World Trade Organization

The WTO is an inter-governmental organization for governments to negotiate global trade agreements and progressively liberalizing trade. Currently, WTO has 164 members. The WTO operates a system of trade rules that apply to all its members. The WTO is also a place for Member governments to settle their trade disputes. Its located in Geneva, Switzerland. It was established on 1 January 1995 and its official languages are English, French and Spanish.

Objectives of WTO

WTO wishes to achieve the following objectives through the multilateral trading system:

• Raise living standards
• Ensure full employment
• Ensure a large and steadily growing volume of real income and effective demand
• Expand the production of and trade in, goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development.

The Agreement also recognizes the need for “positive efforts to ensure that developing countries, and especially the least-developed among them, secure a share in the growth in international trade commensurate with their economic development”.

Principle of Self Selection

WTO Member governments are generally grouped as “developed Members” or “developing Members”, according to their level of development. More than two thirds of the WTO Members are developing countries. We note that there was no agreed definition of what is a “developed” or a “developing” Member in the WTO. It is up to each Member to decide if it is to be considered “developing Member” (this is known as the principle of self-selection). However, other Members can challenge the decision of a Member to be considered as a developing Member.  The distinction between “developed” and “developing” Members is important because the developing Members enjoy special rights in the WTO. Some developing countries are considered least developed countries (LDCs), however, the WTO does not keep the list of LDCs. The United Nations Economic and Social Council (ECOSOC) maintains a list of the countries that are considered LDCs. Least-developed country Members (LDCs) enjoy additional rights in the WTO.

WTO Agreements

The WTO provides to its Member governments a forum for negotiating global trade rules.  Negotiations in the WTO are conducted directly and exclusively by the Member governments. The WTO itself was born out of negotiations and everything it does is the result of negotiations among its Members.

The WTO agreements are essentially contracts legally binding Member governments to keep their trade policies within agreed limits. The WTO Agreements recognise that, in certain circumstances, Members may need to apply trade restrictions to meet certain policy objectives, such as the protection of human health or the environment. In those cases, members are allowed to depart from the basic principles, but subject to specific conditions. Thus, the WTO rules are not absolute in nature.

History of WTO

The history of the WTO begins with the signing of the General Agreement on Tariffs and Trade (GATT) in 1947. From 1948 to 1994, GATT provided the rules for the bulk of world trade and presided over periods that saw some of the highest growth rates in international trade.

Please note that the initial objective was to create an International Trade Organization (ITO) to handle the trade side of international economic cooperation, joining the two “Bretton Woods” institutions, the World Bank and the International Monetary Fund. The efforts to establish the ITO failed and the GATT served for several years as an organization, taking some of the functions originally intended for the ITO.

The GATT developed rules for the MTS through eight rounds of trade negotiations.

In the early years, the GATT trade rounds focused on reducing tariffs. Following GATT trade rounds covered not only tariffs, but also other trade barriers. During the GATT rounds, substantial liberalization for international trade in goods was achieved and fundamental rules were established on the basis of an open and non-discriminatory trading system.

During the last years of the GATT MTS was recognized as an instrument for economic and trade reforms. The eighth round, known as the Uruguay Round, was the most comprehensive round and led to the creation of the WTO and a new set of agreements (the current WTO Agreements).

Negotiations under GATT lasted till the end of Uruguay Round, which lasted between 1986-1994, and GATT was replaced by the World Trade Organization in 1995.

We note here that the original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994. The GATT 1947 is enshrined with some modifications in the GATT 94.  The 75 existing GATT members and the European Communities became the founding members of the WTO on 1 January 1995.  The Final Act concluding the Uruguay Round and officially establishing the WTO regime was signed during the April 1994 ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.

Further, GATT 1994 is not the only legally binding agreement included via the Final Act at Marrakesh. There are a total of 60 agreements, annexes, decisions and understandings. These agreements are divided into 6 main parts viz.

• The Agreement Establishing the WTO
• Multilateral Agreements on Trade in Goods including the GATT 1994
• Trade Related Investment Measures (TRIMS)
• General Agreement on Trade in Services (GATS)
• Intellectual property — the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
• Dispute settlement (DSU)
• Reviews of governments’ trade policies (TPRM)

Principles of WTO

The WTO Agreements are based on a number of simple and fundamental principles such as:

Non-discrimination

• Members shall not discriminate between their trading partners. This is called Most-Favoured Nation (MFN) principle.
• Members shall not discriminate between national and foreign like products, services or nationals. This is called National Treatment

More open trade

• Reducing or eliminating obstacles to trade.

Transparency and predictability

• Traders and Members need to know what are the trade rules around the world (transparency) and that trade measures will not be raised arbitrarily (predictability)
• Special treatment for less developed Members: Least developed Countries face more challenges before they start benefiting from trade liberalization therefore, they have more time to adjust to the rules, greater flexibility and other special rights.

Trade Policy Review Mechanisms

• WTO Members also review periodically each Member’s trade policies and practices under the Trade Policy Review Mechanism (TPRM). These reviews allow the evaluation of individual Members’ trade policies and practices and their impact on the Multilateral Trading System (MTS).

Settlement of Disputes

• The WTO is also a place for Member governments to settle their trade disputes. The WTO’s procedure for settling disputes is vital for enforcing the rules. A dispute commonly arises when a Member adopts a trade measure that one or more Members consider to be contrary to the obligations under the WTO Agreements.
• When Members are unable to agree on a solution, they can request a panel of independent experts to rule on the dispute. The procedure for settling disputes is based on the rules contained in the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU)

Building Trade Capacity

• Technical assistance and capacity building are core elements of WTO’s work. More than two thirds of WTO Members are developing countries. The WTO helps these Members to fully benefit of the multilateral trading system (MTS) in various ways.
• The WTO Agreements contain special provisions for developing countries, including longer periods to implement their obligations and measures to increase their trading opportunities. WTO’s Trade-Related Technical Assistance (TRTA) activities and programmes are geared towards sustainable trade capacity-building in beneficiary countries.
• Capacity building also involves providing assistance to build the supply-side capacity and infrastructure needed in these countries to expand their trade.

We note here that WTO does not provide Financial Assistance to the LDC member countries. However, there are ways via which developed countries provide financial assistance to LDCs. Further, IMF and WTO in collaboration have launched a Trade Integration Mechanism (TIM) in April 2004. In this facility, funds are provided to those developing countries which suffer temporary Balance of Payment problem as a result of multilateral trade liberalization.

Cooperation with other International Organizations

The WTO cooperates with other international institutions to achieve greater coherence in global economic policymaking. The WTO cooperates with the International Monetary Fund and the World Bank to achieve more coherent and complementary international economic policies.

Multilateral Trading System

Multilateral Trading System is a WTO system that governs the trading among various countries. This system has been established over the years as a result of the continuous international negotiations among the various countries. Various components of Multilateral Trading System are shown below:

Principle of Non Discrimination

Non-discrimination is a fundamental principle of the WTO. It has two components:

• The Most-Favoured Nation (MFN) principle: treating other WTO members equally
• The National Treatment Principle: treating foreigners and locals equally

These two principles apply to trade in goods, trade in services as well as trade related aspects of intellectual property rights.

Principle of Most Favored Nation

If a WTO Member grants to a country an advantage, it has to give such advantage to all WTO Members. The MFN principles ensures that every time a WTO Member lowers a trade barrier or opens up a market, it has to do so for the like goods or services from all WTO Members – without regard of the Members’ economic size or level of development.

• However, there are exceptions allowed for preferential treatment of developing countries, regional free trade areas and customs unions.

Please note that under the Most-Favoured-Nation principle, should WTO Member country A agree in negotiations with state B, which needs not be a WTO Member, to reduce the tariff on the same product X to five percent, this same “tariff rate” must also apply to all other WTO Members as well. In other words, if a country gives favourable treatment to one country (Member or Non-Member) regarding a particular issue, it must handle all Members equally regarding the same issue.

Thus, the MFN principle requires to accord to all WTO Members any advantage given to any other country (Member or not of the WTO). A WTO Member could give an advantage to other WTO Members, without having to accord advantage to non- Members (only WTO Members benefit from the most favourable treatment).

Please note that the MFN status is for “like Products”. The criteria for determining “likeness” are not spelled out in the WTO Agreements. Four criteria have been used in several WTO dispute settlement cases as follows:

• The physical characteristics of the products (nature, properties and quality)
• The products’ end uses
• Consumers’ tastes and habits
• The customs classification of the products

Exceptions to MFN:

• A member may provide preferential treatment only to some countries within a free trade area or customs union, without having to extend such better treatment to all members.
• Developed members may give “unilaterally” preferential treatment to goods imported from developing countries and least developed countries (LDCs), without having to extend such better treatment to other members.

Principle of National Treatment

Under the principle of national treatment, a WTO member should not discriminate between imports and like domestic products from a WTO member. This means that for trade in goods, the national treatment principle prohibits a WTO Member from favouring its domestic products over the imported like products of other Members. Please note that the national treatment applies to only internal measures, as opposed to border measures (e.g. tariffs). It covers:

• Internal taxation (e.g. sales, value added tax), and
• Internal laws, regulations and requirements affecting the internal sale, transportation, distribution or use of products
• The GATS and the TRIPS Agreement have similar provisions.

The objective of the National Treatment principle is to prevent countries from taking discriminatory measures on imports on the one hand, and to prevent countries from offsetting the effects of tariffs through non-tariff measures.  The purpose of the national treatment rule is to eliminate “hidden” domestic barriers to trade by WTO Members through according imported products treatment no less favourable than that accorded to products of national origin. The adherence to this principle is important to maintain the balance of rights and obligations, and is essential for the maintenance of the multilateral trading system.

In the area of services, the national treatment principle refers to non-discrimination between, on the one hand, domestically produced services or domestic service providers and, on the other hand, imported services or foreign services providers.

Exceptions to National Treatment Principle

Please note that the following are specific exceptions to the national treatment principle (goods) and remember them for your exam.

• Government procurement
• Subsidies to domestic producers
• Internal maximum price control measures
• Cinematographic films

More open and predictable trade

More open and predictable trade refers to lowering the trade barriers. Lowering trade barriers is one of the most obvious means of encouraging trade. These trade barriers include customs duties (“tariffs”), as well as import bans or quotas. There are also several other measures that could restrict or even impede market access for goods and services.