Fair-trading rules are designed to prevent "unfair trading practices" of governments, exporters, or importers that give products from one country a competitive advantage over products from another country.
The unfair practices of major concern involve governmental subsidies and dumping practices by commercial entities.
Unfair trade practices of lesser concern include patent infringement, non-market pricing and export restrictions on critical raw materials. Other unfair trade practices such as discriminatory health, safety, or environment standards, customs valuation, and so on are essentially covered by the national-treatment principle.
The following discussion will concentrate on subsidies and dumping practices.Subsidies can be used by governments to affect international trade in three ways. Subsidies granted to domestic producers can enable them to gain a competitive advantage over imports.
Subsidies granted to exporters enable them to gain a competitive advantage over domestic producers in the importing country. And subsidies enable exporters in the subsidizing country to gain a competitive advantage in third-country markets over exporters from non-subsidizing countries.
These trade-distorting effects can cause economic injury to producers and workers in firms that are otherwise economically viable and efficient.The GATT recognizes these adverse effects but also recognizes that sovereign nations can use subsidies to achieve important domestic economic objectives.
Thus under the GATT, subsidy practices are not "illegal" per se, but only if they cause injury to producers and/or workers in a trading partner. In such cases the GATT aims at remedying the situation.
If subsidies stimulate exports that cause injury to import-competing firms in the importing country, the GATT authorizes the importing country to levy a countervailing duty sufficient to offset the price effect of the subsidy.
However, in the case of subsidies that reduce exports to the subsidizing country or that divert trade to a third country, the injured country has no unilateral remedy available other than to introduce competitive subsidies of its own, that is, to counter an unfair practice with an unfair practice.
In these latter cases, the remedy must come from consultations with the subsidizing country with the aim of eliminating the injurious effects of the subsidy.Dumping practices can have trade impacts similar to the effects of subsidies. And the remedies are similarly the introduction of an offsetting antidumping duty or international consultations.
The major distinction between these practices is that dumping is defined to be selling in the foreign market at prices below fair value. Theoretically, dumping is considered to be a specific action of a firm to increase the firm's market share, to sell off excess inventories, or to take advantage of profit-maximizing price-discriminatory opportunities.
In practice, however, the dumping issue is often concerned with government firms that benefit from the government's willingness to underwrite firm losses in order to maintain high levels of employment.
GATT has given the world a basic set of rules under which trade negotiations take place and a mechanism for ensuring these rules to be implemented. The principles and rules were originally contained in the Havana Charter for an International Trade Organization of the United Nations (the so-called ITO). However, the ITO was never ratified.
This failure to ratify the ITO left a void that was filled by a general agreement drawn up in 1947 to contain the results of a tariff conference presumed to be the first in a series of such conferences under the ITO.
In order to assure that tariff concessions would not be negated by other restrictions on trade, this agreement contained a number of rules governing international trade that were contained in the ITO charter. Because there was no international trade organization, this general agreement became the basis for the creation of an international institution for discussing and resolving trade issues among nations.