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Case I8
The World Trade Organisation
Opportunities and Threats
The World Trade Organisation has been faced with a barrage of criticisms from many
sources, such as environmentalists, labour organisations, developing countries and groups
opposing globalisation. In answer to these critics, the WTO often refers to various facts.
These include the following:
Fact 1. The WTO is the result of over half a century of international co-operation.
Fact 2. Today, the WTO has 148 member governments, with a combined population of over
5 billion, which accounts for over 97 per cent of world trade.
Fact 3. Some 20 more countries wish to join the WTO. If they did so, this would leave less
than 2 per cent of the world’s people not under the WTO multilateral trading system.
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Growth in
merchandise exports
Real growth rate (%)
10
8
6
4
2
Growth in
real GDP
0
-2
-4
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: International Trade Statistics, WTO (www.wto.org)
Figure 1 Growth in world real GDP and world merchandise exports
Fact 4. Since 1948, world trade has consistently grown faster than world output (as Figure 1
shows).
Fact 5. In 2005, world merchandise exports were worth 10.1 trillion dollars. In volume or
real terms, that represents a 29-fold increase since 1950, compared with an 8-fold
increase in real GDP. Within that total, exports of manufactures were 60 times larger
than in 1950. Over the same period world production of manufactures increased 11
fold.
Fact 6. All countries are now far more dependent on trade between one another than they
were. In 1950 only 8 per cent of national output of goods and services was sold
abroad. By 2005 over 28 per cent of national output was sold abroad.
Fact 7. The average tariff on manufactured products stood at 4 per cent on the completion of
the Uruguay round of trade talks in 1994. This compares with an average tariff of 35
per cent in 1947.
Fact 8. As well as administering agreements in relation to goods, the WTO administers
agreements in relation to trade in services and in trade-related aspects of intellectual
property. In addition, the WTO is exploring new areas for agreement between its
members. Such areas include, trade and investment, trade and competition policy,
trade problems of the least-developed countries, and trade and the environment.
The facts do seem to suggest that the WTO has been hugely successful. It has presided
over a global economy, and operated alongside other institutions (the IMF) and in line with
various international agreements. It has been party to an era of unprecedented economic
growth, in which trade has been a key component. But past performance is no guarantee of
future success.
So what problems lie in wait for the WTO? What threats are there to its future, and the
future of the world trading system?
In this case study, we will explore the opportunities and threats facing the WTO. We will
first give a brief history of the WTO, and identify the foundations upon which it operates. We
will then consider the rationale for pursuing free trade, and the conflicts such a pursuit
generates. Finally, we will explore the WTO’s future and the hurdles it is likely to face.
History: where has the GATT/WTO come from?
The General Agreement on Tariffs and Trade (GATT) was born in 1947, following the
turmoil of the Second World War, and, prior to that, the Great Depression of the 1930s. Trade
policy during the Great Depression was one of extreme protectionism and currency
devaluation. With escalating tariffs, world trade over this period collapsed.
After the war, there was a natural desire to ensure not only that the world became more
politically stable, but also that the economic turmoil of the Great Depression years was not
repeated. It was generally felt that trade, finance and international relations had to be managed
and regulated. At the Bretton Woods conference of 1944, the architecture for the post-war
reconstruction of the global economy discussed. From the conference came the Bretton
Woods exchange rate system, and the creation of the International Monetary Fund (IMF) and
World Bank. It had been intended that, as part of the agreement, there should be established a
body to govern trading matters called the International Trade Organisation (ITO). However,
failure by the US Congress to ratify the ITO agreement by the 1947 deadline, and not wishing
to hold up the whole Bretton Woods agreement, the GATT was created as a temporary,
interim measure, until a more formal deal could be struck concerning the ITO.
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The GATT, however, was never to be replaced by the ITO and, as a consequence, the
GATT was never to attain the same status as the IMF or World Bank. Both of these two
institutions are international organisations, and as such have a legal identity separate from
their members. The GATT, by contrast, was simply an inter-governmental treaty and thus
lacked any power to enforce trade agreements. This, as will be shown, proved to be one of its
major weaknesses.
Even though the ITO never came to be established, the principles it enshrined and its
organisational structure were to be reflected in the GATT. The principles included: raising
standards of living, ensuring full employment and a steady growth in effective demand,
developing the full use of the resources of the world and expanding the production and
exchange of goods.
The GATT might justly claim some success in achieving these goals. There have been
eight rounds of completed multilateral trade talks. A ninth, the Doha Development Round,
began in Doha, Qatar, in November 2001, with 1 January 2005 initially set as the date for
completing the negotiations.
The first round was the Geneva Round in 1947. The last completed round, and the
longest, was the Uruguay Round that ran from 1986 to 1994 (see Case 11.4). As the rounds
have progressed, the number of member countries has grown and the complexity of trade
talks has intensified. It was apparent prior to the Uruguay Round that the GATT, given its
legal status, was finding it increasingly difficult to manage and police these increasingly
complex trading agreements. Hence the decision was taken to elevate the status of the GATT
to that of an international organisation. It would now become the World Trade Organisation.
The creation of the WTO was seen as a necessary move in order to ensure the successful
management of international trade in the future.
The foundations of the WTO and its defining rules
The success of the WTO, and its predecessor the GATT, has been built upon four pillars;
non-discrimination; reciprocity; market access; and fair competition.
Non-discrimination between WTO members is underpinned by the ‘most favoured nation
(MFN) rule’. This states that any favourable trading arrangement extended by one member
country to another, must be extended to all member countries. Thus a member country cannot
apply a higher tariff rate to one member country than to another; the lower rate must be
offered, unconditionally, to all other WTO members.
The MFN rule thus creates both greater economic efficiency, and ensures that
economically powerful countries do not exploit their market power over economically weak
ones, in times of recession, by closing their markets to them.
Reciprocity in trade talks means that, as a member of the WTO, you have both rights and
obligations. If, for example, you accept a reduction in a tariff, then you must offer something
comparable in return. The aim here is to ensure that no country will be allowed to free ride in
the process of negotiation.
Market access means that member countries must be free to export to others. The GATT was
particularly weak in upholding this principle, and it was this more than anything that led to
calls for the creation of the WTO. The WTO’s powers to uphold market access are
considerably stronger than those of the GATT. If a country is unhappy with another
government’s actions in respect to trade or its enforcement of a trade agreement, then it can
invoke the WTO’s dispute settlement procedure (which is binding on the countries in
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dispute), rather than resorting to some unilateral trade retaliation. In addition to this facility,
the WTO insists that trade regimes are transparent and easy to scrutinise, and hence open to
more effective surveillance.
Fair competition is based upon the principle of free trade. This means that governments
should not intervene in support of exporters or industries threatened by imports. However, if
competition is seen as too vigorous and injurious to domestic industries, or trade is seen as
threatening public health or national security, then there is the facility within the WTO for a
national government to intervene to rectify the problem. Barriers to trade used on this basis
are classified as being perfectly legal.
The WTO and the pursuit of free trade
Given these guiding principles, the GATT/WTO has, since its inception in 1947, sought to
create a world trading system based on free trade.
The main advantage attributed to free trade is that allows international production to be
organised in the most efficient way. Countries, playing to their economic strengths, specialise
in the production of goods and services in which they hold a comparative advantage. By
exporting products in which they have a comparative advantage and importing products in
which they have a comparative disadvantage, countries gain by consuming beyond their
production possibility curve.
For exporters the outcomes of free trade are obvious: more jobs, higher earnings and a
larger market. The larger market allows for greater efficiency, lower costs and enhanced
profitability. For the consumer, the cutting of tariff barriers improves choice. Also, with
greater levels of competition on the domestic market, prices are likely to fall and non-price
aspects, such as product quality and after-care service, are likely to improve.
What about import-competing domestic producers: surely they lose from free trade?
Import-competing domestic producers will, without doubt, need to improve their
competitiveness if they are to survive in such an environment. As such, over the longer term
there may well need to be some structural shifts in the economy from import-competing to
export-orientated production. Although import-competing domestic producers might find the
enhanced competition tough, a greater volume of imports will provide the economy with
some positive spin-offs: not only will they help consumers by driving down domestic prices
through competition, but will create jobs in transport, retailing, maintenance, etc. Despite the
fact that imports into the USA between 1990 and 2000 increased by an average of 9.3 per cent
per year, unemployment fell from 5.6 per cent to 4.1 per cent. If there were any net direct job
losses from trade, these were more than offset by gains from economic growth: growth which
was helped by trade.
Free trade and developing economies
Critics often claim that the philosophy of free trade is one always advocated by the
economically powerful as they have the most to gain from its implementation. The
economically weak, forced to open their markets, are simply exploited by their more
competitive rivals and restricted from developing their own independent economic and
technological base. In this case, free trade is certainly not fair trade.
Even though there is likely to be more than an element of truth in this claim, evidence
clearly reveals that more liberal open economies have developed faster than those that have
restricted trade and pursued policies of import substitution. The increasing number of
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developing countries seeking WTO membership implies that these countries clearly see that
their future economic success rests with an open-market, free-trading, global economy.
Of the world’s 25 largest trading countries today, ten are developing countries. As a
whole, developing countries account for nearly 28 per cent of world trade, compared to 20 per
cent just 15 years ago.
The WTO: opportunities
For many countries, developed and developing alike, a policy of freeing trade, the cornerstone
of the WTO’s philosophy, has helped to create phenomenal levels of wealth and prosperity.
Predictably, those that have benefited from the system wish (on the whole) to see the WTO
continue, with its powers to be extended and enhanced. The WTO will clearly face problems
in achieving this. However, such difficulties must be offset against the potential benefits that
the WTO can generate, and the opportunities open to it.
New members
The WTO’s hand clearly becomes strengthened, the more inclusive it is. China joined in
December 2001 and if the Russian Federation succeeds in gaining membership, the WTO will
become a truly global organisation and forum for trade management.
Dispute settlement procedures
The developing and strengthening of the WTO’s dispute settlement procedures is the greatest
major advance of the WTO over the old GATT system. Governments, if found to have failed
to meet a WTO obligation, can be instructed to correct the problem. If they fail to do so, the
WTO Dispute Settlement Body can authorise retaliatory trade measures against the offender.
Between 1995 and July 2006 the dispute settlement procedure was invoked 348 times. This
compares with the GATT procedures which were invoked 300 times in 48 years. This aspect
of the WTO’s work is clearly growing and is a crucially important part of helping to maintain
an orderly trade environment.
New agreements
In addition to agreements covering tariffs, services and intellectual property, the WTO is
seeking to extend agreements into other trade-related areas, that either threaten or restrain the
free-trade philosophy. Preliminary work is underway to investigate relationships between
trade and investment, and trade and competition policy. Both areas clearly have significant
impacts upon trade flows and thus fall into the remit of the WTO. However, national and
cultural differences in respect to investment and competition policy will be extensive, and any
formal agreement in these areas would seem to be far of in the future.
WTO: threats
Offsetting these opportunities are a number of significant threats to the future of the WTO.
Regionalism
Of all the problems facing the WTO, the progressive regionalisation of the global economy is
potentially the most worrying. The creation of regional groups, such as the EU and NAFTA,
is changing the nature of trading relationships. Regional, as opposed to national interests now
dominate, and regional interests are backed by significant economic power. The increasingly
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fractious relationship between the United States and Europe over a wide range of trade issues,
such as bananas, GM foods, hormone-injected beef and, more recently, steel, illustrates quite
clearly the problems the WTO is likely to face in future years. Not only is regionalism is
shifting the global distribution of power, but it is working against the global multilateral trade
system promoted by the WTO. Regional organisations such as the EU, invariably include
favourable bi-lateral trade agreements between members (by implication not extended to nonmembers). This clearly places a strain on the multilateral ethos of the WTO.
The world’s poorest nations
The greatest losers in the regionalisation game are those excluded from the major regional
blocs. The 48 poorest nations of the world, as classified by the UN, account for barely one
half of one percent of world trade. As a group of countries, even prior to the progressive
regionalisation of the global economy, they are clearly on the furthest fringes of world trade.
The problems faced by these poorest countries are far deeper than an issue of trade. Crippling
debt, limited resources and infrastructure, and endemic political instability and civil war,
make helping them an issue that needs to be faced by the international community at large.
The WTO for its part has attempted to encourage and further the measures considered and
adopted in October 1997 by 19 developed countries to give preferential trade access to the
world’s poorest nations. This has been given added impetus in the Doha Round (the Doha
Development Agenda). The core focus of the agenda is improving access to the rich world for
the products of the poor world, and especially agricultural products.
In addition to this, the WTO and other agencies, such as the IMF and World bank, have
sought to co-ordinate their actions more closely, in order to be more effective in aiding
growth and development.
Critics, however, are less convinced by the WTO’s rhetoric, and even less convinced
about the philosophy of free trade. Even though countries make trade rules and set
agreements, it is companies who do the trading, and the benefits to western companies trading
in developing countries may not flow to the people in those countries. Critics point to new
agreements in agriculture, services and intellectual property to illustrate how such agreements
can benefit large western companies at the expense of small producers in developing
economies.
Take the market for coffee. Uganda depends on coffee exports for 70 per cent of its
export earnings, so it would seem to have much to gain from freer trade in coffee. But,
following WTO membership and the liberalisation of the coffee market, Uganda found that it
was worse off. Ugandan coffee traders were driven from the market by the international
coffee houses, who controlled approximately 80 per cent of Uganda’s coffee production.
Intellectual property rules are also argued to work against the interests of developing
countries. Developing countries just do not have the institutional framework necessary to
guarantee intellectual property rights. In fact up to 80 per cent of all patents in developing
countries are held by multinational companies. The Trade-Related Aspects of Intellectual
Property Rights (TRIPS) agreement forces every WTO member to guarantee patents on
products for 20 years. This effectively gives a virtual monopoly position to the company with
the patent. Large multinational companies will then, by implication, maintain both their
market share and their high prices.
The agreement to liberalise trade in telecommunications and financial services in 1997 is
yet another instance where the agreement works against the interests of those in developing
economies. In developing countries, small telecommunication and financial institutions are
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having to compete with multinational rivals, which, it is argued, do not have the long-run
development interests of the developing nation in mind.
The implications of the above are that the progressive liberalisation of the global
economy is shifting the balance of power away from governments in developing economies to
the boardrooms of the world’s major multinationals. Governments are prevented, by
agreement, to compensate weaker domestic producers for the effects of such competition.
Issues have also been raised concerning the desire to incorporate investment and
competition policy rules into WTO trade agreements. Representatives of developing countries
fear that investment guidelines might prevent them from directing investment on
development grounds, and that competition policy could force them to allow big business
access to their markets.
Trade and the environment
Environmentalists have been lobbying for many years against the free-trade philosophy of the
WTO, arguing that it fails to protect the environment, but rather encourages its progressive
degeneration. The WTO’s stance on environmental trade issues is not a particularly clear one.
When cases have been presented to the WTO, it has tended to rule in favour of trade. The
Venezuelan Gas case is one such example. Here clean gasoline standards set in the USA were
deemed by the WTO to be discriminatory and had to be abandoned, and less stringent
standards had to be set, allowing dirtier gasoline from countries such as Venezuela onto the
US market. Hormone-injected cattle and genetically modified food are two further disputes
that have been running between the USA and the EU. The EU has attempted to prevent such
products entering its market. In both cases, the WTO has ruled in favour of the USA and
against the EU. The scientific evidence regarding the environmental or public health issues of
these products is not clearly proven. Yet the WTO has maintained that trade should continue
until they are proved unsafe, rather than the converse, which has been the position adopted by
the EU.
The problem here for the WTO, and national governments generally, is who is sovereign
in these matters. If, for example, a national government following public opinion, imposes
strict environmental regulations on pollution emissions, what right does the WTO have to
override such a policy? If EU consumers express concern over the environmental impacts of
GM crops, and insist that restrictions be placed upon their importation until evidence proves
that are safe, what rights does the WTO have to say that we must introduce such crops into
our food system? This is clearly a difficult and complex issue.
The cultural effects of trade
Many argue, especially those in less developed and traditional economies, that, by being
forced to embrace the free-trade doctrine, their culture is being put under threat. Free trade
spreads values of materialism and undermines tradition. It is argued that the WTO is blind to
such cultural arguments and national differences. By supporting free trade, the WTO views
the world simply as a marketplace with customers. The problem facing the WTO is that, as
integration deepens, cultural differences become more apparent, and begin to feature more
prominently in trade disputes.
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Conclusions
It would seem that key to the WTO’s future success is its ability to ensure that free trade
becomes fairer, and that the benefits of free trade are spread more evenly.
The WTO has a difficult job. It must reconcile not only the diverse interests of developed
economies but developing ones also. It must reconcile the interests of governments, business
and people, rich and poor. It must balance the wealth-creating potential of free trade, with the
inequality it can also intensify. It must take account of the environment and make allowances
for cultural difference and uniqueness.
The WTO’s role today is not as simple as it was: trade issues and disputes are incredibly
complex affairs, which, without the WTO, would inevitably sink into protectionism and
conflict, and that would benefit no-one.
Questions
1.
Using relevant sources, such as the WTO website, find out the issues and problems
encountered by the WTO at the Cancun Summit in 2003. How do the problems and
issues reflect those identified above?
2.
Can free trade ever be fair trade?
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