WTO NOTES

C5

WORLD TRADE
ORGANIZATION

Copyright @ Oxford University Press 1
International Business R. M. Joshi

Learning Objectives
 To elucidate the significance of WTO and its genesis
 To briefly explain the functions and structure of WTO
 To describe the principles of multilateral trading system under
WTO
 To provide an overview of WTO agreements
 To explicate the dispute settlement system under WTO
 To discuss the ministerial conferences and emerging issues
 To evaluate the WTO system in context of developing
countries 2
Copyright @ Oxford University Press

Significance 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.

WTO vs. GATT
 GATT remained a ‘provisional’ agreement and organization
whereas WTO commitments are permanent.
 GATT rules mainly applied to trade in goods whereas the WTO
covers other areas, such as services, intellectual property, etc.
 GATT had contracting parties whereas the WTO has members.
 GATT was essentially a set of rules of the multilateral treaty with
no institutional foundation whereas the WTO is a permanent
institution with its own Secretariat.


 A country could essentially follow domestic legislation even if
it violated a provision of the GATT agreement which is not
allowed by the WTO.
 In WTO, almost all the agreements are multilateral in nature
involving commitment of the entire membership whereas a
number of GATT provisions were plurilateral and therefore
selective.
 The WTO also covers certain grey areas, such as agriculture,
textiles and clothing, not covered under the GATT.
 The dispute settlement system under the WTO is much more
efficient, speedy, and transparent unlike the GATT system
which was highly susceptible to blockages.

Functions of WTO
 To facilitate the implementation, administration, and
operation of trade agreements
 To provide a forum for further negotiations among
member countries
 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 programs
 To cooperate with other international organizations

Decision-making
WTO is a member-driven consensus-based organization
where all major decisions are made by its members as a
whole. The WTO’s agreements have been ratified in all
members’ parliaments.

Unlike other international organizations, such as the
World Bank and the IMF, in WTO the power is not
delegated to the board of directors or the organization’s
head.

Organizational Structure of the WTO

 Highest authority : The Ministerial Conference
 Second level : General Council
 Third level : Councils for each broad area
of trade
 Fourth level : Subsidiary bodies


Principles of the Multilateral Trading
System under the WTO
 Trade without discrimination
 Gradual move towards freer markets through negotiations
 Increased predictability of international business
environment
 Promoting fair competition


WTO AGREEMENTS: AN OVERVIEW

 An umbrella agreement establishing WTO
 Agreements for each of the three broad areas of trade
covered by WTO
• Goods
• Services
• Intellectual Property
 Dispute settlement
 Reviews of governments’ trade policies

General Agreement on Tariffs and Trade
(GATT)

Opening up of the industrial sector

 Reduction in tariffs

 Tariff bindings


Creating Fairer Markets in Agriculture Sector

Although earlier rules of GATT did apply to agriculture
trade they contained loopholes. As a result, international
trade in agriculture became highly ‘distorted’,
especially with the use of export subsidies which would
not normally have been allowed for industrial products.

The Uruguay Round produced the first multilateral
agreement dedicated to the agriculture sector. The
objective of the agreement on agriculture was to reform
trade in agriculture and to make policies more market
oriented.

Elimination of Non-tariff Measures through the
‘Tariffication’ Process

Subsequent to the Uruguay Round, quotas and other
types of trade restrictive measures were to be
replaced by tariffs that provide more or less
equivalent levels of protection.

This process of converting quotas and other types of
non-tariff measures to tariffs that represent about the
same level of protection, is termed ‘tariffication’.


Binding Against Further Increase of Tariffs

In addition to elimination of all non-tariff measures by

tariffication, all countries have bound all tariffs

applicable to agricultural products. In most cases,

developing countries have given binding at rates that

are higher than their current applied or reduced rates.


Domestic Support

Under the Agreement on Agriculture, domestic policies

that have a direct effect on production and trade have to

be cut back. The domestic support in the agriculture

sector is categorized under Green, Amber, and Blue

boxes.


 Green Box: All subsidies that have little or all most minimal
trade distorting effects are exempted from commitments
towards reduction.
 Amber Box: It is a ceiling on the total domestic support that a
government may provide to domestic producers.
 Blue Box: Certain categories of direct payment to farmers are
also permitted where farmers are required to limit production.
This also includes government assistance programmes to
encourage agricultural and rural development in developing
countries Copyright @ Oxford University Press 16

Export Subsidies

The agreement on agriculture prohibits export subsidies
on agricultural products unless the subsidies are
specified in a member’s lists of commitments. Where
they are listed, the agreement requires WTO members
to cut both the amount of money they spend on export
subsidies and the quantities of exports that receive
subsidies.

Standards and Safety Measures

Article 20 of the GATT allows governments to act on

trade in order to protect human, animal, or plant life or

health, provided no discrimination is made and this is

not used as disguised protectionism.


Agreement on Sanitary and Phytosanitary (SPS)
Measures

The SPS measures sets out the basic rules on food

safety and plant health standards. This allows countries

to set their own standards which have to be based on

science and should not arbitrarily or unjustifiably

discriminate between countries where identical or

similar conditions prevail.


Agreement on Technical Barriers to Trade (TBT)

This agreement complements with SPS measures and

attempts to ensure that regulations, standards, testing,

and certification procedures do no create unnecessary

obstacles to trade.


Opening Up International Business
Opportunities in Textiles

From 1974, until the end of the Uruguay Round, the
international trade in textiles was governed by the
Multi-fibre Arrangement (MFA). This was a
framework for bilateral agreements or unilateral actions
that established quotas limiting imports into countries
whose domestic industries were facing serious damage
from rapidly increasing imports.

Post-MFN Textile and Clothing Scenario

On full integration into GATT and final elimination of quotas,

the Agreement on Textiles and Clothing ceased to exist on 1

January, 2005. This has opened immense opportunities and

challenges for the developing countries.


General Agreement on Trade in Services
(GATS)

GATS is the first and the only set of multilateral
rules governing international trade in services.
Negotiated in the Uruguay Round, it was developed
in response to the strong growth of the services
economy and the greater potential for marketing
services internationally.


General Obligations and Disciplines

Mode 1: Services supplied from one country to
another.
Mode 2: Consumers or firms making use of a
service in another country
Mode 3: A foreign company setting up subsidiaries
or branches to provide services in another
country, i.e. ‘commercial presence’
Mode 4: Individuals travelling from their own
country to supply services in another,
i.e. ‘presence of natural persons’


Salient Features of GATS

 Most-favoured-nation (MFN) treatment
 Commitments on market access and national
treatment
 Transparency
 Objectivity and reasonability of regulations
 Recognition
 International payments and transfers
 Progressive liberalization

Protection and Enforcement of IPRs

The WTO’s agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS), introduced intellectual property rules in
the multilateral trading system for the first time. TRIPS lays
down minimum standards for the protection of IPRs as well as
the procedures and remedies for their enforcement. It also
establishes a mechanism for consultations and surveillance at the
international level to ensure compliance with these standards by
member countries at the national level.

Curbing Unfair Marketing Practices

International market competitions get distorted mainly by unfair

trade practices, as:

 If the exported goods benefit from the subsidies

 If exported goods are dumped in overseas markets

The agreements on Anti-Dumping Practices (ADP) and on

Subsidies and Countervailing Measures (SCM) authorize importing

countries to levy compensatory duties on import of products.

Dumping

A product is considered to be dumped if

 The export price is less than the price charged for the same

product in the exporting country, or it is sold for less than

its cost of production and

 Dumping is causing injury to domestic industry in the

importing country.


Agreements on Anti-dumping Practices (ADP)

The WTO agreement on anti-dumping allows governments to act

against dumping where there is genuine (‘material’) injury to the

competing domestic industry.


The Agreement on Subsidies and Countervailing
Measures (SCM)

This agreement disciplines the use of subsidies and
regulates the actions countries can take to counter the
effects of subsidies by other countries.

It can launch its own investigations and ultimately
charge extra duty (known as ‘countervailing duty’) on
subsidized imports that are found to be hurting domestic
producers.


Category of Subsidies included under SCM

Prohibited Subsidies: Those subsidies that require recipients to
meet certain export targets, or to use domestic goods instead of
imported goods.

Actionable Subsidies: Subsidy has an adverse effect on its
interest such as :
• Hurts domestic industry of importing country
• Hurts rival exporters from another country when the two compete in
third market
• Hurt exporters’ trying to compete in the subsidized country’s domestic
market.

Emergency Protection from Imports

A WTO member may restrict imports of a product

temporarily (take ‘safeguard” actions) if its domestic

industry is seriously injured or threatened with injury

caused by a surge in imports.


Attempting to Reduce Non-Tariff Barriers

Growing use of unconventional Non-Tariff Measures

(NTMs), such as health and safety measures, technical

regulations, environmental controls, customs valuation

procedures, and labour laws by developed countries has

become a major barrier to market access to exports from

developing countries.

Import Licensing Procedures

The agreement attempts to simplify and bring

transparency to import procedures.

It requires governments to publish sufficient

information for international traders to know how and

why licences are granted.


Customs Valuation

The WTO agreement aims for a fair, uniform, and

neutral

system for

the

valuation

of goods

Copyright @ Oxford University Press
for 35

Pre-shipment Inspection

The pre-shipment inspection agreement places
obligations on governments that use pre-shipment
inspection such as non-discrimination, transparency,
protection of confidential business information,
avoiding unreasonable delay, use of specific guidelines
for conducting price verification, and avoiding conflicts
of interest by the inspection agencies.


Rules of Origin

‘Rules of origin’ are used as the criteria to define where a product

was made. The Rules of Origin Agreement requires WTO

members to ensure that their rules of origin are transparent; that

they do not have restricting, distorting, or disruptive effects on

international trade. The Rules are administered in a consistent,

uniform, impartial, and reasonable manner.


Agreement on Trade Related Investment
Measures (TRIMs)

The TRIMs stipulates that no member shall apply any

measure that discriminates against foreigners or foreign

products. It also outlaws investment measures that lead

to restrictions in quantities and measures requiring

particular levels of local procurement (‘local content

requirements’) by an enterprise.

Plurilaterals Agreements

 Fair trade in civil aircraft

 Opening up of competition in government procurement


Ensuring Transparency in Trade Policy
WTO’s Trade Policy Review Mechanism (TPRM) aims
to achieve transparency in regulations in the
following ways:
 Governments have to inform the WTO and fellow-
members of specific measures, policies, or laws
through regular ‘notifications’.

 The WTO conducts regular reviews of individual
countries’ trade policies.


Settlement of International Trade Disputes

Dispute settlement is the WTO’s unique contribution

which provides effectiveness to the rule based

multilateral trading system. The WTO’s procedure for

settling disputes makes the trading system more secure

and predictable.

Dispute Settlement Process
Time Taken Stages
60 days Consultations, mediation, etc.
45 days Panel set up and panellists appointed
6 months Final panel report to parties
3 weeks Final panel report to WTO members
60 days Dispute Settlement Body adopts report
(if no appeal)
Total One Year (without appeal)

60–90 days Appeal report
30 days Dispute Settlement Body adopts
appeals report
Total One year 3 months (with appeal)

Ministerial Conferences
 Singapore Ministerial Conference (9–13 December, 1996)

 Geneva Ministerial Conference (18–20 May, 1998)

 Seattle Ministerial Conference (30 November - 03 December,
1999

 Doha Ministerial Conference ( 9–14 November, 2001)

 Cancun Ministerial Conference (10–14 September 2003)

 The Hong Kong Ministerial Conference (13–18 December,
2005)

The Deadlock in WTO Negotiations

Doha work programme were suspended in July, 2006.

mainly due to lack of consensus between developing

and developed countries, and the complexity of issues

involved multilateral negotiations other get stalled.


GATT/WTO System and Developing Countries

Although developing countries form a much bigger group

numerically under the WTO, decision-making is significantly

influenced by the developed countries. Therefore over the years,

the divide between the developed and developing countries in the

WTO has widened, leading to deadlocks in the process of

multilateral negotiations.


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