International Trade (Intl Trade) 101: Trade Policy and Agreements - World Trade, Organization WTO Functions Principles MFN National Treatment Dispute Settlement Mechanism Doha Round

What This Is

The World Trade Organization (WTO) is an international body that promotes free trade and sets rules for global commerce. Its functions include negotiating trade agreements, resolving trade disputes, and providing a framework for international trade. For example, a Chinese exporter shipping goods to the US must comply with WTO rules, including those related to tariffs, subsidies, and intellectual property.

Key Terms & Rules

• WTO Agreement: The main treaty governing international trade, setting rules for tariffs, subsidies, and other trade practices.
• Most-Favored Nation (MFN) Treatment: A principle requiring WTO members to treat each other's goods and services equally, without discrimination.
• National Treatment: A principle requiring WTO members to treat foreign goods and services equally to domestic ones.
• Dispute Settlement Mechanism (DSM): A process for resolving trade disputes between WTO members, involving consultation, mediation, and arbitration.
• Doha Round: A series of trade negotiations launched in 2001 to liberalize trade in agriculture, services, and other areas.
• Tariff Schedule: A list of tariffs imposed by a country on imported goods, used to calculate customs duties.
• Harmonized System (HS) Codes: A standardized system for classifying goods for customs purposes, used by over 200 countries.
• Incoterms: A set of international trade terms (e.g., FOB, CIF, EXW) that define the responsibilities of buyers and sellers in a trade transaction.
• Uniform Customs and Practice for Documentary Credits (UCP 600): A set of rules governing letter of credit transactions, used by banks and traders worldwide.
• Free Trade Agreements (FTAs): Agreements between countries to reduce or eliminate tariffs and other trade barriers.

Step-by-Step Process

1. Identify the trade agreement: Determine which WTO agreement or FTA applies to the trade transaction.
2. Classify goods using HS codes: Use the Harmonized System to classify goods for customs purposes.
3. Calculate customs duties: Use the tariff schedule to calculate customs duties based on the HS code and trade agreement.
4. Apply Incoterms: Use Incoterms to define the responsibilities of buyers and sellers in a trade transaction.
5. Establish a letter of credit: Use UCP 600 to establish a letter of credit for payment, if applicable.
6. Resolve trade disputes: Use the Dispute Settlement Mechanism to resolve trade disputes, if necessary.

Common Mistakes

• Mistake: Confusing CIF and CIP.
• Correction: CIF (Cost, Insurance, and Freight) means the seller bears the cost of goods, insurance, and freight to the buyer's port, while CIP (Carriage and Insurance Paid To) means the seller bears the cost of goods, insurance, and freight to the buyer's destination.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account means payment is due upon receipt of goods, but it does not eliminate the risk of non-payment.
• Mistake: Misusing "free on board" with air freight.
• Correction: Free on board (FOB) means the seller bears the cost of goods to the buyer's port, but it does not apply to air freight, which uses a different set of Incoterms (e.g., FCA, CPT).

Exam / Certification Tips

• FOB vs FCA: FOB (Free on Board) means the seller bears the cost of goods to the buyer's port, while FCA (Free Carrier) means the seller bears the cost of goods to the carrier's warehouse.
• Confirmed vs unconfirmed LC: A confirmed letter of credit is guaranteed by a bank, while an unconfirmed letter of credit is not.
• DPU successor to DAT: DPU (Delivered at Place Unloaded) is a successor to DAT (Delivered at Terminal), which means the seller bears the cost of goods to the buyer's terminal.

Quick Practice Scenario

A Chinese exporter sells goods to a US importer under FOB Shanghai. Who pays for the main carriage?

Answer: The buyer pays for the main carriage, as FOB means the seller bears the cost of goods to the buyer's port.

Last-Minute Cram Sheet

• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• The WTO Agreement sets rules for tariffs, subsidies, and other trade practices.
• MFN Treatment requires WTO members to treat each other's goods and services equally.
• National Treatment requires WTO members to treat foreign goods and services equally to domestic ones.
• The Dispute Settlement Mechanism resolves trade disputes between WTO members.
• The Doha Round aims to liberalize trade in agriculture, services, and other areas.
• Tariff schedules list tariffs imposed by a country on imported goods.
• HS Codes classify goods for customs purposes.
• Incoterms define the responsibilities of buyers and sellers in a trade transaction.
• UCP 600 governs letter of credit transactions.
• FTAs reduce or eliminate tariffs and other trade barriers.
• CIF means the seller bears the cost of goods, insurance, and freight to the buyer's port.
• CIP means the seller bears the cost of goods, insurance, and freight to the buyer's destination.
• Open account means payment is due upon receipt of goods, but it does not eliminate the risk of non-payment.
• FCA means the seller bears the cost of goods to the carrier's warehouse.
• DPU is a successor to DAT, meaning the seller bears the cost of goods to the buyer's terminal.