Introduction

World Trade

History Of The WTO

The Structure Of The WTO

The WTO's Agreements

How The WTO Works

Regional And Bi-Lateral Pacts And Groupings

The Future Of The WTO

Note: Some parts of this chapter are adapted from texts issued by the World Trade Organization and the author gratefully acknowledges the WTO's permission to use them.

Introduction

Why, out of all the global organizations described in the preceding five chapters, pick the WTO to study in more depth? Because, if it is true that trade was the engine that drove the early socialization of groups of people, then it may be through the management of trade that we can most easily govern our unruly world. This is a brave statement, and it needs to be elaborated.

An account was given at the beginning of Chapter 1 of the intimate involvement of exchange in the preservation of the web of competing groups that probably characterized early human society, and their evolution into settled societies over hundreds of thousands or even millions of years. It is no longer contentious among evolutionary biologists and anthropologists to claim that trade was at least one, if not the most important of the human activities that turned a collection of grunting, murderous apes into the highly organized societies of ancient history.

Previous chapters have traced the groupish origins of trading and markets, culminating in the mediaeval guild system, the city-states of Europe and the Hansa (see Kropotkin ¹ and Benson ². An account has also been given of the emergence of colonial trading companies and their gradual takeover by nation states in the 18th and 19th centuries, the rise of mercantilism between 1850 and 1950, which led to the erection of trade barriers, and finally the dominance of the State in economic management in the 20th century under the banner of socialism.

In the second half of the 20th century, however, as we have seen, globalization began to undermine the nation state and gave a new lease of life to independent (private) commercial law. The realisation after World War II that such important human goods as peace and trade could not be left to uncomprehending national bullies led to the creation of the United Nations, while the Bretton Woods conference resulted in the creation of the GATT (later to become the WTO) alongside the IMF and the World Bank.

The essence of the WTO is that it is a rules-based organization, equivalent to a legal arena, with the power to impose its conclusions on its members. Just as an individual in society accepts the overall benefit of the law-based polity in which she lives, even though occasionally trying to subvert or cheat it, so do all countries (150 now in the WTO) accept that its writ runs for them.

The remainder of this chapter forms a description of the origins, the working methods and the effects of the WTO. Its possible future as primus inter pares of international economic bodies is referred to frequently throughout Parts Two and Three of the book.

World Trade

Whether or not the importance of trade for a stable world order is accepted, there is no denying the ever-increasing profile of world trade: according to WTO figures, total global merchandise exports (at current prices) increased by a factor of 217 times between 1948 and 2005:

These are stunning figures, and they are worth a closer look.

World GDP has grown at about 4% a year between 1970 and 2005, according to IMF figures. The growth of merchandise trade as above has been at the rate of more than 15% a year for over 50 years.

World merchandise exports in 1948 represented 22% of US GDP in that year;

World merchandise exports in 2005 represented 85% of US GDP in that year.

Of course, this amazing growth in world trade (and remember that services are on top of those figures and growing even more quickly) is not just thanks to the WTO; but the long-term reduction in tariffs which the WTO has overseen must surely be a major factor in such growth. Interestingly, given the number of enemies of free trade to be found dotted around the world, the WTO has published rigorous statistical studies showing a strong inverse correlation between levels of trade and tariff levels.

Other factors underpinning or associated with the growth in trade no doubt include advances in communications and the long-lasting, stable political environment of the last 50 years.

History Of The WTO

The GATT (General Agreement on Trade and Tariffs) founded in 1947 as a forum for negotiating lower customs duty rates and other trade barriers was one of the three international economic institutions set up by the Bretton Woods conference in 1944. Originally there was to have been an International Trade Organization, but the US Senate would not ratify it, and only its set of rules, the GATT, came into force, at least until 1995 when the WTO was, finally, formed.

The WTO has therefore existed as such only from 1995, but it had evolved by degrees out of the GATT . The text of the General Agreement spelled out important rules, particularly non-discrimination, and the major trading nations which signed up to the GATT contracted to obey those rules. The GATT, updated in 1995 when the WTO was founded, has become the WTO’s umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping.

Since GATT’s creation in 1947-48 there have been eight rounds of trade negotiations. A ninth round, under the Doha Development Agenda, is now underway. 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% on average. 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 Structure Of The WTO

The WTO is run by its member governments, of which there are currently 140, with several other countries, including importantly Russia, due to join in the near future.

Unlike the IMF and the World Bank, the WTO has no in-house directorate empowered to make decisions, although it does have a secretariat with a high-profile Secretary-General. The ruling body of the WTO is the ministerial conference which has to meet at least once every two years. Day-to-day work in between ministerial conferences is handled by three bodies, with delegated authority:

• The General Council
• The Dispute Settlement Body
• The Trade Policy Review Body

Three further councils, each handling a different broad area of trade, report 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)

A number of smaller committees report to the General Council, covering issues such as trade and development, the environment, regional trading arrangements, and administration.

The Dispute Settlement Body also has two subsidiaries: the dispute settlement “panels” of experts appointed to adjudicate on unresolved disputes, and the Appellate Body that deals with appeals.

The WTO is not itself a rule-making body, but it brokers agreements between nations, then administers these using dispute resolution procedures and quasi-judicial powers which are binding on its members.

However, the WTO does insist (as of right) that certain principles should be incorporated in the agreements it oversees:

• Most-favoured-nation (MFN). Under the WTO agreements, countries cannot normally discriminate between their trading partners. This principle is known as most-favoured-nation (MFN) treatment. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods.

• National treatment. 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. National treatment only applies once a product, service or 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.

The rules on non-discrimination — MFN and national treatment — are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual property, services, for example.

The WTO's rules apply to all of its member states, since they have always been reached by consensus during the various negotiating rounds that have taken place. Rulings of the WTO's Dispute Settlement and Appellate bodies have direct effect on the member states involved in any particular reference and are enforced by the members themselves under agreed procedures that they negotiated, including the possibility of trade sanctions. Since the founding of the GATT, no member state has ever refused to implement negotiated policies or procedures, and no member state has ever refused to accept a Dispute Settlement ruling, once appeal procedures have been exhausted.

The WTO's Agreements

All the legal agreements under which the WTO operates are between the governments of the member countries of the WTO.

The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes. They prescribe special treatment for developing countries. They require governments to make their trade policies transparent by notifying the WTO about laws in force and measures adopted, and through regular reports by the secretariat on countries’ trade policies.

The GATT (General Agreement on Tariffs and Trade) was negotiated in 1947 and came into force in 1948. It was elaborated and extended during the eight subsequent negotiating rounds prior to the establishment of the WTO as such under the Uruguay Round, which began in 1986 and was concluded in Marrakesh in 1994. The 1947 GATT (and now its 1994 revision) forms part of the legal structure of the WTO.

The Marrakesh agreements, which are numerous, include:

• Agreement Establishing the World Trade Organization;
• Multilateral Agreements on Trade in Goods
• GATT 1994 (supplements GATT 1947);
• Trade-Related Investment Measures (TRIMs);
• Anti-dumping (Article VI of GATT 1994);
• Rules of Origin;
• Import Licensing;
• Subsidies and Countervailing Measures;
• General Agreement on Trade in Services (GATS);
• Trade-Related Aspects of Intellectual Property Rights (TRIPS);
• Dispute Settlement Understanding;
• Trade Policy Review Mechanism;
• Plurilateral Trade Agreements.

There are schedules to the agreements which contain the commitments made by individual WTO members allowing specific foreign products or service-providers access to their markets. The schedules are integral parts of the agreements. In the print version these schedules comprise about 30,000 pages for all WTO Members.

There are some later Protocols and Agreements prior to the commencement of the Doha Round in 2001. Assuming that there is eventually a successful conclusion to the Doha Round, it can be expected that many of the Marrakesh agreements will be extensively amended and that new agreements will be signed.

How The WTO Works

The WTO Secretariat is located in Geneva. It has around 630 staff, headed by director-general Pascal Lamy, previously Trade Commissioner at the European Commission. The WTO has a budget of SFr 160m, provided by its member states. Its responsibilities include:

• Administrative and technical support for WTO delegate bodies (councils, committees, working parties, negotiating groups) for negotiations and the implementation of agreements.
• Technical support for developing countries, and especially the least-developed.
• Trade performance and trade policy analysis by WTO economists and statisticians.
• Assistance from legal staff in the resolution of trade disputes involving the interpretation of WTO rules and precedents.
• Dealing with accession negotiations for new members and providing advice to governments considering membership.

The size of the WTO and its budget are puny compared to its peer organisations such as the IMF and the World Bank, while its reach and its impact are equal or greater. However, it should be remembered that representatives of member governments do a great deal of work in committees and other fora, whose cost is of course absorbed by the countries concerned. Still, it may be fair to say that never in the history of human trade conflict has so much been achieved by so few.

In the WTO, when countries agree to open their markets for goods or services, they “bind” their commitments. For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports at rates that are lower than the bound rates. Frequently this is the case in developing countries. In developed countries the rates actually charged and the bound rates tend to be the same. A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade.

One of the achievements of the Uruguay Round of multilateral trade talks was to increase the amount of trade under binding commitments. In agriculture, 100% of products now have bound tariffs.

The system tries 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 — 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.

The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements. And the agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries.

Any state or customs territory having full autonomy in the conduct of its trade policies may join the WTO, but WTO members must agree on the terms. This means that an applicant country must negotiate bilaterally with many member countries until a consensus is reached that all identified issues have been dealt with. This can take a long time, and results finally in an agreement, including many detailed commitments, which is set before, and hopefully approved by the General Council or the Ministerial Conference. A two-thirds majority among members is required.

Market access negotiations as in the Uruguay Round and now the Doha Round also involve a painstaking process of bilateral meetings prior to any attempt to form over-arching agreements.

The working method of the WTO sounds highly complex; but it is probably the only way of getting willing treaty adherence from such a large number of parties. Everyone has to feel that they have been fully involved.

Regional And Bi-Lateral Pacts And Groupings

Although the WTO has made a huge contribution to the growth of world trade over the last 50 years, a significant part has also been played by bi-lateral and regional trade agreements. At first sight these may seem to run counter to the goals of the WTO and the GATT, and in strict theory can be seen to infringe the 'Most Favoured Nation' principle; but in reality they have probably often served to 'soften up' tariff-bound economies prior to full WTO membership; and in many cases the tariff reductions in bi-lateral or regional trade agreements go beyond what has so far been achieved at a global level.

The European Union Single Market and NAFTA are the two most prominent examples of full (if local) free trade. These regions (Europe and North America) tend to have some fairly nasty protectionist instincts as regards the rest of the world, and it is here that the WTO swings into action to moderate and arbitrate in disputes with injured parties in the rest of the world, and particularly with developing countries.

These external groupings are reflected in the workings of the WTO itself. Increasingly, countries are getting together to form groups and alliances in the WTO. In some cases they even speak with one voice using a single spokesman or negotiating team.

This is partly seen as a means for smaller countries to increase their bargaining power in negotiations with their larger trading partners. Sometimes when groups of countries adopt common positions consensus can be reached more easily. Sometimes the groups are specifically created to compromise and break a deadlock rather than to stick to a common position. But there are no hard and fast rules about the impact of groupings in the WTO.

The largest and most comprehensive group is the European Union (for legal reasons known officially as the “European Communities” in WTO business) and its 27 member states. The EU is a customs union with a single external trade policy and tariff. While the member states coordinate their position in Brussels and Geneva, the European Commission alone speaks for the EU at almost all WTO meetings. The EU is a WTO member in its own right as are each of its member states.

A lesser degree of economic integration has so far been achieved by WTO members in the Association of South East Asian Nations (ASEAN) — Brunei Darussalam, Indonesia, Malaysia, Myanmar, Philippines, Thailand, Singapore and Vietnam, which joined in 2007. (The two remaining members, Cambodia and Laos, are applying to join the WTO.) Nevertheless, they have many common trade interests and are frequently able to coordinate positions and to speak with a single voice. The role of spokesman rotates among ASEAN members and can be shared out according to topic. MERCOSUR, the Southern Common Market (Argentina, Brazil, Paraguay and Uruguay, with Bolivia and Chile as associate members), has a similar set-up.

More recent efforts at regional economic integration have not yet reached the point where their constituents frequently have a single spokesman on WTO issues. An example is the North American Free Trade Agreement: NAFTA (Canada, US and Mexico). Among other groupings which occasionally present unified statements are the African Group, the least-developed countries, the African, Caribbean and Pacific Group (ACP) and the Latin American Economic System (SELA).

A well-known alliance of a different kind is the Cairns Group. It was set up just before the Uruguay Round began in 1986 to argue for agricultural trade liberalization. The group became an important third force in the farm talks and remains in operation. Its members are diverse, but sharing a common objective — that agriculture has to be liberalized — and hold a common view that they lack the resources to compete with larger countries in domestic and export subsidies.

The Future Of The WTO

Criticizing the WTO is a popular sport, and its meetings have often provided high-profile opportunities for the anti-globalization mafia to throw a spoke in the wheel of international economic cooperation.

Hopefully it will be clear from the above account of the organization and from previous chapters that, of all the 'multilaterals', it is the one that does the most good, and is the one which least deserves the odium it receives. It is not the WTO's fault that its rich country members such as the EU and the USA have dug their heels in over agricultural and other subsidies, to the detriment of the Doha Round and of developing countries in general. The EU's Common Agricultural Policy is one of the most protectionist and one could even say cruel pieces of economic regulation in existence because of its impact on poor people in developing countries.

The WTO can be criticized, however, for a lack of democratic legitimacy. It is reasonably transparent, yes, and its nation state members certainly have one vote each at all times; but there is no recourse to the votes of ordinary people at any stage of its operations. Of course this criticism applies to all of the multilaterals. It is discussed in Chapter 8 (The Future of the State), and the conclusion is that, as Winston Churchill said about democracy, the structure of the WTO is flawed, but any other structure would be worse. That discussion does however set out the case for the establishment of an international 'guardian of the guardians' - a body with an auditing role in relation to such institutions as the WTO.

In addition to such a global auditor, there will eventually, perhaps, be one integrated world economic governance body. As has been apparent from the seemingly endless lists of international bodies set out in previous chapters, and in Appendix 1, there is no shortage of candidate organizations for the job of global economic supervisor, and plenty of overlap between existing, partial supervisors. Of all the competing organizations, however, the WTO seems both the best structured and the most successful to date. Also, and very importantly, it is one of the very few international economic organizations which both makes rules and enforces them

It would seem logical to bring some of the existing, free-standing economic governance organizations under the wing of the WTO, for instance the International Standards Organization. The IMF and the World Bank, if they end up as standard-setting organizations without clear financing roles - something which seems more likely than not - would also be candidates for integration with the WTO. Even the OECD, which suffers from being just a 'rich-country' organization, and has no judicial or dispute resolution equipment, might be better off inside the WTO.

These suggestions will perhaps stun or outrage many, and the time is not yet ripe perhaps for them to be taken seriously. But in the later, more speculative chapters of this book it is assumed that the WTO will in time come to have a dominant global supervisory role on the economic level.

Footnotes:

1. Kropotkin, P (1902) Mutual Aid, Heinemann, London

2. Benson, B (1989) The Spontaneous Evolution of Commercial Law, Southern Economic Journal, 55, pp 644-61