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International Business
Topic: World Trade System &World Trade
Organization (WTO)
Submitted To:
Md. Mahmudul Hasan Fouji
Associate Professor
Department of marketing
Jagannath University
Submitted By:
4th Year 2nd semester
6th Batch
Jagannath University
Date of Submission: August 20, 2015.
Group Leader: Md. Helal Mridha
ID No.
Md. Helal Mridha
Md. Mokshadur Rahman
[email protected]
Mohammad Amzad Hosen
[email protected]
Md. Famtiaj Islam Miltu
[email protected]
[email protected]
Executive Summary
Table of Contents
Executive Summary ..................................................................................................................... 3
Introduction ..................................................................................................................................... 5
The World Trade organization (WTO) ................................................................................ 5
Functions of World Trade Organization (WTO) ................................................................. 8
Structure of World Trade Organization ............................................................................... 8
Secretariat of World Trade Organization............................................................................. 9
World Trade Organization Agreements ............................................................................... 9
Benefits of WTO Trading Organization ............................................................................ 11
6.1 The system helps to keep the peace ..................................................................................................................12
6.2 The system allows disputes to be handled constructively..................................................................................13
6.3 A system based on rules rather than power makes life easier for all ................................................................14
6.4 Freer trade cuts the cost of living ......................................................................................................................15
6.5 It gives consumers more choice, and a broader range of qualities to choose from ...........................................15
6.6 Trade raises incomes..........................................................................................................................................16
6.7 Trade stimulates economic growth and that can be good news for employment ............................................16
6.8 The basic principles make the system economically more efficient, and they cut costs ....................................17
6.9 The system shields governments from narrow Interests ...................................................................................18
6.10 The system encourages good government ......................................................................................................18
Developing Countries and World Trade Organization ...................................................... 19
Development and Trade .............................................................................................................................19
Technical Assistance and Trading ..............................................................................................................20
The Role of Developing countries in World Trade System ............................................... 20
9.0 The World trade Organization and A Changing Global Economy ......................................... 22
10.0 Free Trade Agreements: Implication for the WTO .............................................................. 24
11.0 The Challenge of the WTO’s Legitimacy............................................................................. 25
12.0 The Future of the World Trading System: Asian Perspective .............................................. 28
13.0 The Multilateral Trading System: Past, Present, and Future ................................................ 32
14.0 Conclusion ............................................................................................................................ 33
15.0 Reference .............................................................................................................................. 33
In brief, the World Trade Organization (WTO) is the only international organization
dealing with the global rules of trade between nations. Its main function is to ensure that
trade flows as smoothly, predictably and freely as possible.
The result is assurance. Consumers and producers know that they can enjoy secure
supplies and greater choice of the finished products, components, raw materials and
services that they use. Producers and exporters know that foreign markets will remain
open to them. The result is also a more prosperous, peaceful and accountable
economic world. Decisions in the WTO are typically taken by consensus among all
member countries and they are ratified by members’ parliaments. Trade friction is
channeled into the WTO’s dispute settlement process where the focus is on interpreting
agreements and commitments, and how to ensure that countries’ trade policies conform
with them. That way, the risk of disputes spilling over into political or military conflict is
reduced. By lowering trade barriers, the WTO’s system also breaks down other barriers
between peoples and nations.
At the heart of the system known as the multilateral trading system are the WTO’s
agreements, negotiated and signed by a large majority of the world’s trading nations,
and ratified in their parliaments. These agreements are the legal ground-rules for
international commerce. Essentially, they are contracts, guaranteeing member countries
important trade rights. They also bind governments to keep their trade policies within
agreed limits to everybody’s benefit. The agreements were negotiated and signed by
governments. But their purpose is to help producers of goods and services, exporters,
and importers conduct their business. The goal is to improve the welfare of the peoples
of the member countries.
1.0 The World Trade organization (WTO)
The World Trade Organization, created in 1995, is the successor to, and incorporates
within it, the GATT – the General Agreement on Tariffs and Trade – which was a treaty
among western market economies at the end of World War II. Member countries agree
to rules about when they may increase trade barriers, especially tariffs, in order to
prevent them using trade policies that harm other countries.
The GATT was also a forum for negotiation to reduce trade barriers. Presumably the
WTO will do this as well, although it has not yet. The GATT oversaw eight rounds of
multilateral trade negotiations, culminating in the Uruguay Round that created the WTO.
The WTO also took on issues that GATT had not covered, including trade in services,
tariffication in agriculture, and intellectual property protection.
The most important change in the WTO, compared to the GATT, may be its dispute
settlement mechanism (DSM). The GATT permitted countries to complain against other
countries for violating its rules. Each complaint was handled by a “panel” of experts who
issued a report that, if adopted unanimously by GATT members, would require the
offending party to either change its behavior or be subject to sanctions. However,
unanimity meant that the offending party could block a report, in effect giving every
country veto power over findings against itself. The surprise was that this ever worked
at all, which it did.
The WTO reversed this bias, requiring instead a unanimous decision to block a report,
and it therefore made the DSM much more effective. It also made other improvements,
including the right to appeal. The intent was to provide viable enforcement for WTO
rules, and it appears to have worked. The DSM has been used much more often than
under the GATT, both by and against a wide range of countries, as shown in Table 1.
Just as important, large countries (the U.S.) have stopped going outside the GATT with
their most important complaints.
Inevitably, however, the DSM has not worked to everyone’s satisfaction. The WTO
restricts policies that harm other countries, not only deliberately, but also inadvertently,
as when policy restricts the options of another country’s citizens. A contentious example
was the “shrimp-turtle” case. A U.S. law protected sea turtles from death in the nets of
shrimp fishermen by prohibiting imports of shrimp caught without “turtle exclusion
devices” (TEDs). Since it is impossible to tell from looking at a shrimp how it was
caught, the law restricted imports from certain countries. These took the case to the
WTO, which decided against the United States. In effect, this decision struck down U.S.
law, an intrusion into sovereignty that offended environmentalists and others. There
have been other, similar examples.
The potential of the WTO to intrude in national affairs was also increased by its
expanded coverage. The GATT was limited to trade in goods, even excluding certain
sectors such as agriculture and textiles/apparel. The latter was covered instead by the
GATT-sanctioned Multi-Fiber Arrangement (MFA), restricting developing-country
exports to developed countries. The WTO changed all that, or at least it promises to.
The Uruguay Round scheduled the elimination of the MFA, though the most difficult
liberalization is postponed (“back loaded”) ten years. First steps were also taken in
agriculture, converting existing NTBs to tariffs (tariffication) so as later to negotiate them
downward. And trade in services was covered in a parallel agreement to the GATT, the
General Agreement on Trade in Services (GATS).
The WTO also expanded to new areas. Most prominent and effective is it’s TRIPS
(Trade Related Intellectual Property) Agreement covering intellectual property –
primarily patents, copyrights, and trademarks. In addition, the WTO includes (as the
GATT had before, actually) some small ways that countries may use trade policies for
environmental purposes. However, the one area – much discussed – where the WTO
has not been extended is labor standards and rights. Despite many in developed
countries who favor using trade policies for this purpose, resistance from the developing
world, as well as from corporations who employ labor there, has prevented it from even
being discussed.
1.1 Basic Information about WTO
❖ Location: Geneva, Switzerland
❖ Established: 1 January 1995
❖ Created By: Uruguay Round negotiations (1986–94)
❖ Membership: 134 countries (as of February 1999)
❖ Budget: 122 million Swiss francs for 1999
❖ Secretariat Stuff: 500
❖ Head: Director-general
2.0 Functions of World Trade Organization (WTO)
The WTO’s overriding objective is to help trade flow smoothly, freely, fairly and
predictably. It does this by:
➢ Administering trade agreements
➢ Acting as a forum for trade negotiations
➢ Settling trade disputes
➢ Reviewing national trade policies
➢ Assisting developing countries in trade policy issues, through technical
assistance and training programs
➢ Cooperating with other international organizations
3.0 Structure of World Trade Organization
The WTO has more than 130 members, accounting for over 90% of world trade. Over
30 others are negotiating membership. Decisions are made by the entire membership.
This is typically by consensus. A majority vote is not also possible but it has never been
used in the WTO, and was extremely rare under the WTO’s predecessor, GATT. The
WTO’s agreements have been ratified in all members’ parliaments.
The WTO’s top level decision-making body is the Ministerial Conference which meets at
least once every two years. Below this is the General Council (normally ambassadors
and heads of delegation in Geneva, but sometimes officials sent from members’
capitals) which meets several times a year in the Geneva headquarters. The General
Council also meets as the Trade Policy Review Body and the Dispute Settlement Body.
At the next level, the Goods Council, Service Council, and Intellectual Property Council
report to the General Council.
Numerous specialized committees, working groups and working parties deal with the
individual agreements and other areas such as the environment, development,
membership applications and regional trade agreements.
The first Ministerial Conference in Singapore in 1996 added three new working groups
to this structure. They deal with the relationship between trade and investment, the
interaction between trade and competition policy and transparency in government
procurement. At the second Ministerial Conference in Geneva in 1998 ministers decided
that the WTO would also study the area of electronic commerce, a task to be shared out
among existing councils and committees.
4.0 Secretariat of World Trade Organization
The WTO Secretariat, based in Geneva, has around 500 staff and is headed by a
director general. It does not have branch offices outside Geneva. Since decisions are
taken by the members themselves, the Secretariat does not have the decision-making
role those other international bureaucracies are given. The Secretariat’s main duties are
to supply technical support for the various councils and committees and the ministerial
conferences, to provide technical assistance for developing countries, to analyze world
trade, and to explain WTO affairs to the public and media.
The Secretariat also provides some forms of legal assistance in the dispute settlement
process and advises governments wishing to become members of the WTO. The
annual budget is roughly 122 million Swiss francs
5.0 World Trade Organization Agreements
How can you ensure that trade is as fair as possible, and as free as is practical? By
negotiating rules and abiding by them. The WTO’s rules—the agreements—are the
result of negotiations between the members.
The current set were the outcome of the 1986–94 Uruguay Round negotiations which
included a major revision of the original General Agreement on Tariffs and Trade
(GATT). GATT is now the WTO’s principal rule-book for trade in goods. The Uruguay
Round also created new rules for dealing with trade in services, relevant aspects of
intellectual property, dispute settlement, and trade policy reviews. The complete set
runs to some 30,000 pages consisting of about 60 agreements and separate
commitments (called schedules) made by individual members in specific areas such as
lower customs duty rates and services market-opening.
Through these agreements, WTO members operate a non-discriminatory trading
system that spells out their rights and their obligations. Each country receives
guarantees that its exports will be treated fairly and consistently in other countries’
markets. Each promises to do the same for imports into its own market. The system
also gives developing countries some flexibility in implementing their commitments.
5.1 Goods Agreement
It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating
lower customs duty rates and other trade barriers; the text of General Agreement spelt
out important rules, particularly non-discrimination.
Since 1995, the updated GATT 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.
5.2 Services Agreement
Banks, insurance firms, telecommunications companies, tour operators, hotel chains
and transport companies looking to do business abroad can now enjoy the same
principles of freer and fairer trade that originally only applied to trade in goods.
These principles appear in the new General Agreement on Trade in Services (GATS).
WTO members have also made individual commitments under GATS stating which of
their services sectors they are willing to open to foreign competition, and how open
those markets are.
5.3 Intellectual Property Agreement
The WTO’s intellectual property agreement amounts to rules for trade and investment in
ideas and creativity. The rules state how copyrights, trademarks, geographical names
used to identify products, industrial designs, integrated circuit layout-designs and
undisclosed information such as trade secrets—“intellectual property”—should be
protected when trade is involved.
5.4 Dispute Settlement Agreement
The WTO’s procedure for resolving trade quarrels under the Dispute Settlement
Understanding is vital for enforcing the rules and therefore for ensuring that trade flows
Countries bring disputes to the WTO if they think their rights under the agreements are
being infringed. Judgments by specially-appointed independent experts are based on
interpretations of the agreements and individual countries’ commitments.
The system encourages countries to settle their differences through consultation. Failing
that, they can follow a carefully mapped out, stage by stage procedure that includes the
possibility of a ruling by a panel of experts, and the chance to appeal the ruling on legal
Confidence in the system is borne out by the number of cases brought to the WTO—
167 cases by March 1999 compared to some 300 disputes dealt with during the entire
life of GATT (1947–94).
5.5 Policy Review
The Trade Policy Review Mechanism’s purpose is to improve transparency, to create a
greater understanding of the policies that countries are adopting, and to assess their
impact. Many members also see the reviews as constructive feedback on their policies.
All WTO members must undergo periodic scrutiny, each review containing reports by
the country concerned and the WTO Secretariat. Over 54 members have been
reviewed since the WTO came into force.
6.0 Benefits of WTO Trading Organization
❖ The system helps promote peace
❖ Disputes are handled constructively
❖ Rules make life easier for all
❖ Freer trade cuts the costs of living
❖ It provides more choice of products and qualities
❖ Trade raises incomes
❖ Trade stimulates economic growth
❖ The basic principles make life more efficient
❖ Governments are shielded from lobbying
❖ The system encourages good government
6.1 The system helps to keep the peace
Peace is partly an outcome of two of the most fundamental principles of the trading
system: helping trade to flow smoothly and providing countries with a constructive and
fair outlet for dealing with disputes over trade issues. It is also an outcome of the
international confidence and cooperation that the system creates and reinforces.
History is littered with examples of trade disputes turning into war. One of the most vivid
is the trade war of the 1930s when countries competed to raise trade barriers in order to
protect domestic producers and retaliate against each other’s barriers. This worsened
the Great Depression and eventually played a part in the outbreak of World War 2. Two
developments immediately after the Second World War helped to avoid a repeat of the
pre-war trade tensions. In Europe, international cooperation developed in coal, and in
iron and steel. Globally, the General Agreement on Tariffs and Trade (GATT) was
created. Both have proved successful, so much so that they are now considerably
expanded—one has become the European Union, the other the World Trade
Organization (WTO).
Crudely put, sales people are usually reluctant to fight their customers. In other words, if
trade flows smoothly and both sides enjoy a healthy commercial relationship, political
conflict is less likely. What’s more, smoothly-flowing trade also helps people all over the
world become better off. People who are more prosperous and contented are also less
likely to fight. But that is not all. The GATT/WTO system is an important confidence
builder. The trade wars in the 1930s are proof of how protectionism can easily plunge
countries into a situation where no one wins and everyone loses. The short-sighted
protectionist view is that defending particular sectors against imports is beneficial. But
that view ignores how other countries are going to respond. The longer term reality is
that one protectionist step by one country can easily lead to retaliation from other
countries, a loss of confidence in freer trade, and a slide into serious economic trouble
for all including the sectors that were originally protected. Everyone loses.
Confidence is the key to avoiding that kind of no-win scenario. When governments are
confident that others will not raise their trade barriers, they will not be tempted to do the
same. They will also be in a much better frame of mind to cooperate with each other.
The WTO trading system plays a vital role in creating and reinforcing that confidence.
Particularly important are negotiations that lead to agreement by consensus and a focus
on abiding by the rules.
6.2 The system allows disputes to be handled constructively
There could be a down side to trade liberalization and expansion. More trade means
more opportunities for disputes to arise. Left to themselves, those disputes could lead to
serious conflict. But in reality, a lot of international trade tension is reduced because
countries can turn to organizations, in particular the WTO, to settle their trade disputes.
Before World War 2 that option was not available. After the war, the world’s community
of trading nations negotiated trade rules which are now entrusted to the WTO. Those
rules include an obligation for members to bring their disputes to the WTO and not to
act unilaterally. When they bring disputes to the WTO, the WTO’s procedure focuses
their attention on the rules. Once a ruling has been made, countries concentrate on
trying to comply with the rules, and perhaps later renegotiating the rules—not on
declaring war on each other. Around 300 disputes have been brought to the WTO since
it was set up in 1995. Without a means of tackling these constructively and
harmoniously, some could have led to more serious political conflict. The fact that the
disputes are based on WTO agreements means that there is a clear basis for judging
who is right or wrong. Once the judgment has been made, the agreements provide the
focus for any further actions that need to be taken.
The increasing number of disputes brought to GATT and its successor, the WTO, does
not reflect increasing tension in the world. Rather, it reflects the closer economic ties
throughout the world, the GATT/WTO’s expanding membership and the fact that
countries have faith in the system to solve their differences. Sometimes the exchanges
between the countries in conflict can be acrimonious, but they always aim to conform to
the agreements and commitments that they themselves negotiated.
6.3 A system based on rules rather than power makes life easier for all
Decisions in the WTO are made by consensus. The WTO agreements were negotiated
by all members, were approved by consensus and were ratified in all members’
parliaments. The agreements apply to everyone. Rich and poor countries alike have an
equal right to challenge each other in the WTO’s dispute settlement procedures. This
makes life easier for all, in several different ways. Smaller countries can enjoy some
increased bargaining power. Without a multilateral regime such as the WTO’s system,
the more powerful countries would be freer to impose their will unilaterally on their
smaller trading partners. Smaller countries would have to deal with each of the major
economic powers individually, and would be much less able to resist unwanted
In addition, smaller countries can perform more effectively if they make use of the
opportunities to form alliances and to pool resources. Several are already doing this.
There are matching benefits for larger countries. The major economic powers can use
the single forum of the WTO to negotiate with all or most of their trading partners at the
same time. This makes life much simpler for the bigger trading countries. The
alternative would be continuous and complicated bilateral negotiations with dozens of
countries simultaneously. And each country could end up with different conditions for
trading with each of its trading partners, making life extremely complicated for its
importers and exporters.
The principle of non-discrimination built into the WTO agreements avoids that
complexity. The fact that there is a single set of rules applying to all members greatly
simplifies the entire trade regime. And these agreed rules give governments a clearer
view of which trade policies are acceptable.
6.4 Freer trade cuts the cost of living
Protectionism is expensive: it raises prices. The WTO’s global system lowers trade
barriers through negotiation and applies the principle of non-discrimination. The result is
reduced costs of production (because imports used in production are cheaper) and
reduced prices of finished goods and services, and ultimately a lower cost of living.
There are plenty of studies showing just what the impacts of protectionism and of freer
trade are. These are just a few figures:
6.5 It gives consumers more choice, and a broader range of qualities to choose from
Think also of the things people in other countries can have because they buy exports
from us and elsewhere. Look around and consider all the things that would disappear if
all our imports were taken away from us.
Imports allow us more choice—both more goods and services to choose from, and a
wider range of qualities. Even the quality of locally-produced goods can improve
because of the competition from imports. The wider choice isn’t simply a question of
consumers buying foreign finished products. Imports are used as materials,
components and equipment for local production.
This expands the range of final products and services that are made by domestic
producers, and it increases the range of technologies they can use. When mobile
telephone equipment became available, services sprang up even in the countries that
did not make the equipment, for example. Sometimes, the success of an imported
product or service on the domestic market can also encourage new local producers to
compete, increasing the choice of brands available to consumers as well as increasing
the range of goods and services produced locally. If trade allows us to import more, it
also allows others to buy more of our exports. It increases our incomes, providing us
with the means of enjoying the increased choice.
6.6 Trade raises incomes
The WTO’s own estimates for the impact of the 1994 Uruguay Round trade deal were
between $109 billion and $510 billion added to world income (depending on the
assumptions of the calculations and allowing for margins of error). More recent research
has produced similar figures. Economists estimate that cutting trade barriers in
agriculture, manufacturing and services by one third would boost the world economy by
$613 billion — equivalent to adding an economy the size of Canada to the world
economy. than they would have done without the Single Market.
So trade clearly boosts incomes. Trade also poses challenges as domestic producers
face competition from imports. But the fact that there is additional income means that
resources are available for governments to redistribute the benefits from those who gain
the most—for example to help companies and workers adapt by becoming more
productive and competitive in what they were already doing, or by switching to new
6.7 Trade stimulates economic growth and that can be good news for employment
This is a difficult subject to tackle in simple terms. There is strong evidence that trade
boosts economic growth, and that economic growth means more jobs. It is also true that
some jobs are lost even when trade is expanding. But a reliable analysis of this poses at
least two problems.
First, there are other factors at play. For example, technological advance has also had a
strong impact on employment and productivity, benefiting some jobs, hurting others.
Second, while trade clearly boosts national income (and prosperity), this is not always
translated into new employment for workers who lost their jobs as a result of
competition from imports. The picture is not the same all over the world. The average
length of time a worker takes to find a new job can be much longer in one country than
for a similar worker in another country experiencing similar conditions.
In other words, some countries are better at making the adjustment than others. This is
partly because some countries have more effective adjustment policies. Those without
effective policies are missing an opportunity.
6.8 The basic principles make the system economically more efficient, and they cut costs
Trade allows a division of labor between countries. It allows resources to be used more
appropriately and effectively for production. But the WTO’s trading system offers more
than that. It helps to increase efficiency and to cut costs even more because of
important principles enshrined in the system. Imagine a situation where each country
sets different rules and different customs duty rates for imports coming from different
trading partners. Imagine that a company in one country wants to import raw materials
or components—copper for wiring or printed circuit boards for electrical goods, for
example—for its own production. It would not be enough for this company to look at the
prices offered by suppliers around the world. The company would also have to make
separate calculations about the different duty rates it would be charged on the imports
(which would depend on where the imports came from), and it would have to study each
of the regulations that apply to products from each country. Buying some copper or
circuit boards would become very complicated.
That, in simple terms, is one of the problems of discrimination. Imagine now that the
government announces it will charge the same duty rates on imports from all countries,
and it will use the same regulations for all products, no matter where they come from,
whether imported or locally produced. Life for the company would be much simpler.
Sourcing components would become more efficient and would cost less.
Non-discrimination is just one of the key principles of the WTO’s trading system. Others
➢ Transparency (clear information about policies, rules and regulations);
➢ Increased certainty about trading conditions (commitments to lower trade barriers
and to increase other countries’ access to one’s markets are legally binding);
➢ Simplification and standardization of customs procedure, removal of red tape,
centralized databases of information, and other measures designed to simplify
trade that come under the heading “trade facilitation”.
Together, they make trading simpler, cutting companies’ costs and increasing
confidence in the future. That in turn also means more jobs and better goods and
services for consumers.
6.9 The system shields governments from narrow Interests
One of the lessons of the protectionism that dominated the early decades of the 20th
Century was the damage that can be caused if narrow sectorial interests gain an
unbalanced share of political influence. The result was increasingly restrictive policy
which turned into a trade war that no one won and everyone lost.
Superficially, restricting imports looks like an effective way of supporting an economic
sector. But it biases the economy against other sectors which shouldn’t be penalized—if
you protect your clothing industry, everyone else has to pay for more expensive clothes,
which puts pressure on wages in all sectors, for example.
Protectionism can also escalate as other countries retaliate by raising their own trade
barriers. That‘s exactly what happened in the 1920s and 30s with disastrous effects.
Even the sectors demanding protection ended up losing. Governments need to be
armed against pressure from narrow interest groups, and the WTO system can help.
The GATT-WTO system covers a wide range of sectors. So, if during a GATTWTO
trade negotiation one pressure group lobbies its government to be considered as a
special case in need of protection, the government can reject the protectionist pressure
by arguing that it needs a broad-ranging agreement that will benefit all sectors of the
economy. Governments do just that, regularly.
6.10 The system encourages good government
The rules include commitments not to backslide into unwise policies. Protectionism in
general is unwise because of the damage it causes domestically and internationally, as
we have already seen. Particular types of trade barriers cause additional damage
because they provide opportunities for corruption and other forms of bad government.
One kind of trade barrier that the WTO’s rules try to tackle is the quota, for example
restricting imports or exports to no more than a specific amount each year. Because
quotas limit supply, they artificially raise prices, creating abnormally large profits
(economists talk about “quota rent”). That profit can be used to influence policies
because more money is available for lobbying. It can also provide opportunities for
corruption, for example in the allocation of quotas among traders. There are plenty of
cases where that has happened around the world. In other words, quotas are a
particularly bad way of restricting trade. Governments have agreed through the WTO’s
rules that their use should be discouraged. Nevertheless, quotas of various types
remain in use in most countries, and governments argue strongly that they are needed.
But they are controlled by WTO agreements and there are commitments to reduce or
eliminate many of them, particularly in textiles. Many other areas of the WTO’s
agreements can also help reduce corruption and bad government. Transparency (such
as making available to the public all information on trade regulations), other aspects of
“trade facilitation”, clearer criteria for regulations dealing with the safety and standards
of products, and nondiscrimination also help by reducing the scope for arbitrary decision
making and cheating.
Quite often, governments use the WTO as a welcome external constraint on their
policies: “we can’t do this because it would violate the WTO agreements.”
7.0 Developing Countries and World Trade Organization
7.1 Development and Trade
Over three quarters of WTO members are developing or least-developed countries.
Special provisions for these members are included in all the WTO agreements. They
include longer time periods for implementing agreements and commitments, measures
to increase trading opportunities for these countries, provisions requiring all WTO
members to safeguard the trade interests of developing countries, and support to help
developing countries build the infrastructure for WTO work, handle disputes, and
implement technical standards.
In 1997, a high-level meeting on trade initiatives and technical assistance for leastdeveloped countries brought their concerns to Centre stage. The meeting involved six
intergovernmental agencies and resulted in an “integrated framework” to help leastdeveloped countries increase their ability to trade, and some additional preferential
market access agreements.
A committee on trade and development, assisted by a sub-committee on leastdeveloped countries, looks at developing countries’ special needs. Its responsibility
includes implementation of the agreements, technical cooperation, and the increased
participation of developing countries in the global trading system
7.2 Technical Assistance and Trading
The WTO organizes around 100 technical cooperation missions to developing countries
annually. It holds on average three trade policy courses each year in Geneva for
government nonofficial. Regional seminars are held regularly in all regions of the world
with a special emphasis on African countries. Training courses are also organized in
Geneva for officials from countries in transition from central planning to market
In 1997/98, the WTO set up reference centers in over 40 trade ministries in capitals of
least developed countries, providing computers and internet access to enable ministry
officials to keep abreast of events in the WTO in Geneva through online access to the
WTO’s immense database of official documents and other material.
8.0 The Role of Developing countries in World Trade System
At the inception of the GATT in 1947, flowing out of the Breton Woods Agreement that
provided the basic architecture for the international economic system in the post-war
years, little provision was made for the special circumstances of developing countries (
at that stage, in most cases, still colonies of developed countries). While Article XXIV,
from the outset, provided for the possibility of Preferential Trade Agreements (with the
formation of the European Community on the horizon), these provisions were little
utilized until the beginning of the 1990s.
The original normative foundations of the GATT reflected both economic and geopolitical considerations. Obviously, as a matter of classical trade theory, going back to
Adam Smith, the larger a market the greater the potential gains from specialization and
economies of scale and scope. From a geo-political point of view, a world trading
regime that provided a common set of rules by which all countries in the world
(whatever their political, ideological or cultural orientation) could, in principle, trade with
each other, with the Most Favored Nation principle as its central pillar, offered the
prospect of increasing economic interdependence, raising the costs of military conflict
and hence reducing the risk of the calamities that had beset Europe and much of the
rest of the world in the first half of the 20th century.
In many respects, this framework has served the world well over the intervening years,
with average tariffs on industrialized products falling from almost 50 percent in 1947 to a
little over 3 percent today, reflected in vast increases in world trade (and global welfare)
and increased economic interdependence that has in fact substantially reduced the risk
of military conflicts amongst major powers. As I point out in my recent book, Dealing
with Losers: The Political Economy of Policy Transitions,5 this dramatic transformation
of world trade was advanced by an astute combination of transition cost-mitigation
strategies, principally gradualism in reducing tariffs and other trade barriers within and
across negotiating rounds, reciprocity in the exchange of concessions so that
contraction on the import side was offset by expansion on the export side, and
reversibility through a safeguard regime that permitted the temporary reinstatement of
trade restrictions in the face of unexpectedly large import surges. But the adequacy of
these mechanisms to meet the adjustment costs faced by developing countries in
integrating into a liberal trading regime has been a persistent source of controversy.
Beginning in the early 1980s, both limbs of Special and Differential Treatment came in
for increasingly searching scholarly scrutiny.6 On the import side, infant industry or
import substitution policies were often criticized for fostering uncompetitive and nonsustainable domestic industries, while also fostering extensive corruption in the
administration of import controls and related foreign exchange controls. On the export
side, reliance on non-reciprocal preferences – in effect, altruism or welfare transfers, as
Hudec put it – by developed countries on a highly discretionary basis, often influenced
by geo-political considerations, led to uneven, unpredictable, and often negligible
benefits for developing countries, while mobilizing the latter as a source of resistance to
further MFN tariff reductions out of concern for erosion of whatever preferences they
Hence, with the launch of the new Doha Round in 2001, many developing countries
were determined to reassert and indeed expand their Special and Differential status
under the GATT/WTO system and rebalance what they conceived of as the unfair
bargain imposed on them at the end of the Uruguay Round. Beginning with the aborted
Ministerial meetings in Cancun, Mexico in September 2003, a major fault-line has now
emerged between developed countries and many developing countries, with the former
initially pressing for an expansion of the Uruguay Round mandate of the GATT/WTO
into new areas of regulation such as investment, competition policy, trade facilitation,
government procurement, and a broader range.
Thus, two cornerstone principles of the post-war multilateral system are under serious
threat: first, the principle of reciprocity where trade or related commitments are
exchanged for quid pro quo commitments by other countries; and the principle of nondiscrimination as enshrined in the MFN principle. Whether the multilateral trading
system can survive these dual threats in the longer run is a serious and open question.
In my view they represent a more mortal threat to its sustainability than any that it has
faced over the course of its history.
9.0 The World trade Organization and A Changing Global Economy
According to the World Trade Organization, trade liberalization achieved since its
establishment in 1995 has raised global income by as much as $510 billion. Since its
creation, WTO rules, its dispute settlement mechanism and the work of its secretariat
have also become central to the management and smooth functioning of global trade.
During the 2008 global financial crisis when plunging economies and rising
unemployment created pressures to protect domestic industries, the WTO was credited
for stopping a descent into the type of tit-for-tat protectionism that countries engaged in
during the Great Depression. Despite the WTO’s undeniable success, a changing
international economic environment creates a series of signifi cant challenges for the
The most obvious challenge is that the Doha Development Round—the current round of
multilateral trade negotiations to further liberalizes trade and reform the WTO. After a
decade of talks, it still remains to be concluded. The Doha Round is focused on
reducing important trade barriers in sectors, such as agriculture, industrial goods and
services. This would encourage businesses around the world to specialize in the
production of goods and services, achieve economies of scale, and increase their
efficiency and productivity, which would allow them to deliver improved and cheaper
products to global consumers. As importantly, the Doha Round is particularly focused
on providing increased market access to goods and services from developing countries.
In the end, the WTO estimates that the Doha Round could increase global GDP by
$150 billion per year. However since the launch of the Doha Round, countries have
turned to free trade agreements (FTAs) in order to gain significant trade access in new
markets and to explore new trade-related issues that are currently not addressed within
the WTO. As more FTAs have been concluded, the central role of the WTO in
liberalizing trade has been called into question. In addition, the WTO has played a very
limited role in helping address other global issues related to trade, such as food
security, climate change and global trade imbalances.
In order for the WTO to respond to these new challenges, it must focus on its capacity
for global economic governance. This capacity is derived from the WTO’s ability to
exercise power and the WTO’s dispute settlement mechanism, rules and secretariat are
a central part of this process. However, as with all forms of governance, the ability of the
WTO to exercise governance effectively depends largely on its own legitimacy—the
acceptance by those people or entities being governed. Thus, for the WTO to secure a
key role for itself in global economic governance, it needs to address concerns
regarding its legitimacy.
10.0 Free Trade Agreements: Implication for the WTO
Since the launch of the Doha Round, there has been a proliferation of free trade
agreements. Whereas the U.S. only had FTAs with four countries in 2000, it has now
concluded FTAs with 17 countries and has signed another three. Since 2002, Japan
has gone from having one FTA with Singapore to 11 FTAs. Additionally, regional FTAs
are also on the rise. The Association of Southeast Asian Nations (ASEAN) has entered
into FTAs with China, Japan, South Korea, India, and most recently with Australia and
New Zealand. In an effort to establish free trade among pacific-rim countries, the U.S. is
currently negotiating the so-called Trans-Pacific Partnership with Australia, Chile,
Vietnam, New Zealand, Brunei, Singapore, Malaysia and Peru. The proliferation of
FTAs presents a number of challenges for the WTO’s mandate to liberalize trade
The most profound change impacting the WTO is that FTAs have increasingly become
the means for liberalizing trade. Currently, there remain numerous large bilateral trade
relationships not governed by FTAs for which the WTO remains the focus; the U.S.-EU,
the U.S.-Japan and the U.S.-China are three of the most significant. However, if Japan
manages to join the Trans-Pacific Partnership negotiations, the U.S. will have an FTA
with its fourth largest (Japan) and largest (Canada) trading partners.
The market access gains that countries have achieved under FTAs have reduced the
economic value of an outcome from the Doha Round, thereby making its completion
less significant. In fact, it is estimated that approximately half of world trade now occurs
under preferential tariff rates or zero tariff rates granted on a most-favored nation
basis.3 Negotiating FTAs also requires the investment of political capital by world
leaders and the resources of trade negotiators. This leaves less energy and capacity to
focus on the Doha Round. Also, once countries have negotiated preferential market
access arrangements, there is less interest in reducing these potential gains through a
multilateral outcome.
WTO could provide the legal architecture and institutional structure, such as the dispute
settlement mechanism and secretariat support. FTAs then become places where
groups of countries experiment with different rules and undertake deeper levels of trade
liberalization than otherwise possible under the WTO. Like the opportunity for U.S.
states to be policy laboratories for the federal government, FTAs could provide the
opportunity for countries to develop and test new international trade rules on a range of
Experience gained from FTAs has also made countries more willing to support the
development of these rules in the WTO. For example, Singapore, Chile, Australia and
Morocco became familiar with the U.S. approach to trade facilitation through their FTAs
with the U.S. Therefore, they supported a U.S. proposal in the Doha Round on trade
facilitation that was modeled on their FTAs with the U.S. This feedback interaction
between FTAs and the WTO can be viewed as self-reinforcing instead of zero-sum. The
capacity for free trade agreements to build momentum around new rules has also
meant that FTAs have become an arena of strategic competition as countries use these
negotiations to establish the new global norms.
For example, the recently concluded Korea-EU FTA has included protection for
geographical indications (GI) 8 that goes further than the GI negotiations in the Doha
Round. The U.S. has responded with a proposal on GIs in the Trans-Pacific Partnership
negotiations that limits protections for GIs. FTAs also provide an opportunity for
countries to experiment with liberalizing highly protected sectors, which could be a step
toward broader liberalization under the WTO. For instance, the Australia-Japan FTA
negotiations might provide Japan with an opportunity to experiment with agriculture
liberalization. With properly phased in tariff reductions and domestic assistance from the
Japanese government to facilitate the structural reform such liberalization would require,
this could allow Japan’s agriculture sector to adjust before opening its markets more
broadly under other FTAs or multilaterally at the WTO.
11.0 The Challenge of the WTO’s Legitimacy
The challenges in completing the Doha Round, the proliferation of FTAs, the growth of
large developing countries and the globalization of the world economy require creative
thinking about how the international community can strengthen the WTO as the key
international institution for managing global trade. In contrast to other forums and
institutions like the G-20 and the IMF, the WTO is the only international organization
focused on international trade with legally binding rules and the power to enforce them.
For the WTO to address the challenges identified above, international policymakers
must enhance the WTO’s role in global economic governance. However in order to do
this, the WTO needs to be seen as legitimate.
It is often argued that the WTO derives a sufficient level of legitimacy from the consent
of its members. However, there is a problem with relying on members’ consent for
legitimacy. For instance, governments provided inadequate levels of consultation and
transparency when formulating their negotiating positions during the Uruguay Round.
Before countries consented to the final agreements of the Uruguay Round, there was
limited opportunity for public comment and debate about the outcomes and implications
of the round. Instead, public access to trade officials was restricted and the opportunity
to follow the developments in the negotiations was made difficult by the secrecy of the
process. This might happen in cases where career advancement of officials is tied to
completing the trade round. In other cases, the negotiations may be so complex that
officials do not fully understand the implications of the deal, as was the case in the
Uruguay Round.
The WTO’s power is manifest through its secretariat, its rules and its dispute settlement
mechanism. For example, the WTO secretariat exercises power through agenda setting
and framing the issues under consideration. The role of the WTO secretariat in
choosing panelists for a dispute and providing legal advice to panels certainly influences
the outcomes of WTO disputes.
The WTO has sought to address some of these
process issues by being more transparent about the negotiations and engaging directly
with civil society. Ensuring that the interests of developing countries are adequately
taken into account is also important for legitimating the Doha Round—particularly as
this is meant to be the Doha Development Round. This should help alleviate some of
the concerns felt by developing countries that the benefits from the Uruguay Round
were biased toward developed countries.
Member countries need to spend more time explaining the implications of the Doha
Round and international trade more generally to their citizens. For example, only 19
percent of Americans believe that free trade can contribute to economic growth.
Therefore, merely repeating that the Doha Round will increase global welfare is not
enough to convince a public that is concerned about job security and sees global trade
as a threat instead of an opportunity.
Along with increased public outreach, governments around the world need a targeted
set of policies aimed at assisting those most impacted by trade liberalization. For
instance, many developed countries have policies that help the structurally unemployed.
In developing countries, for example, the ability of farmers to adjust to the liberalization
of agricultural trade will depend on a range of factors, such as access to adequate
infrastructure. Ensuring that developing countries are able to take advantage of trade
liberalization is important for all countries and providing development assistance to do
this should be part of the Doha negotiations. Giving legitimacy to the Doha
Development Round and the WTO means that agricultural sector liberalization must be
a central focus. Should developed countries provide increased market access in areas
such as services this would help developing countries take advantage of their lower cost
labor to increase their services sectors.
The WTO’s exercise of power also needs to be legitimated. For instance, the WTO
secretariat must be seen as accountable to its members and civil society. Ensuring that
the panel and appellate body process is conducted according to rules of due process
and in a transparent manner will also go a long way in strengthening the WTO’s
legitimacy. Thankfully, the appellate body has been dealing with these issues. In
numerous decisions, it has found that the WTO texts incorporate a range of due
process norms, such as a right to legal representation and a right of the defendant to be
notified of the case against it and the legal basis of the claim. Reform of the dispute
settlement process is part of the Doha Round, including developing rules for opening
panel and appellate body hearings to the public and the use amicus briefs—
submissions by non-parties to the dispute, such as civil society and businesses. Also,
since the WTO appellate body adjudicates issues that impact public policy—such as
how governments manage issues relating to human health—transparency of the
process is especially important. The appellate body has found that it has the power to
accept amicus briefs, but has tended to reject them as being not relevant to the dispute.
Formalizing these reforms would affirm transparency in the WTO’s dispute settlement
process and give the wider public a chance to be heard in WTO disputes. This would
certainly further enhance the legitimacy of the WTO.
Another important aspect of securing legitimacy for the WTO requires understanding
and agreeing the limits of what the WTO can and should do. The need for WTO rules to
prevent behind-the-border measures being used to protect domestic industries and
erode market access gains from tariff reductions has made it increasingly difficult to
draw a clear boundary around what laws the WTO should discipline. A similar mission
creep has occurred at the international level, where compliance with environmental or
human rights treaties has been raised to the WTO because of their impact on trade.
While there might be no straightforward way of defining the proper scope of WTO’s
responsibility, one way forward would be to encourage greater dialogue between it and
other international organizations. The WTO has taken some steps in this direction. For
example, it has encouraged engagement with the secretariats of other international
institutions and the Doha Round includes negotiations on the relationship between the
WTO and multilateral environmental agreements.
However, a more systematic approach is desirable and should be extended to include
other international bodies.
12.0 The Future of the World Trading System: Asian Perspective
Asia is a vast continent with large heterogeneity – physically, culturally, linguistically,
politically, and economically. The region includes some of the world’s most competitive
and sophisticated economies, as well as large emerging ones which are fast becoming
important global players. At the same time, they co-exist with numerous smaller, poorer
and more vulnerable economies, including landlocked and island states. Despite its
rapid economic growth, Asia still remains home to nearly half of the worlds poor. The
region is facing numerous challenges, ranging from rising inequalities and disparities,
limited natural resources and vulnerability to climate change to the risk of falling into the
“middle income trap”, all of which have implications for the rest of the world. The past
few decades have witnessed the rapid economic take-off of the region. Asia’s share of
world merchandise trade has grown from around 13% in 1960 to over 30% in 2011.
Asia is projected to account for more than half of global GDP, trade, and investment and
to enjoy widespread affluence by the middle of the 21st century.
Trade has played a key role in shaping the transformation of Asian economies in recent
history; Asia is a living example of how trade can contribute to economic development.
The trade share of GDP in Asia grew from 13% in 1960 to 70% by 2007. During the
same period, hundreds of millions have been lifted out of poverty. It is my belief that
trade will continue to play a defining role in Asia’s future prosperity.
12.1 WTO: Thinking ahead on global trade
The cross-border flows of goods, investment, services, know-how and people
associated with international production networks – call it ‘supply-chain trade’ for short –
has transformed the world (Gereffi and Lee 2012). The WTO has not kept pace. It is
time to change that, as I argued in CEPR Policy Insight No 64 (Baldwin 2012). Before
turning to the governance issue, consider the changes.
12.2 The world of trade has changed
Since the 1990s, globalization has been associated with a sharp drop in rich nations’
share of world income, world manufacturing and world exports (Figure 1). The big
winners are developing nations that industrialized by joining, rather than by building,
supply chains (Figure 2). The big share winners are all part of the supply chains of the
US, Germany (Poland and Turkey), and Japan (People’s Republic of China (PRC),
Republic of Korea, Indonesia and Thailand). India is the exception. This rapid
industrialization also pulled up a wide range of developing nation commodity exporters
like Brazil, Russia, Australia and South Africa.
Figure 1: G7 share of world exports, manufacturing and GDP
Figure 2: Manufacturing shares: Seven gainers and the G7 losers
The world of trade politics and trade governance also changed. If a high-tech firm is to
locate production stages in a developing nation, the nation’s government must ensure
the necessary free movement of goods, services, information and the protection of
tangible and intangible property rights. Old fashioned protection, anti-FDI policies, or lax
property rights almost guarantee that the offshored stages will go somewhere else.
Developing nations that got the offshored factories became hyper-competitive and
wiped out the exports of developing nations that clung to import-substitution
industrialization. In the world of supply-chain industrialization, protectionism has
become destructionism. Having learned this lesson, developing nations unilaterally
lowered tariffs and eagerly signed up for deep disciplines in regional trade agreements
and bilateral investment treaties (Figure 3). It happened regionally, rather than
multilaterally since most supply chains are regional (Baldwin and Lopez-Gonzales
2012). The fact that the WTO has been locked in a decade-long preoccupation with
20th century trade issues (tariffs and agriculture) in the Doha Round has merely
exacerbated the regionalization of supply chain disciplines.
Figure 3: Trade politics changed: Protectionism became destructionism
The latest erosion of WTO centricity comes with the mega-regionals – like the TransPacific Partnership – that are being negotiated. On current trajectory, rules for supply
chain trade will have been harmonized in these mega-regionals within a few years
entirely outside the WTO’s ambit.
13.0 The Multilateral Trading System: Past, Present, and Future
The World Trade Organization came into being in 1995. One of the youngest of the
international organizations, the WTO is the successor to the General Agreement on
Tariffs and Trade (GATT) established in the wake of the Second World War. So while
the WTO is still young, the multilateral trading system that was originally set up under
GATT is already 50 years old. The system celebrated its golden jubilee in Geneva on 19
May 1998, with many heads of state and government leaders attending. The past 50
years have seen an exceptional growth in world trade. Merchandise exports grew on
average by 6% annually. Total trade in 1997 was 14-times the level of 1950. GATT and
the WTO have helped to create a strong and prosperous trading system contributing to
unprecedented growth. The system was developed through a series of trade
negotiations, or rounds, held under GATT. The first rounds dealt mainly with tariff
reductions but later negotiations included other areas such as anti-dumping and nontariff measures. The latest round “the 1986-94 Uruguay Round” led to the WTO’s
The negotiations did not end there. Some continued after the end of the Uruguay
Round. In February 1997 agreement was reached on telecommunications services, with
69 governments agreeing to wide-ranging liberalization measures that went beyond
those agreed in the Uruguay Round.
In the same year 40 governments successfully concluded negotiations for tariff-free
trade in information technology products, and 70 members concluded a financial
services deal covering more than 95% of trade in banking, insurance, securities and
financial information.
At the May 1998 ministerial meeting in Geneva, WTO members agreed to study trade
issues arising from global electronic commerce. The next ministerial conference is due
to be held in the United States in late 1999.
In 2000, new talks are due to start on agriculture and services and possibly a range of
other issues.
14.0 Conclusion
15.0 Reference