Establishment of WTO
The World Trade Organization (WTO) is the only international organization that deals with global rules of trade between nations. It provides a framework for conduct of international trade in goods and services. It lays down the rights and obligations of governments in the set of multilateral agreements.
In addition to goods and services, it also covers a wide range of issues related to international trade, such as protection of intellectual property rights and dispute settlement, and prescribes disciplines for governments in formulation of rules, procedures, and practices in these areas. Moreover, it also imposes discipline at the firm level in certain areas, such as export pricing at unusually low prices.
The basic objective of the rule-based system of international trade under the WTO is to ensure that international markets remain open and their access is not disrupted by the sudden and arbitrary imposition of import restrictions.
Under the Uruguay Round, the national governments of all the member countries have negotiated improved access to the markets of the member countries so as to enable business enterprises to convert trade concessions into new business opportunities.
The emerging legal systems not only confer benefits on manufacturing industries and business enterprises but also create rights in their favour. The WTO also covers areas of interest to international business firms, such as customs valuation, pre-shipment inspection services, and import licensing procedures, wherein the emphasis has been laid on transparency of the procedures so as to restrain their use as non-tariff barriers.
The agreements also stipulate rights of exporters and domestic procedures to initiate actions against dumping of foreign goods. An international business manager needs to develop a thorough understanding of the new opportunities and challenges of the multilateral trading system under the WTO.
The WTO came into existence on 1 January 1995 as a successor to the General Agreements on Tariffs and Trade (GATT). Its genesis goes back to the post-Second- World-War period in the late 1940s when economies of most European countries and the US were greatly disrupted following the war and the great depression of the 1930s.
Consequently a United Nations Conference on Trade and Employment was convened at Havana in November 1947.
It led to an international agreement called Havana Charter to create an International Trade Organization (ITO), a specialized agency of the United Nations to handle the trade side of international economic cooperation.
The draft ITO charter was ambitious and extended beyond world trade discipline to rules on employment, commodity agreements, restrictive business practices, international investment, and services. However, the attempt to create the ITO was aborted as the US did not ratify it and other countries found it difficult to make it operational without US support.
The combined package of trade rules and tariff concessions negotiated and agreed by 23 countries out of 50 participating countries became known as General Agreement on Tariffs and Trade (GATT): an effort to salvage from the aborted attempt to create the ITO.
India was also a founder member of GATT, a multilateral treaty aimed at trade liberalization. GATT provided a multilateral forum during 1948-94 to discuss the trade problems and reduction of trade barriers.
World Trade Organization membership increased from 23 countries in 1947 to 123 countries by 1994. GATT remained a provisional agreement and organization throughout these 47 years and facilitated considerably, tariff reduction. During its existence from 1948 to 1994, average tariffs on manufactured goods in developed countries declined from about 40 per cent to a mere 4 per cent.
It was only during the Kennedy round of negotiations in 1964-67, that an anti-dumping agreement and a section of development under the GATT were introduced. The first major attempt to tackle non-tariff barriers was made during the Tokyo round. The eighth round of negotiations known as the Uruguay Round of 1986-94 was the most comprehensive of all and led to the creation of the WTO with a new set up of agreements.
Reasons to Join WTO for International Business:
Despite the disciplinary framework for conduct of international trade under the WTO, countries across the world including the developing countries were in a rush to join the pack. The WTO has nearly 153 members, accounting for over 97 per cent of world trade. Presently, 34 governments hold observer status, out of which 31 are actively seeking accession, including large trading nations, such as Russia and Taiwan.
The major reasons for a country to join the WTO are:
- Since each country needs to export its goods and services to receive foreign exchange for essential imports, such as capital goods, technology, fuel, and sometimes even food, it requires access to foreign markets. But countries require permission for making their goods and services enter foreign countries. Thus countries need to have bilateral agreements with each other. By joining a multilateral framework like the WTO, the need to have individual bilateral agreements is obviated as the member countries are allowed to export and import goods and services among themselves.
- An individual country is unlikely to get a better deal in bilateral agreements than what it gets in a multilateral framework. It has been observed that developing countries had to commit to a greater degree to developed countries in bilateral agreements than what is required under the WTO.
- A country can learn from the experiences of other countries, being part of the community of countries and influence the decision-making process in the WTO.
- The WTO provides some protection against subjective actions of other countries by way of its dispute settlement system that works as an in-built mechanism for enforcement of rights and obligations of member countries.
- It would be odd to remain out of WTO framework for conducting international trade that has been in existence for about six decades and accounts for over 97 per cent of world trade. It may even be viewed as suspicious by others.
Functions of WTO:
The major function of the WTO is to ensure the flow of international trade as smoothly, predictably, and freely as possible. This is a multilateral trade organization aimed at evolving a liberalized trade regime under a rule-based system.
The basic functions of WTO are:
- To facilitate the implementation, administration, and operation of trade agreements.
- To provide a forum for further negotiations among member countries on matters covered by the agreements as well as on new issues falling within its mandate.
- Settlement of differences and disputes among its member countries.
- To carry out periodic reviews of the trade policies of its member countries.
- To assist developing countries in trade policy issues, through technical assistance and training programmes.
- To cooperate with other international organizations.
Summit of WTO
The organizational structure of WTO as summarized in Fig. 5.1, consists of the Ministerial Conference, General Council, council for each broad area, and subsidiary bodies.
First level – The Ministerial Conference:
The Ministerial Conference is the topmost decision-making body of the WTO, which has to meet at least once every two years.
Second level – General Council:
Day-to-day work in between the Ministerial Conferences is handled by the following three bodies:
- The General Council
- The Dispute Settlement Body
- The Trade Policy Review Body
In fact, all these three bodies consist of all WTO members and report to the Ministerial Conference, although they meet under different terms of reference.
Third level – Councils for each broad area of trade:
There are three more councils, each handling a different broad area of trade, reporting to the General Council.
- The Council for Trade in Goods (Goods Council)
- The Council for Trade in Services (Services Council)
- The Council for Trade Related Aspects of Intellectual Property Rights (TRIPS Council)
Each of these councils consists of all WTO members and is responsible for the working of the WTO agreements dealing with their respective areas of trade. These three also have subsidiary bodies. Six other bodies, called committees, also report to the General Council, since their scope is smaller.
They cover issues, such as trade and development, the environment, regional trading arrangements, and administrative issues. The Singapore Ministerial Conference in December 1996 decided to create new working groups to look at investment and competition policy, transparency in government procurement, and trade facilitation.
Fourth level – Subsidiary bodies:
Each of the higher councils has subsidiary bodies that consist of all member countries.
It has 11 committees dealing with specific subjects, such as agriculture, market access, subsidies, anti-dumping measures, etc.
The subsidiary bodies of the Services Council deal with financial services, domestic services, GATS rules, and specific commitments.
Dispute settlement body:
It has two subsidiaries, i.e., the dispute settlement ‘panels’ of experts appointed to adjudicate on unresolved disputes, and the Appellate Body that deals with appeals at the General Council level. Formally all of these councils and committees consist of the full membership of the WTO. But that does not mean they are the same, or that the distinctions are purely bureaucratic.
In practice, the people participating in the various councils and committees are different because different levels of seniority and different areas of expertise are needed. Heads of missions in Geneva (usually ambassadors) normally represent their countries at the General Council level.
Some of the committees can be highly specialized and sometimes governments send expert officials from their countries to participate in these meetings. Even at the level of the Goods, Services, and TRIPS councils, many delegations assign different officials to cover different meetings.
All WTO members may participate in all councils, etc., except the Appellate Body, dispute settlement panels, textile monitoring body, and plurilateral committees.
The WTO has a permanent Secretariat based in Geneva, with a staff of around 560 and is headed by the Director-General. It does not have branch offices outside Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the decision-making role those other international bureaucracies are given.
The Secretariat’s main duties are to extend technical support for the various councils and committees and the Ministerial Conferences, to provide technical assistance for developing countries, to analyse world trade, and to explain WTO affairs to the public and media.
The Secretariat also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become members of the WTO.
Principles of the Multilateral Trading System under the WTO:
For an international business manager, it is difficult to go through the whole of the WTO agreements which are lengthy and complex being legal texts covering a wide range of activities.
The agreements deal with a wide range of subjects related to international trade, such as agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, and intellectual property.
However, a manager dealing in international markets needs to have an understanding of the basic principles of WTO which form the foundation of the multilateral trading system.
These principles are discussed below:
(i) Trade Without Discrimination:
Under the WTO principles, a country cannot discriminate between its trading partners and products and services of its own and foreign origin.
Most-favoured nation treatment:
Under WTO agreements, countries cannot normally discriminate between their trading partners. In case a country grants someone a special favour (such as a lower rate of customs for one of their products), then it has to do the same for all other WTO members. The principle is known as Most-favoured nation (MFN) treatment.
This clause is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS, Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS, Article 4), although in each agreement, the principle is handled slightly differently.
Together, these three agreements cover all three main areas of trade handled by the WTO.
Some exceptions to the MFN principle are allowed as under:
- Countries can set up a free trade agreement that applies only to goods traded within the group—discriminating against goods from outside.
- Countries can provide developing countries special access to their markets.
- A country can raise barriers against products that are considered to be traded unfairly from specific countries.
- In services, countries are allowed, in limited circumstances, to discriminate.
But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners—whether rich or poor, weak or strong.
The WTO agreements stipulate that imported and locally- produced goods should be treated equally—at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.
This principle of ‘national treatment’ (giving others the same treatment as one’s own nationals) is also found in all the three main WTO agreements, i.e., Article 3 of GATT, Article 17 of GATS, and Article 3 of TRIPS.
However, the principle is handled slightly differently in each of these agreements. National treatment only applies once a product, service, or an item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.
(ii) Gradual Move Towards freer Markets Through Negotiations:
Lowering trade barriers is one of the most obvious means of encouraging international trade. Such barrier includes customs duties (or tariffs) and measures, such as import bans or quotas that restrict quantities selectively. Since GATT’s creation in 1947-48, there have been eight rounds of trade negotiations. At first these focused on lowering tariffs (customs duties) on imported goods.
As a result of the negotiations, by the mid- 1990s industrial countries’ tariff rates on industrial goods had fallen steadily to less than 4 per cent. But by the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to new areas, such as services and intellectual property.
The WTO agreements allow countries to introduce changes gradually through ‘progressive liberalization’. Developing countries are usually given longer period to fulfill their obligations.
(iii) Increased Predictability of International Business Environment:
Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future market opportunities. With stability and predictability, investment is encouraged, jobs are created, and consumers can fully enjoy the benefits of competition—choice and lower prices.
The multilateral trading system is an attempt by governments to make the business environment stable and predictable.
One of the achievements of the Uruguay Round of multilateral trade talks was to increase the amount of trade under binding commitments. In the WTO, when countries agree to open their markets for goods or services, they ‘bind’ their commitments. For goods, these bindings amount to ceiling on customs tariff rates.
A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. In agriculture, 100 per cent of products now have bound tariffs. The result of this is a substantially higher degree of market security for traders and investors.
The trading system under the WTO attempts to improve predictability and stability in other ways as well. One way is to discourage the use of quotas and other measures used to set limits on quantities of imports as administering quotas can lead to more red-tape and accusations of unfair play.
Another is to make countries’ trade rules as clear and public (transparent) as possible. Many WTO agreements require governments to disclose their policies and practices publicly within the country or by notifying the WTO. The regular surveillance of national trade policies through the Trade Policy Review Mechanism provides a further means of encouraging transparency both domestically and at the multilateral level.
(iv) Promoting Fair Competition:
The WTO is sometimes described as a ‘free trade’ institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair, and undistorted competition.
The rules on non-discrimination—MFN and national treatment—are designed to secure fair conditions of trade. The WTO has also set rules on dumping and subsidies which adversely affect fair trade. The issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade.
Many of the other WTO agreements aim to support fair competition, such as in agriculture, intellectual property, and services. The agreement on government procurement (a ‘plurilateral’ agreement because it is signed by only a few WTO members) extends competition rules to purchases by thousands of government entities in many countries.