The World Trade Organization (WTO): Functions, Principles, and Role in International Trade, Study notes of Economics

Download The World Trade Organization (WTO): Functions, Principles, and Role in International Trade and more Study notes Economics in PDF only on Docsity! he WTO, established in 1995, adminis- ters the trade agreements negotiated by its members, in particular the General Agree- ment on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. (These and other major WTO agreements are contained in the CD-ROM “Applied Trade Policy,” which is included with this Handbook.) The WTO builds on the organizational structure that had developed under GATT auspices as of the early 1990s. The origins of the GATT were in the abortive negotiations to create an International Trade Orga- nization (ITO) following World War II. Negotiations on the charter of such an organization were con- cluded successfully in Havana in 1948, but the talks did not lead to the establishment of the ITO because the U.S. Congress was expected to refuse to ratify the agreement. Meanwhile, the GATT was negotiated in 1947 by 23 countries—12 industrial and 11 develop- ing—before the ITO negotiations were concluded.1 As the ITO never came into being, the GATT was the only concrete result of the negotiations. Since 1947, the GATT has been the major focal point for industrial country governments seeking to lower trade barriers. Although the GATT was initially largely limited to a tariff agree- ment, over time, as average tariff levels fell, it increasingly came to concentrate on nontariff trade policies and domestic policies having an impact on trade. (See the Glossary to this volume for a list of trade-related policies used by countries.) Its success was reflected in a steady expansion in the number of contracting parties. By the end of the Uruguay Round (1994), 128 countries had joined the GATT. Since the entry into force of the WTO, membership has grown to 144, as of the end of 2001. The WTO differs in a number of important respects from the GATT. The GATT was a rather flexible institution; bargaining and deal-making lay at its core, with significant opportunities for coun- tries to “opt out” of specific disciplines. In contrast, WTO rules apply to all members, who are subject to binding dispute settlement procedures. This is attractive to groups seeking to introduce multilater- al disciplines on a variety of subjects, ranging from the environment and labor standards to competi- tion and investment policies to animal rights. But it is a source of concern to groups that perceive the (proposed) multilateral rules to be inappropriate or worry that the adoption of specific rules may affect detrimentally the ability of governments to regulate domestic activities and deal with market failures. The main function of the WTO is as a forum for international cooperation on trade-related poli- cies—the creation of codes of conduct for member 41 The WTO: Functions and Basic Principles T 6 B E R N A R D H O E K M A N governments. These codes emerge from the exchange of trade policy commitments in periodic negotiations. The WTO can be seen as a market in the sense that countries come together to exchange market access commitments on a reciprocal basis. It is, in fact, a barter market. In contrast to the markets one finds in city squares, countries do not have access to a medium of exchange: they do not have money with which to buy, and against which to sell, trade policies. Instead they have to exchange apples for oranges: for example, tariff reductions on iron for foreign market access commitments regarding cloth. This makes the trade policy market less effi- cient than one in which money can be used, and it is one of the reasons that WTO negotiations can be a tortuous process. One result of the market exchange is the development of codes of conduct. The WTO contains a set of specific legal obligations regulating trade policies of member states, and these are embodied in the GATT, the GATS, and the TRIPS agreement. Basic Principles The WTO establishes a framework for trade poli- cies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy game, not with the results of the game. Five principles are of particular importance in under- standing both the pre-1994 GATT and the WTO: nondiscrimination, reciprocity, enforceable com- mitments, transparency, and safety valves. Nondiscrimination Nondiscrimination has two major components: the most-favored-nation (MFN) rule, and the national treatment principle. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these three areas. This is especially true of the national treatment principle, which is a specific, not a general commitment when it comes to services. The MFN rule requires that a product made in one member country be treated no less favorably than a “like” (very similar) good that originates in any other country. Thus, if the best treatment grant- ed a trading partner supplying a specific product is a 5 percent tariff, this rate must be applied immedi- ately and unconditionally to imports of this good originating in all WTO members. In view of the small number of contracting parties to the GATT (only 23 countries), the benchmark for MFN is the best treatment offered to any country, including countries that are not members of the GATT. National treatment requires that foreign goods, once they have satisfied whatever border measures are applied, be treated no less favorably, in terms of internal (indirect) taxation than like or directly competitive domestically produced goods (Art. III, GATT). That is, goods of foreign origin circulating in the country must be subject to taxes, charges, and regulations that are “no less favorable” than those that apply to similar goods of domestic origin. The MFN rule applies unconditionally. Although exceptions are made for the formation of free trade areas or customs unions and for preferential treat- ment of developing countries, MFN is a basic pillar of the WTO. One reason for this is economic: if pol- icy does not discriminate between foreign suppliers, importers and consumers will have an incentive to use the lowest-cost foreign supplier. MFN also pro- vides smaller countries with a guarantee that larger countries will not exploit their market power by raising tariffs against them in periods when times are bad and domestic industries are clamoring for protection or, alternatively, give specific countries preferential treatment for foreign policy reasons. MFN helps enforce multilateral rules by raising the costs to a country of defecting from the trade regime to which it committed itself in an earlier multilateral trade negotiation. If the country desires to raise trade barriers, it must apply the changed regime to all WTO members. This increases the political cost of backsliding on trade policy because importers will object. Finally, MFN reduces negoti- ating costs: once a negotiation has been concluded with a country, the results extend to all. Other coun- tries do not need to negotiate to obtain similar treatment; instead, negotiations can be limited to principal suppliers. National treatment ensures that liberalization commitments are not offset through the imposition of domestic taxes and similar measures. The requirement that foreign products be treated no less favorably than competing domestically produced products gives foreign suppliers greater certainty regarding the regulatory environment in which they must operate. The national treatment principle has often been invoked in dispute settlement cases brought to the GATT. It is a very wide-ranging rule: the obligation applies whether or not a specific tar- 42 T H E W O R L D T R A D E O R G A N I Z AT I O N tilateral trade negotiations gradually expanded the scope of the GATT to take in a larger number of nontariff policies. Until the Uruguay Round, how- ever, no progress was made on agriculture or on tex- tiles and clothing. The deal that finally allowed these sectors to be subjected to multilateral disciplines included the establishment of rules for trade in services and enforcement of intellectual property rights (IPRs), as well as the creation of the WTO. There are many similarities between the GATT and the WTO, but the basic principles remain the same. The WTO continues to operate by consensus and to be member driven. There were, however, a number of major changes. Most obviously, the coverage of the WTO is much wider. A change of great importance is that in contrast to the GATT, the WTO agreement is a “single undertaking”—all its provisions apply to all members. Under the GATT there was great flexibility 45 The WTO: Functions and Basic Principles Transparency at both the multilateral (WTO) level and the national level is essential to ensure owner- ship of commitments, reduce uncertainty, and enforce agreements. Efforts to increase the trans- parency of members’ trade policies take up a good portion of WTO resources. The WTO requires that all trade laws and regulations be published. Article X of the GATT, Article III of the GATS, and Article 63 of the TRIPS agreement all require that relevant laws, regulations, judicial decisions, and administra- tive rulings be made public. More than 200 notifi- cation requirements are embodied in the various WTO agreements and mandated by ministerial and council decisions. The WTO also has important sur- veillance activities, since it has a mandate to period- ically review the trade policy and foreign trade regimes of members. The WTO’s Trade Policy Review Mechanism (TPRM), established during the Uruguay Round, builds on a 1979 Understanding on Notification, Consultation, Dispute Settlement, and Surveillance under which contracting parties agreed to conduct a regular and systematic review of developments in the trading system. The objec- tive of the TPRM is to examine the impact of mem- bers’ trade policies and practices on the trading system and to contribute to improved adherence to WTO rules through greater transparency. The legal compatibility of any particular measure with WTO disciplines is not examined, this being left for members to ascertain. The TPRM was originally motivated in part by concerns stemming from the fact that the only available review of global trade policies at the time was produced by the United States (Keesing 1998). The TPRM is an important element of the WTO because it fosters transparency and enhances communication, thereby strengthening the multilateral trading system. Country-specific reviews are conducted on a rotational basis, and the frequency of review is a function of a mem- ber’s share in world trade. The four largest play- ers—the European Union, the United States, Japan, and Canada—are subject to review by the WTO General Council every two years. In princi- ple, the next 16 largest traders are subject to reviews every four years, and the remaining members are reviewed every six years. A longer periodicity may be established for least-devel- oped countries. The trade policy review (TPR) for a country is based on a report prepared by the government concerned and on a report by the WTO Trade Policies Review Division. TPRs are supplemented by an annual report by the Direc- tor-General of the WTO that provides an overview of developments in the international trading environment. By subjecting the trade policies of the largest industrial country markets to regular public peer review, the TPRM shifts the balance of power in the WTO ever so slightly in favor of the develop- ing countries (Francois 2001). Equally important, the TPRM provides domestic interest groups with the information necessary to determine the costs and benefits of national trade policies. The reports are not analytical in the sense of deter- mining the economic effects of various national policies—the size of the implied transfers and the beneficiaries and losers under the prevailing poli- cies. This task is left to national stakeholders (think tanks and policy institutes). Sources: Hoekman and Kostecki (2001); Francois (2001). B O X 6 . 1 : T R A N S PA R E N C Y: N O T I F I C AT I O N A N D S U R V E I L L A N C E for countries to “opt out” of new disciplines, and in practice many developing countries did not sign spe- cific agreements on issues such as customs valuation or subsidies. This is no longer the case, implying that the WTO is much more important for developing countries than the GATT was. Also important were changes in the area of dispute settlement, which became much more “automatic” with the adoption of a “negative consensus” rule. (All members must oppose the findings in a dispute settlement to block adoption of reports.) Finally, the secretariat acquired much greater transparency and surveillance func- tions through the creation of the Trade Policy Review Mechanism. Scope, Functions, and Structure of the WTO The WTO is headed by a ministerial conference of all members that meets at least once every two years. By contrast, under the GATT a decade could pass between ministerial meetings. The more frequent participation by trade ministers under the WTO was intended to strengthen the political guidance of the WTO and enhance the prominence and credibility of its rules in domestic political arenas. Article II of the Marrakech Agreement that established the WTO charges the organization with providing a common institutional framework for the conduct of trade relations among its members in matters to which agreements and associated legal obligations apply. Four annexes to the WTO define the substantive rights and obligations of members. Annex 1 has three parts: Annex 1A, Multilateral Agreements on Trade in Goods, which contains the GATT 1994 (the GATT 1947 as amended by a large number of understandings and supplementary agreements negotiated in the Uruguay Round); Annex 1B, which contains the GATS; and Annex 1C, the TRIPS agreement. Annex 2 contains the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU)—the WTO’s common dispute set- tlement mechanism. Annex 3 contains the Trade Policy Review Mechanism (TPRM), an instrument for surveillance of members’ trade policies. Finally, Annex 4, Plurilateral Trade Agreements, consists of 46 T H E W O R L D T R A D E O R G A N I Z AT I O N Table 6.1 From GATT to WTO: Major Events Date Event 1947 The GATT is drawn up to record the results of tariff negotiations among 23 countries. The agreement enters into force on January 1, 1948. 1948 The GATT provisionally enters into force. Delegations from 56 countries meet in Havana, Cuba, to consider the final draft of the International Trade Organization (ITO) agreement; in March 1948, 53 countries sign the Havana Charter establishing an ITO. 1950 China withdraws from the GATT. The U.S. administration abandons efforts to seek con- gressional ratification of the ITO. 1955 A review session modifies numerous provisions of the GATT. The United States is granted a waiver from GATT disciplines for certain agricultural policies. Japan accedes to the GATT. 1965 Part IV (on trade and development) is added to the GATT, establishing new guidelines for trade policies of and toward developing countries. A Committee on Trade and Develop- ment is created to monitor implementation. 1974 The Agreement Regarding International Trade in Textiles, better known as the Multifibre Arrangement (MFA), enters into force. The MFA restricts export growth in clothing and textiles to 6 percent per year. It is renegotiated in 1977 and 1982 and extended in 1986, 1991, and 1992. 1986 The Uruguay Round is launched in Punta del Este, Uruguay. 1994 In Marrakech, on April 15, ministers sign the final act establishing the WTO and embody- ing the results of the Uruguay Round. 1995 The WTO enters into force on January 1. 1999 Ministerial meeting in Seattle fails to launch a new round. 2001 A new round of trade talks (the Doha Development Agenda) is agreed on in Doha, Qatar. Source: Hoekman and Kostecki (2001). Tokyo Round codes that were not multilateralized in the Uruguay Round and that therefore bind only their signatories. Together, Annexes 1 through 3 embody the multilateral trade agreements. Article II of the WTO specifies that all the agreements con- tained in these three annexes are an integral part of the WTO agreement and are binding on all mem- bers. All of these instruments are discussed further in this chapter or in other chapters of this volume, The WTO is charged with facilitating the imple- mentation and operation of the multilateral trade agreements, providing a forum for negotiations, administering the dispute settlement mechanism, exercising multilateral surveillance of trade policies, and cooperating with the World Bank and the IMF to achieve greater coherence in global economic policymaking (Art. III WTO). Between meetings of the ministerial conference, which is responsible for carrying out the functions of the WTO, the organi- zation is managed by the General Council, at the level of diplomats. The General Council meets about 12 times a year. On average, about 70 percent of all WTO members take part in its meetings, at which members are usually represented by delega- tions based in Geneva. The General Council turns itself, as needed, into a body that adjudicates trade disputes (the Dispute Settlement Body, or DSB) or that reviews members’ trade policies (the Trade Pol- icy Review Body, or TPRB). Three subsidiary councils, on goods, on services, and on intellectual property rights, operate under the general guidance of the General Council. Sepa- rate committees deal with the interests of develop- ing countries (Committee on Trade and Development); surveillance of trade restriction actions taken for balance of payment purposes; sur- veillance of regional trade agreements; trade-envi- ronment linkages; and WTO finances and administration. Additional committees or working parties deal with matters covered by the GATT, the GATS, or the TRIPS agreement. There are commit- tees, functioning under the auspices of the Council on Trade in Goods, on subsidies, antidumping and countervailing measures, technical barriers to trade (product standards), import licensing, customs val- uation, market access, agriculture, sanitary and phy- tosanitary measures, trade-related investment measures, rules of origin, and safeguards. In addi- tion, working groups have been established to deal with notifications, with state-trading enterprises, with the relationships between trade and invest- ment and between trade and competition policy, and with the issue of transparency in government procurement. Specific committees address matters relating to the GATS or the TRIPS agreement. All WTO members may participate in all councils, committees, and other bodies, with the exceptions of the Appellate Body, dispute settlement panels, the Textiles Monitoring Body, and committees dealing with plurilateral agreements. About 40 councils, committees, subcommittees, bodies, and standing groups or working parties functioned under WTO auspices in 2000, more than twice the number under the GATT. Such bodies are open to all WTO members, but generally only the more important trading nations (less than half of the membership) regularly send representatives to most meetings. The degree of participation reflects a mix of national interests and resource constraints. The least-developed countries, in particular, tend not to be represented at these meetings; often, they do not have delegations based in Geneva. All of these fora, plus working parties on accession (aver- aging close to 30 in the late 1990s), dispute settle- ment panels, meetings of regional groups, meetings of heads of delegations, and numerous ad hoc and informal groups add up to 1,200 events a year at or near WTO headquarters in Geneva. Most WTO business is conducted in English, but many official WTO meetings require French and Spanish inter- pretation. The main actors in the day-to-day activities are officials affiliated with the delegations of members. The WTO—like the 1947 GATT—is therefore something of a network organization (Blackhurst 1998). The WTO secretariat is the hub of a very large and dispersed network comprising official representatives of members based in Geneva, civil servants based in capitals, and national business and nongovernmental groups that seek to have their governments push for their interests at the multilat- eral level. The operation of the WTO depends on the collective input of thousands of civil servants and government officials who deal with trade issues in each member country. Initiatives to launch multilateral trade negotia- tions and to settle disputes—the two highest-profile activities of the WTO—are the sole responsibility of WTO members themselves, not the secretariat. The member-driven nature of the organization puts a considerable strain on the national delegations of members. Many countries have no more than one 47 The WTO: Functions and Basic Principles