international
trade. This theory builds upon the principles of comparative advantage and absolute advantage but
focuses on differences in factor endowments, specifically capital and labor, as the primary drivers of
trade.

According to the Heckscher-Ohlin Theory, countries will export goods that intensively use their
abundant factors of production and import goods that require factors in which they are relatively
scarce. In other words, a country will specialize in producing goods that make the most efficient use
of its abundant resources, while trading for goods that require resources it lacks in abundance. This
specialization based on factor endowments leads to mutually beneficial trade between countries with
differing resource distributions.

The theory identifies two primary factors of production: capital and labor. Capital refers to physical
assets such as machinery, equipment, and infrastructure, while labor encompasses human resources,
skills, and expertise. Countries are classified based on their relative abundance of these factors. For
example, capital-abundant countries have a relatively high ratio of capital to labor, while
labor-abundant countries have more abundant labor relative to capital.

The Heckscher-Ohlin Theory predicts that capital-abundant countries will export capital-intensive
goods and import labor-intensive goods, while labor-abundant countries will export labor-intensive
goods and import capital-intensive goods. This is because capital-abundant countries can produce
capital-intensive goods more efficiently due to their surplus of capital, while labor-abundant
countries have a comparative advantage in labor-intensive production.

An illustrative example of the Heckscher-Ohlin Theory is the trade relationship between the United
States and China. The United States, being a capital-abundant country, specializes in the production
of capital-intensive goods such as aircraft, machinery, and technology. Conversely, China, with its
abundance of labor, specializes in labor-intensive manufacturing such as textiles, electronics, and
toys. This specialization allows both countries to maximize their production efficiency and benefit
from trade.
However, the Heckscher-Ohlin Theory has faced criticisms and challenges. Critics argue that the
theory oversimplifies the complexities of real-world trade patterns and ignores factors such as
technology, economies of scale, and non-economic barriers to trade. Additionally, the theory assumes
perfect factor mobility within countries, which may not always hold true in practice.

Despite these limitations, the Heckscher-Ohlin Factor Endowment Theory remains a foundational
concept in international trade theory. It provides valuable insights into the role of factor endowments
in shaping trade patterns and offers a framework for understanding the benefits of specialization and
comparative advantage in the global economy.

Raymond Vernon’s Product Life Cycle Theory

Raymond Vernon's Product Life Cycle Theory, proposed in the 1960s, offers a framework for
understanding the international trade patterns of manufactured goods. This theory suggests that the
life cycle of a product, from its introduction to its decline, influences the flow of trade and
investment between countries.

The Product Life Cycle Theory posits that products go through distinct stages of development:
introduction, growth, maturity, and decline. During the introductory stage, a new product is
developed and introduced into the market. Initially, production is concentrated in the country where
the innovation originates. As the product gains acceptance and demand grows, production expands,
leading to increased exports from the innovating country.

During the growth stage, production ramps up to meet rising demand, and the product becomes more
standardized. At this stage, other countries begin to recognize the market potential of the product and
may start producing it domestically to meet local demand. However, the innovating country typically
maintains a comparative advantage in production due to its early entry and expertise in the
technology or design.

As the product reaches maturity, competition intensifies, and production becomes more widespread
globally. Other countries with competitive advantages, such as lower labor costs or proximity to key
markets, may begin to dominate production and exports. The innovating country's share of global
production and exports may decline as production shifts to other countries offering cost advantages.
Finally, in the decline stage, demand for the product decreases as newer technologies or substitutes
emerge. Production may shift to countries with lower costs or more advanced technologies, leading
to a decline in exports from the early innovating country.

One classic example often cited to illustrate the Product Life Cycle Theory is the case of the
television industry. In the mid-20th century, the United States was a leader in television technology,
and American companies dominated global production and exports of televisions during the
introduction and growth stages. As the industry matured, production expanded to other countries
such as Japan, South Korea, and China, where lower labor costs and growing expertise in electronics
manufacturing allowed for competitive production. Eventually, as demand for traditional televisions
declined with the advent of newer technologies like flat-screen TVs and streaming services,
production shifted to countries offering cost advantages or specializing in emerging technologies.

Critics of the Product Life Cycle Theory argue that it oversimplifies the complexities of international
trade and technological innovation. They point out that factors such as government policies, industry
dynamics, and consumer preferences also play significant roles in shaping trade patterns. Despite
these criticisms, Vernon's theory provides valuable insights into the dynamics of international trade
and the evolution of industries over time. It underscores the importance of innovation, comparative
advantage, and adaptation in the global marketplace.

National Competitive Theory (Porter‟s Diamond)

Porter's Diamond, also known as National Competitive Advantage Theory, is a framework proposed
by Michael Porter in the 1990s to explain why certain countries or regions become more competitive
in specific industries. This theory suggests that a nation's competitiveness in a particular industry is
influenced by four interrelated factors, which together form a "diamond" of competitive advantage.

1. Factor Conditions: Factor conditions refer to the nation's endowment of factors of production,
including natural resources, human resources, capital, infrastructure, and technology. Porter argues
that the quality, quantity, and efficiency of these factors influence a country's ability to compete in
specific industries. While factors like natural resources are inherited, others, such as education and
infrastructure, can be improved through investment and policy initiatives.

2. Demand Conditions: Demand conditions refer to the nature and size of the domestic market for a
particular product or service. Porter suggests that a strong domestic demand can stimulate innovation
and competitiveness by providing firms with a testing ground for new products, feedback for
improvement, and economies of scale. Furthermore, sophisticated and demanding domestic
consumers can drive companies to produce high-quality goods and services that are competitive
internationally.

3. Related and Supporting Industries: Related and supporting industries encompass the presence and
strength of supplier industries, complementors, and other supporting sectors within the country.
Porter argues that the presence of competitive suppliers, research institutions, and other supporting
industries fosters innovation, efficiency, and specialization within a particular industry. Close
collaboration and competition among related industries can create clusters of excellence, driving
competitiveness and innovation.

4. Firm Strategy, Structure, and Rivalry: Firm strategy, structure, and rivalry refer to the competitive
environment within the country, including the intensity of competition, the presence of domestic
rivals, and the strategies and structures of domestic firms. Porter contends that strong domestic
competition can stimulate firms to innovate, improve efficiency, and adopt best practices.
Furthermore, the presence of competitive rivals can drive firms to seek competitive advantages
through differentiation, cost leadership, or niche strategies.

Porter's Diamond framework emphasizes the dynamic interaction among these four determinants of
competitive advantage. According to Porter, the conditions within a country or region influence the
strategies and competitiveness of firms operating within that context. Moreover, the framework
suggests that government policies, institutional factors, and chance events can shape the conditions
of the diamond and influence a country's competitive position in specific industries.

An example of Porter's Diamond in action is the Swiss watchmaking industry. Switzerland has a long
history of producing high-quality watches, supported by a skilled workforce, advanced technology, a
tradition of craftsmanship, and a strong domestic market for luxury goods. The presence of
competitive suppliers, such as precision instrument manufacturers and component suppliers, further
enhances the competitiveness of the Swiss watch industry. Additionally, intense rivalry among Swiss
watchmakers has spurred innovation, differentiation, and brand building, contributing to
Switzerland's global leadership in the luxury watch market.
In summary, Porter's Diamond framework provides a holistic perspective on the determinants of
national competitive advantage, highlighting the importance of domestic conditions, industry
structure, and firm strategy in shaping competitiveness in specific industries. By understanding and
leveraging these factors, countries can enhance their competitiveness and position themselves for
sustained economic growth and prosperity.

b. Lex Mercatoria and Codification of International Trade Law

Lex Mercatoria, or the "Law Merchant," refers to the body of customary laws and principles that
developed over centuries among merchants engaged in international trade. Originating in medieval
Europe during the heyday of trade fairs and merchant guilds, Lex Mercatoria facilitated commerce
by providing a standardized legal framework that transcended national boundaries. This legal system
emerged in response to the need for consistent rules and dispute resolution mechanisms to govern
cross-border trade, given the diverse legal systems and jurisdictions prevalent at the time.

Lex Mercatoria was characterized by several key features:

1. Flexibility: Lex Mercatoria was adaptive and responsive to the needs of merchants and the
evolving nature of trade. It was not bound by rigid legal codes or formal legislative processes but
rather developed organically through custom, usage, and practical necessity.

2. Universality: Lex Mercatoria operated as a transnational legal system, applying universally across
different countries and regions. Merchants from diverse backgrounds and legal traditions relied on
Lex Mercatoria to facilitate trade and resolve disputes, transcending national boundaries and legal
jurisdictions.

3. Commercial Custom: Lex Mercatoria was grounded in commercial customs and practices
observed by merchants in their day-to-day transactions. These customs formed the basis of legal
rules and principles governing issues such as contract formation, payment terms, delivery
obligations, and dispute resolution.

4. Dispute Resolution: Lex Mercatoria provided mechanisms for resolving disputes among
merchants, often through specialized tribunals, arbitration, or informal mediation processes. These
mechanisms aimed to ensure quick and efficient resolution of commercial disputes while preserving
the continuity of trade relationships.

While Lex Mercatoria historically played a vital role in facilitating international trade, its
significance diminished with the rise of modern nation-states and the codification of national laws.
As countries began to assert sovereignty and establish formal legal systems, Lex Mercatoria
gradually gave way to national legal codes and statutes governing commercial transactions.
However, elements of Lex Mercatoria continue to influence contemporary international trade law
and practice in several ways:

1. Uniform Commercial Codes: Many countries have adopted uniform commercial codes or laws
governing commercial transactions, which draw upon principles and concepts rooted in Lex
Mercatoria. These codes aim to harmonize domestic laws and facilitate international trade by
providing common rules and standards for commercial transactions.

2. International Trade Treaties and Conventions: International treaties and conventions, such as the
United Nations Convention on Contracts for the International Sale of Goods (CISG) and the
UNIDROIT Principles of International Commercial Contracts, incorporate principles and concepts
reminiscent of Lex Mercatoria. These instruments aim to promote uniformity and predictability in
international trade by establishing common rules for contract formation, performance, and dispute
resolution.

3. Arbitration and Alternative Dispute Resolution: Arbitration remains a popular method for
resolving international commercial disputes, reflecting the influence of Lex Mercatoria's emphasis
on private, expeditious, and flexible dispute resolution mechanisms. International arbitration often
draws upon principles of Lex Mercatoria and commercial custom to interpret contracts and resolve
disputes between parties from different legal systems.

In conclusion, while Lex Mercatoria may no longer exist as a distinct legal system, its legacy endures
in contemporary international trade law and practice. The principles of Lex Mercatoria, including
flexibility, universality, and reliance on commercial custom, continue to inform the development of
modern legal regimes governing international trade. By drawing upon the lessons of Lex Mercatoria,
policymakers, practitioners, and scholars can work towards promoting greater harmonization,
efficiency, and fairness in the regulation of global commerce.
c. Sources and Principles of International Trade Law

International trade law encompasses a complex network of sources and principles that govern the
conduct of trade relations between countries. These sources and principles provide the legal
framework for regulating international trade transactions, resolving disputes, and promoting
cooperation among nations. Understanding the sources and principles of international trade law is
essential for policymakers, practitioners, and scholars engaged in global commerce.

Sources of International Trade Law:

1. Treaties and Agreements: Treaties and agreements negotiated between countries form a primary
source of international trade law. These agreements can take various forms, including bilateral trade
agreements, regional trade agreements (such as free trade agreements or customs unions), and
multilateral trade agreements established under international organizations like the World Trade
Organization (WTO). Examples include the General Agreement on Tariffs and Trade (GATT), the
North American Free Trade Agreement (NAFTA), and the Trans-Pacific Partnership (TPP).

2. Customary International Law: Customary international law consists of unwritten rules and
practices that are accepted as binding by states based on widespread and consistent state practice.
Customary rules of international trade may develop over time through consistent patterns of behavior
among states, such as customary rules on diplomatic immunity or freedom of navigation. While less
codified than treaties, customary international law plays a significant role in shaping the legal
landscape of international trade.

3. WTO Law: The World Trade Organization (WTO) is a key institutional framework for
international trade law, overseeing the negotiation and enforcement of multilateral trade agreements
among its member states. The WTO agreements, including the General Agreement on Tariffs and
Trade (GATT), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS),
and the Agreement on Trade in Services (GATS), constitute a central source of international trade
law.

4. National Laws and Regulations: National laws and regulations enacted by individual countries
also contribute to the body of international trade law. These laws govern various aspects of trade,
including import and export controls, customs procedures, tariffs, and trade remedies such as
anti-dumping measures and countervailing duties. While domestic in nature, these laws can have
significant implications for international trade relations and may be subject to international
obligations under trade agreements.

Principles of International Trade Law:

1. Most-Favored-Nation (MFN) Principle: The MFN principle requires countries to extend the same
favorable trade treatment to all trading partners, without discrimination. Under this principle,
concessions granted to one country must be extended to all other WTO members, ensuring
nondiscriminatory treatment in international trade.

2. National Treatment Principle: The national treatment principle requires countries to treat foreign
goods, services, and nationals no less favorably than domestic equivalents once they enter the
domestic market. This principle aims to prevent discriminatory treatment against foreign products or
service providers in favor of domestic ones, promoting fair competition in international trade.

3. Reciprocity: Reciprocity refers to the practice of countries granting trade concessions to each other
on a mutual basis. Trade agreements often involve reciprocal concessions, where countries agree to
reduce tariffs or other trade barriers in exchange for similar concessions from their trading partners.
Reciprocity encourages countries to negotiate mutually beneficial trade agreements and fosters
cooperation in international trade relations.

4. Good Faith and Transparency: Good faith and transparency are fundamental principles underlying
international trade law, requiring countries to act honestly, openly, and transparently in their trade
relations. Countries are expected to comply with their international trade obligations in good faith
and to provide timely and accurate information to other WTO members regarding their trade policies
and practices.

In conclusion, the sources and principles of international trade law provide the legal framework for
regulating international trade relations and promoting cooperation among nations. Treaties,
customary international law, WTO agreements, and national laws contribute to the body of
international trade law, while principles such as MFN treatment, national treatment, reciprocity, and
good faith govern the conduct of trade relations between countries. By adhering to these sources and
principles, countries can facilitate fair, transparent, and mutually beneficial trade relations in the
global marketplace.