World Trade Organization (WTO)

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The World Trade Organization (WTO) is an intergovernmental organization that is concerned with the regulation of international trade between nations. The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. It is the largest international economic organization in the world.

The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments. The WTO prohibits discrimination between trading partners, but provides exceptions for environmental protection, national security, and other important goals. Trade-related disputes are resolved by independent judges at the WTO through a dispute resolution process.

World Trade Organization (WTO)

Headquarters: Geneva, Switzerland
Membership: 164 Members States
Official language: English, French, Spanish
Table of Contents:
Background:
Limitations of GATT | Uruguay Round (1986-1995)
Membership
Decision Making
Principles of the Trading System
Major Agreements of WTO
Recent Negotiation Round:
Doha Development Agenda (2001- till now)
Main Issues of Doha Development Round
Nairobi Ministerial Meet 2015: Highlights
India and WTO
New Issues at WTO

Background

  • GATT was established along with Bretton Woods Institutions- the IMF and the World Bank to help global economy recover after World War II by supporting global development through promotion of free trade and free market.
  • GATT was signed initially signed by 23 members only, the membership increased in coming years and by the time Uruguay Round (1986) was concluded at Marrakesh (1995) there were 123 members and it led to the creation of WTO.

Limitations of GATT

  1. No Institution: It lacked institutional structure. GATT by itself was only the set of rules and multilateral agreements.
  2. Narrow coverage: It didn’t cover trade in services, Intellectual Property Rights (IPRs) etc. Its main focus was on Textiles and agriculture sector.
  3. No dispute resolution mechanism: A strong Dispute Resolution Mechanism was absent.
  4. Only west representation: It was seen by developing countries as a body meant for promoting interests of west. This was because Geneva Treaty of 1946, where GATT was signed had no representation from newly independent states and socialist states.
  5. Failure on mission: Under GATT countries failed to curb quantitative restrictions on trade. (Non-Tariff barriers)   

Accordingly WTO seeks to give more weightage to interests of Global South in framing of multilateral treaties. Here, a number of other aspects have been brought into, such as Intellectual property under Trade related aspects of Intellectual Property (TRIPS), Services by General Agreement on Trade in Service (GATS), Investments under Trade related Investment Measures (TRIMS).

Uruguay Round (1986-1995)

  • This round (8th negotiations) begun in 1986 and went on till 1994. Uruguay Round of negotiations covered more issues and involved more countries than any previous round.
  • It prescribes, among other things, that
    • Tariffs on industrial products be reduced by an average of more than one-third,
    • Trade in agricultural goods be progressively liberalized,
    • A new body, the World Trade Organization, be established both to facilitate the implementation of multilateral trade agreements and to serve as a forum for future negotiations.
    • Reduction of import duty on Tropical Products, which are mainly exported by developing and least developed countries. The most important of them were a fixed timetable for dismantling the multi-fibre agreement (MFA) governing trade in textiles
  • The advanced countries agreed to reduce tariffs on industrial imports amounting to 64% of the total value of their imports of such products.
  • The developing countries agreed to lower their tariffs on about one-third of their industrial imports.
  • The Agreement on Textiles and Clothing provided for the gradual dismantling of the quotas that existed under the MFA.

Membership

  • The WTO has 164 members and 23 observer governments.
  • Liberia became the 163rd member and Afghanistan became the 164th member in July 2016.
  • In addition to states, the European Union (EU), and each EU country in its own right, is a member.
  • WTO members do not have to be fully independent states; they need only be a customs territory with full autonomy in the conduct of their external commercial relations. Thus Hong Kong has been a member since 1995.
  • As of 2007, WTO member states represented 96.4% of global trade and 96.7% of global GDP.
  • Iran and Algeria are the economies with the largest GDP and trade outside the WTO.

Decision Making

  • The WTO describes itself as “a rules-based, member-driven organization– all decisions are made by the member governments, and the rules are the outcome of negotiations among members”.
  • The WTO Agreement foresees votes where consensus cannot be reached, but the practice of consensus dominates the process of decision-making.
  • Although the WTO’s consensus governance model provides law-based initial bargaining, it is alleged that trading rounds close through power-based bargaining favouring Europe and the U.S.

Principles of the Trading System

Non- Discrimination:

  • Most Favored Nation: Treating other nations equally
    • Under the WTO agreements, countries cannot normally discriminate between their trading partners.
    • Some exceptions are allowed. For example: countries can set up a free trade agreement that applies only to goods traded within the group- discriminating against goods from outside.
    • Or they can give developing countries special access to their markets.
  • National Treatment: Treating foreigners and locals equally
    • Found in all the three main WTO agreements (GATT, GATS and TRIPS)
    • National treatment only applies once a product, service or item of intellectual propertyhas 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.

Freer Trade:

  • Lowering trade barriers gradually through negotiation is one of the most obvious means of encouraging trade.
  • The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively.
  • From time to time other issues such as red tape and exchange rate policies have also been discussed

Predictability:

  • 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.
  • 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. 

Promoting fair competition:

  • The WTO 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.
  • So too are those on dumping (exporting at below cost to gain market share) and subsidies. The rules try to establish how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade.

Encouraging Development and Economic Reforms:

  • 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 allow for special assistance and trade concessions for developing countries.
  • Over three quarters of WTO members are developing countries and countries in transition to market economies. During the seven and a half years of the Uruguay Round, over 60 of these countries implemented trade liberalization programmes autonomously.
  • At the same time, developing countries and transition economies were much more active and influential in the Uruguay Round negotiations than in any previous round, and they are even more so in the current Doha Development Agenda.

Major Agreements of WTO

Agreement on subsidies and countervailing measures (SCM Agreement):

  • The WTO SCM Agreement contains a definition of the term “subsidy”. The definition contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.
  • Thus, the SCM Agreement applies not only to measures of national governments, but also to measures of state governments and of such public bodies as state-owned companies.
  • Further, there is separate category of ‘Actionable subsidies’. These are not prohibited but countries can take ‘Countervailing measures’ such as imposing countervailing duties or antidumping duty against these subsidies or they can be challenged in ‘dispute resolution body’ of WTO.
    • Countervailing Duty: It is imposed on imported goods to counterbalance subsidy provided by the exporter country.
    • Anti-Dumping Duty: At times countries resort to subsidize production or exports so heavily that exporters are able to sell goods below domestic price or even cost of production in foreign markets. It is aimed at wiping out target country’s industry. Anti-Dumping Duty is aimed at counterbalancing such subsidization.           

General Agreement on Trade in Services (GATS):

  • Combined with changing consumer preferences, such technical and regulatory innovations have enhanced the “tradability” of services and, thus, created a need for multilateral disciplines.
  • Services negotiations in the WTO follow the so-called positive list approach, whereby members’ schedules of specific commitments list all of the services sectors and sub-sectors where they undertake to bind the market opening and the granting of national treatment to foreign service suppliers, apart the listed barriers that remain.
  • Sectors and sub-sectors not included in the schedule are exempt from any obligations as regards market access and national treatment.
  • West is pushing hard to move from positive list approach to negative list approach. In negative list approach, services where GATS is not applicable will have to be negotiated, agreed upon and specified. India is against this concept as it will throw open almost whole Indian services sector to western multinational giants.
  • Negotiations is services under GATS are classified in 4 modes:
    1. Mode 1: It covers cross border supply of services without movement of natural persons. E.g. Business Process Outsourcing (BPO).
      • Here, it’s in India’s interest to push for liberalization given its large human resource pool and competitive IT industry.
    2. Mode 2: It covers supply of a service of one country to the service consumer of any other country. E.g. telecommunication  
    3. Mode 3: It covers services provided by a service supplier of one country in the territory of any other country. (Commercial presence)
      • This opens door of relevant sector in one country to investments from another country.
      • It is in west’s interest to push for liberalization here. There has been sustained pressure to open up higher education sector, insurance sector, Medical sector etc through this mode.
    4. Mode 4: It covers services provided by a service supplier of one country through the presence of natural persons in the territory of any other country.
      • E.g. Infosys or TCS sending its engineers for onsite work in US/Europe.
      • Here again it’s in India’s interest to push for liberalization.

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS):

  • TRIPS under WTO sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members.
  • It was negotiated at the end of the Uruguay Round in 1994
  • It remains an issue between developed and developing countries.
  • TRIPS was fine tuned in favor of developing countries in 2003, as part of Doha development agenda, when all members agreed to Compulsory Licensing (CL) in certain cases.
    • CLs allow a company to produce a patented product without the consent of the patent owner by the national Govt
    • Included in 2001 Doha  Declaration on TRIPS to protect public health especially in developing nations
    • The company has to pay a royalty to the original patent holder.
    • Data related with the disease as well as the medicinal cost should be in open access
    • There should be a basis for the Govt to grant CL to enhance Patent holders confidence in the Indian market for investment.

Agreement on Trade-Related Investment Measures (TRIMS):

  • TRIMS recognizes that certain investment measures can restrict and distort trade.  It states that WTO members may not apply any measure that discriminates against foreign products or that leads to quantitative restrictions, both of which violate basic WTO principles. 
  • A list of prohibited TRIMS, such as local content requirements, is part of the Agreement. 
  • Recently India was dragged to WTO by the US over former’s specification of Domestic Content Requirement in relation to procurement of Solar Energy cells and equipments.  

Agreement on Agriculture (AoA):

  • AoA was concluded in 1994, and was aimed to remove trade barriers and to promote transparent market access and integration of global markets.
  • Agreement is highly complicated and controversial; it is often criticized as a tool in hands of developed countries to exploit weak countries. Negotiations are still going on for some of its aspects.
  • The Agreement on Agriculture (AoA) includes the following agreements (pillars):
    1. Market Access: Custom Tariffs (including non- tariff barriers) to be reduced by a certain level
    2. Export Subsidy: to eliminate all forms of export subsidy
    3. Domestic Support: Flexibilities allowed for developing countries to support small and marginal farmers, however, Aggregate Measure of Support (AMS) in agriculture should not exceed 10% of GDP (1986-88)
  1. Market Access:
    • Earlier there were quotas for Imports under which only certain quantities of particular commodities were allowed to Import. This is an example of Non-tariff Barrier.
    • Maximum tariff has been bonded as required by WTO, under which a higher side of tariffs is fixed in percentage that should never be surpassed.
  2. Export Subsidy:
    • These can be in form of subsidy on inputs of agriculture, making export cheaper or can be other incentives for exports such as import duty remission etc.
    • These can result in dumping of highly subsidized (and cheap) products in other country. This can damage domestic agriculture sector of other country.
    • These subsidies are also aligned to 1986-1990 levels, when export subsidies by developed countries was substantially higher and Developing countries almost had no export subsidies that time.
  3. Domestic Support:
    • Green Box Subsidies:
      • That don’t distort trade
      • Allowed and not subjected to reduction
      • Support for research, insurance, environment protection
    • Blue Box Subsidies:
      • Price support to limit production and environment
      • Design to reduce trade distorting, but allowed
    • Amber Box Subsidies:
      • Price support and input subsidies
      • Trade distorting, subject to reduction
    • The Aggregate Measure of Support (AMS) is the amount of money spent by governments on agricultural production, except for those contained in the Blue Box, Green Box and ‘de minimis’.
    • In effect developed countries are allowed to maintain substantially higher amount of trade distorting subsidies as subsidies were bind to levels of 1986-1988 when subsidies which latter came under ‘Amber Box’ were historically high in western countries. Therefore, there was inequality at very beginning of the agreement.
    • De-Minimis provision:
      • Under this provision developed countries are allowed to maintain trade distorting subsidies or ‘Amber box’ subsidies to level of 5% of total value of agricultural output. For developing countries this figure was 10%.
      • So far India’s subsidies are below this limit, but it is growing consistently due to upward revision of MSP irrespective of the price levels and likely to cross 10% level allowed by de Minimis provision.

Multi- fibre Arrangement (MFA) and Agreement on Textiles and Clothing (ATC):

  • The MFA was introduced in 1974 as a short-term measure intended to allow developed countries to adjust to imports from the developing world.
  • It was decided to bring the textile trade under the jurisdiction of the World Trade Organization. The Agreement on Textiles and Clothing provided for the gradual dismantling of the quotas that existed under the MFA.
  • This process was completed on 1 January 2005. However, large tariffs remain in place on many textile products.

Sanitary and Phyto- Sanitary Measures:

  • The Agreement sets out the basic rules for food safety and animal and plant health standards.
  • It allows countries to set their own standards. But it also says regulations must be based on science.
  • They should be applied only to the extent necessary to protect human, animal or plant life or health.

Recent Negotiation Round: Doha Development Agenda (2001- till now)

The Doha Round began with a ministerial-level meeting in Doha, Qatar in 2001. The aim was to put less developed countries’ priorities at heart. The needs of the developing countries were the core reasons for the meeting. The major factors discussed include trade facilitation, services, and rules of origin and dispute settlement. Special and differential treatment for the developing countries was also discussed as a major concern.

Main Issues of Doha Development Round

Agriculture:

  • It called for the end agreement to commit to substantial improvements in market access; reductions (and ultimate elimination) of all forms of export subsidies (including under Green and blue box); and substantial reductions in trade-distorting support.
  • The United States is being asked by the EU and the developing countries, led by Brazil and India, to make a more generous offer for reducing trade-distorting domestic support for agriculture. The United States is insisting that the EU and the developing countries agree to make more substantial reductions in tariffs and to limit the number of import-sensitive and ‘special products’ that would be exempt from cuts. 
  • Import-sensitive products are of most concern to developed countries like the European Union, while developing countries are concerned with special products– those exempt from both tariff cuts and subsidy reductions because of development, food security, or livelihood considerations.

Access to patented medicines:

  • The issue under TRIPS involves the balance of interests between the pharmaceutical companies in developed countries that held patents on medicines and the public health needs in developing countries.
  • In Cancun 2003 Conference, WTO members reached agreement on the allowing a member country to export pharmaceutical products made under compulsory licenses to least-developed and certain other members. It also allows members to not to allow evergreening of Patents.

Special and differential treatment (SDT):

  • SDT as a principle has been there since 1970’s in multilateral negotiations under GATT.
  • In Doha round, members agreed that Developing and Least developed countries will continue to be eligible for a favorable treatment.
  • However, developed countries claim that only least developed countries are rightful claimant of differential treatment.
  • At 2005 Hong Kong Conference, members agreed to five S&D provisions for least developed countries(LDCs), including the duty-free and quota-free access.

Implementation issue: 

  • Developing countries claim that they have had problems with the implementation of the agreements reached in the earlier Uruguay Round because of limited capacity or lack of technical assistance.
  • They also claim that they have not realized certain benefits that they expected from the Round, such as increased access for their textiles and apparel in developed-country markets.
  • They seek a clarification of language relating to their interests in existing agreements.

Nairobi Ministerial Meet 2015: Highlights

  • Developed countries have committed to remove export subsidies immediately, developing by 2018 with flexibility to cover marketing and transport subsidies till 2023
    • Developed members have committed to remove export subsidies immediately, except for a handful of agriculture products, and developing countries will do so by 2018.
    • Developing members will keep the flexibility to cover marketing and transport costs for agriculture exports until the end of 2023, and the poorest and food-importing countries would enjoy additional time to cut export subsidies.
  • To work towards a permanent solution on public stockholding
    • The decision commits members to engage constructively in finding a permanent solution to this issue.
    • Under the Bali Ministerial Decision of 2013, developing countries are allowed to continue food stockpile programmes, which are otherwise in risk of breaching the WTO’s domestic subsidy cap.
  • Developing members will have the right to temporarily increase tariffs under SSM in face of import surges:
    • A Ministerial Decision on a Special Safeguard Mechanism (SSM) for Developing Countries recognizes that developing members will have the right to temporarily increase tariffs in face of import surges by using an SSM.
    • Members will continue to negotiate the mechanism in dedicated sessions of the Agriculture Committee.
  • Preferential Rules of Origin for LDCs:
    • It entails that ‘Made in LDC’ products will get unrestricted access to markets of non-LDCs.
  • Division among members on the issue of continuance of DDAs:
    • Ministers acknowledged that members “have different views” on how to address the future of the Doha Round negotiations but noted the strong commitment of all Members to advance negotiations on the remaining Doha issues.

India and WTO

  • India is one of the prominent members of WTO and is largely seen as leader of developing and under developed world.
  • At WTO, decisions are taken by consensus. So there is bleak possibility that anything severely unfavorable to India’s interest can be unilaterally imposed.
  • India stands to gain from different issues being negotiated in the forum provided it engages with different interest groups constructively, while safeguarding its developmental concerns.
  • In absence of such a body we stand to lose a platform through which we can mobilize opinion of like minded countries against selfish designs of west. Thanks to vast resources of developed countries they can easily win smaller countries to their side.
  • WTO provides a forum for such developing countries to unite and pressurize developed countries to make trade sweeter for poor countries.  For example, India remains committed to various developmental issues such as Doha Development Agenda, Special Safeguard Mechanism, Permanent solution of issue of public stock holding etc. 
  • Apart from this, Dispute Resolution Mechanism of WTO is highly efficient. WTO is a body which provides opportunity to aggrieved country to bring unfair trade practices to notice of Dispute Settlement body and to bring an end to such unfair practice.

New Issues at WTO

Developed Nations’ Side:

  • India and China are emerging economies, instead of developing and are cornering the benefits meant for developing nations.
  •  They wanted to revitalize WTO by introducing new issues, often called emerging trade issues:
    • Labour and environmental standards
    • Global value chains and promotion of supply chains
    • e-Commerce
    • Environmental and sustainable goods produced using clean and green energy
    • Transparency in state-owned enterprises and designated monopolies
    • Developing nations oppose these to be included in the talks as they feel these standards become no-tariff barriers for their exports.
  • India’s stand:
    • India will not take any binding commitments on these issues
    • The issues of labour and environment should be taken at concerned international bodies such as ILO and UNFCCC, not at WTO.
    • New issues should also include those with a development angle such as easier movement of natural persons, such as skilled professionals.
  • India still a developing a country:
    • WTO does not define Developing nation but defines Least Developed Country (LDC) as designated by UN.
    • Members announce for themselves of being developing while other members can challenge the decision
    • Developed countries allege India as an emerging economy and not a developing on the basis India’s High rate of economic growth
    • India puts low per capita GDP ($1600 against $55000 in USA) and high level of poverty (300 million with less than $1 per day).

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