WTO'S ROLE IN INTERNATIONAL TRADE
ARIZONA STATE UNIVERSITY
ECN 736 - INTERNATIONAL TRADE THEORY
WEEK 6
A.
Background:
International organizations are one of the actors in international relations, so international
organizations are very influential in relations between countries. International organizations
are formed with the objectives of the countries that are members, in addition to the rules
applied to its members. One of them we will explain the international organization, the WTO.
The WTO is an international organization for free trade. Many countries that are members
of the WTO aim to advance their country's economy. However, it turns out that not all
developing countries that are members of the WTO have succeeded in advancing their
country's economy. Many developing countries still cannot keep up with the WTO free trade
system, which backfires on their own countries, because they import too many goods from
other countries.
The establishment of the World Trade Organization (WTO) has given the concept of
trade liberalization to the world, especially to member countries, where the basic concept of
trade liberalization is the removal of barriers to international trade. This concept in its
implementation forms globalization.
The WTO applies many rules to its member countries that violate free trade regulations.
However, the fact is that there are many cases of countries violating WTO rules, but the
sanctions given by the WTO to the violating country cannot fully make the country carry out
the punishment given by the WTO. In other words, the rules in the WTO and other
international organizations cannot fully bind the countries that are members. For example, in
the case we raise in this book, regarding Indonesia and South Korea, where South Korea was
clearly found wrong by the WTO, but until now South Korea does not want to carry out the
ruling of the WTO. In that case, the WTO could not force or impose more sanctions on South
Korea.
An international organization is a formal and sustainable structure formed by an
agreement between members (governmental and non-governmental) of two or more sovereign
states with the aim of pursuing the common interests of its members.
There is also an IGO classification according to Coulumbis and Wolfe, namely:
1.
Global membership and general purpose: international intergovernmental organizations and
global membership and general purpose (e.g. UN).
2.
Global membership and limited purpose: an international intergovernmental organization with
global membership and specific aims and objectives (e.g. WTO).
3.
Regional membership and general purpose: international intergovernmental organizations and
global membership and general purpose (e.g. ASEAN).
4.
Regional membership and limited purpose: international intergovernmental organizations and
global membership and specific purposes (e.g. APEC).
B.
History of the World Trade Organization:
The World Trade Organization (WTO) is the only international organization that regulates
international trade. Established in 1995, the WTO operates under a series of treaties
negotiated and agreed upon by a large number of countries around the world and ratified
through parliament. The purpose of WTO agreements is to help producers of goods and
services, exporters, and importers in their activities.
The establishment of the WTO stemmed from negotiations known as the "Uruguay
Round" (1986-1994) as well as earlier negotiations under the General Agreement on Tariffs
and Trade (GATT). The founding principles and basis of the WTO were to pursue open
borders, guarantee the Most Favored Nation (MFN) principle and nondiscriminatory
treatment by and among member countries, and a commitment to transparency in all its
activities. The opening of national markets to international trade, with appropriate exceptions
or sufficient flexibility, is seen to promote and assist sustainable development, increase
prosperity, reduce poverty, and build peace and stability. At the same time, market openness
must be accompanied by appropriate national and international policies that can contribute to
economic growth and development in accordance with the needs and aspirations of each
member country. Currently, the WTO consists of 159 member countries.
C.
Functions and Principles of the World Trade Organization:
The World Trade Organization (WTO) has several functions in international trade, namely:
1.
WTO trade agreements;
2.
forum for trade negotiations;
3.
handling of trade disputes;
4.
monitoring of national trade policy;
5.
technical assistance and training for developing countries;
6.
cooperation with other international organizations.
In addition, the World Trade Organization (WTO) has principles in carrying out its
duties, namely:
1.
Nondiscrimination
A country should not differentiate between trading partners and should not differentiate
between own and foreign products, services or citizens.
2.
More open
Lowering trade barriers is one of the most obvious ways to encourage trade; these barriers
include import duties (or tariffs) and measures, such as import bans or quotas that limit
selective quantities.
3.
Predictable and transparent
Foreign companies, investors, and governments should be assured that trade barriers should
not be arbitrarily raised. With stability and predictability, investment is encouraged, jobs are
created, and consumers can fully enjoy the benefits of competition-choice and lower prices.
4.
More competitive
Practices prevent "unfairness", such as export subsidies and dumping products below cost to
gain market share; the issues are complex, and the rules try to establish what is fair or unfair,
and how governments can respond, in particular by charging additional duties calculated to
offset the damage caused by unfair trade.
5.
More beneficial for developing countries
Giving them more time to adjust, greater flexibility, and privileges; more than three-fourths of
WTO members are developing countries and countries in transition to a market economy.
WTO agreements provide a transition period to adjust to more unfamiliar, and possibly,
difficult WTO provisions.
6.
Protecting the environment
WTO agreements allow members to take measures to protect not only the environment, but
also public health, animal health, and plant health. However, these measures must be applied
in the same way to both national and foreign companies. In other words, members should not
use environmental protection measures as a means to disguise protectionist policies.
D.
How to Join the World Trade Organization:
Any country has the freedom to join the WTO trade organization, but WTO members must
agree on terms. Broadly speaking, the application goes through four stages:
1.
Tell Us about Yourself
Governments applying for membership must explain all aspects of trade and economic
policies that impact on WTO agreements. These are submitted to the WTO in a memorandum
that is examined by the working party dealing with the country's application. This working
group is open to all WTO members.
2.
Work Out with Us Individually What You Have to Offer
When the working committee has made sufficient progress on principles and policies, parallel
bilateral talks begin between the prospective new member and each country. This is because
each country has different trade interests. These talks cover specific tariff levels and market
access commitments, and other policies in goods and services. New member commitments are
applicable to all WTO members under normal nondiscrimination rules, even though they are
negotiated bilaterally. In other words, talks determine the benefits (in the form of export
opportunities and guarantees) other WTO members can expect when a new member joins.
(Talks can be very complicated. It is said that in some cases the negotiations are almost as
large as an entire round of multilateral trade negotiations).
3.
Let's Draft Membership Terms
Once the working committee has completed the examination of the applicant's trade regime,
and the parallel bilateral market access negotiations are complete, the working committee
finalizes the terms of accession. These appear in a report, a draft membership agreement
(protocol of accession) and a list (schedule) of member commitments.
4.
The Decision
The final package, consisting of the report, protocol, and list of commitments, is presented to
the WTO General Council or Conference Ministerial Level. If a two-thirds majority of WTO
members vote in favor, participants are free to sign the protocol and accede to the
organization. In many cases, the country's own parliament or legislature must ratify the
agreement before membership is complete.
E.
Decision Making and Dispute Resolution
in the World Trade Organization:
In decision-making the WTO applies one country one vote consensus. It is based on simple
majority of the members present, but in practice there is rarely an opportunity for formal
voting, but informal meetings through consensus. For countries that disagree to formally
challenge a decision by consensus, they must garner the support of a majority of members
present.
Dispute settlement in the WTO has been agreed by its member states using the principle
of a multilateral system rather than taking unilateral action. This means that countries must
adhere to the agreed procedures and respect the decisions made. Dispute settlement is the
responsibility of the Dispute Settlement Body (DSB) which is an incarnation of the General
Council (GC). The DSB is the only body with the authority to form panels of experts to
review cases. The DSB can also accept or reject panel decisions or decisions on appeal. The
DSB monitors the implementation of decisions and recommendations and has the power or
authority to authorize retaliation if a country does not comply with a decision.
Parties to the dispute may appeal the panel's decision. Sometimes both parties may
appeal. However, the appeal must be based on a specific rule, such as a legal interpretation of
a provision/article in a WTO agreement. Appeals are not made to re-examine existing or
emerging evidence, but rather to scrutinize the arguments put forward by the previous panel.
Each appeal is scrutinized by three of the seven members. A permanent Appellate Body (AB)
is appointed by the DSB and drawn from a broad cross-section of WTO members. AB
members have a four-year term. They should be individuals of repute in the field of
international law and trade, and independent of any state interest. Decisions at the appeal level
can delay, modify, or reverse the panel's legal findings and rulings. Usually, appeals take no
more than 60 days, with a maximum limit of 90 days. The DSB must accept or reject the
appeal report within a period of no more than 30 days where rejection is only possible by
consensus.
F.
The case of Indonesia and South Korea :
Indonesia in using the dispute settlement mechanism at the WTO has also been the lead
plaintiff in a case with South Korea (Korea) regarding the application of anti-dumping duties
by Korea on certain paper products from Indonesia imported by Korean importers. Through a
consultation process that began on July 7, 2004, Indonesia requested Korea, in this case the
Korean Trade Commission (KTC), to revoke the additional anti-dumping duties because
Indonesia considered that the action was not in accordance with the applicable anti-dumping
rules in accordance with WTO provisions.
The bilateral Indonesia-Korea consultation process failed to reach an agreement.
Indonesia then submitted the dispute to the DSB-WTO and requested the establishment of a
panel to examine the anti-dumping case. On October 28, 2005, the panel ruled that Korea's
application of anti-dumping duties on certain paper products from Indonesia was not in
accordance with the provisions of the WTO Anti Dumping Agreement. Korea was advised by
the panel to revise its rules and recalculate the anti-dumping duties imposed on Indonesian
paper companies. This shows Indonesia's victory in this case. The case is not over yet, and
Indonesia continues to try in the WTO forum to force Korea to implement the
recommendations of the WTO panel. Under the DSB provisions Korea is given time to
implement the panel's recommendations and in this case Korea has exceeded the time limit
specified in the WTO panel's recommendations implementing the panel's recommendations.
In the Indonesia-Korea case, there have also been case developments that show Korea has not
been willing to implement WTO panel recommendations in accordance with Indonesia's
expectations.
International organizations are a forum for several countries to come together to discuss a
related issue and to achieve common goals with the organization. In each of these
organizations, several requirements have been determined to join and sanctions if related to
violations by the country concerned to the organization.
However, in reality, increased world trade has not translated into increased prosperity and
development in developing and poor countries. In fact, it is now starting to feel like the
welfare of developing countries is deteriorating and the development process is being
hampered. Their products still find it difficult to penetrate the markets of developed countries.
Even developed countries still practice very high non-tariff barriers, such as standardization of
goods and services, and setting high standards at borders based on health, hygiene and safety
aspects.
GENERAL AGREEMENT ON TARIFFS AND TRADE OR GATT:
One important source of law in international trade law is the General Agreement on
Tariffs and Trade (GATT). Its content is not only important in regulating trade policy
between countries, but also, to some extent, in regulating trade between businesses. An
example of the latter is the regulation of counterfeit goods or customs. GATT was formed in
October 1947. The creation of the WTO in 1994 brought two important changes to the GATT.
First, the WTO took over the GATT and made it an appendix to the WTO rules. Second, the
GATT principles became the regulatory framework for new areas of WTO agreements,
particularly the Agreement on Services (GATS), Investment (TRIMS), and also in the
Agreement on Trade Related to Intellectual Property Rights (TRIPS).
The purpose of the GATT is to create a safe and clear international trade climate for the
business community, as well as to create sustainable trade liberalization, employment, and a
healthy trade climate. To achieve these goals, the international trading system that GATT
seeks is one that can promote economic growth and development around the world.
The main objectives of the GATT can be clearly seen in its preambule. There are
basically four important objectives that GATT aims to achieve:
1.
improve the standard of living of mankind;
2.
increase employment opportunities;
3.
increasing the utilization of the world's natural resources; and
4.
increase production and exchange of goods.
There are three main functions of the GATT in achieving its objectives: first, as a
multilateral set of provisions (rules) that regulate trade transactions conducted by GATT
member countries by providing a set of trade provisions (the 'rules of the road' for trade).
Second, as a forum for trade negotiations. Here it is sought that trade practices can be
freed from disruptive obstacles (trade liberalization). In addition, the GATT seeks to make
such trade rules or practices predictable, either through the opening of national markets or
through the enforcement and dissemination of its rules.
A.
History GATT:
The GATT was established as a temporary basis (or platform) after World War II. At that
time, the international community realized the need for a multilateral institution in addition to
the World Bank and IMF. The need for a specialized multilateral institution was felt at that
time. At that time, the international community found it difficult to reach an agreement on the
reduction and elimination of various quantitative restrictions and trade discrimination. This
was done to prevent a repeat of the protectionist practices of the 1930s that had hit the world
economy. As mentioned earlier, at the time of its formation, the first 23 countries were
members. These 23 also drafted the Charter of the International Trade Organization, which at
the time was planned as a special agency of the United Nations. The Charter was intended not
only to provide provisions or rules for the trade of goods and services in the United Nations,
but also to provide rules for the trade of goods and services in the United States world trade,
but also makes decisions on employment, commodity agreements, restrictive trade practices,
international investment, and services. The historical seed of the formation of GATT actually
dates back to the signing of the Atlantic Charter in August 1941. One of the objectives of this
charter was to create a world trading system based on nondiscrimination and free exchange of
goods and services. With this goal in mind, a series of discussions and negotiations took place
between 1943-1944, particularly between the United States, the United Kingdom, and
Canada. On December 6, the United States first proposed the need for an International Trade
Organization (ITO).
The purpose of this organization, according to the US version at the time, was to create
gradual trade liberalization, combat monopolies, expand demand for commodities, and
coordinate trade policies of countries. The proposal to establish a trade organization was
welcomed by ECOSOC (Economic and Social Council). This specialized UN body expressed
its desire to organize a conference. For this purpose, the countries succeeded in establishing a
preparatory commission. The sessions of the commission took place in London from October
18 to December 26, 1946.
B.
Terms of Trade in GATT :
The trade provisions that make up the multilateral trading system contained in the GATT have
three main provisions. The first, and most important is the GATT itself and its 38 articles. The
second, resulting from the 1973-1979 Tokyo Round negotiations are provisions covering anti-
dumping, subsidies, and nontariff provisions or sectoral issues. Although membership in the
second provision was limited to around 30 countries, these countries controlled most of the
world's trade. The third is the provision on "multi-fiber arrangements". This provision is an
exception to the general GATT provisions especially concerning textiles and clothing.
GATT Principles:
To achieve its objectives, the GATT is guided by 5 main principles. The principles are:
a.
Most Favored Nation Principle:
The Most Favored Nation (MFN) principle is contained in Article I of the GATT. This
principle states that a trade policy should be implemented on a nondiscriminatory basis.
According to this principle, all member countries are bound to give other countries equal
treatment in the implementation and policy of imports and exports and other costs. Such equal
treatment must be applied immediately and unconditionally to products originating from or
submitted to all GATT members. Therefore, a country may not give preferential treatment to
another country or discriminate against it. This principle appears in Article 4 of the
Agreement on Intellectual Property Rights (TRIPS) and in Article 2 of the Agreement on
Services (GATS).
In short, all countries should be treated on an equal basis and all countries enjoy the
benefits of a trade policy. However, in practice, this principle has its exceptions, especially
when it comes to the interests of developing countries. So, based on this principle, a member
country can basically demand to be treated equally for its imports and exports in other
member countries. However, there are some exceptions to this principle. Some of these
exceptions are set out in the GATT articles themselves and some are set out in decisions at
GATT conferences through waivers and GATT principles under Article XXV. The exceptions
in question are:
1)
frontier traffic advantage, should not be imposed on other GATT members (Article VI);
2)
preferential treatment in certain existing territories (e.g. economic cooperation within the
British Commonwealth; the French Union with its former colonies); and Banelux (Banelux
Economic Union), may continue to be implemented, but the level of preference limit may not
be raised (Article I, paragraphs 2-4);
3)
GATT members that form a Customs Union or Free Trade Area that meets the requirements
of Article XXIV do not have to provide the same treatment to other members. For countries
establishing regional and bilateral preferential arrangements that do not meet the requirements
of Article XXIV, they may form an exception by reason of a "waiver" of the GATT
provisions. This waiver may also be exercised or requested by a member country. According
to this principle a country may, when its economy or the state of its trade is in difficult
circumstances, request an exemption from certain obligations established by the GATT;
4)
The granting of tariff preferences by developed countries to imported products from
developing countries or least developed countries through the generalized system of
preference facility. Another exception is the so-called "safeguard" rule. This exception
recognizes that a government, if it has no other recourse, may temporarily protect its domestic
industry. This "safeguard" arrangement, set out in Article XIX, permits such a policy, but
only in certain circumstances. A member country may limit or suspend a tariff concession on
products that are imported in an increased quantity and that cause serious injury to domestic
producers. In recent years, quite a number of GATT members have implemented
discriminatory bilateral arrangements which are also often referred to as Voluntary Export
Restraints (VER). This trade policy is done to avoid one of the most hotly discussed issues in
the Uruguay Round, which is textile trade. VER is a "subtle" way for developed countries to
pressure developing countries, which are generally textile producers. To limit the entry of
textile products into their domestic markets, developed countries subtly tell developing
countries to export only a certain amount of textiles. In this case, the developed countries
emphasize that the limitation of the amount must be solely voluntary in nature coming from
the will of the developing countries.
b.
Principle of National Treatment:
The principle of national treatment is contained in Article III of GATT. According to this
principle, products from a country imported into a country must be treated the same as
domestic products. This principle is broadly applicable. It also applies to all kinds of taxes and
other levies. It also applies to laws, regulations, and requirements that affect the sale,
purchase, transportation, distribution, or use of products in the domestic market. This
principle also provides protection against protectionism as a result of administrative or
legislative measures or policies.The principle of national treatment and the MFN principle are
central principles compared to other principles in the GATT. These two principles became the
principles in the regulation of trade areas that later emerged in the Uruguay Round agreement.
For example, this principle is contained in Article 3 of the TRIPS Agreement. Both principles
are also applied in The General Agreement on Trade in Service (GATS). Under GATS, WTO
member countries are required to apply MFN treatment to services or service providers from
one country to another.
However, the WTO agreement allows a country to request an exemption from the
application of this MFN obligation that covers specific measures that would not otherwise be
offered such treatment. To this end, whenever a country requests a waiver of the MFN
obligation, the request will be reviewed every five years.
This exemption from the application of MFN obligations can only be done for a period of
10 years. The principle of national treatment is an obligation in the GATS where countries
must explicitly apply this principle to certain services or services activities. Therefore, the
principle of national treatment is generally the result of negotiations between member states.
c.
Quantitative Restriction Prohibition Principle:
The basic provision of the GATT is the prohibition of quantitative restrictions, which is the
biggest hurdle to the GATT. Quantitative restrictions on exports or imports of any kind (e.g.,
the establishment of import or export quotas, restrictions on the use of import or export
licenses, controls on the payment of imported or exported products) are generally prohibited
(Article IX). This is because such practices interfere with normal trade practices. Quantitative
restrictions are currently less widespread in developed countries. However, textiles, metals,
and certain products, mostly from developing countries, are still often subject to these
barriers.
However, in practice, this may be done in the following cases: first, to prevent the
depletion of essential products in the exporting country; second, to protect domestic articles,
especially those concerning agricultural and fishery products; third, to secure, under the
escape clause (Article XIX), an excessive increase of imports in the country in an effort to
protect, for example, threatened domestic production; fourth, to protect its (foreign) balance
of payments (Article XII). However, such restrictions may not be imposed beyond what is
necessary to protect its balance of payments. The restriction must also be progressively
reduced and even eliminated if it is no longer needed. With the recognition provided for in
Article XVII, the exemption has been extended to developing countries. In this case, such
countries may impose quantitative restrictions to prevent the depletion of their foreign
exchange due to the demand for imports necessary for payment or because they are
establishing or expanding domestic production. For the benefit of such countries, the GATT
organizes regular consultations with the country proposing the restriction imports to protect
its balance of payments. According to Article XIII, these quantitative restrictions, while
permissible, must not be applied in a discriminatory manner.
d.
Principle of Protection Through Tariffs:
In principle, GATT only allows protection of domestic industries through tariffs (increasing
the level of import duty rates) and not through other non-tariff commercial measures.
Protection through tariffs clearly indicates the level of protection provided and still allows for
healthy competition. As a policy to regulate the entry of export goods from abroad, the
imposition of tariffs is still allowed in GATT. GATT countries generally use this method to
protect their domestic industries and also to attract revenue for the country concerned.
Although allowed, the use of tariffs is still subject to the provisions of GATT. For example,
the imposition or application of the tariff must not be discriminatory and is subject to its tariff
commitments to the GATT/WTO.
This tariff commitment means the tariff level of a country on a certain product. This tariff
level becomes a binding commitment of the country. Therefore, a country that has committed
to a tariff cannot arbitrarily increase the tariff level it has agreed to, unless followed by
negotiations on compensation with its trading partners (Article XXVII).
It is worth mentioning here that tariff negotiations among countries were one of the jobs
of GATT (which is also now continued by the WTO). The goal of GATT in this regard is to
try to reduce the level of tariffs to the lowest possible point or level. From the time GATT was
formed in 1948 until the ratification of the Uruguay Round agreement, the level of tariffs
applied by countries had fallen quite sharply. From an average of 38% in 1948, by 1994 it had
fallen to around 4%. In the Uruguay Round, countries' commitment to greater market access
was achieved, among others, through the reduction of interest rates by more than 120
countries. The commitment of countries These are set out in 22,500 pages of national tariff
schedules. In this tariff reduction, the WTO requires that the reduction be reduced to 40%
(especially for industrial products in developed countries) for a period of 5 years (by the year
2000).
By the time the Uruguay Round closed (1994), the general tariff rate was around 6.8%.
With such a reduced tariff rate, it was expected that there would be an increase in the revenue
of advanced industrial products that received duty exemptions (i.e. from 20% to 4% in
developed countries). As with tariffs, GATT also requires member countries to apply the
principle of transparency. This principle is also key to the precondition of predictable trade.
The principle of transparency requires openness or transparency of a country's national laws
and trade practices. Quite a few rules in the WTO agreement contain transparency principles
that require member countries to make national announcements by publishing in the official
gazette or by formally notifying the WTO.
e.
Principle of Reciprocity:
This principle is a fundamental principle in GATT. It appears in the GATT preambule and
applies to tariff negotiations that are based on reciprocity and mutual benefit. 21 Paragraph 3
of the GATT Preambule states:
"Being desirous of contributing to these objectives by entering into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers
to trade and to the elimination of discriminatory treatment in international commerce".
f.
Special Treatment for Developing Countries:
About two-thirds of GATT member countries are developing countries that are still in the
early stages of economic development. To assist their development, in 1965, a new section,
Part IV, which contained three articles (Art.XXXVI-XXXVIII), were added to the GATT.
The three new articles in the section were intended to encourage industrialized countries to
assist the economic growth of developing countries. This Part IV recognizes the need for
developing countries to enjoy more favorable market access.
It also prohibits developed countries from erecting new barriers to developing countries'
exports. Industrialized countries also accept that they will not seek reciprocity in negotiations
on the reduction or elimination of tariffs and other barriers to developing countries' trade.
At the end of the 1979 Tokyo Round, countries agreed and issued a decision on providing
more favorable treatment and greater participation for developing countries in world trade
(enabling clause). The decision recognized that developing countries are also permanent
participants in the world trading system. This recognition is also the legal basis for
industrialized countries to grant GSP (Generalized System of Preferences) to developing
countries.
C.
Outline of Terms GATT:
The GATT has 38 articles. Broadly speaking, these articles are divided into 4 sections:
The first part contains two articles, namely:
1.
Article I, contains the main article that establishes the main principle of the GATT, namely
the obligation of member states to apply the 'most favored nation' treatment clause, to all its
members.
2.
Article II contains the agreed tariff reductions based on the agreed tariff reductions. The tariff
reduction agreement is included in the annex to the GATT provisions and becomes part of the
GATT.
Part two contains 30 articles, from Article III to Article XXII. Article III prohibits the
imposition of discriminatory taxes and other measures on imported products for the purpose
of protect domestic production. Other measures are defined here as any measures, whether
domestic levies or the issuance of laws, regulations, or administrative requirements that affect
the sale, offer for purchase, transportation, distribution, or use of products.
Based on this principle of national treatment, all imported products that have met the
customs rules must receive the same treatment as domestic products in the country.
Article IV falls under the heading of special provisions on cinematograph films. This
article allows a country to set quotas on films through regulations on film restrictions.
However, these restrictions or quotas must still be subject to negotiation with the parties
affected by the restrictions in the form of quotas.
Article V provides for freedom of transit. This article recognizes the freedom of transit of
goods, including boats and other means of transport through the territory of a member state by
using routes used for international transit to transit to or from the territory of another GATT
member state (paragraph 2).
In the case of transit, any member state may impose duties and make regulations on
transit to and from the territories of other member states. Such charges and regulations shall
be reasonable having regard to the circumstances or conditions of the transit traffic (paragraph
4).
Article VI provides for anti-dumping and additional import duties. This article plays an
important role and is widely used by developed countries against developing countries'
products. Developed countries accuse (certain) developing countries of introducing their
goods into their markets at dumping prices. Dumping is the practice of a country selling its
products in another country at a lower price (below the normal price) with the intention of
capturing the market (unfair competition). Article VI expressly provides limitations on the
definition of below normal prices, namely:
1.
lower than the price for the product in the country where it will be consumed in the exporting
country (domestic price);
2.
where there is no indication of a domestic price, the normal price is the highest price for the
product designated or exported to a third country; or
3.
the cost of production for that product plus additional costs (fees) and a reasonable profit.
If a country finds positive evidence that a particular product is dumping, it may impose
anti-dumping duties and additional duties on that product. Article VII (valuation for custom
purposes). This article establishes criteria for the valuation of imported goods by customs
officials of GATT member countries.
This article requires that the value of imported goods for customs purposes must be based
on the actual value of the imported merchandise, not on the origin value of the goods or on
arbitrary or fictitious values.
Article VIII falls under the heading of fees and formalities. This Article requires that all
fees and charges (other than import and export duties and taxes provided for in Article III)
imposed on or in connection with imports or exports be limited. It emphasizes that such
charges shall not constitute indirect protection of domestic products or constitute taxation of
imports or exports for fiscal purposes (Article VIII paragraph 1 (a). Paragraph 1 (b) of this
article requires member states to reduce the amount of such fees and charges.
Article VIII paragraph 1 (c) requires member states to:
1) simplify the regulation and complexity of import and export formalities; 2) reduce and
simplify import and export documentation requirements.
The provisions of this article shall also apply to fees, charges, formalities and
requirements imposed by government officials in connection with imports and exports,
including:
1.
consular transactions, such as invoices and consular certificates;
2.
quantitative restrictions;
3.
License;
4.
exchange control;
5.
statistical services;
6.
documents, documentation, and certification;
7.
analysis and inspection;
8.
quarantine or sanitation.
Article IX regulates marks of origin. In principle, this article requires that all member
states must give the same treatment (no favorable treatment) with regard to this requirement
of origin to all products from member states, as they do to similar products from third
countries (paragraph 1).
Paragraph 6 of Article IX requires that member states shall cooperate in preventing the
use of trade names that do not describe the origin of a product, to the detriment of regional or
geographical names of a member state's products that are protected by law.
Article X governs the publication and administrative requirements of trade arrangements.
This article confirms that laws, regulations, judicial and administrative decisions concerning
the classification or grading of products for customs purposes, taxes, levies, or any
requirements affecting sale, distribution, transportation, insurance, inspection, processing, use,
etc. shall be reasonably published so that member states and traders are aware of them.
Articles XI through XV govern quantitative restrictions or limitations. Quantitative
restrictions that are often practiced are the imposition of quotas, import or export licenses, or
other measures in addition to import duties, taxes, or other levies.
Article XI confirms that this practice is prohibited. Article XII allows a country to impose
restrictions on the entry of imported products in order to safeguard its balance of payments.
Article XIII requires that the application of quantitative restrictions must be implemented
without discrimination. So, for example, if a country restricts the entry of a product from a
country, such as B, then the restriction must also apply to a third country, such as C.
Article XIV provides for exceptions to the application of quantitative restrictions in terms
of restricting the entry of imported products for certain monetary reasons.
Article XV provides for payment arrangements. This article requires cooperation between
GATT and the IMF.
Article XVI deals with subsidies. This article recognizes the practice of countries that still
subsidize their domestic products in order to compete in the international market. However,
this article requires the country to notify the GATT of the existence of these subsidies. In the
development of the GATT rules as later contained in paragraphs 2, 3, and 4 of Article XVI,
the GATT required member countries to eliminate these subsidies.
Article XVII regulates state trading enterprises. The GATT recognizes that state trading
enterprises may give rise to unfair trade practices. Therefore, this article explicitly states that
such enterprises must act in accordance with the general principles of nondiscriminatory
treatment in relation to government measures affecting imports and exports by traders.
Article XVIII falls under the heading of 'governmental assistance to economic
development'. This article recognizes that developing countries need flexible tariffs and can
apply some quantitative restrictions to maintain their foreign exchange for their development
needs.
Article XIX provides for emergency measures on the import of certain products. This
article gives a country the right or justification to suspend some or all of its obligations under
the GATT or withdraw or modify some or all of them concession. This new article can be
applied when an imported product enters a country where the presence of that product in
quantity has caused or threatens to seriously hit domestic producers. Paragraph 2 of this
article requires countries wishing to apply this article to first notify and consult with the
GATT.
Article XX provides for general exceptions, i.e. possible exceptions to waive a country's
rules or obligations under the GATT, particularly in relation to measures necessary to:
1.
protect the morals of society;
2.
protect human, plant, or animal life or health;
3.
import or export of gold or silver;
4.
protection of intellectual property rights;
5.
products that come from the work of the inmates;
6.
protection of national treasures, art, history or antiquities;
7.
conservation of exhaustible natural resources;
8.
in relation to obligations arising from intergovernmental commodity agreements; and others.
Article XXI of the GATT allows a country to waive its obligations under the GATT on
security grounds (security exception). Articles XXII and XXIII govern dispute settlement
within the GATT. The third part contains 11 articles.
Article XXIV regulates how customs unions and free trade areas can utilize exceptions to
the most favored nation principle.
Article XXV sets out the actions taken by governments of GATT member countries. This
article also recognizes the permissibility of some exceptions (waivers) to the GATT rules.
Articles XXVI to XXXV are articles on the implementation of the GATT, in the form of
acceptance and entry into force of GATT provisions (Article XXVI); tariff status (condition)
of non-member countries (Article XXVII); provisions for tariff negotiations and changes to
the GATT rules (Article XXVII) changes in tariff lists (Article XXVIII), the relationship
between the GATT and the Havana Charter (Article XXIX), amendments to the GATT
(Article XXX), withdrawal or resignation of members from the GATT (Article XXXI),
limitations on contracting parties (GATT membership) (Article XXXII), admission to GATT
membership (Article XXXIV), and non-application of some GATT rules among certain
GATT members (Article XXXV).
The fourth part consists of 3 articles (Articles XXXVI-XXXVIII) which were added in
1965. Article XXXVI recognizes the special needs of developing countries in the field of
international trade. Article XXXVII provides for the commitment of (developed) countries,
unless there are urgent reasons not to implement this article, to provide economic and trade
assistance to developing countries. Article XXXVIII provides for concerted action by
members to assist developing country trade.
Since the first GATT conference was held in Geneva in 1948, it was a milestone for the
first time that participating countries agreed to reduce barriers to international trade through
efforts to reduce entry tariffs. This proves that the world countries involved in international
trade have agreed not to fight against domestic products by blocking the entry of materials
from other countries. Efforts to reduce entry tariffs are carried out continuously through
various international trade conferences.
Regardless of the controversy about free trade, from a legal point of view, the ratification
by the Indonesian government of the WTO is a legal fact formed on the basis of the
government's political will to encourage an unavoidable free trade system. This change is
mainly caused by the development of science and technology that is increasingly rapidly
expanding in line with changes in human attitudes and thoughts that are increasingly
advanced. As a result of this process of change, nations must work together, both at the global
and regional levels.
In the face of discriminatory attitudes from developed countries towards imports from
developing countries, the Indonesian government should play a greater role in emphasizing
multilateral arrangements. The GATT is based on economic principles, which in this case
indicate that the welfare of the nation can be improved through free trade and based on the
principle of non-discrimination. Indonesia's support for an open trading system has been
ongoing since the 1980s. Since the last twenty years, the Indonesian economy can be called
the decade of reform.
D.
Government Relations with GATT and WTO :
Indonesia recognizes that since 1948 GATT rules have proven to have a major role in
developing international trade. The benefits that Indonesia feels from the GATT arrangement
are the success in developing exports, especially non-oil and gas exports. Indonesia has been a
member of GATT since its inception, as countries with special conditions require different
treatment. On the whole this means weaker obligations to make concessions on the one hand
and the right to more accommodating concessions from industrialized countries. Formally,
differential preferential treatment for developing countries is part of the GATT, particularly
Part IV of the GATT 1947. Materially, however, the system of generalized preferences is the
only concrete product in this regard.
Faced with the discriminatory attitude of developed countries towards imports from
developing countries, Indonesia emphasized the need for multilateral trade arrangements as
contained in the GATT.
In carrying out its functions, there are several main principles used by GATT. Huala
Adolf mentioned that there are 6 principles used by GATT, namely Most Favored Nation
(MFN), national treatment, the principle of prohibition of quantitative restriction, the
principle of protection through tariffs, the principle of reciprocity, and the principle of special
treatment for developing countries. In relation to these principles, the basic rules of minimum
standards, basic rules of safeguards and escape clauses, basic rules of peaceful dispute
settlement, basic rules of state sovereignty over natural resources, prosperity and economic
life, and basic rules of international cooperation are also known.
First, the Most Favored Nation (MFN) principle. This principle emphasizes that a
country's trade policy must be implemented on a nondiscriminatory basis. According to this
principle, all member countries are bound to give other countries equal treatment in the
implementation and policy of imports and exports as well as other costs. However, there are
some exceptions to this principle. One of the exceptions is mentioned in Article XXIV which
stipulates that if any GATT members form a Customs Union or Free Trade Area, then the
GATT members do not have to provide equal treatment to other members.
Second, the principle of national treatment. Under this principle, member states are
required to give equal treatment to imported and local goods, at least after the imported goods
enter the domestic market. Third, the principle of no quantitative restriction. This principle
prohibits quantitative restrictions on import-export in any form. Fourth, the principle of
protection through tariffs. This principle emphasizes that GATT only allows protection of
domestic industries through tariffs and not through other trade measures.
Fifth, the principle of reciprocity. This principle applies in tariff negotiations that are
based on reciprocal relations that are mutually beneficial to both parties. This principle often
experiences obstacles in its implementation due to differences in economic levels between
countries, especially between developed and developing countries. For example, a developed
country wants to get the same import duty relief that it gives to a developing country. In fact,
the competitiveness of developing countries is not as strong as developed countries.
Therefore, the implementation of this principle must be balanced by the goodwill of
developed countries to assist the development of international trade of developing countries,
by providing special treatment.
Sixth, the principle of special treatment for developing countries. This principle serves as
the legal basis for developed countries to grant the Generalized System of Preferences (GSP)
to developing countries. Of all these principles, there is another one called the principle of
transparency, which requires GATT member countries to be open/transparent to their various
trade policies, making it easier for businesses to conduct trade activities.
E.
Pros and Cons of Free Trade :
With the formation of the ASEAN Free Trade Area (ASEAN Free Trade Area) is a big
challenge for Indonesia, especially in positioning local or domestic producers or business
actors to be equal to other business actors in facing the free market, both in the ASEAN
region and outside ASEAN. Then since January 1, 2010, the China-ASEAN Free Trade Area
(CAFTA) was also formed. The existence of the free market area is expected to increase
Indonesia's economic growth, especially the increase in non-oil and gas exports.
It is inevitable that contradictions about free trade still exist among experts, both from
other countries and from within the country itself, including Sri Edi Swasono in Nursalam
Sianipar, for example, assessing that:
1.
The free market will thwart the ideals of achieving social justice for all Indonesians.
2.
The free market could undermine the ideals of the Proclamation of Independence to protect
the entire nation and all of Indonesia's blood.
3.
The free market is incapable of favoring the former inlanders (colonized people) who are far
below the dignity of Europeans and foreigners.
4.
The free market closes the people's right to economic democracy, the poor without purchasing
power will become mere spectators, outside the fences of economic transactions.
5.
The free market gave birth to privatization, which gave branches of production that are
important to the state and control the livelihood of many people to private and foreign hands.
6.
The free market seeks economic gain. Free markets displace and displace people and their
land and economic enterprises.
7.
The free market reinforces structural inequality, leading to socio-economic polarization and
straining national unity.
8.
The free market sees a subordinate economic system that is exploitative and discriminatory
against the weak.
9.
Then the free market messes with our minds, paralyzes our noble missions and pushes our
tongues to speak falsely, blindly anti-subsidy, anti-protection for the sake of efficiency that
rarely benefits the weak.
The opinion seems to belong to the school of thought that disapproves of developing
countries getting too involved in free trade because it will only make them more miserable. It
is also very nationalistic, ignoring the concrete results that have been achieved by countries in
the world that have participated in free trade.
The implementation of economic liberalization, which is reflected through international
trade, for developing countries turns out to be a lot of problems, especially regarding the
readiness of economic actors in competition. Similarly, the readiness of legal instruments as a
support for the enactment of trade liberalization has not yet shown its supremacy. This is the
most crucial issue for developing countries, especially regarding the existence of economic
liberalization that is believed to be able to create optimal prosperity for the community. The
slogans of free market, free trade, deregulation, privatization, and liberalization, aim to
maximize the freedom and resources that should be given to various transnational
corporations to operate. At the same time, advanced industrialized countries demand the
minimization of government interference to participate in economic activities. The efforts of
various companies to seize the free market, deregulation, and privatization started at the
national level and were subsequently extended to the international level using the free market
concept. Therefore, if the proposals of industrialized countries are accepted by Third World
countries, which are generally developing countries, they will lose most of their rights to
regulate their economy, environment, health, and even culture. This right will be shifted to
companies that were given various freedoms from state interference and intervention in Third
World countries.
According to Martin Khor Kok Peng, in the Uruguay Round of negotiations, what Third
World countries should be fighting for is fair trade, not free trade. What is urgently needed is
an international economic order that recognizes and serves its various development needs,
namely the need to produce a variety of products that can meet the basic needs and human
needs of citizens, the need for an increasingly fair and equitable distribution of resources, and
the need for ecologically sustainable forms of development.
In light of the above, for such a world economic order to be realized, the Northern
countries (industrialized countries) should recognize that they have a huge historical debt to
the South (Third World) because of their centuries-long exploitation of the human, financial
and natural resources of the South. As a result of this exploitation, the South was
economically unable to compete on equal terms with the industrialized countries. That is why
Third World countries consider the principle of development as a very important concept to
be followed in the Uruguay Round. They need to be given the opportunity to prioritize their
development needs in negotiating the terms of agreement in various areas in the Uruguay
Round.
In the face of competition that tends to be more intense, Indonesia needs readiness,
especially efforts to improve human resources, efficiency, technology, and product quality, as
well as improving legal systems and institutions that are able to support increasingly modern
and global business activities.
The conditions of interdependence and the need for trade between nations require
regulation in accordance with the norms of international economic law, so that the smooth
flow of trade is more assured in order to advance the economic conditions of a country. The
number of trade barriers that have been causing economic sluggishness, so that the need for
an agreement to facilitate the flow of trade is realized goods, services, and capital between
countries. With the reduction or removal of trade barriers between countries, each country
will compete with each other to capture other countries' markets, while also maintaining the
domestic market.
The existence of international trade is expected to increase world economic growth,
especially for developing countries based on the principles of free trade outlined in the
GATT/WTO. However, these principles are still perceived as unfair by developing countries,
as well as non-governmental organizations and labor organizations in developed countries.
The policy pays even less attention to environmental issues and the fate of labor, but rather
provides opportunities for developed countries to dominate the domestic markets of
developing countries. Meanwhile, developed countries still want to defend their domestic
markets against the entry of goods and services from developing countries.
Although free trade does not always have a positive impact on the economic progress of
developing countries, Indonesia cannot close itself off from globalization by adopting
protectionist policies. The interests of our nation and state cannot be achieved by closing
ourselves off from the outside world. Globalization must be accepted as an unavoidable
reality of contemporary international society. Therefore, Indonesia must play in free trade to
compete with other countries, so that it can recognize its own weaknesses and strengths and
be able to take advantage of them.
Similarly, policymakers should no longer see the world confrontationally, viewing
developed countries as colonizers and developing countries as colonized, because this way of
thinking is not useful. The tendency of countries in the world to accept free trade, almost all
countries are members of the WTO or are waiting to become members. Developing countries
have become members of international trade organizations, both global and regional, because
of the many benefits they can obtain. To guarantee their rights and obligations that have been
mutually agreed upon, legal instruments are needed that can resolve legal issues for the
realization of a free, orderly and fair trading system.
F.
Steps the Government Should Take in Anticipating the Free Market:
The steps the government should take in anticipation of the free market are as follows:
1.
In the era of free trade and globalization, every policy maker in the field of international trade,
as well as implementers in the field, are required to have international insight. In practice, this
means mastering international legal instruments related to policy formulation and
implementation of activities in the field.
2.
From the trends that have taken place in the international arena, it must be realized that
national interests need to be fought better and safer in the context of the interdependence of
all nations, not by throwing problems at other countries.
3.
In the era of globalization, the concept of sovereignty must be used with great wisdom
considering that this concept has undergone substantial changes. The argument of a sovereign
state cannot be used only as a tool to reject international obligations arising from a
multilateral agreement because if taken to the extreme, the argument will spark conflict and
even anarchy in the international arena.
4.
Indonesia's membership in the WTO is a legal reality that carries consequences in terms of
rights and obligations. To secure the rights derived from this membership in the long run is to
strengthen the multilateral trading system that has been agreed upon by the majority of these
nations. One way to strengthen this system is to be consistent with it.
5.
As a developing country, Indonesia has a strong interest in ensuring that the laws governing
international trade traffic are upheld. The best way to counteract the unilateral actions of
developed countries that often harm weak countries is to take refuge behind legal norms.
However, for that, Indonesia itself must first prepare its legal norms which are very basic for
economic activities concerning property rights and other property rights and contract law, in
addition to other areas of sectoral law. In the author's opinion, Indonesia's ability to fulfill its
obligations in the WTO is highly dependent on the political will of the government as it
believes in the ability of the Indonesian nation and people to improve their dignity.
6.
One way of upholding international legal norms is by operationalizing dispute settlement
mechanisms and effectively implementing the decisions reached. If trade disputes arise with
its partners, it is more appropriate for Indonesia to utilize multilateral dispute resolution
forums rather than bilateral settlements which, based on experience, are usually characterized
by greater party pressure.
7.
After the government ratifies the WTO agreement, the attitude taken by policy makers should
be directed towards a situation of equal rights and obligations as a member of the WTO,
considering that Indonesia as a developing country that is accustomed to receiving special
treatment will soon end as a result of the success of the nation's economic program.
8.
Efforts to create mutually beneficial and orderly trade relations also require adjustments to the
national laws and regulations of each country involved. Therefore, one of the urgent tasks
after Indonesia ratified the WTO agreement was to take inventory of institutions.
Indonesia's commitment:
The active participation of developing countries in the Uruguay Round, including Indonesia,
has been more evident than in previous rounds of negotiations. Some important elements of
Indonesia's commitment consist of:
a.
Ratification of nontariff barriers to trade in agricultural products;
b.
Formulation of the tariff;
c.
Increased the largest share of tariffs on industrial products, including 6,848 positions at a rate
of 40%, 688 positions at a rate below 40%;
d.
Transitional removal of nontariff barriers in 98 tariff positions and elimination of surcharges
in 172 tariff positions.
G.
Indonesian Government's Commitment and Steps to Support Trade Liberalization:
1.
International Cooperation and Indonesia's Future Prospects:
In MPR Decree No. IV/MPR/1999 on the 1999-2004 Guidelines for National Development,
specifically on "foreign relations", among other things, it is explained that the direction of
foreign policy is free and active and interest-oriented, emphasizing solidarity between
developing countries, supporting the struggle for independence of nations, rejecting
colonialism in all forms, and increasing national independence and international cooperation
for the welfare of the people.
In connection with the principles contained in the Guidelines, to realize a new world order
based on freedom, peace and social justice, Indonesia needs to foster international cooperation
in all fields including cooperation in the legal and economic fields in an effort to support and
accelerate the implementation of national development. One sector that is being and continues
to be promoted by the government in an effort to increase national economic growth is the
trade and industry sector, which leads to increased non-oil and gas exports, increased
competitiveness, and expansion of foreign markets. In facing global developments, changes,
and trends as well as taking advantage of existing opportunities, Indonesia continues to
participate in efforts to increase cooperation between countries to accelerate the realization of
economic growth, namely through an open, fair, and orderly international trade system, and
free of barriers and restrictions that have been considered unfavorable to the development of
international trade. The cooperative relationship is then expected to can have a positive
influence on economic growth, equity, and national stability, which are the goals of national
development.
In the context of international economic and trade relations, Indonesia's success in
increasing exports and national development will also depend on the development of the
world economic order and the stability of the international trade system in addition to the
ability to organize the national economy against existing developments. One of the factors
affecting the world economy is the order or system that is the basis for the development of
trade between countries. The order in question is the General Agreement on Tariffs and Trade
(GATT). In the implementation of national development, especially in the economic sector,
efforts are needed to be able to improve, expand, stabilize, and secure markets for all
products, both goods and services, including aspects of investment and intellectual property
rights related to trade and improve competitiveness, especially in international trade. To
support these objectives, the Indonesian government decided to ratify Law No. 7 of 1994 on
the Agreement on Establishing the World Trade Organization on 2 November 1994.
In international trade or free trade, a policy from the government needs to be enforced to
achieve an economic growth and stability that is always in a positive direction, here are some
policies from the government in international trade or free trade.
a.
Customs
b.
Tax
c.
Rates
d.
Quota
e.
Importer Appointment
f.
Import Substitution
The reasons for international trade or free trade are:
a. The classical theory that discusses an absolute advantage proposed by Adam Smith and the
efficiency of production costs proposed by David Ricardo.
b. The modern theory states that the factors of production are capital and a large amount of
labor.
In international trade or free trade in export activities must take an action or a policy in
regulating the rate of entry and exit of goods coming from outside the country, several
policies in regulating the rate of exports, namely by way of:
a.
Diversification:
1)
Expanding market share
2)
Quality improvement
3)
Add item types
b.
Devaluation, which is a policy of lowering the value of a currency.
c.
Subsidy + export premium.
d.
Domestic price stability.
Some forms of anticipatory efforts that Indonesia has not yet taken or has taken, among
others:
a. Providing education to the public to love domestic products more by continuously improving
the quality of domestic products. For example, by intensifying the Aku Cinta Produk
Indonesia (ACI) program.
b. Renegotiate the free trade agreement or at least postpone it, especially for sectors that are not
ready.
c. Conduct product selection to protect national industries.
d. Revoke levies that burden businesses in the regions, so that local industries become more
competitive.
e. Tightening the inspection of incoming goods at the port must also be done, because other
countries also do the same thing.
f. Provide convenience in the form of funding, by way of business loans with low interest rates.
g. Activate non-tariff measures, such as the implementation of the Indonesian National Standard
(SNI), labeling requirements, and a number of other regulations related to securing the
domestic market.
h. Improve various economic policies to deal with free trade.
2.
The Good of a Free Market Economy:
Conventional economists believe that the free market has its virtues, among others:
a.
Production factors will be used efficiently. Factor efficiency consists of allocative and
productive efficiency. Allocative efficiency is achieved when the price level = marginal cost.
Productive efficiency will be achieved when the cost of production of a firm's goods reaches
the minimum cost of production or the lowest point of Ac. This minimum cost will be
achieved when the market is perfect.
b.
Economic activities in the market are efficiently regulated and harmonized. With a variety of
goods in the market and a variety of markets, the changes that occur will drive economic
activities to be efficient. Many experts believe that the free market will make adjustments on
its own without any regulation.
c.
Steady economic growth will be realized. With the freedom of individuals to carry out their
economic activities, it will encourage more efficient economic growth. This is driven by the
more enterprising individuals in carrying out their productivity, making innovations, and steps
to win the competition.
d.
Actors of economic activity are given the freedom to carry out economic activities they like.
3.
The Failure of the Free Market Economy:
While the free market has its advantages, it also has its failures, which stem from several
factors:
a.
Adverse external factors. An adverse externality factor is when the social cost is higher than
the social cost. Private costs (costs that producers or factors of production spend to produce
goods). The free market system cannot prevent social costs, such as pollution, pollution, etc.
from arising.
b.
Lack of public goods and merit goods. What is meant by public goods are goods that are used
together, such as road construction, television, and others. Meanwhile, merit goods are goods
that are indispensable to society and are very important for the prosperity of society.
c.
Uneven income distribution. One of the weaknesses of the free market system is that it tends
to create an unequal distribution of income as the economy develops. A market economy
tends to give greater returns to those who work more efficiently, are enterprising, clever, have
skills, and creative thinking.
4.
Government Interference in the Free Market:
Some of the failures of the free market as described above, require economists to think about
government intervention in the market for the regulation of economic activity. Government
intervention is intended with a purpose:
a.
Supervise so that adverse external consequences of economic activities can be avoided.
b.
Provide enough public goods that people can buy them easily and cheaply.
c.
Supervise the activities of companies, especially large companies that may affect the market.
d.
Ensure that economic activities do not cause inequality in society.
e.
Ensure economic growth can be realized efficiently.
Government intervention in the economy can take three forms, namely:
a. Making laws. Laws are needed to enhance the efficiency of the market mechanism, create a
basis for the market to operate socioeconomics, and create free competition so that there is no
monopoly power.
b. Directly conducting economic activities (establishing companies) with the production of
public goods.
c. Conduct fiscal and monetary policy. Fiscal policy is needed by society so that the government
can set a balanced budget for state expenditure and revenue. Monetary policy is needed to
control the price level to keep it stable. However, ultimately monetary policy is the role of
money in economic activity. Fiscal and monetary policy can be used by the government with
a purpose:
1)
Increase the efficiency of the use of production factors.
2)
Leveling Income Distributions
3)
Address the macroeconomic problems that always arise, namely, unemployment, inflation,
etc.
Indonesia in this case supports free trade by becoming a member of GATT and WTO
Indonesia recognizes that since 1948 GATT rules have proven to have a major role in
developing international trade. The benefit that Indonesia feels from the GATT arrangement
is the success in developing exports, especially non-oil and gas exports. Indonesia has been a
member of GATT since the beginning, as countries with special conditions require different
treatment. Overall this means weaker obligations to make concessions on the one hand and
the right to more accommodating concessions from industrialized countries. We conclude that
the opposition to the free market is that the free market will frustrate the ideals of achieving
social justice for all Indonesians. The free market can thwart the ideals of the Proclamation of
Independence to protect the entire nation and all of Indonesia's blood. The free market is
unable to favor the former inlanders (colonized people) who are far below the dignity of
Europeans and foreigners.
The free market closes off the people's right to economic democracy, the poor without
purchasing power will become mere spectators, outside the fences of economic transactions.
Those in favor of the free market argue that international trade is expected to be The free
market can increase world economic growth, especially for developing countries based on the
principles of free trade set out in the GATT/WTO. The steps that the government should take
in anticipation of the free market are as follows:
a.
In the era of free trade and globalization, every policy maker in the field of international trade,
as well as implementers in the field, are required to have international insight. In practice, this
means mastering international legal instruments related to policy formulation and
implementation of activities in the field.
b.
From the trends that have taken place in the international arena, it must be realized that
national interests need to be fought better and safer in the context of the interdependence of
all nations, not by throwing problems at other countries.
c.
In the era of globalization, the concept of sovereignty must be used with great wisdom
considering that this concept has undergone substantial changes. The argument of a sovereign
state cannot be used only as a tool to reject international obligations arising from a
multilateral agreement because if taken to the extreme, the argument will spark conflict and
even anarchy in the international arena.
d.
Indonesia's membership in the WTO is a legal reality that carries consequences in terms of
rights and obligations. To secure the rights derived from this membership in the long run is to
strengthen the multilateral trading system that has been agreed upon by the majority of these
nations. One way to strengthen this system is to be consistent with it.
International trade as a part of economic activities or business activities, in the last decade
has shown a very rapid development, amidst the increasing attention of the business world to
international business activities. This phenomenon can be observed from the growing flow of
circulation of goods, services, capital, and labor between countries, as well as the
development of international business activities business through export-import relations,
investment, trade in services, licenses and franchises, intellectual property rights, and other
types of international trade.
International trade has driven domestic trade to transform into global trade, where the
whole world is a global market, globalization means that the flow of goods, services, capital,
technology, and people spreads around the world. The core element of globalization is the
expansion of world trade through the removal or reduction of trade barriers, such as import
tariffs.
Economic "globalization" as a result of international trade is a historical process, the
result of human innovation and technological progress. It refers to the increasing integration
of economies around the world, primarily through the movement of goods, services, and
capital across borders. The term sometimes also refers to the movement of people (labor) and
knowledge (technology) across international borders.
There are various reasons why countries or legal subjects (trade actors) conduct
international trade, including because international trade is the backbone for countries to
become prosperous, prosperous and strong. This has been proven in the course of the history
of world development.
The liberalization of international trade began to experience a very rapid growth in the
19th century, providing economic benefits in Europe. However, the freedom of trade has not
been enjoyed by other nations outside Europe, especially in Asia and Africa. This is because
at that time Asia and Africa were colonial territories or colonies of European countries, so in
the trade sector, Asians and Africans did not get the same opportunities and freedom as
Europeans. Thus, those who held economic and political power in this liberal period were
Europeans, while Asian and African nations did not have power and politics in their own
countries. The emergence of freedom in carrying out trade between countries or called
international trade is motivated by the understanding and theory put forward by Adam Smith
in his book entitled The Wealth of Nation, which states that the welfare of a country's society
will actually increase, if international trade is carried out in a free market and intervention.
Government policies are kept to a minimum. Policies in the context of liberalization can be
grouped into two, namely those carried out globally and unilaterally, and those carried out
bilaterally or regionally. Policies that apply globally are related to agreements decided at the
WTO and unilateral ones are policies that are unilaterally implemented by the country.
Regional or bilateral policies are policies that are implemented based on bilateral or regional
agreements that are usually in a trade agreement, either bilateral or regional.
The year 1995 marked a new chapter in the international economy. In this year, a more
formal trade organization was established, the World Trade Organization (WTO). The WTO
replaced the old trade regime, the General Agreements on Tariffs and Trade (GATT), which
had been in place since 1947. This change in trade regime certainly has an impact on the
international economy in general. As an organization, the WTO has more legality and clearer
and more binding rules. The following is a review of the formation process of the WTO and
its existence as an international trade organization.
Particularly in the services sector, it contributes greatly to the country's revenue. Services
have played an increasingly influential role in a country's economy and employment.
In its ideal form, liberalization of trade in services is a state in which firms and
individuals are free to sell services beyond their national borders. This means that it includes
the freedom to establish companies in other countries and for individuals to work in other
countries. Despite fears of the rise of "neoliberalism" and other neo-neo's, services trade
liberalization came about due to several facts.
First, World Wars I and II were caused by trade wars between countries. The trade war
itself occurred due to the adoption of the doctrine of mercantilism, which teaches that a
country's progress will occur if it is able to increase exports as much as possible and reduce
imports to a minimum. This doctrine encouraged countries to implement protective trade
policies.
Second, capitalism encourages the accumulation of as much wealth as possible. This
notion gave birth to multinational corporations which expands its business to various
countries to increase profits on an ongoing basis. Furthermore, this phenomenon then gave
birth to the practice of Foreign Direct Investment (FDI).
Third, developing countries have the need to conduct trade relations with other countries,
such as the export of labor abroad. In this regard, developing countries also want their trading
partners to implement liberalization policies on trade in services.
The growth of the middle class and international demand are crucial to the rapid
development of the services sector. Both are driving the expansion of modern services,
tourism, transportation, and business services.
H.
Differences between Trade in Services and Trade in Goods:
Trade in services has characteristics that distinguish it from trade in goods. The first is the
nature of service transactions. In the services sector, transactions require the presence of both
parties, namely producers and consumers. If service producers in a country have a service
product that is in demand by consumers from abroad, then the foreign consumer must directly
transact with the producer to obtain the service product. Thus, the supply of service products
to foreign markets is often accompanied by the movement of capital or labor.
Another characteristic is the heavy regulation and control of trade in services. These
regulations and controls are in order to: first, avoid the risk of market failure from the lack of
information obtained by consumers on the products they will consume. As we know, the
market can be an efficient allocation of resources (i.e. the meeting of consumer demand and
producer supply) if the assumptions are met, one of which is perfect information. If not, then
the market fails to be an efficient resource allocation tool. Consumers will never know exactly
about the quality of the products they will consume. Therefore, perfect information about the
product is required. For example, in the case of trade in services, if a consumer in a country
wants to use a service that is not available in the market, then it is necessary to have perfect
information about the product foreign construction expert services, then he must know the
quality of the experts he will use. And it would be better if the quality of experts who will
enter the country has been standardized in accordance with existing regulations.
Second, this large regulation and control is a consequence of the provision of service
products that are different from the provision of goods. If the process of providing goods
products recognizes the term storage or stock, then in the provision of service products this
term is not known. That is, service products are provided directly by the producer without
going through the storage process as in goods products. So, it can be concluded that the large
regulation and control of service trade is intended so that both consumers and producers do
not feel disadvantaged.
In addition, what distinguishes trade in services from trade in goods is the difficulty of
detecting barriers. It is more difficult to detect barriers in trade in services than in trade in
goods. Barriers in trade in goods can be detected clearly through price differentials. Whereas
in trade in services the barriers are rather difficult to detect because they are in the form of
regulations. Barriers to trade in services are less transparent than barriers to trade in goods,
which makes it difficult to determine the impact of these barriers.
In addition, Mary E. Footer in her article Global and Regional Approaches to the
Regulation of Trade in Services also explains the characteristics that distinguish trade in
services from trade in goods. First, services are intangible, unlike tangible goods, which
contain rights and obligations. For example, the invisible rights and obligations are reflected
in international banking. For example, the claims and liabilities of a country's citizens in the
form of foreign currency or the claims and liabilities of foreigners in the form of the country's
currency. In addition, trade in services is more bound to regulations than trade in goods. For
example, safety standards in the airline industry.
The application of trade in services often clashes with non-economic matters. For
example, transborder broadcasting often clashes with a country's national cultural policy.
The market structure of the services sector is also characterized by imperfect competition. The
telecommunications industry is a good example of imperfect competition. In many countries,
telecommunications equipment is supplied by the government and the system is operated
monopolistically by the government.
I.
Regulation of Trade in Services Under Economic Law
International:
As a step to address international trade issues, in February 1946, ECOSOC, a body under the
UN, at its first session had adopted a resolution to hold a conference to draft an international
charter in the field of trade. At about the same time, the US government issued a draft or
concept of a charter for the International Trade Organization (hereinafter ITO).
In 1947, negotiators in Geneva carried out preparations to formulate the ITO charter
which was then submitted to the delegations of participating countries at the 1948 Havana
Conference. In addition to preparing the text of the ITO (International Trade Organization)
charter, negotiators in Geneva also conducted negotiations to reduce import duties or tariffs
which later became an annex to the GATT agreement and formally an integral part of the
GATT agreement. It can be added that this applies henceforth in the GATT that every set of
negotiations in the area of tariffs becomes an integral part of the GATT agreement.
Structurally, the GATT was created as a multilateral agreement rather than an
"organization". In other words, the GATT officially had the same status as the previous
bilateral trade agreements. However, in terms of substance, when negotiations were held to
formulate the GATT agreement, the substance, principles, and systems contained in the
agreement were envisioned to operate under the umbrella of the ITO.
In 1948, the charter text of the ITO was completed. However, the ITO could not
materialize because the US congress could not approve it when the US President submitted
the text to congress for approval. After repeated attempts by the US executive, in 1951, the
signs became clear that Congress would not approve it. Thus, US President Harry Truman
withdrew the proposed ratification of the Havana Charter.
With the international community unsuccessful in realizing the ITO, the GATT became
the only legal instrument that became the main institution in international trade. However, the
question then becomes how did the GATT become the main institution for trade, when it had
never been legally established as an international organization and was previously designed as
an interim agreement?
According to H.S. Kartadjoemena, the answer to that question is the fictitious juridical
path with the protocol of provisional application which technically can immediately apply the
GATT agreement provisionally and emergency. In the mechanism of applying this juridical
provision, it can be stated that the GATT, as an agreement, was completed in 1947, before the
ITO agreement which was planned as an umbrella could be realized.
At that time, there were different views on the ratification of the GATT with the ITO as
its umbrella on the one hand and the urgency to implement and formalize the agreement when
it was completed. So the Protocol of Provisional Application (PPA) was implemented for
countries that needed the GATT to be approved immediately and for countries that wanted to
ratify the GATT and ITO simultaneously could wait until both agreements were completed.
In fact, the ITO never came into effect and the GATT stood independently until the
official establishment of the World Trade Organization (WTO) on April 15, 1994 in line with
the success of the Uruguay Round, as a replacement for the ITO and a new umbrella for the
GATT.
The journey of the WTO until its formation is inseparable from the ministerial-level
GATT contracting parties meeting attended by 108 countries, which was first held on
September 20, 1986 in Punta Del Este, Uruguay to launch multilateral trade negotiations. The
negotiations were held for 7 years, several times until it was completed on April 15, 1994 in
Marrakech, Morocco which later gave birth to the World Trade Organization (WTO) which
provides more complete and comprehensive arrangements in the field of trade. This series of
negotiations became commonly known as the Uruguay Round negotiations.
The negotiations not only discussed classical matters such as "market access", but also
discussed new matters that grew and developed in connection with the advancement of trade
and a rapidly growing economy, such as investment and services that were not touched by the
GATT arrangement.
One of the most important outcomes of the Uruguay Round was the agreement on a
framework for services, known as the General Agreement on Trade in Services (GATS),
which is a relatively new agreement and the first multilateral trade agreement in services.
GATS is the result of a long process that began with the United States' initiative during
the Tokyo Round. At that time, the United States began trying to convince participants to
support its initiative to include Trade in Services in the GATT. This effort succeeded in 1986
when a firm decision was made during the 1986 Punta Del Este Declaration.
The Punta Del Este Declaration in 1986 was the result of a compromise between
developed and developing countries on trade in services. This compromise emerged as a
reaction to developing countries that initially opposed the inclusion of arrangements regarding
services within the GATT framework. This is evident in the decision of the Punta Del Este
Declaration which regulates trade in services which essentially contains the following points:
1.
The ministers agreed to launch services trade negotiations as part of multilateral trade
negotiations.
2.
The negotiations aim to establish a multilateral legal framework containing principles and
provisions on trade in services, so as to create transparent trade and progressive liberalization,
in an effort to improve the economies of all trading partners and the progress of developing
countries.
3.
The legal framework should respect national laws and applicable provisions on services and
cooperate with relevant international organizations.
4.
To carry out these negotiations, a services negotiating group must be established, which is
obliged to report the results to the Trade Negotiations Committee.
This compromise came as a reaction to developing countries initially opposing the
inclusion of trade in services within the GATT/WTO framework. In this negotiation,
developing countries managed to place it in a separate regulation outside the legal framework
of the GATT/WTO. This was done to eliminate the possibility of crossover between
GATT/WTO issues on trade in goods and trade in services. Developing countries also
succeeded in trying to have economic development and growth included as an objective of
any agreement reached. This legal framework gave birth to the GATS. GATS arrangements
are seen as a way of promoting economic growth for all trading countries and the
development of developing countries. The inclusion of trade in services arrangements within
the GATT/WTO framework is considered an important step forward for the GATT/WTO.
The establishment of the GATS as stated in the Punta Del Este Declaration was to
establish a framework of material principles or rules on trade in services. Important
documents that must be considered in studying the GATS are: framework agreement, initial
commitments, sectoral annex, and ministerial decision and understanding. The framework
agreement is the GATS agreement itself which contains a set of general concepts, principles,
and provisions that give rise to obligations with respect to all measures relating to trade in
services.
GATS is a framework agreement that includes basic principles that are the basis for the
rules of the game in international trade in services. The aim is to deepen and broaden the level
of liberalization of the services sector in member countries, so that it is expected that trade in
services in the world can increase.
The role of GATS in world trade in services is basically inseparable from the following
two (2) pillars: First, it ensures increased transparency and predictability of both rules and
regulations. The second is the effort to promote a continuous liberalization process through
negotiation rounds.
The obligations for parties to the GATS can be divided into two groups:
1.
General obligations and disciplines are obligations applied to all services sectors by all
member states in accordance with the sectoral annex. These include Most Favored Nation
(MFN) treatment, transparency provisions, availability of legal procedures, consultation on
business practices, and consultation on trade-affecting subsidies.
2.
Special obligations, namely obligations in relation to specific commitments (obligation
related to specific commitments). What is meant by specific obligations are obligations that
bind certain countries in accordance with the commitments made as stated in the Schedule of
Commitments (SOC). Matters included in this special obligation category include the
principles of national treatment and market access.
Based on specific obligations, each member state must treat services and service suppliers
from other countries at least the same as those agreed and recorded in the Schedule of
Commitments (SOC). In addition, each member state must also give fair treatment to services
and service suppliers from other members compared to that given to its own (domestic)
services and service suppliers.
GATS contains 3 (three) documents, among others, as follows:
1.
A document that contains a set of basic obligations that apply to all countries.
2.
A document containing annexes to an agreement that sets out the specific circumstances of
service sectors in each WTO member country.
3.
A document containing countries' commitments contained in a national schedule to expedite
the process of liberalizing trade in services.
The first document is a framework agreement that consists of 39 articles and is divided
into 6 sections. These sections include the following:
1.
Part I contains basic obligations regarding the definition and scope of services.
2.
Part II contains provisions with general obligations, such as Most Favored Nation (MFN) or
nondiscrimination, transparency, provisions for increased participation of developing
countries, obligations with respect to terms of recognition in services, use restrictions in
transfers, and international payments.
3.
Part III is the operative part that contains important provisions: market access, national
treatment, and additional commitments. These provisions are not included as general
obligations, but as specific commitments that must be included in the national schedule.
4.
Part IV is the section that lays the foundation for progressive liberalization of services through
services trade negotiation rules. It includes the withdrawal and modification of commitments
in the list of national commitments after 3 years.
5.
Part V covers institutional provisions including the establishment of the Council on Trade in
Services along with articles on consultation and dispute settlement procedures.
6.
Part VI contains the final provisions.
The second document sets out provisions on market access and national treatment and is
not a general obligation. Rather, they are commitments set out in a Schedule of Commitments.
This Schedule of Commitments (SOC) contains binding commitments of WTO members
towards other members in implementing their obligations under the GATS, in other words,
the list is a concretization in tangible form of the commitments of GATS-WTO members.
The third document deals with specific sectors. The first annex is an annex on exceptions
to Article II (on the applicability of MFN). The second annex deals with the movement of
people (movement of natural persons) that provide services under the GATS. There are also
several annexes related to specific sectors, such as: annex on air transport services, annex on
financial services, second annex on financial services, annex on negotiations on maritime
transport services, annex on telecommunications, annex on negotiations on basic
telecommunications.
The scope of GATS trade in services is contained in Article 1(1) of GATS which reads:
"This agreement applies to measures by affecting trade in services". This article tries to
provide an explanation that what is meant by Trade in Service is trade in services carried out
by:
1.
services that are provided from one country's territory to another (cross-border), such as
services that use telecommunications media;
2.
services provided within a country to a consumer from another country (consumption
abroad), such as tourism;
3.
services provided through the presence of a country's business entity in the territory of another
country (commercial presence), for example the opening of a foreign bank branch office;
4.
services provided by nationals of one country within the territory of another country (presence
of natural persons), such as the services of consultants, lawyers, and accountants.
Thus, it appears that the scope of trade in services regulated by the GATS is relatively
broad and universal, as is the regulation in the area of Trade in Goods. Therefore, some of the
principles in the GATT are also applied in the context of trade in services listed in the GATS.
Such as the MFN principle, gradual liberalization, and so on.
The following are some of the main rules in services liberalization contained in the
GATS:
1.
Most Favored Nation Treatment (MFN):
The MFN principle is the principle that if a favor is granted to one country, it must also be
granted to another. This is also the main principle in trade in goods under GATT which is also
used in trade in services (GATS). MFN, also known as the principle of Nondiscrimination is a
general obligation in the GATS. This obligation is immediate and unconditionally automatic.
In the regulation on MFN in Article II paragraph 1 of the GATS, the formula is used: "....
Each member shall accord immediately and unconditionally to service and service suppliers
of any other member, 'treatment no less favorable' than it accords to like service and service
suppliers of any other country". The term "treatment no less favorable" is also used in Article
XVI on market access and Article XVII on national treatment.
The difference is that in MFN treatment no less favorable what is compared is the
treatment given to service suppliers from one country with other countries, while in national
treatment what is compared is the treatment given to domestic service suppliers with foreign
service suppliers. Meanwhile, in market access, the understanding is that the treatment given
to foreign service suppliers by a country must be in accordance with the requirements and
restrictions stated in the country's Schedule of Commitment (SOC).
However, the GATS system allows members to deviate from the MFN obligation.
Therefore, a member may grant more favorable treatment for a service sector to one or more
members than it grants to other members as long as the other members are treated at least in
accordance with the SOC. However, it is not permissible for a country to give less favorable
treatment to one or more members than that given to other members as long as the other
members are treated at least in accordance with the SOC (e.g. based on the principle of
reciprocity).
2.
Protecting Through Specific Commitments:
In terms of protection, trade in services is different from goods. In trade in services, protection
using tariff restrictions cannot be implemented because the services themselves, given their
abstract nature, enter a region not through a port (customs) so that they cannot be inhibited
through tariffs. Therefore, the protection that can be done in trade in services is in the form of
SOC made by each country in accordance with the circumstances of the country which is then
negotiated with its trading partners.
The SOC essentially contains a "reservation", meaning that the country making the SOC
is subject to the provisions of the GATS with the conditions, restrictions, and requirements as
stated in its commitment.
This SOC is regulated in Part III which is separate from Part II of GATS which is a
general obligation. Thus, it can be said that the Schedule of Commitments (SOC) is not an
automatic obligation, but a specific obligation. This means that the obligation is in accordance
with what is stated in the SOC of the country concerned.
In Section III of the GATS (specific commitments) three kinds of commitments are
recognized, namely:
a.
market access commitments;
b.
national treatment commitments; and
c.
additional commitments.
These three types of commitments are combined into one in the SOC of each country.
The SOC of each country in accordance with Article XX paragraph 3 becomes an integral part
of the GATS. Thus, the SOC is binding for the country that makes it. With this SOC, it also
reflects a principle, namely the principle of liberalization in trade in services carried out
gradually (progressive liberalization) in accordance with the circumstances and capabilities of
each country. This is in line with the provisions of Article XIX of the GATS.
3.
Transparency:
This principle of transparency is stipulated in Article III of the GATS which requires all
members to publish all laws and regulations, implementing guidelines, and all decisions and
provisions of general application issued by central and local governments that have an impact
on the implementation of the GATS. In addition, it is also required to notify the Council for
Trade and Service (one of the "bodies" of the WTO) of any changes or new legislation
affecting trade in services listed in the SOC. This notification must be made at least once a
year.
4.
Increased Participation of Developed Countries:
In principle, the WTO system does not distinguish between developed and developing
countries. However, under certain conditions, developing countries are given special
treatment. This can be seen from the special treatment given to developing countries in
submitting SOCs. The submission of the SOC is one of the requirements to become an
original member of the WTO (Article 11 WTO). For least developing countries, time is given
until April 1995, while for other countries the deadline for submission is December 15, 1993.
In addition, developing countries are also given facilities in order to increase their
participation through the relevant SOC negotiations:
a.
increasing the capacity of domestic services and the efficiency and competitiveness of the
domestic services sector, among others through access to commercial technology;
b.
improved access to distribution networks and information; and
c.
liberalization of market access for sectors and modes of supply that are of interest to
developing country exports (Article IV paragraph (1) of the GATS.
Another convenience given to developing countries is in the context of further
negotiations to open markets. They are given sufficient flexibility to open fewer sectors,
expanding market access gradually in line with their development situation (Article XIX
paragraph 2 GATS).
Furthermore, in order to assist developing countries, developed countries are required to
establish "contact points" to assist developing countries in accessing information about each
developed country's market. Such information includes:
a.
commercial and technical aspects of the service supplier;
b.
registration, recognition, and how to obtain professional qualifications; and
c.
availability of service technology (Article IV paragraph (2) of GATS).
5.
Economic Integration:
Regional cooperation has long been seen as an exception to the MFN clause in trade
agreements. However, the WTO does not in principle prohibit its members from joining
regional economic cooperation organizations, such as the North America Free Trade
Agreement (NAFTA), or entering into liberalization agreements on trade in services between
two or more countries, as long as they meet several detailed and complex criteria as stipulated
in Article V of the GATS.
6.
Gradual Liberalization:
The gradual liberalization is done by requiring all WTO members to conduct continuous
rounds of negotiations starting no later than five years after the entry into force of the WTO
agreement (since January 1, 1995). The negotiations should be conducted by reducing or
eliminating measures that may adversely affect trade in services. Nonetheless, the
liberalization process must be carried out while respecting national interests and respective
levels of development (Article XIX paragraph (1) of GATS). The provisions in Article XIX
can be used by developed countries to pressure developing countries to conduct further
negotiations.
Commitments that have been given in the framework of the Uruguay Round Negotiations,
and have become annexes of the GATS, in principle may not be withdrawn, amended, and/or
reduced. Improvements are only possible if they are made with the intention of increasing
commitments. Withdrawal and/or amendment of commitments given can only be done with
the payment of compensation to the aggrieved member (Article XXI GATS).
7.
Emergencies:
Escape clauses are important provisions in all international agreements, which are only
enforced under unforeseeable circumstances or difficulties.
In general, escape clauses allow a member, under certain circumstances, to temporarily
avoid one aspect of the agreement without undermining the purpose of the agreement as a
whole. Escape clauses in an agreement provide certainty for signatories that in emergency
situations, they are justified in temporarily avoiding the commitments they have given.
Under the GATS, a member in an emergency is also allowed to make temporary
deviations from its commitments. Such deviations may be made in the event of payment
difficulties. Under these conditions, members are allowed to impose restrictions on trade in
services that have been included in their SOC. Such restrictions are conditional:
a.
does not lead to discrimination among fellow members;
b.
consistent with the provisions of the International Monetary Fund (IMF);
c.
avoid commercial, economic, and financial loss to other members;
d.
not exceeding what is necessary to overcome the situation;
e.
Must be temporary and must be phased out.
Emergency safeguard measures, other than balance of payments difficulties that members
can take, will still be negotiated multilaterally. Such negotiations should commence no later
than three years after the entry into force of the WTO. This is to give members the
opportunity to study what difficulties may arise after the implementation of the GATS, given
that trade in services has not been regulated before.
LETTER OF CREDIT (L/C):
With the rapid increase in international trade activities or trade between countries, such as
export-import transactions coupled with the number and prices that are quite large and high, it
is certain that it will be different from local transactions or transactions usually. These
differences exist in terms of regulations, mechanisms, payments, and so on. In addition, in the
case of interstate transactions, it usually cannot be done personally, meaning only between the
seller and the buyer, because in such cases a party is needed to help handle the financing
traffic in this international transaction. Transactions between countries, especially with large
and high amounts and prices, usually require an institution that can be used as a payment
intermediary to facilitate financing traffic and can even provide a guarantee of security for
sellers and buyers between these countries. These institutions are foreign exchange banks,
which are in charge of serving and issuing Letters of Credit (L/C).
Factors that become the basis for the continued development of the use of L/C include
foreign exchange controls in several countries, the uncertainty of the economic situation, and
the need for a way for exporters to facilitate the payment of their export goods. Although this
Letter of Credit (L/C) is issued by a bank, the bank only deals with documents and not goods.
Letter of Credit (L/C) itself has several roles not only as an instrument to facilitate
international trade financing, but there are still several other roles.
A.
Definition of Letter of Credit:
In general, L/C is used to finance long-distance sales contracts between buyers and sellers
who do not know each other well. In other words, L/C is used to finance international trade
transactions. However, L/C is not a guarantee or transferable securities.
C.F.G. Sunaryati Hartono said, literally L/C can be translated as a debt letter or receivable
letter or bill, but actually L/C is more of a promise of payment, if and after certain conditions
are met.
Agoes Moerjono, an insurance practitioner in the field of export development, said that
Letter of Credit (L/C) is an agreement between banks that issue Letter of Credit (L/C) and
exporters who enjoy the benefits of Letter of Credit (L/C).
Henry Harfield, an L/C legal expert in America said, "A Letter of Credit (L/C) is a legally
enforceable promise by an issuer to a beneficiary," meaning that the essence of a Letter of
Credit (L/C) is a legally enforceable promise.
In addition, UCP (Uniform Customs and Practice for Documentary Credits) says that L/C
is a promise from the issuing bank to make payment or authorize other banks to make
payment to the beneficiary upon submission of documents (e.g. bills of lading, invoices, and
insurance certificates) in accordance with the L/C requirements. The essence of the definition
of L/C according to the UCP is that an L/C is a "promise of payment".
Bank Indonesia said, Letter of Credit (L/C) is a promise of the issuing bank to pay a
certain amount of money to the exporter as long as he can fulfill the terms and conditions of
the Letter of Credit (L/C).
According to Amir M.S., in his book entitled Letter of Credit: In the Import-Export
Business explains, Letter of Credit (L/C) are letters issued by foreign exchange banks at the
request of importers of foreign exchange bank customers concerned and addressed to
exporters. The letter states that the exporter receiving the L/C is given the right by the
importer to draw drafts on the opening bank for a certain amount of guarantee to accept or
honor the drawn draft. The content of the letter states that the exporter receiving the L/C is
given the right by the importer to draw a draft (warrant to settle debt) on the opening bank for
a certain amount of guarantee to accept or honor the drawn draft as long as it complies with
all the conditions stated in the letter.
From some of the definitions previously presented, we can conclude that Letter of Credit
(L/C) is one of the most important payment instruments in international trade, which is an
international payment method that allows exporters to receive payment without waiting for
news from abroad after the goods and documents are sent abroad (to the customer).
The concept of Letter of Credit (L/C) is simply the assumption of payment responsibility
by another party (bank) based on the request of the guaranteed party (applicant/buyer) to
make payment to the beneficiary/seller based on the terms and conditions specified and
agreed upon.
B.
Legal Basis L/C:
As an instrument of trade, especially international trade, it is certain that Letter of Credit
(L/C) has a legal basis, either as a regulation or guideline in the implementation of Letter of
Credit (L/C).
1.
Legal Basis of L/C in Indonesia:
a.
Government Regulation No. 1 Year 1982 on the Implementation of Export, Import, and
Foreign Exchange Traffic.
b.
Circular Letter No. 26/34/ULN dated December 17, 1993 stipulates that L/Cs issued by
foreign exchange banks may or may not be subject to the UCP.
c.
And other laws, regulations, instructions, and decrees that have been issued.
2.
UCP 600
UCP 600 (Uniform Customs and Practice for Documentary Credits) is the latest version of
the international best practice guidelines. L/C transactions issued by the ICC (International
Chamber of Commerce). UCP 600 is effective since July 1, 2007 replacing the previous
guideline (UCP 500). Since that date, all banks issuing new L/Cs are expected to refer to UCP
600.
C.
Role L/C:
In international trade, L/C has several roles, namely:
1.
Facilitate the settlement of export transaction payments.
2.
Secure the funds provided by the importer to pay for the imported goods.
3.
Ensure the completeness of shipping documents.
Exports and imports are separated, both geographically and geopolitically. Even
personally, exporters and importers do not know each other. L/C is opened by the importer to
provide a guarantee to the exporter, and vice versa, the importer opens the L/C also as a
guarantee to obtain the shipment of goods in full in accordance with what he wants.
Meanwhile, the L/C will not be disbursed without the submission of shipping documents.
D.
Mechanism L/C:
Here is the mechanism of L/C:
1.
Buyers take the initiative to order goods/services.
2.
The seller asks the buyer to open an L/C, notifying the acceptable "terms and conditions" as
well as the name of the designated advising bank.
3.
The buyer requests the bank where his account is located (issuing bank) to open an L/C by
informing the acceptable "terms and conditions" as well as the name of the advising bank
appointed by the seller.
4.
Issuing bank opens an L/C and sends it to the advising bank. (As well as sending a copy to the
buyer, the buyer sends the copy to the seller as confirmation that the L/C has been opened). If
the issuing bank does not have a correspondent relationship with the advising bank, the buyer
will find a correspondent bank as an intermediary.
5.
The advising bank conveys the L/C to the beneficiary (seller).
6.
After the ordered goods/services are ready for shipment, the beneficiary (seller) prepares the
documents required in the L/C (export documents). If the documents are ready, the
beneficiary will submit the documents to the advising bank.
7.
The advising bank will study the contents of the document, if it meets the requirements (in
accordance with the L/C conditions) then the document will be sent to the issuing bank to
request payment, otherwise the document will be rejected and returned to the beneficiary and
notify the deviations that have occurred.
8.
Once the documents are received, the issuing bank will check the completeness and
conformity of the documents received with the terms and conditions in the L/C. If not, the
payment will be rejected. If it is appropriate, the issuing bank will pay the beneficiary (seller)
through the advising bank, and send the document to the buyer. With the original documents
received from the issuing bank, the buyer will pick up the customized goods/services, without
the original documents, the buyer will not be able to pick up the goods/services.
E.
Related Parties in L/C Opening :
The following are the parties involved in opening an L/C:
1.
Opener or Applicant
The importer who requests the assistance of a foreign exchange bank to open an L/C for the
purposes of the seller or exporter is referred to as the opener or applicant of the L/C.
2.
Opening Bank or Issuing Bank
The foreign exchange bank that is asked for assistance by the importer to open an L/C for the
exporter's needs is called the opening bank or issuing bank. It is this foreign exchange bank
that provides a guarantee to the exporter. Therefore, the value of the L/C is highly dependent
on the good name and reputation of the foreign exchange bank that opens the L/C.
3.
Advising
The opening bank opens the L/C for the exporter through another bank in the exporter's
country that is a correspondent of the opening bank. The correspondent bank is obliged to
deliver the mandate contained in the L/C to the rightful exporter. This correspondent bank is
obliged to convey the mandate contained in the L/C to the entitled exporter. Therefore, the
correspondent bank in question is called an advising bank, or mandate delivery bank.
4.
Beneficiary
The exporter receiving the L/C opening and being given the right to withdraw money from the
available L/C funds is referred to as the L/C recipient or beneficiary.
5.
Negotiating Bank
In the L/C, the beneficiary is usually allowed to cash (negotiate the shipping document)
through any preferred bank as long as it meets the L/C requirements. The bank that pays this
document is called the negotiating bank.
L/Cs that can only be negotiated at certain banks are usually called Restricted L/Cs. L/C
that can be negotiated at any bank is usually called Open L/C.
F.
Advantages L/C:
1.
Advantages for Exporters
a.
Payment certainty and risk aversion
Although exporters and importers do not know each other, the existence of an L/C is a
guarantee for exporters that their bills will be paid by the bank in accordance with the
provisions. The reputation or good name of the bank that opens the L/C is the main guarantee,
and the payment guarantee will become a double guarantee if the foreign exchange bank
acting as the advising bank also provides confirmation. Thus, the risk of non-payment is
minimal. Here we can see the role of banks in facilitating international trade.
b.
Document reinforcement can be done immediately
If the goods are already on the ship, the L/C shipping document can be directly cashed or
negotiated with the advising bank and there is no need to wait for payment or remittance from
the importer.
c.
The fee charged by the bank for document negotiation is relatively small if there is an L/C.
d.
The exporter/seller will receive payment for the delivery of goods with certainty in
accordance with the terms of the L/C.
e.
Avoid the risk of exchange transfer restrictions
At each L/C opening, the bank has provided foreign currency for each bill based on the L/C,
thus the exporter avoids the risk of non-payment that may occur if the transaction is carried
out without an L/C.
f.
Possibility of obtaining a down payment or interest-free credit
If the importer is willing to open an L/C with a "red clause", the exporter can obtain an
advance payment from the L/C. This means that the exporter gets an interest-free credit or a
kind of advance payment that is usually needed to start the production of the goods to be
exported.
Even in Indonesia, the possession of a Letter of Credit (L/C) can be used as a basis for
applying for an "Export Credit (EC)" to obtain early funds from foreign exchange banks, to
be used as working capital in producing goods facilitated by the Letter of Credit (L/C). Of
course, the bank will charge a certain interest on the credit, which is commonly called
discount interest.
2.
Benefits for Importers:
a.
Exporters come to believe that the goods shipped will definitely be paid for.
b.
The importer/buyer will receive the goods and pay the exact price in accordance with the
terms in the L/C.
c.
The L/C is a guarantee for the importer that the documents on the ordered goods will be
received in a complete and intact condition because they are scrutinized by a bank that already
has expertise in that matter.
d.
The importer may include conditions for security that the exporter will definitely comply with
in order to withdraw money from the L/C.
G.
Types of Letter of Credit:
There are several types of L/C, namely:
1.
Revocable L/C
It is an L/C that can be canceled or changed unilaterally by the opener or by the issuing bank
without requiring approval from the beneficiary.
2.
Irrevocable L/C
Irrevocable L/C is an L/C that cannot be canceled during the validity period specified in the
L/C and the opening bank still guarantees to accept the drafts drawn on the L/C. Cancellation
may also be done, but it must be with the consent of all parties concerned with the L/C.
3.
Irrevocable and Confirmed L/C
This L/C is considered the most perfect and safest from the point of view of the beneficiary
because the payment or repayment of drafts drawn on this L/C is fully guaranteed by the
opening bank and by the advising bank, if all conditions are met, and is not easily canceled
due to its irrevocable nature.
4.
Clean Letter of Credit
This L/C does not include other conditions for the withdrawal of a draft. That is, no other
documents are required, even the withdrawal of money from the available credit can be done
with the submission of ordinary receipts.
5.
Documentary Letter of Credit
Withdrawal of available money or credit must be completed with other documents as
mentioned in the terms of the L/C.
6.
Documentary L/C with Red Clause
In this type of L/C, the beneficiary is given the right to withdraw part of the available L/C
amount by submitting an ordinary receipt or by withdrawing a draft without requiring other
documents, while the rest is executed as in the case of documentary L/C. This L/C is a
combination of open L/C and documentary L/C.
7.
Revolving L/C
This L/C allows the available credit to be reused without making any changes to the specific
terms of the L/C. For example, for a period of six months, the credit available each month is
US$1,200, meaning that automatically each month (for six months) the credit available is
US$1,200, no matter whether the amount is used or not.
8.
Back to Back L/C
In this L/C, the beneficiary is usually not the owner of the goods, but only an intermediary.
Therefore, the beneficiary of this L/C is forced to ask his bank for help to open an L/C for the
actual owner of the goods by pledging the L/C he received from abroad.
9.
Transferable L/C
Beneficiary has the right to request the bank mandated to make payment/acceptance to any
bank entitled to negotiate, to assign the right to credit fully/partially to a third party.
10.
Stand by Letter of Credit
A special guarantee that is usually used as a "stand by" by the beneficiary or bank on behalf
of its customers. In this case if the applicant fails to execute a contract / fails to repay the loan
/ fulfill the loan, the bank will pay the beneficiary upon submission of a sight draft and a
statement from the beneficiary stating that the applicant or contractor is unable to execute the
agreed contract, repay the loan / fulfill its obligations.
Case Example:
PT Citra Senantiasa Abadi or PT CSA, is engaged in the polypropylene industry. Teguh
Boentoro and Anhar Satyawan are listed as shareholders, 99% and 1% respectively. While the
management of PT CSA, Anhar Satyawan as director and Teguh Boentoro, commissioner.
Teguh Boentoro, also works as a tax consultant at PB & Co.
Based on the results of Bank Indonesia's examination, it is known that PT CSA received
preferential treatment in obtaining L/C facilities from Century Bank. Like PT SPI's mode, the
L/C for PT CSA was issued based on the instruction of Robert Tantular (Shareholder of
Century Bank), and Hermanus Hasan Muslim (Managing Director of Century Bank).
Everything was based on information from the Head of the Senayan Operational Center
Office (KPO), Linda Wangsadinata. Letter of Credit (L/C) Facility No. 0525LC08B given to
PT CSA amounting to US$20 million. The collateral, or margin deposit, was a US$2 million
deposit (or 10% of the L/C ceiling). The L/C facility was used for naphtha import transactions
from Bunge, S.A, Singapore (beneficiary) in accordance with sales contract No. BSA SG
S08-5908-1190. The guarantor bank (negotiating bank) is Dresdner Bank Switzerland,
Singapore, and the correspondent bank, Dresdner Bank Switzerland, Jakarta.
Analysis:
L/C transactions should not have received preferential treatment in obtaining L/C facilities
from Century Bank. And there should be no interference from the shareholders of Century
Bank. There should have been a comprehensive procedure, especially regarding the ability or
financial condition of the company run by the bank concerned in accordance with the Bank's
Credit Policy and the Bank's Credit Implementation Guidelines. The Audit Board (BPK) also
noted PT CSA's violation of the Bank Credit Policy and Credit Implementation Guidelines
issued by Century Bank No. 20/SK-DIR/ Century/IV/2005 dated April 21, 2005. The
violations were related to the absence of LRKU and credit agreement along with other
necessary bindings.
Buyer : PT Citra Senantiasa Abadi
Seller : Bunge, S.A, Singapore (Beneficiary)
Exporter's Bank : Dresdner Bank Switzerland, Singapore
Correspondent Bank : Dresdner Bank Switzerland, Jakarta Traded
Goods : Naphtha
A condition where the seller and buyer in their activities are limited by long distances and
long travel times, so that the seller and buyer are not able to fulfill their activities makes it
difficult for cash transactions to take place across borders. This raises concerns by both parties
to the risk of loss if one party does not fulfill its obligations. Therefore, the existence of Letter
of Credit (L/C) facilitates and provides security guarantees in cross-border transaction
activities in the form of export-import. Letter of credit, or often abbreviated as L/C, LC, or
LOC is an international payment method/payment service commonly used by vendors and
buyers in export-import activities with buying and selling transactions that provide deferred
payment facilities. It serves to maintain security and convenience in international buying and
selling transactions efficiently and reliably.
L/C actors include: applicant, beneficiary, issuing bank, advising bank, confirming bank,
and carrier which have their respective roles and functions in this L/C activity. L/C also has
types of agreements in conducting transactions based on mutual agreement between the
vendor and the buyer.
Letter of Credit (L/C) does play a very important role in business activities or transactions
between countries, therefore the implementation of Letter of Credit (L/C, LC, LOC) must be
in accordance with the universal applicable provisions in the procedure and situation, this is
also very influential for the continuity of business activities. It is advisable for all parties to be
careful to check the completeness of other documents so as to avoid adverse risks. So that the
goods and payments will be guaranteed security is useful.
