CHAPTER NO: 1INTRODUCTION

TRIMs MEANINGThe Trade-Related Investment Measures (TRIMS) Agreement deals with policies that are considered inconsistent with GATT.

An illustrative list includes such measures as minimum local content and trade balancing requirements. Developing countries have to eliminate inconsistent measures by 1 January 2000, least-developed countries 1 January 2002.

Developing countries want to retain the flexibility to choose investment promotion policies that they consider necessary to fulfill their developmental needs, including some of those listed as inconsistent with TRIMs. Equally important, some developing countries were unable to notify some of their investment measures in time (they had to do this immediately) and they cannot now apply these measures.

With the wrangling over TRIMs compliance refusing to die away, the Quad (US, Canada, EU and Japan) has proposed a compromise formula for developing countries. The compromise proposal would give nine developing countries - Argentina, Chile, Colombia, Malaysia, Mexico, Pakistan, the Philippines, Romania and Thailand - until 1 January 2002 to comply with TRIMs agreement.

These countries have been pushing for extension of the 1 January 2000 deadline for implementation of the TRIMs Agreement so that they can have more time to remove measures in their industrial policies that do not currently comply with WTO rules.

As a condition for final settlement, the Quad countries particularly the US - which has already taken dispute settlement proceedings against India and Philippines over TRIMs- inconsistent measures in their auto industries also indicated that the nine members must agrees to accelerate dispute settlement proceedings should they fail to meet the new deadline.

The WTO Goods Council Chairman in November 2000 put forward a similar proposal which drew qualified support from both developed and developing countries. The developed countries, however, want that further extension after 1 January 2002 should not be given on an automatic basis, but rather considered on a case-to-case basis.

As with other agreements of the WTO, the Preamble to the Agreement on Trade Related Investment Measures (TRIMs) raises the special concerns of the developing country Members. The Article 4 of the Agreement grants flexibility to a developing country Member to deviate temporarily from the provisions of the Article 2 under special circumstances.

On elimination of all TRIMs notified under Article 5.1, the Agreement grants extended periods of five years and seven years in the case of developing country and LDC Members respectively as against two years for developed country Members.

Further, the Council for Trade in Goods may, on request, extend the transition period for elimination of the notified measures for a developing country Member if it demonstrates particular difficulties in the implementing the provisions of the Agreement.

The TRIMs agreement was the success story of developing countries. Right from the beginning of the negotiations they had been insisting on the extension of trade obligations into the field of investment and inclusion of principles such as "right of establishment" and "national treatment" privileges into the trading system. The TRIMs Agreement recognizes that certain investment measures can cause distortion to trade.

The developed countries extended the scope of multilateral trade negotiations to cover investments by bringing the TRIMs Agreement into the Uruguay Round despite the opposition of developing countries. The TRIMs Agreement is a limited one restricted to phasing out certain performance requirements that are imposed by host countries to regulate the operations of foreign investors in tune with their development policy objectives. However, it included a provision for a possible review to extend its scope and coverage later.

CHAPTER NO: 2CONCEPTUAL FRAMEWORK

Sometimes, governments impose conditions on investment, some of which are trade-related, others are not. For example, a government may prescribe that investment can only be made in a firm which is owned by resident nationals, or it may impose restrictions on the repatriation of profits or on the import of raw materials or the export of products.

The restrictions on import and export relate to trade in goods, whereas the others, viz., the restrictions in respect of firm ownership or the transfer of funds from the country, relate to non-trade matters. The Agreement on Trade-Related Investment Measures (TRIMs) covers conditions on investment which are related to trade in goods. Measures which are outside the domain of trade in goods are not covered by it.

The Agreement on TRIMs prohibits investment restrictions which conflict with the obligations of a Member in the WTO agreements. Specifically, it prohibits measures which are in conflict with Articles III.4 or XI.1 of GATT 1994. Since these measures are inconsistent with the obligations of GATT 1994, they are, in any case, prohibited. The Agreement on TRIMs reasserts this prohibition and prescribes procedures for monitoring the obligations.

As mentioned in the chapter on national treatment. Article III.4 of GATT 1994 prescribes that the treatment accorded to an imported product must not be less favorable than that accorded to a like domestic product in respect of laws and regulations affecting sale, purchase, transportation, distribution or use.

Hence, for example, it cannot be prescribed that for a particular purpose, the use of the domestic product should be preferred to the use of the like imported product. Article XI. 1 of GATT 1994 prohibits non-tariff restrictions on the import or export of goods. In particular, it says that no quantitative restrictions can be applied by any Member on the export or import of goods.

2.1 TRIMS: WHAT IT MEANT FOR Trade Related Investment Measures (TRIMs) refer to a set of measures employed usually, but not exclusively, by developing countries, with a view to compelling or inducing MNCs to meet certain yardsticks of performance.

This is a common phenomenon in the developing countries where governments often impose conditions on foreign investors to encourage investment in accordance with certain national priorities. Conditions that can affect trade are known as trade-related investment measure (TRIMs).

In order to allure foreign direct investments (FDI) governments often extend incentives which include fiscal incentives, like loans, tax rebates, provision of services on preferential terms etc. as well as series of requirements or conditions designed to encourage the use of investment according to their developmental needs.

These requirements are in the form of local content requirements, manufacturing requirements, input performance requirements, and technology transfer or licensing requirements which set the conditions for entry of investment into a host country. Such investment requirements which distort international trade in goods, in any way, are called trade related investment measures (TRIMs).

Local content requirements (LCR) and the export performance requirements (EPRs) are considered to be the most effective barriers to FDL According to LCR, investors have to use a certain amount of local inputs in total production mix. As a part of the export performance requirements, the investor has to make a commitment to export a certain proportion of its output. Such measures are believed to have adverse impact on trade, and that is why these distortionary measures are called trade related investment measures (TRIMs).

The motive behind imposing conditionalities is the urge to develop domestic ancillary industries through enforcing LCR and developing the export sector through an export performance requirement. These two are the most important areas of the developing countries.

Another motive behind employing TRIMs has been to control anti-competitive and trade restrictive business practices of the MNCs. Developing countries have been demanding since long that restrictive business practices of MNCs should also be addressed through TRIMs, rather than attempting to detect such practices later on and to prosecute TNCs under competition law.

Therefore, the combination of a variety of incentives and performance requirements are aimed at securing balanced regulations and enhancement of FDI in the host country. At the same time the same mixture can be effectively used to compromise the interest between the host country and the investors.

The UNCTC shows that TRIMs are not spread across the industries, but, rather it is concentrated on some specific industries, viz., automotive, chemicals and pharmaceutical and computer/informatics. LCR is more prominent in the automotive industry than computer/informatic industry. In the chemical and petrochemical industries both local content and export performance requirements are prominent.

Although in most of the cases TRIMs aim at promoting investment, but the measures have generally been seen as a tool of promoting the development objective of the developing countries through encouraging technology transfer, regional development and export expansion.

Most important reason why developing nations are very particular about TRIMs is simply to curb the monopolistic power of MNCs. Once they establish their control over supply of sources, the conventional experience shows that they start charging monopoly price, which is much higher than the local competitive price. Forming cartel among themselves, they often destroy competition, and establish absolute control over production and supplies as well as prices.

Balasubramaniam argues that TRIMs are welfare enhancing and some policy commentators have recommended them on these grounds. But the opponents have opined that these are second best solutions, fraught with uncertainty and it generates wasteful rent seeking behavior.

2.2 CHARACTERISTICS OF TRIMSDespite the absence of consensus on what constitutes a TRIM, three kinds of TRIMs (domestic-content TRIMs, export-performance TR1 Ms and trade-balancing TRIMs) have provoked the most intensive empirical examination. A close examination of the principal attempts to document TRIM characteristics yields five conclusions: TRIM requirements tend to be concentrated in specific industries, with the automotive, chemical and petrochemical and computer/informatics sectors leading the list. Local-content TRIMs are more frequent than export TRIMs in the automotive industry, with the reverse true in computers; informatics. In chemicals and petrochemicals both domestic-content and export-performance TRIMs are present.

TRIM regulations exist in both developed and developing countries, but are more frequent in the latter (although implicit TRIMs may be hidden in the former via "rules of origin" indicating a requirement for domestic content).

In contrast to the raw numbers of countries with TRIMs, the extent of investment covered by TRIM regulations is heavily weighted towards the developed world. The 20 developed countries with the most extensive presence of TRIM regulations are recipients of $230 billion in United States direct investment. For example, the comparable figure for the 20 developing countries with the most extensive presence of TRIM regulations is $30 billion.

With regard to the actual exercise of local-content or export TRIM mandates, there is wide disparity in the data between firms reporting their third world subsidiaries subject to such TRIMs (approximately 2 per cent to 6 per cent of all affiliates in the most extensive surveys) and the amount of third world investment hypothetically covered by such TRIMs (45 per cent to 62 per cent of all investment). Two possible (complementary) explanations find support in the data: first, that the majority of TRIMs on the books are, in fact, discretionary and negotiable, and arc often not required; and second, that many TRIMs are redundant in the sense of simply accelerating the firms' plans to develop local suppliers and enter export markets.

2.3 PROS AND CONS OF TRIMS TO LDCSPROS From another perspective, local content requirements stipulate that a minimum share of inputs be obtained from local sources; laws of similar are often used to define appropriate local inputs.

Import and foreign exchange restrictions have the same effect as both limit the amount of inputs that can be imported. The trade effect is to reduce imports (that are displaced by local supplies)

TRIMs reduce imports and also contribute to increasing potential balance of payments benefits from FDI. Export requirements are aimed to increase the proportion of output exported.

TRIMs designed to reduce competition with domestic producers, that may be import-substituting, have the same effect. These include manufacturing requirements, market reserve and domestic sales limitations on what can be sold on the local market.

Some TRIMs aim to ensure that MNEs, on balance, do not import more in value than they export e.g. trade or foreign exchange balancing.

CONS Broadly speaking, FDI has not yielded the benefits anticipated by hosts in terms of technology transfer, local linkages or having a net positive impact on the balance of payments. There are a range of MNE practices, restrictive or not, that reduce the benefits of FDI to hosts.

Thus, the hosts try to impose restrictions on the activities of MNEs so as to capture more of the benefits. The most prevalent of such TRIMs are local content requirements, import restrictions and export requirements.

In the TRIMS Agreement, "investment measures" such as local content (obliging foreign firms to use at least a specified minimal amount of local inputs) is prohibited for most developing countries. Developing countries need policies because of the low level of development of the local sector, which would not be able to withstand free competition.

Thus, by implementing TRIMS, developing countries will lose some important policy options to pursue their industrialisation. But notably, governments are still free under the WTO to have their own investment policy to decide what kind of foreign investors to permit, and what conditions to impose. This kind of authority can be undermined since these MNEs have the supremacy drive for most economies in LDCs.

The prohibition of "local content" requirement (i.e. that firms or projects make use of a certain minimum amount of local materials) will seriously hinder the efforts of developing countries to promote local industry, save on foreign exchange, and upgrade local technological capacity. There is also a prohibition on investment measures that limit the import of inputs by firms to a certain percentage of their exports.

Such measures had been introduced to protect the country's balance of payments. The prohibition of these two investment measures will make the attainment of development goals much more difficult.

In any case of nonconformity the decision goes against the defending party requiring them to bring their laws into conformity with the TRIMs agreement. Suppose the defendant is a developing country the rules of the game apply despite the claim in the WTO of Special and Differential treatment. If a developed or developing country lodges its complaint on any violations cases here are treated on equal basis.

However the Agreement, as it is biased towards the interests of MNEs rather than those of host countries, restricts the ability of hosts to constrain the activities of MNEs. This may have undesirable social impacts (in terms of labour standards) and environmental impacts (such as excessive pollution). No liberalisation implies adverse sustainability impact.

Local content requirements may force a foreign-affiliated producer to use locally produced parts. Although this requirement results in immediate sales for the domestic parts industry, it also means that the industry is shielded from the salutary effects of competition. In the end, this industry will fail to improve its international competitiveness.

Moreover, the industry using these parts is unable to procure high quality, low-priced parts and components from other countries and will be less able to produce internationally competitive finished products. At best, the domestic industry can hope to achieve import substitution, but the likelihood of further development is poor.

In general, therefore, the record for implementation for the TRIMs agreement is not too bad but approximately a third of the members that notified policies did not comply with the TRIMs agreement.

This, however, does not mean that serious implementation problems do not exist. There are serious problems, but they differ substantially from the type of implementation problems in such agreement as the Trade Related Aspects of Intellectual Property Rights (TRIPs).

Basically capacity constraints affect the transitions periods. First, some LDCs lack the capacity to identify measures that are inconsistent with the TRIMs agreement and hence are unable to meet the notification deadline. This means that for these countries the effective transition period is zero years, which is clearly inadequate according.

2.4 PROHIBITED MEASURESIn order to specify the types of investment measure which are in conflict with these two provisions of GATT 1994, an illustrative list has been given in the annex to the Agreement describing these measures. For the measures to be covered by the prohibition, the general condition is that:(i) These are mandatory or enforceable under a domestic law or under administrative rulings, or(ii) Compliance with these is necessary to obtain an advantage.

2.5 MEASURES INCONSISTENT WITH ARTICLE III.4 OF GATT 1994Measures mentioned in the Agreement on TRIMs as violating Article III.4 of GATT 1994 are the following:i. Specifying that particular products of domestic origin must be purchased or used by an enterprise, orii. Specifying that a particular volume or value of some products of domestic origin must be purchased or used by an enterprise, or

iii. Specifying that an enterprise must purchase or use domestic products at least up to a particular proportion of the volume or value of the local production of the enterprise, or

iv. Restricting the purchase or use of an imported product by an enterprise to an amount related to the export of its (the enterprise's) local production.

The first three are local-content requirements and the fourth is an indirect requirement of partial balancing of foreign exchange outflows and inflows.

These will be clearer if we take an example. Let us take the case of an investment to manufacture steel. In accordance with this Agreement, a government is prohibited from laying down conditions that:a) The coking coal or the iron ore required by the firm must be supplied only from domestic sources, or

b) One million tonnes of coking coal or iron ore worth $1 million must be obtained from domestic sources, or

c) This factory must obtain domestic inputs for its use for at least up to 15 per cent of the volume of its local production or 20 per cent of the value of its local production, or

d) This factory can use imported coking coal only to the extent of 10 per cent of the volume of the export of its local production or 15 per cent of the value of the export of its local production.

2.6 MEASURES INCONSISTENT WITH ARTICLE XI.L OF GATT 1994Measures inconsistent with Article XI.l of GATT 1994 are specified in the Agreement on TRIMs as the following:1. Imposing a general restriction on the import of inputs by an enterprise or restricting the import of inputs to an amount related to the export of its local production.

2. Restricting the foreign exchange for the import of inputs by an enterprise to an amount related to the foreign exchange inflow attributable to the enterprise.

3. Restricting export by an enterprise by specifying the products so restricted the volume or value of products so restricted, or the proportion of its local production so restricted.

The first two are requirements of a partial balancing of foreign exchange, and the third is an export-restraint requirement for ensuring the domestic availability of the product.

Let us again take the illustration of the investment for the steel factory. A Member is not permitted to put the following conditions on the investment:1) the factory must not import coking coal, or the value of the import of coking coal must be limited to 75 per cent of the value of the export of the local production of the firm, or

2) the foreign exchange for the import of coking coal and iron ore will be limited to 50 per cent of the foreign exchange that the firm gets from abroad, or

3) the firm must not export speciality steel, or one million tonnes of hot rolled strip must be kept for domestic use, or only 50 per cent of the local production will be allowed to be exported.

2.7 FLEXIBILITY FOR DEVELOPING COUNTRY MEMBERS A developing country Member is allowed temporary deviation from this obligation in so far as it is covered by the flexibility provided under Article XVIIIB of GATT 1994 as clarified and elaborated by the Understanding on Balance-of-Payments Provisions (explained in the chapter on BOP provisions).

The BOP provision allows flexibility in respect of restraining the import of a product, but once a product is imported, it will have to be given national treatment. There can be no discrimination between the imported product and the like domestic product in respect of their use.

For example, if the BOP situation of a Member satisfies the conditions of Article XVIIIB of GATT1994 and the Understanding on BOP Provisions, the import of the coking coal or iron ore may be totally prohibited, or the imports of these raw materials may be limited to particular quantities or values.

This would automatically mean that these raw materials must be fully or at least partially supplied from domestic sources.

But in the absence of such restraints on imports under these provisions, trade measures of the type covered by the Agreement on TRIMs cannot be taken.

The Agreement on TRIMs also refers, in this connection, to the flexibility permitted to developing countries in the Declaration on Trade Measures Taken for BOP Purposes adopted on 28 November 1979 (BISD 26S/205-209), but this Declaration has essentially been subsumed under the Understanding on BOP Provisions mentioned above.

2.8 ELIMINATION OF EXISTING MEASURESThe Agreement prescribes a time schedule of elimination of all measures which are covered by it. These measures will be eliminated within:(i) Two years of 1 January 1995, by a developed country Member,

(ii) Five years of 1 January 1995, by a developing country Member, and

(iii) Seven years of 1 January 1995, by a least developed country Member.

If a developing country Member or at least developed country Member faces particular difficulties in eliminating these measures according to this schedule, it may request for an extension of the time.

The Council for Trade in Goods will consider this request, taking into account the individual development, financial and trade needs of the Member, and may extend the time.

Measures which were introduced within 180 days prior to the coming into force of the WTO Agreement will have to be eliminated immediately, as a Member does not have the benefit of the time schedule mentioned above in respect of these measures.

During the period of elimination, the terms of any existing measure must not be modified in such a manner as to make it more inconsistent with the Agreement.

2.9 INTRODUCTION OF NEW MEASURES There is a provision in the Agreement for protecting the interests of existing enterprises which are subjected to some investment measures.

A Member may apply such measures during the time schedule mentioned above to new enterprises which would produce like products if it is necessary to avoid a distortion to the condition of competition between the new enterprises and the existing enterprises. The measures applied to these two sets of enterprises will be eliminated at the same time.

The term "like products" has been explained in detail in the chapter on national treatment.

2.10 NOTIFICATION AND TRANSPARENCY Members have to notify all TRIMs not in conformity with the Agreement to the Council for Trade in Goods within 90 days of 1 January 1995. The principal features of these measures will be described in this notification.

A Member will also notify the WTO Secretariat about the publications in which its TRIMs may be found. This will also include information about the measures applied by regional and local governments and authorities.

A Member must accord sympathetic consideration to requests for information and provide adequate opportunity for consultation if such a matter is raised by another Member.

2.11 COMMITTEE, CONSULTATION AND DISPUTE SETTLEMENTThe Committee on TRIMs, which is open to all Members, is responsible for monitoring the operation and implementation of the Agreement.The provisions of Articles XXII and XXIII of GATT 1994, as elaborated and applied by the Dispute Settlement Understanding, will be applicable to the consultation and settlement of disputes under this Agreement.

2.12 REVIEWThe Council for Trade in Goods has to review the operation of the Agreement on TRIMs with a view to suggesting amendments as considered appropriate. In particular, the review will consider whether the Agreement should be complemented with provisions on investment policy and competition policy.

2.13 NATIONAL TREATMENT PRINCIPLE IN TRIMS The Agreement on Trade-Related Investment Measures (TRIMS) under WTO applies to investment measures related to trade in goods only.

The TRIMs Agreement debars recourse to any trade-related investment measure that is inconsistent with the provisions of Article III (National Treatment) or Article XI (QRs) of GATT 1994. Article III of GATT 1994 is specially important since it mandates national treatment to foreign companies of internal taxation and regulation.

An element in the TRIMS agreement that could be of great importance for the future activities of the WTO is a provision that calls for review of its operation within five years (not later than the end of the year 1999).

As part of this review, the Council for Trade in Goods is to consider "whether the agreement should be complemented with provisions on investment and competition policy". The Singapore Ministerial Conference took up the question of including investment in the WTO agenda after the lobbying by the EU.

India emerged as the leader of the opposition to the inclusion of the item in WTO. WTO in meant for trade issues, investment is a different cup of tea, it was said. The argument that Investment is already in WTO under TRIMS was advanced to counter the submission.

Ultimately the "hook of TRIMS to work to pull the broad investment topic into WTO under the working group to study the link between trade and investment.

The proposed agreement on investment (commonly known as multilateral agreement on investment) under the WTO framework has epoch making liberalization potential of investment across borders.

It stipulates national treatment even at the pre-establishment phase. It should be noted that most developing countries including India lack the necessary legislation to meet the investment liberalization situation conceived under the proposed agreement.

Local Content and Foreign Exchange Balancing Governments impose requirements on enterprises that the goods they produce shall incorporate a certain minimum proportion of domestically-produced inputs, or that a certain proportion of their output is exported.

The stipulation ensures that the host country benefits from the investment in terms of downstream demand for inputs.

The intention is to discourage the assembly of finished products from semi knocked down or completely knocked down kits.

The Uruguay Round negotiations on trade-related investment measures (TRIMS) identified nearly a dozen such measures in the Annexure to the legal text. TRIMs deals only with measures that are already prohibited by two GATT articles.

Its main importance lies in the clearly identified measures, which were previously widely ignored as contrary to GATT provisions.

Article 1 of TRIMS defines the coverage of the agreement; it applies only to investment measures related to trade in goods. There should be no distinction between measures imposed on foreign-owned investments and those affecting domestic enterprises; the same rules apply to both.

Article 2 is the central point in the agreement. It states that, without prejudice to other rights and obligations under GATT 1994, no member shall apply any TRIM that is inconsistent with Article III or Article XI of the GATT. Four of the five TRIMS identified in this "illustrative list" (the title of the list is significant, since it leaves open the possibility that other TRIMS may also be found contrary to these GATT articles) belong essentially to two broad categories: they either demand that there be certain local content in the products of the enterprise concerned, or require some degree of balancing of trade between exports and imports. The fifth concerns restriction on exports. The prohibition covers such measures not only if they are a matter of law or government ruling, but also if they are a condition "compliance with which is necessary to obtain an advantage"2.13.1 GATT Exceptions Apply The TRIMS agreement specifically provides, however, that exceptions permitted under the GATT continue to apply. This could mean, for instance, that a TRIM otherwise banned might be justifiable for reasons of national security.

2.13.2 Notification and Elimination of TRIMS The agreement demands that all TRIMS inconsistent with its provisions be notified, and eliminated over a fixed period.

Notifications were required to be made within 90 days of entry into force of the WTO: this requirement was subsequently interpreted as meaning, for late entries into WTO membership that the member concerned should notify within 90 days of its acceptance of the WTO agreement.

Developed countries thus have a two year transition period, up to 1January 1997, to eliminate the notified TRIMS.

Developing countries have three years longer, until 1 January 2000, to eliminate notified TRIMS, and least-developed countries have until 1 January 2002. The benefit of these transition periods does not apply to any TRIM that was introduced less than 180 days before the WTO Agreement entered into force.

A developing country member demonstrating particular difficulties in implementing the provisions of this agreement may have its transitional period for the elimination of notified TRIMs extended by the Council for Trade in Goods.

When considering an extension, the Council will take into account the individual development, financial and trade needs of the member concerned.TRIMS Deadline Extended in Long-Sought implementation Move The WTO Council for Trade in Goods on 31 July 2001 approved decisions granting extension of the deadline for TRIMs.

The agreement was brokered on the basis of the o-called 2+2 formula (Initial two years from 1 January 2000 to 31 December and a further two years 1 January 2002 to 31 December 2003 subject to certain conditions such us a phase out plan) to the following countries: Argentina, Chile, Colombia, Malaysia, Mexico, Pakistan, Philippines and Romania.

The General Council also approved Thailands TRIMS under the same conditions. Extension of some countries TRIMS compliance deadlines primarily for domestic automobile support programs have been one area where &developing countries have sought 'early harvest' in their implementation agenda

2.14 TRIMS ISSUES Measures taken by governments lo impose conditions to encourage and direct investments according to certain national priorities are considered us "trade-related Investment measures - TRIMs".

The Agreement on TRIMs prohibits five types of such measures as they are considered to be inconsistent with GATT rules on "national treatment" and the rules against use of "quantitative restrictions".

Important among these are "domestic content" and "export performance" requirements.

The developing countries have a transitional period of five years that is up to l .1. 2000, to eliminate TRIMs covered by the Agreement, provided they have notified them to WTO when the Agreement became operational.

However, the domestic content is an extremely useful and necessary tool from the point of view of developing count- -tries.

Such a requirement is often necessary for (i) Encouraging domestic economic activities in raw material and intermediate input sectors;

(ii) Up-gradation of input production;

(iii) Prevention of wastage of foreign exchange in the import of raw material and intermediate Inputs;

(iv) Ensuring linkages of FDI with domestic economic activities;

(v) Encouraging indigenization in case of FDI; and

(vi) Acting in several other ways as an important instrument in the development process. Similarly developing countries also find export performance requirements to be useful and necessary from the point of view of balanced economic growth and national development.

2.15 EFFECTS OF AGREEMENT ON TRIMS ON INDIAN FOREIGN TRADE

Foreign trade is an engine of growth and innovation. It tends to optimize the use of world resources with every country specializing in the production of the commodity for which it is best suited according to natural and human resource endowment.It promotes more efficient employment of productive forces leading to extension of market, division of labour and specialization and promotes capital formation through import of technology. International trade thus leads to an increase in productivity and competitiveness and reduction of costs and thereby growth of nations. From time immemorial, India had trade relations with several countries. But with the conquest of India by British the characteristics of Indias traditional trade completely changed. The destruction of Indian industries and trade by the British coupled with destruction of agriculture converted Indian economy into a mere market for the goods manufactured by the factories of Britain. The same situation continued till independence. With the impressive industrial development since independence, Indias foreign trade has undergone a radical change and is no longer confined to a few countries trading with few commodities. In order to improve the trade links further, India became a founder member of the WTO. The WTO aims at the liberalization of world trade. In 1991, Indian government replaced the system of controls with liberalization, which alongside; globalization has become the buzzword. The new economic policy was devised to accelerate economic development, which is the consequence of the international developments resulted through the coming into force of the WTO and other agreements under its umbrella such as TRIMs, Antidumping etc. Trade Related Investment Measures (TRIMS) refers to certain conditions or restrictions imposed by a government in respect of foreign investment in the country. Most developing countries impose such conditions on foreign investors. These impose obligations like use of specified percentage of locally produced raw material or components, local equity requirements, export performance and control on imports requiring foreign Effects of Agreement on Trims on Indian Foreign Trade investors to use domestic supplies. They are nothing but protective tariffs as they deny market access to a service industry wanting to invest in another country. To remove these restrictions the Agreement on Trade Related Investment Measures was negotiated in the Uruguay Round. The central objective is to promote expansion and progressive liberalization of world trade and to facilitate investment across international frontiers so as to ensure free competition and increasing economic growth of trading partners, particularly developing country members, while ensuring free competition.

2.16 ECONOMIC IMPLICATIONS Some governments view TRIMs as a way to protect and foster domestic industry.

TRIMs are also mistakenly seen as an effective remedy for a deteriorating balance of payments.

These perceived benefits account for their frequent use in developing countries.

In the long run, however, TRIMs may well retard economic development and weaken the economies of the countries that impose them by stifling the free flow of investment.

Local content requirements, for example, illustrate this distinction between short-term advantage and long-term disadvantage.

Local content requirements may force a foreign affiliated producer to use locally produced parts.

Although this requirement results in immediate sales for the domestic parts industry, it also means that this industry is shielded from the salutary effects of competition.

In the end, this industry will fail to improve its international competitiveness. Moreover, the industry using these parts is unable to procure high-quality, low-priced parts and components from other countries, and will be less able to produce internationally competitive finished products.

The best the domestic industry can hope to achieve import substitution, but the likelihood of further development is poor.

The consumer in the host country also suffers as a result of TRIMs.

The consumer has no choice but to spend much more on a finished product than would be necessary under a system of liberalized imports. Since consumers placed in such a position must pay a higher price, growth of domestic demand will stagnate. This lack of demand also hinders the long-term economic development of domestic industries.2.17 CASE LAWTRIMS/1 Indonesia - Certain Measures Affecting the Automobile Industry, complaint by Japan (WT/DS55).This request, dated 4 October 1996, concerns Indonesia's National Car Programme basically the same measures as in WT/DS54. Japan contends that these measures are in violation of Indonesia's obligations under Articles I:1,III:2, III:4 and X:3(a) of GATT 1994, as well as Articles 2 and 5.4 of the TRIMs Agreement. On 17 April 1997, Japan requested the establishment of a panel.

At its meeting on 12 June 1997, the DSB established a panel. In accordance with Article 9.1 of the DSU, the DSB decided that a single panel will examine this dispute together with DS54 and DS64. The Panel found that Indonesia was in violation of Articles I and II:2 of GATT 1994, Article 2 of the TRIMs Agreement, Article 5(c) of the SCM Agreement, but was not in violation of Article 28.2 of the SCM Agreement.

The Panel however, found that the complainants had not demonstrated that Indonesia was in violation of Articles 3 and 65.5 of the TRIPS Agreement. The report of the Panel was circulated to Members on 2 July 1998. In view of the fact that a single Panel examined the disputes in DS55, DS64, DS54, and DS59, pursuant to Article 9.1 of the DSU, a single Panel report was issued which covers this dispute, as well as those listed below. At its meeting on 23 July 1998, the DSB adopted the Panel report.

TRIMS/5.1 (3)(a) complaint by the US (WT/DS175/1).This request, dated 1 May 1999, is in respect of certain Indian measures affecting trade and investment in the motor vehicle sector.

The US contends that the measures in question require manufacturing firms in the motor vehicle sector to: (i) Achieve specified levels of local content;

(ii) Achieve a neutralization of foreign exchange by balancing the value of certain imports with the value of exports of cars and components over a stated period; and

(iii) Limit imports to a value based on the previous year's exports. According to the US, these measures are enforceable under Indian law and rulings, and manufacturing firms in the motor vehicle sector must comply with these requirements in order to obtain Indian import licenses for certain motor vehicle parts and components.

The US considers that these measures violate the obligations of India under Articles III and XI of GATT 1994, and Article 2 of the TRIMS Agreement. On 15 May 2000, the US asked for the establishment of a panel. At its meeting on 27 July 2000, the DSB established a panel, The EC, Japan and Korea reserved their third-party rights.

TRIMS/5.2 (3)(b) India - Measures Affecting the Automotive Sector, complaint by the European Communities (WT/DS146/1).This request, dated 6 October 1998, concerns certain measures affecting the automotive sector being applied by India.

The EC states that the measures include the documents entitled "Export and Import Policy, 1997-2002", "1TC (HS Classification) Export and Import Policy 1997-2002" ("Classification"), and "Public Notice No. 60 (PN/97-02) of 12 December 1997, Export and Import Policy April 1997-March 2002", and any other legislative or administrative provision implemented or consolidated by these policies, as well as MOUs signed by the Indian Government with certain manufacturers of automobiles.

The EC contends that under these measures, imports of complete automobiles and of certain parts and components are subject to a system of non-automatic import licenses.

The EC further contends that in accordance with Public Notice No. 60, import licenses may be granted only to local joint venture manufacturers that have signed an MOU with the Indian Government, whereby they undertake, inter alia, to comply with certain local content and export balancing requirements.

The EC alleges violations of Articles III and XI of GATT 1994, and Article 2 of the TRIMs Agreement. On 12 October 2000, the EC requested the establishment of a panel. At its meeting of 23 October 2000, the DSB deferred the establishment of a panel.

At its meeting of 17 November 2000, the DSB established a panel and decided that this would be a single panel under Article 9.1 of the DSU with the panel already established under WT/DS175 (see (8)(a) above). Japan reserved its third-party rights.

2.18 AGREEMENT ON TRADE RELATED INVESTMENT MEASURESConsidering that Ministers agreed in the Punta del Este Declaration that "Following an examination of the operation of GATT Articles related to the trade restrictive and distorting effects of investment measures, negotiations should elaborate, as appropriate, further provisions that may be necessary to avoid such adverse effects on trade";Desiring to promote the expansion and progressive liberalisation of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners, particularly developing country Members, while ensuring free competition; taking into account the particular trade, development and financial needs of developing country Members, particulars those of the least-developed country Members; recognizing that certain investment measures can cause trade-restrictive and distorting effects; Hereby agree as follows:Article 1 CoverageThis Agreement applies to investment measures related to trade in goods only (referred to in this Agreement as "TRIMs").

Article 2National Treatment and Quantitative Restrictions1. Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994.

2. An illustrative list of TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 is contained in the Annex to this Agreement.

Article 3 ExceptionsAll exceptions under GATT 1994 shall apply, as appropriate, to the provisions of this Agreement.

Article 4Developing Country MembersA developing country Member shall be free to deviate temporarily from the provisions of Article 2 to the extent and in such a manner as Article XVIII of GATT l994, the Understanding on the Balance-of-Payments Provisions of GATT 1994, and the Declaration on Trade Measures Taken for Balance-of-Payments Purposes adopted on 28 November 1979 (B1SD 26S/205-209) permit the Member to deviate from the provisions of Articles III and XI of GATT 1994.

Article 5Notification and Transitional Arrangements1. Members, within 90 days of the date of entry into force of the WTO Agreement, shall notify the Council for Trade in Goods of all TRIMs they are applying that are not in conformity with the provisions of this Agreement. Such TRIMs of general or specific application shall be notified, along with their principal features

2. Each Member shall eliminate all TRIMs which are notified wader paragraph 1 within two years of the date of entry into force of the WTO Agreement in the case of a developed country Member, within five years in the case of a developing country member, and within seven years in the case of a least-developed country Member.

3. On request, the Council for Trade in Goods may extend the transition period lor the elimination of TRIMs notified under paragraph 1 for a developing country Member, including a least-developed country Member, which demonstrates particular difficulties in implementing the provisions of this Agreement. In considering such a request the Council for Trade in Goods shall take into account the individual development, financial and trade needs of the Member in question.

4. During the transition period, a Member shall not modify the terms of any TRIM which it notifies under paragraph 1 from those prevailing at the date of entry into force of the WTO Agreement so as to increase the degree of inconsistency with the provisions of Article 2. TRIMs introduced less than 180 days before the date of entry into force of the WTO Agreement shall not benefit from the transitional arrangements provided in paragraph 2.

5. Notwithstanding the provisions of Article 2, a Member, in order not to disadvantage established enterprises which are subject to a TRIM notified under paragraph 1, -may apply during the transition period the same TRIM to a new investment (i) where the products of such investment are like products to those of the established enterprises, and (a) where necessary to avoid distorting the conditions of competition between the new investment and the established enterprises. Any TRIM so applied to a new investment shall be notified to the Council for Trade in Goods. The terms of snch a TRIM shall be equivalent in their competitive effect to those applicable to the established enterprises, and it shall be terminated at the same time.

Article 6 Transparency1. Members reaffirm, with respect to "TRIMs, their commitment to obligations on transparency and notification in Article X of GATT 1994, in the undertaking on "Notification" contained in the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance adopted on 28 November 1979 and in the Ministerial Decision on Notification Procedures adopted on 15 april 1994.

2. Each Member shall notify the secretariat of the publications in which TRIMs may be found, including those applied by regional and local governments, and authorities within their territories.

3. Each Member shall accord sympathetic consideration to requests for information, and afford adequate opportunity for consultation, on any matter arising from this Agreement raised by another Member. In conformity with Article X of GATT 1994 no Member is required to disclose information the disclosure of which would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises, public or private.

Article 7Committee on Trade-Related Investment Measures1. A Committee on Trade-Related Investment Measures (referred to in this Agreement as the "Committee") is hereby established, and shall be open to all Members. The Committee shall elect its own Chairman and Vice-Chairman, and shall meet not less than once a year and otherwise at the request of any Member.

2. The Committee shall carry out responsibilities' assigned to it by the Council for Trade in Goods and shall afford Members the opportunity to consult on any matters relating to the operation and implementation of this Agreement.3. The Committee shall monitor the operation and implementation of this -Agreement and shall report thereon annually to the Council for Trade in Goods.

Article 8Consultation and Dispute SettlementThe provisions of Articles XXII and XXIII of GATT 1994, as elaborated and applied by the Dispute Settlement Understanding, shall apply to consultations and the settlement of disputes under this Agreement

Article 9Review by the Council for Trade in GoodsNot later than five years after the date of entry into force of the WTO Agreement, the Council for Trade in Goods shall review the operation of this Agreement and, as appropriate, propose to the Ministerial Conference amendments to its text. In the course of this review, the Council for Trade in Goods shall consider whether the Agreement should be complemented with provisions on investment policy and competition policy.

Annex - Illustrative List1. TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require:

a) The purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; or

b) That an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports.

2. TRIMs that are inconsistent with the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which restrict;

a) The importation by an enterprise of products used in or related to its local production, generally or to an amount related to the volume or value of local production that it exports;

b) The importation by an enterprise of products used in or related to its local production by restricting its access to foreign exchange to an amount related to the foreign exchange inflows attributable to the enterprise; or

c) The exportation or sale for export by an enterprise of products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

CHAPTER NO: 3CONCLUSION

CONCLUSIONThe Agreement on Trade Related Investment Measures (TRIMs) is a set of rules that apply to the domestic regulations a country applies to foreign investors, often as part of an industrial policy. The agreement was agreed upon by all members of the WTO.

Normally all the countries impose some restrictions on the imports and exports to promote their foreign exchange. Such measures may hinder the growth of foreign trade to prevent such hindrance, all the member countries agreed to prohibit some measures under the agreement on Trade Related Investment Measures.

Hence policies such as local content requirements and trade balancing rules that have traditionally been used to both promote the interests of domestic industries and combat restrictive business practices are now banned. Special provisions were made for the developing and least developed countries, and given some facilities under these Agreements.

Any member country can deviate from the provisions of the WTO to meet out its BOP problems. Provision for revision of existing measures from time to time was also recognized.

Through Ministerial Conferences, the member countries can complain, or suggest for the required changes in the provisions of World Trade Organization. India being a founder member of the WTO, with an aim to get benefits, agreed to accept all agreements.

To comply with the provisions of these agreements structural adjustments were made to the existing laws.

Through amendments the provisions of customs laws has been modified. Indian government liberalized its trade sector to fulfill the requirements of these provisions. It has opened its doors to foreign investors and multinational companies, by accepting the proposal of globalization.

The text of all the agreements makes the person to believe that, all the provisions are carefully framed and by obliging such provisions the country could attain economic prosperity.

But in reality, there are several lacunas in the agreement and there is no proper implementation of the provisions. With a dream to have successful trade relations with other countries India has opened up its market for foreigners.

However, Indias gain will be much less than those of several other developing countries. Indias exports in some areas are decreasing every year, on the other hand, quantity of imports are increasing. Even the dispute settlement body has not given justice to India in many cases. Developing countries from the beginning were placed in a no win situation.

Now it is believed that, it is a waste of time and money for India to invoke the WTOs dispute settlement procedure against industrial countries. Even if, India obtains a clear legal ruling that an industrial country has violated legal obligations, we have no effective way to enforce it. On the contrary, if India violates any of the obligations, the developed nations can effectively take retaliation actions against India.

Further, we could not achieve much in the ministerial conferences held so far and the World Trade Organization failed to fulfill our aspirations. Finally we have to accept the truth that neither we can take actions against the MNCs under the agreements of WTO nor can invoke the dispute settlement procedure.

CHAPTER NO: 4APPENDIX

4.1 BIBLIOGRAPHY WTO in the new millennium by Arun Goyal, Nor Mohd

Protecting Foreign Investment: Implications of a WTO Regime and Policy Options by Carlos Mara Correa, Nagesh Kumar

The World Trade Organisation: A Guide to the New Framework for International ... by Bhagirath Lal Das

Liberalisation and Globalisation of Indian Economy, Volume 3 edited by Kulwant Rai Gupta

4.2 WEBLIOGRAPHY www.ijceronline.com