CHAPTER 10: Markets Laws Governing Access to Foreign Left to their own devices, the natural inclination of most nations is to protect their domestic industrial and agricultural base from foreign competition. National governments are easily tempted by the persuasive voices of trade groups representing powerful industries, political lobbyists, voters, and local politicians, and domestic producers calling for protection from low-cost foreign competitors. One of the most rudimentary principles of modern economics is that protectionism causes market distortions and economic inefficiency. Most nations today recognize the economic benefits of opening their markets to foreign competition. At the same time, nations realize that many of their domestic firms are also competing for business in foreign markets and facing barriers to market access there. As more and more of their industries become dependent on export sales, they also become vulnerable to protectionist tactics. These nations realize protectionism is a double-edged sword. If they expect their firms to have open access to foreign markets, or market access, they must be willing to grant the same privileges to foreign firms in their own markets. Agreeing to concessions that open a market to foreign competition can be a painfully slow process. It can be economically painful, because local firms are finding that they now must either reinvent themselvesretraining employees, retooling their factories, and employing new technologies to become more competitiveor go out of business. And it can be politically painful, because politicians at all levels of government find themselves pressured by local interests to protect the status quo. This chapter examines specific GATT/WTO agreements that open markets for goods and services in the following areas: (1) technical barriers to trade, including product standards; (2) import licensing procedures; (3) government procurement of goods and services; (4) trade in services, including consulting, engineering, banking and financial services, insurance, telecommunications, and the professions; (5) trade in agricultural products; (6) trade in textiles and apparel; (7) trade-related investment measures; and (8) trade-related aspects of intellectual property rights. The chapter concludes with a look at the U.S. response to foreign trade barriers that deny access to U.S. products and services or that treat U.S. firms unfairly. This includes U.S. laws that permit retaliation against illegal foreign barriers to fair trade. THE GENERAL PRINCIPLE OF LEAST RESTRICTIVE TRADE We begin with one of the broadest and most important legal concepts in the body of international trade law: the principle of least restrictive trade. The principle states that WTO member countries, in setting otherwise valid restrictions on trade, shall make them no more onerous than necessary to achieve the goals for which they were imposed. For example, if a country requires inspections of foreign fruit arriving from countries affected by a plant disease, the inspection procedures must be no more arduous, rigorous, or expensive than is needed to achieve those ends. They may not be a trade barrier in disguise. A corollary is that national laws and regulations passed for purely internal purposes, such as the protection of the general health, welfare, and safety, must also pose the fewest barriers to trade as possible. This principle is relevant to all types of regulations: health codes, environmental regulations, worker safety laws, and uniform technical specifications for a wide range of industrial or consumer products. Examples might include laws regulating the sale of alcohol or tobacco or banning the sale of beef containing growth hormones, genetically modified foods, or toxic lead paint. It might include testing requirements for the fire resistance of fabrics or the safety of children's toys or set mandatory standards for the practice of law or medicine. The list is endless; the concept is the same. Countries may protect their citizens to the extent they deem necessary but must choose those methods that do not unduly burden international trade and/or single out foreign goods or service providers for unfair or discriminatory treatment. The WTO Appellate Body has stated that this is a balancing test: nations must weigh the necessity of protecting the public against restrictions on free trade. The principle of least restrictive trade appears throughout GATT law and applies to most of the discussions in this chapter. The following case, ThailandRestrictions on Importation of Cigarettes (1990), is an early GATT panel decision that is still cited by the WTO Appellate Body. It considers Thailand's options for reducing tobacco use. As you read, consider reviewing the GATT national treatment provisions in the previous chapter. ThailandRestrictions on Importation of Cigarettes GATT Basic Instruments and Selected Documents, 37th Supp. 200 (Geneva, 1990) Report of the Dispute Settlement Panel BACKGROUND AND FACTS The Royal Thai government maintains restrictions on imports of cigarettes. The Tobacco Act of 1966 prohibited the import of all forms of tobacco except by license of the Director-General of the Excise Department. Licenses have only been granted to the governmentowned Thai Tobacco Monopoly, which has imported cigarettes only three times since 1966. None had been imported in the ten years prior to this case. The United States requested the panel to find that the licensing of imported cigarettes by Thailand was inconsistent with GATT Article XI and could not be justified under Article XX(b) since, as applied by Thailand, the licensing requirements were more restrictive than necessary to protect human health. Thailand argued that cigarette imports were prohibited to control smoking and because chemicals and other additives contained in American cigarettes might make them more harmful than Thai cigarettes. REPORT OF THE PANEL ADOPTED ON 7 NOVEMBER 1990 The Panel, noting that Thailand had not granted licences for the importation of cigarettes during the past 10 years, found that Thailand had acted inconsistently with Article XI:1, the relevant part of which reads: \"No prohibitions or restrictions ... made effective through... import licenses...shall be instituted or maintained by any [country] on the importation of any product of the territory of any other [country].\" ... The Panel proceeded to examine whether Thai import measures affecting cigarettes, while contrary to Article XI:1, were justified by Article XX(b), which states in part: [N]othing in this Agreement shall be construed to prevent the adoption or enforcement by any [country] of measures: ... (b) necessary to protect human, animal or plant life or health. The Panel then defined the issues which arose under this provision.... [The] Panel accepted that smoking constituted a serious risk to human health and that consequently measures designed to reduce the consumption of cigarettes fell within the scope of Article XX(b). The Panel noted that this provision clearly allowed [countries] to give priority to human health over trade liberalization; however, for a measure to be covered by Article XX(b) it had to be \"necessary.\" ... The Panel concluded from the above that the import restrictions imposed by Thailand could be considered to be \"necessary\" in terms of Article XX(b) only if there were no alternative measure consistent with the GATT Agreement, or less inconsistent with it, which Thailand could reasonably be expected to employ to achieve its health policy objectives. The Panel noted that [countries] may, in accordance with Article III:4 of the GATT Agreement, impose laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of imported products provided they do not thereby accord treatment to imported products less favourable than that accorded to \"like\" products of national origin. The United States argued that Thailand could achieve its public health objectives through internal measures consistent with Article III:4 and that the inconsistency with Article XI:1 could therefore not be considered to be \"necessary\" within the meaning of Article XX(b). The Panel proceeded to examine this issue in detail.... The Panel then examined whether the Thai concerns about the quality of cigarettes consumed in Thailand could be met with measures consistent, or less inconsistent, with the GATT Agreement. It noted that other countries had introduced strict, non-discriminatory labeling and ingredient disclosure regulations which allowed governments to control, and the public to be informed of, the content of cigarettes. A non-discriminatory regulation implemented on a national treatment basis in accordance with Article III:4 requiring complete disclosure of ingredients, coupled with a ban on unhealthy substances, would be an alternative consistent with the GATT Agreement. The Panel considered that Thailand could reasonably be expected to take such measures to address the quality-related policy objectives it now pursues through an import ban on all cigarettes whatever their ingredients. The Panel then considered whether Thai concerns about the quantity of cigarettes consumed in Thailand could be met by measures reasonably available to it and consistent, or less inconsistent, with the GATT Agreement. The Panel first examined how Thailand might reduce the demand for cigarettes in a manner consistent with the GATT Agreement. The Panel noted the view expressed by the World Health Organization (WHO) that the demand for cigarettes, in particular the initial demand for cigarettes by the young, was influenced by cigarette advertisements and that bans on advertisement could therefore curb such demand. At the Forty-third World Health Assembly a resolution was approved stating that the WHO is: \"Encouraged by...recent information demonstrating the effectiveness of tobacco control strategies, and in particular...comprehensive legislative bans and other restrictive measures to effectively control the direct and the indirect advertising, promotion and sponsorship of tobacco.\" A ban on the advertisement of cigarettes of both domestic and foreign origin would normally meet the requirements of Article III:4.... The Panel noted that Thailand had already implemented some nondiscriminatory controls on demand, including information programmes, bans on direct and indirect advertising, warnings on cigarette packs, and bans on smoking in certain public places. The Panel then examined how Thailand might restrict the supply of cigarettes in a manner consistent with the GATT Agreement. The Panel noted that [countries] may maintain governmental monopolies, such as the Thai Tobacco Monopoly, on the importation and domestic sale of products. The Thai Government may use this monopoly to regulate the overall supply of cigarettes, their prices and their retail availability provided it thereby does not accord imported cigarettes less favourable treatment than domestic cigarettes or act inconsistently with any commitments assumed under its Schedule of Concessions.... For these reasons the Panel could not accept the argument of Thailand that competition between imported and domestic cigarettes would necessarily lead to an increase in the total sales of cigarettes and that Thailand therefore had no option but to prohibit cigarette imports. In sum, the Panel considered that there were various measures consistent with the GATT Agreement which were reasonably available to Thailand to control the quality and quantity of cigarettes smoked and which, taken together, could achieve the health policy goals that the Thai government pursues by restricting the importation of cigarettes inconsistently with Article XI:1. The Panel found therefore that Thailand's practice of permitting the sale of domestic cigarettes while not permitting the importation of foreign cigarettes was an inconsistency with the GATT not \"necessary\" within the meaning of Article XX(b). Decision. The licensing system for cigarettes was contrary to Article XI:1 and is not justified by Article XX(b). The panel recommended that Thailand bring its laws into conformity with its obligations under the GATT. Comment. GATT Article XVII permits a country to create state agencies and \"marketing boards\" that have the authority to import and export goods. The Thai Tobacco Monopoly is an example. State trading enterprises are often used in developing countries and usually have the exclusive right to import or export certain classifications of goods. Products traded by state enterprises might include foodstuffs, medicines, liquor, or, as in this case, tobacco. Article XVII requires that state enterprises not discriminate against the purchase of foreign goods, or treat them differently than domestic goods. Case Questions 1. What reasons did Thailand give for restricting imports of cigarettes? What GATT provision did Thailand rely on to restrict cigarette imports? 2. The panel states that GATT permits countries to give priority to human health over trade liberalization only under certain conditions. What are those conditions? 3. How was the doctrine of \"least restrictive trade\" used in this case? 4. What alternative means could Thailand have used to achieve its objectives that would have not singled out imported cigarettes for discriminatory treatment? TECHNICAL BARRIERS TO TRADE A technical regulation is a law or regulation affecting a product's characteristicssuch as performance, design, construction, chemical composition, materials, packaging, or labelingthat must be met before a product can be sold in a country. A product standard, or standard, is a voluntary guideline for product characteristics established by a recognized private or administrative body. Technical regulations are mandatory and imposed by government regulations, whereas standards are usually voluntary and issued by either private industry groups or government agencies. Although a standard may be \"voluntary,\" a product may not be accepted by consumers in the marketplace unless it complies with the standard. Technical regulations and standards that apply to imported foreign products, even if they also apply equally to domestic products, are called technical barriers to trade. The Protection of Public Health, Safety, or Welfare Almost all products are subject to technical regulations or standards set by either government regulators or private standard-setting groups. They are generally imposed for the protection of public health, safety, or welfare to promote uniform design, engineering, and performance standards or to ensure product quality or purity. Examples include standards for the safe design of consumer goods, for automotive safety, vehicle emissions, or fuel economy, for safe foods and pharmaceuticals, standards of weights and measures, or worker safety standards for machinery and industrial equipment. Other standards protect consumers from fraud or deception (such as labels that disclose the product's content or warn of safe uses); impose environmental criteria on appliances and other products (such as by restricting ozone-damaging refrigerants or eliminating dangerous formaldehyde or heavy metals from bed linens, carpeting, or construction materials); set packaging requirements for products such as plastic bottles that aid in recycling or for energy efficiency; require technical specifications standardizing electrical power and telecommunications, building and construction standards (such as common sizes for lumber and building materials), standards for barcodes and barcode readers, and many others. Imagine multinational companies such as Ford, General Electric, Electrolux, or Bosch-Siemens and the incredibly diverse product standards they must meet in each country in which their products are sold. Product Testing, Inspections, and Certifications for Compliance with Technical Standards and Regulations. Most countries require some type of testing, inspection, or certification of regulated products. There are several different approaches taken with regard to inspections. In some countries, regulated products must be tested or inspected by an approved laboratory, receive a certification of compliance with technical standards, and then receive prior regulatory approval before sale. In other countries, regulated products must be tested or inspected and certified, but that certification remains on file with the manufacturer or importer, and no regulatory approval is needed prior to import or domestic sale. Different countries have different philosophies and thus take different approaches. For instance, in the United States, the U.S. Flammable Fabrics Act places technical restrictions on the sale of all bed mattresses. The law is administered through regulations of the Consumer Products Safety Commission. Six prototypes of a given mattress are subjected to a controlled cigarette burn test under laboratory conditions to determine whether they meet federal safety requirements. If the length of the char is longer than allowed or if the mattress ignites, then it does not pass. The manufacturer usually arranges to have the test performed by an independent laboratory. They are required to keep photographs and records of the results at their place of business and to make them available to retailers, customers, or agency regulators when requested. Importers are also subject to these regulations; any of their products entering into the United States must meet these standards. If they cannot produce the certification, their goods will be denied entry or removed from stores. Thus, foreign manufacturers and importers alike must be familiar with the regulations of the countries to which their products will be shipped. Because they often cause delays in getting goods to market, inspection and testing requirements can prove to be a tremendous barrier to trade. This is especially true if the product has a short shelf life, as with produce or other food products, or a short technological life (semiconductors or computer parts). In 1989, the European Community complained that the United States was delaying the inspection of perishable products by making them wait in turn behind nonperishable goods such as steel products, causing the perishables to spoil in the process. Entire shipments of citrus fruit from Spain had to be dumped, and the importer received no compensation. In the United States, technical regulations and product standards are set by many federal agencies, including the Department of Agriculture, the Consumer Product Safety Commission, the Food and Drug Administration, the Federal Communications Commission, the Department of Energy, and the Department of Transportation. To illustrate, the U.S. Department of Agriculture is required by law to review meat inspection standards in foreign countries to ensure that imported meat products comply with USDA standards. The Federal Communications Commission promulgates uniform standards for telecommunications equipment that apply to foreign products. The Consumer Product Safety Commission's rules apply to all consumer products, regardless of where they are made. In 2007, it was discovered that Chinese-made toys were found to contain dangerous amounts of lead (a known carcinogen, long banned in the United States and other countries), as well as other chemicals that can cause seizures, coma, and death. (In 1994, Chinese crayons had been removed from sale for the same reasons.) Millions upon millions of these toys were found in many countries around the world. The event caused an outcry of public opinion, a reawakening of consumer safety sentiment, a review of consumer legislation in the United States and elsewhere, and a vast change in concern and oversight by the Chinese government. Why Standards and Technical Regulations are Barriers to Trade. It is obvious that a regulation or standard that applies only to foreign goods and not to domestic goods discriminates against the foreign goods. However, many technical barriers do not discriminate on their face, only in their application. As a result, discrimination may occur even when imported and domestic products are treated the same. A manufacturer whose product meets local regulations may find that building another product specially to meet foreign regulations is cost prohibitive. For instance, if U.S. wallboard manufacturers produce wallboard in compliance with U.S. regulations that is 1/2 thick and Europe requires wallboard to be 2.0 cm thick, then a U.S. exporter would have to produce specially made wallboard for export to Europe. Certainly, the European nations have the right to determine safety standards for construction, but the regulation does not allow the U.S. firm to take advantage of economies of scale and is, thus, an indirect technical barrier to trade. Environmental regulations, in particular, can vary greatly from country to country. Another problem is that many technical regulations and standards are not transparent; they lack transparency. Transparency refers to ability of the public, particularly foreign firms, to have open access to government rules or private standards that are published and made readily available to foreign firms. If a technical regulation is made known only to domestic firms, then it indirectly becomes a technical barrier to foreign firms who are unable to comply. Indeed, many foreign firms never learn of a foreign technical barrier until it is too late - only after their shipment to a customer is turned away by a foreign customs agency. Moreover, foreign companies are generally not a part of the standard-setting process. Domestic firms are typically invited to participate in developing and writing regulations or standards; foreign firms are not. Thus, they often experience delays in adapting their products for sale in the foreign market, causing them to lose competitive advantage to local firms. The U.S. Department of Commerce maintains a collection of international standards so that U.S. exporters will have access to foreign technical regulations and standards applicable to their industries. Another problem is that some countries require the inspection of the factory where a product is made, including foreign factories, or advance approval of certifying laboratories. This makes it extremely difficult and expensive to import these products. European Union Standards and Technical Regulations The problem of technical barriers is critical to firms operating in the EU, where national standards vary tremendously. Consider the impact of these barriers on a firm such as Phillips, a Dutch electronics company, which has had to manufacture twenty-nine different types of electrical outlets. Thus, the standards policy of the EU is designed to balance the health and safety interests of member countries with the need for the free flow of goods. Despite decades of work by the EU Commission to reduce technical barriers to trade, thousands of new national standards have arisen. Even after years of debating detailed standards for thousands of products, companies wishing to sell their products in Europe still face a maze of complex regulations, applicable to a wide range of products from beer to hair dryers, automobiles to plywood. However, EU countries understand that uniform standards are essential to achieving a unified market. The EU's effort to reduce technical barriers is reflected in many opinions of the European Court of Justice. In one case, arising over the sale of liquor made in France and sold in Germany, the Court ruled that an EU member country could not prohibit the sale of a product produced in another EU member country when that product had already met the technical specifications of the producing country. In decisions handed down in the 1980s, the Court rejected attempts by two EU countries to protect centuries-old industries. Disregarding consumer protection arguments, the Court of Justice struck down Germany's beer purity law, which had kept out foreign beers containing preservatives and required that beer only be made from wheat, barley, hops, and yeast (beer made in other European countries often contains rice and other grains). The Court also struck down Italy's pasta content regulations. In one long-standing dispute with the United States, the EU prohibited the import of beef containing growth hormones. Because these hormones are widely used in the United States, U.S. beef was kept out of European markets. Standard setting in the EU for nonelectrical products is done by the European Committee for Standardization. This intergovernmental agency works with manufacturers, including some European subsidiaries of U.S. firms, and with scientists to develop workable product standards. When adopted by directive of the European Council, the standards become legally binding for products sold in Europe (see Exhibit 10.1). EXHIBIT 10.1: EU Council Directive Concerning the Safety of Toys* Article 1.1. This Directive shall apply to toys. A \"toy\" shall mean any product or material designed or clearly intended for use in play by children of less than 14 years of age. 2. Taking account of the period of foreseeable and normal use, a toy must meet the safety and health conditions laid down in this Directive. Article 5.1. Member states shall presume compliance with the essential requirements referred to in Article 3 in respect of toys bearing the EC mark provided for in Article 11, hereinafter referred to as \"EC mark,\" denoting conformity with the relevant national standards which transpose the harmonized standards the reference numbers of which have been published in the Official Journal of the European Communities. Article 7.1. Where toys bearing the EC mark are likely to jeopardize the safety and/or health of consumers, it shall withdraw the products from the market. Article 8.1. Before being placed on the market, toys must have affixed to them the EC mark by which the manufacturer or his authorized representative established within the Community confirms that the toys comply with those standards; ... 3. The approved [inspection firm] shall carry out the EC typeexamination in the manner described below: -it shall check that the toy would not jeopardize safety and/or health, as provided for in Article 2. -it shall carry out the appropriate examinations and testsusing as far as possible the harmonized standards referred to in Article 5 (1). Article 11.1. The EC mark shall as a rule be affixed either to the toy or on the packaging in a visible, easily legible and indelible form. 2. The EC mark shall consist of the symbol \"CE.\" 3. The affixing to toys of marks or inscriptions that are likely to be confused with the EC mark shall be prohibited. Article 12.1. Member States shall take the necessary measures to ensure that sample checks are carried out on toys which are on their market and may select a sample and take it away for examination and testing. ANNEX II ESSENTIAL SAFETY REQUIREMENTS FOR TOYS II. PARTICULAR RISKS 1. Physical and mechanical properties: (a) Toys must have the mechanical strength to withstand the stresses during use without breaking at the risk of causing physical injury. (b) Edges, protrusions, cords, cables, and fastenings on toys must be so designed and constructed that the risks of physical injury from contact with them are reduced as far as possible.... (d) Toys, and their component parts, and any detachable parts of toys which are clearly intended for use by children under thirty-six months must be of such dimensions as to prevent their being swallowed or inhaled.... (e) Toys, and their parts and the packaging in which they are contained for retail sale must not present a risk of strangulation or suffocation. (h) Toys conferring mobility on their users must, as far as possible, incorporate a braking system which is suited to the type of toy and is commensurate with the kinetic energy developed by it. 2. Flammability: (a) Toys must not constitute a dangerous flammable element in the child's environment. They must therefore be composed of materials which...irrespective of the toy's chemical composition, are treated so as to delay the combustion process. ANNEX IV WARNINGS AND INDICATIONS OF PRECAUTIONS TO BE TAKEN WHEN USING TOYS 1. Toys which might be dangerous for children under thirty-six months of age shall bear a warning, for example: \"Not suitable for children under thirty-six months.\" 5. Skates and skateboards for children. If these products are offered for sale as toys, they shall bear the marking: \"Warning: protective equipment should be worn.\" * Exhibit text was edited for student use by the authors. Council Directive 88/378/EEC of 3 May 1998 concerning the safety of toys. Official Journal I. 187, 16/07/1988, p. 0001-0013; Document 388L0378. SOURCE: EU Website. The EU has attempted to increase its standardization through the CE Mark. (CE means Conformit Europene.) The CE Mark is an internationally recognized symbol for quality and product safety for many different types of products, such as children's toys, gas appliances, machinery, and medical and electrical equipment. European manufacturers seeking the mark are inspected and audited by an EUauthorized body. Their products must be tested by an independent laboratory. Once the mark is received, a European manufacturer may sell its products throughout the EU without undergoing inspections in each individual country. Manufacturers outside the EU may submit their products to an independent laboratory for testing before attaching the CE Mark. The U.S. government estimates that soon half of the U.S. products shipped to Europe will require CE Mark compliance. Japanese Standards and Technical Regulations Japan and the United States have had a long history of disputes over Japanese technical barriers to trade. U.S. and other non-Japanese firms have lodged many complaints against Japan's technical barriers, most of which involve unreasonable and burdensome inspection procedures or import licensing requirements and the arbitrary enforcement of overly strict standards. Japan has maintained complex technical regulations on thousands of important products, including electrical appliances, telecommunications and medical equipment, lumber, electronic components, pharmaceuticals, and food. The prolific use of technical requirements in Japan is rooted in Japan's protective attitude toward consumers, the historical role of the Japanese government in economic life, and the Japanese people's acceptance of governmental regulation of business. Product standards in Japan have been generally based on design characteristics that govern how a product should be designed. U.S. standards, by contrast, are usually based on performance. Performance standards describe how a product should function. It is usually more cost-effective for a manufacturer to meet foreign performance standards than design standards. Thus, it is easier for Japanese manufacturers to meet U.S. performance standards than for U.S. manufacturers to meet Japanese design standards. In Japan, products capable of inflicting injury on consumers or products that affect public health are more highly regulated than other products. For example, for many years Japan banned the import of cosmetics containing colorants and preservatives for health reasons, despite the fact that they are approved for use in the United States. Japanese agencies that enforce technical regulations include the Japanese Ministry of Economy, Trade, and Industry, which has the widest authority, and the ministries that oversee the health, agriculture, and transportation sectors. Many products require testing and prior approval before they can be sold in Japan. For instance, prior to the mid-1980s, foreign products could not be inspected for pre-clearance at the foreign factory, but could only be inspected, shipment by shipment, as they arrived in Japan. Items had to be individually inspected and tested for compliance with the applicable technical regulations or standards. Legal changes have now made it possible for a foreign firm to register with the appropriate regulatory ministry and to obtain advance product approval without going through a Japanese importer or intermediary. Another problem occurs when Japanese technical regulations and standards lack transparency. Their agencies still generally do not permit foreign input into the drafting of the regulations, although on occasion U.S. industry groups, under pressure, have succeeded in being heard by Japanese standard-setting groups. During the 1980s, new Japanese regulations provided that advance announcements of product standards be made by the Japan External Trade Organization. The symbol of an approved product in Japan is the governmentauthorized Japan Industrial Standards Mark, or JIS Mark. Its appearance on a product, although voluntary, indicates that the manufacturer has submitted to on-site inspections by the appropriate Japanese ministry and has met accepted standards for quality control, production techniques, and research methods. Because this mark has become widely recognized, foreign products without it are often not competitive in the Japanese market. Chinese Standards and Technical Regulations China has a complex regulatory system governing product quality, safety, and other standards and technical regulations. As a socialist country, the enormous bureaucracy dwarfs any similar agencies in Western countries. The laws are administered by China's General Administration of Quality Supervision, Inspection, and Quarantine, or AQSIQ. In 2008, AQSIQ had 19 major departments, 15 national institutes and research centers, 35 inspection and quarantine bureaus in 31 provinces, 500 branches and local offices across the country, and over 30,000 employees at Chinese seaports, airports, and other ports of entry. Over 180,000 employees work for provincial or municipal bureaus in developing and enforcing quality and standards laws. These bureaus also have the responsibility for enforcing Chinese laws against counterfeit products. Ten industry trade associations are allied with AQSIQ in setting standards and technical regulations. The most important Chinese laws and regulations administered by AQSIQ are: The Law on Product Quality The Standardization Law The Law on Metrology (weights and measures) The Law on Import and Export Commodity Inspection Food Hygiene Law Frontier [all air, land, and sea ports of entry] Health and Quarantine Law The Law on the Entry and Exit Animal and Plant Quarantine Regulations on the Import and Export of Endangered Wild Animals and Plants Regulations on the Recall of Defective Motor Vehicles China enforces its product quality standards through compulsory product testing, factory inspections, and certifications and by the accreditation of testing laboratories. China's compulsory certification and inspection system covers thousands of consumer and industrial products. Chinese rules require that covered products receive certification prior to import. Samples must be shipped to an approved laboratory in China for inspection and testing for compliance with Chinese quality, safety, and environmental standards. Chinese inspectors must then visit the foreign plants, whether they be in the United States, Canada, or Europe, that produce goods destined for China. Products that meet the quality and safety requirements for certification may be marked with the China Compulsory Certification Mark (CCC). No covered products can be imported into China without the mark. Under the regulations, fines may be imposed for falsification of marks. Anyone who plans to export goods to China should check the AQSIQ and CCC Mark Websites to determine whether their products are covered by Chinese regulations. The Chinese certification process can be expensive and time consuming. Follow-up supervision and reviews are conducted annually. Many companies wishing to ship to China find that they must employ a consulting firm to manage the certification process. Many of the regulations, such as those related to human health, apply to all travelers to China. The WTO Agreement on Technical Barriers to Trade The WTO Agreement on Technical Barriers to Trade (TBT Agreement) is one of the 1994 Uruguay Round agreements. It governs the use of technical regulations, product standards, testing, and certifications by WTO member countries. The TBT Agreement is binding on all WTO member countries. Remember that this agreement does not contain standards of its own. It makes no attempt to say how a product should perform or be designed or when a product is safe or unsafe. These are matters for nations and local governments to decide. But the TBT Agreement does prohibit countries from using their regulations or standards to discriminate against the import of foreign goods. Harmonization, Equivalence, and Mutual Recognition. The primary goal of the TBT Agreement is to minimize technical barriers to trade. It sets out three methods of achieving this goal. The first is harmonization, by which nations will attempt to bring their standards and technical regulations into harmony with internationally accepted standards. The second is equivalence, by which nations agree to accept foreign standards that are functionally equivalent to their own. The third is known as mutual recognition. Nations are encouraged to enter into mutual recognition agreements, whereby they recognize the certifications, or conformity assessments, of foreign inspection firms and laboratories approved in the country where the article is manufactured. For example, if a manufacturer ships telephones to several different markets, it would be far cheaper if all countries accepted the certification of an inspection firm in the manufacturer's country that the device conforms to the telecommunications standards in the importing country. This avoids the expense of having to perform multiple tests. Main Provisions of the TBT Agreement. The WTO Agreement on Technical Barriers to Trade applies to all products, including agricultural, industrial, and consumer goods. The agreement's main provisions can be outlined as follows: 1. All technical regulations shall be applied on a nondiscriminatory basis, without regard to the national origin of the products. 2. Regulations must not be made or applied to create an unnecessary obstacle to trade, and they must not be more trade restrictive than is necessary to fulfill a legitimate objective such as national security, preventing fraud or deception of consumers, protecting public health or safety, or protecting the environment. 3. Countries should take into account available scientific and technical information in writing their standards. This provision is intended to ensure that standards are not just made to keep out foreign goods, but have some scientific foundation. 4. Wherever possible, product requirements should be based on performance abilities of the product rather than on design or descriptive characteristics. For example, there are several different mechanisms in use to hold automobile doors securely closed. Government regulations that require industry to use a mechanism of a certain type or design are creating a barrier to trade. Instead, the agreement encourages governments to set a performance standard requiring that the door remain securely closed during certain collisions, leaving the design up to the manufacturer. 5. Countries should develop and use internationally accepted standards where they exist. International standards will be presumed to be in compliance with the TBT Agreement. 6. Countries should work toward the goals of harmonization of standards and equivalence. 7. Proposed standards must be published and made available to foreign countries, and those countries must be given an opportunity to make written comments prior to adoption. 8. Final regulations must be published a reasonable time before they become effective so that foreign producers have time to adapt their products. 9. Testing and inspection procedures should restrict trade as little as possible and should not discriminate. The agreement encourages on-site factory inspections instead of port-of-entry inspections for foreign goods. 10. Nations should accept the testing reports and certifications from approved foreign inspection firms and laboratories (mutual recognition of conformity assessments). 11. Countries should try to ensure that state and local governments, as well as private standard-setting groups, comply with the agreement. 12. Disputes between countries may be referred to the WTO for negotiation and settlement. The following case, WTO Report on the European Communities Measures Affecting Asbestos & Asbestos-Containing Products, is considered a landmark case in world trade law. Not only is it the first case to interpret the WTO Agreement on Technical Barriers to Trade but it also addresses a country's right to pass laws protecting the public health and safety under this agreement and under general GATT principles.(Consider reviewing the GATT articles reproduced earlier in this chapter.) International Organization for Standardization The International Organization for Standardization (ISO), based in Geneva, is a non-governmental organization comprising the national standards institutes of 157 countries. It has developed over 16,500 product standards for goods and services in many industries. ISO standards are not legally binding, and the organization has no legal authority to enforce them. However, the standards have been accepted by businesses and entire industries worldwide and are legally enforceable in countries where they have been incorporated into a treaty or under national law. In general, the standards are intended to ensure product quality, safety, efficiency, and interchangeability, although some standards have been adopted to minimize the impact of manufacturing or the use of products on the environment. European CommunitiesMeasures Affecting Asbestos & Asbestos-Containing Products WT/DS135/AB/R (2001) World Trade Organization Report of the Appellate Body BACKGROUND AND FACTS Asbestos is a natural mineral product that has been in use since the 1800s. It is inexpensive, resistant to heat and flame, and has been used in many industrial applications. It has been used in making fireproof materials, fireproof insulation, and brake linings and is used today in construction materials such as asbestos cement boards and pipes. It has been known for some time that exposure to asbestos fibers and particles can cause deadly lung disease, including a form of cancer for which the death rate is 100 percent. Signs of disease may not manifest themselves for thirty years after exposure. Although most uses of asbestos are now banned, it is still used in certain forms. Today, deposits are still mined in Russia, Canada, China, Brazil, and a few other countries. There are substitutes for asbestos whose fibers are not as dangerous, such as glass and cellulose. The asbestos at issue in this case involved Canadian chrysotile exports to France. Prior to 1997, Canada was exporting up to 40,000 tons of asbestos to France each year. Citing the health risk, France imposed a virtual ban on its manufacture, import, sale, and use, subject to a few limited and temporary exceptions. The Canadian asbestos industry responded that chrysotile fibers could be used without incurring any detectable risk because the fibers become encapsulated in the hardened products into which it is made, such as heat-resistant cement blocks. Canada requested WTO dispute settlement. France claimed that it could restrict asbestos both under GATT Article XX(b) (general provisions that a country may protect public health) and under similar provisions in the Agreement on Technical Barriers to Trade (the TBT Agreement). The Canadian government argued that the French law was not a \"technical regulation\" as permitted under the TBT Agreement, but a total prohibition. It also argued that under GATT Article III:4 (the general principle of nondiscrimination) a country may not treat imported products differently than \"like products\" of domestic origin. Canada maintained that the restrictions on asbestos discriminated against other, less-harmful substitute products made of glass or cellulose. Finally, Canada argued that the restrictions went beyond what was \"necessary\" to protect human health, as set forth in GATT Article XX(b). It claimed that less restrictive measures, such as \"controlled use\" of the product, were enough to guarantee safety. The Appellate Body report upheld the French law, although for different reasons than those stated by the original panel. REPORT OF THE APPELLATE BODY *** The TBT Agreement applies to \"technical regulations.\" Are the restrictions on asbestos a technical regulation? [added by authors for comprehension] The heart of the definition of a \"technical regulation\" is that a \"document\" must \"lay down\"that is, set forth, stipulate or provide \"product characteristics.\" The word \"characteristic\" has a number of synonyms that are helpful in understanding the ordinary meaning of that word in this context. Thus, the \"characteristics\" of a product include, in our view, any objectively definable \"features,\" \"qualities,\" \"attributes,\" or other \"distinguishing mark\" of a product. Such \"characteristics\" might relate...to a product's composition, size, shape, colour, texture, hardness, tensile strength, flammability, conductivity, density, or viscosity.... The definition of a \"technical regulation\" also states that \"compliance\" with the \"product characteristics\" laid down in the \"document\" must be \"mandatory.\" A \"technical regulation\" must, in other words, regulate the \"characteristics\" of products in a binding or compulsory fashion. * * * \"Product characteristics\" may, in our view, be prescribed or imposed with respect to products in either a positive or a negative form. That is, the document may provide, positively, that products must possess certain \"characteristics,\" or the document may require, negatively, that products must not possess certain \"characteristics.\" In both cases, the legal result is the same: the document \"lays down\" certain binding \"characteristics\" for products, in one case affirmatively, and in the other by negative implication. * * * With these considerations in mind, we examine whether the measure at issue is a \"technical regulation.\" [The French law] aims primarily at the regulation of a named product, asbestos [and imposes] a prohibition on asbestos fibers, as such. This prohibition on these fibers does not, in itself, prescribe or impose any \"characteristics\" on asbestos fibers, but simply bans them in their natural state. Accordingly, if this measure consisted only of a prohibition on asbestos fibers, it might not constitute a \"technical regulation.\" There is, however, more to the measure than this prohibition on asbestos fibers.... It is important to note here that, although formulated negativelyproducts containing asbestos are prohibited the measure, in this respect, effectively prescribes or imposes certain objective features, qualities or \"characteristics\" on all products. That is, in effect, the measure provides that all products must not contain asbestos fibers [emphasis added].... We also observe that compliance with the prohibition against products containing asbestos is mandatory and is, indeed, enforceable through criminal sanctions. * * * Accordingly, we find that the measure is a \"document\" which \"lays down product characteristics ... including the applicable administrative provisions, with which compliance is mandatory.\" For these reasons, we conclude that the measure constitutes a \"technical regulation\" under the TBT Agreement. * * * GATT prevents discrimination between \"like products.\" Are the asbestos imports a \"like product\" as compared to the safer substitutes? The Panel concluded that [the safer non-asbestos alternatives] are all \"like products\" under Article III:4. * * * In examining the \"likeness\" of these two sets of products, the Panel adopted an approach based on the Report of the Working Party on Border Tax Adjustments. Under that approach, the Panel employed four general criteria in analyzing \"likeness\": (i) the properties, nature and quality of the products; (ii) the end-uses of the products; (iii) consumers' tastes and habits; and, (iv) the tariff classification of the products. The Panel declined to apply \"a criterion on the risk of a product\