INTERNATIONAL BUSINESS

ASSIGNMENT ON

STATE TRADING ENTERPRISE GSP

SUBMITTED TO: Dr. Nazia Jamal LECTURER SUBMITTED BY: Novaira Fatima Roll no. 27 MBA(HR &IR) INSTITUTE OF MANAGEMENT SCIENCES UNIVERSITY OF LUCKNOW

STATE TRADING ENTERPRISES

State trading enterprises are defined as governmental and non-governmental enterprises, including marketing boards, which deal with goods for export and/or import. Article XVII of the GATT 1994 is the principal provision dealing with state trading enterprises and their operations. The regulation of state trading under the WTO system Article XVII of the GATT 1994 is the principal Article dealing with state trading enterprises (referred to as "STEs") and their operations. It sets out that such enterprises in their purchases or sales involving either imports or exports are to act in accordance with the general principles of non-discrimination, and that commercial considerations only are to guide their decisions on imports and export It also instructs that Members are to notify their state trading enterprises to the WTO annually. Clarification of what is considered to be a state trading enterprise, and thus notifiable, is provided in the WTO Understanding on the Interpretation of Article XVII. Paragraph 1 of this text states that Members shall notify state trading enterprises in accordance with the following working definition: "Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports." Particularly important in this definition is the phrase "in the exercise of which they influence the level or direction of imports or exports", as this goes to the heart of what the regulation of state trading in the WTO is aimed at that is, the potentially distorting effects on trade of the operations of state trading enterprises. Conversely, the WTO does not seek to prohibit or even discourage the establishment or maintenance of state trading enterprises, but merely to ensure that they are not operated in a manner inconsistent with WTO principles and rules. It should be noted that the notification requirement does not apply to what is termed "government procurement", i.e. imports of products for immediate or ultimate consumption in governmental use, and this is specified in both of the above legal texts. (Government procurement is regulated by the Agreement on

Government Procurement for those Members which are parties to it.)

The substantive obligations of Members under the rules governing state trading can be summarized in the following four points: (1) non-discrimination, commonly referred to as "most favoured nation" or "MFN" treatment; (2) no quantitative restrictions; (3) preservation of the value of tariff concessions; and (4) transparency

WHY REGULATE STATE TRADING? STEs versus private traders In the sphere of international trade, there is a general presumption that trading enterprises will act on the basis of commercial considerations, and that based on the theories of comparative advantage, they will expand their international trade in order to reap the benefits. However, a private firm, if it has significant power in a given market, may exercise this power in a way that distorts trade and thus causes economic detriment, rather than benefit. Furthermore, governments can act in indirect ways to influence world trade in an uneconomic direction; for example, acting through firms or enterprises to provide protection against imports or to advance exports, to the detriment of foreign producers. Thus, the drafters of the General Agreement sought to place the State trading enterprise in the same competitive position with regard to governmental support or protection as the private firm. In other words, they sought to make State traders behave as private competitive traders, and thus to remove the potential for trade distortion offered by government involvement in an enterprise's decisions and activities.

State trading is a common feature of many economies where agriculture is an important sector of trade. Thus, State trading enterprises are found in developed countries with significant agricultural trading interests, as well as in agriculturallybased developing countries. The heavy emphasis on agriculture in State trading activities would seem to indicate governments' belief that State trading is an appropriate means of implementing agriculture-related policy objectives, such as providing price support for important agricultural products or ensuring food security. In the area of industrial goods, State trading may arise as a by-product of the nationalization of an ailing industry or as a means of pursuing government policies on products or industries considered to have strategic importance.

TYPES OF STES

1. 2. 3. 4. 5. 6. 7.

Statutory marketing boards Export marketing boards Regulatory marketing boards Fiscal monopolies Canalizing agencies Foreign trade enterprises Boards or corporations resulting from nationalized industries

1. Statutory marketing boards Statutory marketing boards, also referred to as statutory marketing authorities and control boards, appear to be the most common type of State trading enterprise in the agricultural sector. They often combine a monopoly on foreign trade with responsibility for management of domestic production and distribution.

2. Export marketing boards Detailed procedures for consultations, known as full consultation procedures have been in existence since 1970. More summary procedures, known as simplified consultation procedures are provided for the least-developed country Members and, with some limitations, for the developing country Members.

3. Regulatory marketing boards Regulatory marketing boards have functions similar to statutory marketing boards, with one distinctive feature: they do not themselves engage in foreign trade operations, but rather contract out the actual trading operations to private entities.

4. Fiscal monopolies Fiscal monopolies are a type of STE typically established to cover trade in goods for which domestic demand is relatively price-inelastic and foreign demand is relatively priceelastic, and with respect to which the government may have a policy of protecting public health. Ethyl alcohol, alcoholic beverages, tobacco, salt, and matches and related inflammables are products frequently covered by such monopolies.

5. Canalizing agencies Canalizing agency is the term used by a number of developing countries to describe the STEs they maintain. The term refers to the channelling, or canalizing, of imports and/or exports through a designated product-specific enterprise. Such STEs aim to provide some degree of price stabilization, particularly for producers, as well as to ensure availability of supplies for domestic consumers.

6. Foreign trade enterprises Foreign trade enterprise is the term used for the State trading enterprises of some current and former non-market economies. Such STEs are also known as foreign trade organizations.

7. Boards or corporations resulting from nationalized industries Detailed procedures for consultations, known as full consultation procedures have been in existence since 1970. More summary procedures, known as simplified consultation procedures are provided for the least-developed country Members and, with some limitations, for the developing country Members.

What do the rules aim to achieve? The rules on State trading essentially try to ensure that STEs:

operate on the basis of commercial considerations and in a non-discriminatory manner; do not erode or nullify the value of negotiated tariff concessions; do not serve to implement otherwise WTO-inconsistent measures, such as quantitative restrictions or subsidies; and are fully notified to the WTO on a regular basis.

Given that so little is known of State trading operations world-wide, the transparency obligation is perhaps one of the most important rules at present. As more becomes known and understood of the functions and operations of STEs, there may be efforts to further tighten the rules governing them. However, it should be stressed that the WTO does not seek to prohibit or even discourage the establishment of maintenance of STEs, but rather to ensure that they are used and operated in a manner consistent with WTO principles and rules.

GENERALIZED SYSTEM OF PREFERENCES Generalized System of Preferences (GSP) is a preferential tariff system extended by developed countries (also known as preference giving countries or donor countries) to developing countries (also known as preference receiving countries or beneficiary countries). It involves reduced MFN Tariffs or duty-free entry of eligible products exported by beneficiary countries to the markets of donor countries.

BENEFITS OF GSP

1. Indian exporters benefit indirectly - through the benefit that accrues to the
importer by way of reduced tariff or duty free entry of eligible Indian products. 2. Reduction or removal of import duty on an Indian product makes it more competitive to the importer - other things (e.g. quality) being equal. 3. This tariff preference helps new exporters to penetrate a market and established exporters to increase their market share and to improve upon the profit margins, in the donor country.

ELIGIBILE PRODUCTS

Only such products of a beneficiary country (like India) that fulfil the requirements of the rules of origin laid down by the importing country, are considered eligible for preferential tariff treatment on import into the markets of donor countries. For example, in the case of 15 member states of European Union, an Indian product is considered eligible only if it fulfils the requirements of Rules of Origin laid down in the Community legislation.

Rule of Origin:

Rules of origin comprise a set of requirements laid down by the importing country, which must be fulfilled by a product to be eligible for preferential tariff treatment upon import in that country. The rules of origin are aimed at reserving, as far as possible, the benefit of the preferential system to the country for which it is intended, and to prevent third countries' goods from unduly exploiting the system. This may be of particular, importance in case the national quotas and ceilings are reintroduced. On the other hand, the need of the industries to source raw materials and semi-manufactured products or parts' from other countries are taken into account, by accepting, in many cases, a third country content. There are three components of rule of origin:

1. Origin

Criteria - which determine whether a product can be considered to be originating in the beneficiary, country, the country from where the goods are being exported. country of export to the country of consignee in. order that the goods in question qualify for preferential tariff treatment upon import in the country of consignee.

2. Transport Conditions - which specify mode of transportation from the

3. Documentary Evidence - that will serve as the proof for goods to be

granted GSP benefits at the border of the donor country.

Products Exported From India Can Be Divided Into Two Groups 1. Wholly Obtained Products 2. Products With Import Content Wholly Obtained Products Are Those, which have been entirely (a) Grown, (b) Extracted from the Soil,

(c) Harvested within the country, or (d) Manufactured exclusively from the above Wholly obtained products qualify for GSP benefits by virtue of total absence of any materials or components of imported / unknown origin in their manufacture. Products with import content are manufactured wholly or partially from materials, parts or components imported into India or of unknown origin. They qualify for GSP if the materials, parts or components of imported or unknown origin used in their manufacture have undergone sufficient working or processing in India. On the other hand, a product using imported materials is non-originating if the imported materials have only been subject to minimal operations in India. Materials of unknown origin are treated as though they were imported. Criteria laid down for acquisition of originating status must be satisfied without interruption in the beneficiary country.