Sample Economic Paper on The World Trade Organization (WTO)

The World Trade Organization (WTO)

Brief History

The World Trade Organization (WTO) was started on January 1, 1995 following the successful completion of the Uruguay Round negotiations from 1986 to 1994. The organization is headquartered in Geneva, Switzerland. As at June 26, 2014, WTO had membership of160 countries, representing more than 97% of global trade. Several other countries are still negotiating to become members of the organization. In its simplest terms, WTO can be defined as a global body that deals with rules that govern trade between countries. The WTO is a very powerful organization. The organization`s dispute settlement arm can use sanctions to ensure disagreeing member countries follow the set WTO rules. Prior to WTO, there was the General Agreement on Tariffs and Trade (GATT), which came into force in 1947. As at that time, the intention was to create a global trade organization, but this did not come to fruition. Under GATT, the focus was on trade liberalization through removal of output quotas and tariff reductions. The Final GATT round held in Uruguay in 1994 gave birth to WTO, which continues to liberalize trade using negotiation rounds (Dembowski 2).

Structure

The organizational structure of WTO Incorporates several bodies as indicated in the figure 1 below.

Source: World Trade Organization (1).

The Ministerial Conference– is made up of trade ministers drawn from member countries.  This is the most superior organ of the WTO, and is charged with the responsibility of setting the strategic direction of the organization. It also makes all final decisions on agreements under its docket. The Ministerial Conference is convened at least once in two years. Decisions are made primary through consensus, a difficult exercise considering its 160 members; however, members can also vote (World Trade Organization 1).

The General Council- this organ is made up of senior representatives from member counties (individual countries` ambassadors). Its primary responsibilities include providing oversight on the day to day operations of the WTO. It is the main decision making branch of the organization, and is based in the headquarters. The other organs discussed below directly report to the General Council (World Trade Organization 1).

The Trade Policy Review Body– includes all members of the WTO and convenes periodically to review member countries` trade practices and policies. The reviews are aimed at providing general indicators on how member states are complying with their obligations under the WTO (World Trade Organization 1).

The Dispute Settlement Body- incorporates all members of the WTO. Executes all the dispute resolution processes for all the agreements under WTO members. It also implements decisions made on WTO disputes. Disputes are heard and determined by dispute resolution panels selected separately for each case. It also has a permanent Appellate Body created in 1994. The resolutions made bind all member countries (World Trade Organization 1).

Other important bodies within the structure include the Councils on Trade in Goods and Trade in services, which oversees details on specific and general agreements of trade in goods and services; the Secretariat and Director General, which performs the administrative functions of the WTO; and the Committee on Trade and Development and Committee on Trade and Environment that deal with sustainability in development (World Trade Organization 1).

Primary Functions

WTO`s main functions include: to oversee the implementation and administration of its agreements; offer a platform for member countries to negotiate; and provide a mechanism for dispute resolution. These functions are driven by several goals that include: improving standards of living; the need to ensure full employment; the need to achieve large and steady growth of real incomes and demand; and the need to expand the production of goods and services and trade in the same (United Nations Environment Programme 15). The WTO seeks to achieve these objectives by optimally utilizing the globe`s resources in a sustainable manner, while protecting and preserving the environment. Part of the WTO`s mandate is to help developing economies to grow their share of international trade (United Nations Environment Programme 15).

Benefits and Costs of Entering the WTO

            Involvement in WTO grants a member country grants a member country several benefits, and these benefits are the main reasons why countries choose to join the WTO. Firstly, as a member of WTO, a country`s products and services can access different foreign markets of member states without discrimination, and in the event that trade disputes arise between member countries, there is an international mechanism for resolving the disputes.  Secondly, WTO membership creates a good climate for foreign direct investment because prior to accession, a country must ensure that legal and regulatory climate conforms to the WTO regulations. This has the effect of removing barriers and opening up the economy to foreign capital. In addition, it opens up opportunities for local investors to invest in the different sectors of the WTO member countries. Thirdly, membership creates conditions for improvement of the competitiveness and quality of the domestically produced products and services due to the increase in the flow of foreign products and services and investment in the domestic market. Moreover, a country`s participation in WTO enables the country to be involved in the development of international trade rules in line with its national interests, and enhances the country`s image as an active participant in global trade. To the people, the availability of foreign products and services not only provide a wide variety to choose from, but also reduce the cost of living. Furthermore, by opening up the domestic economy, incomes for the citizens are improved and economic growth is stimulated.

Nonetheless, involvement in international trade also has costs. Firstly, there are WTO and RTA conflicts. Members of WTO who are also members of RTA are permitted to use internal dispute settlement mechanisms available in the RTA to implement the RTA norms. However, the majority of RTAs have obligations and rights that run parallel to their WTO`s obligations. Therefore, there is a possibility that two states at dispute may resort to two different dispute settlement mechanisms on the same issue. This creates overlap of jurisdictions in settling disputes. For example, if country A chooses RTA dispute settlement mechanism and country B goes to the WTO dispute settlement body, the two bodies may claim supremacy over the same matter, and they can arrive at opposite or different results, with no legal solution (Kwak and Gabrielle 45). Secondly, WTO membership opens up the economy to foreign companies. Given that these multinationals are highly efficient, they create significant competition for local companies and some domestic firms are likely to be pushed out of business because of their reduced competitiveness. Worse still, as a member of WTO, a country cannot provide support to its domestic sectors. Secondly, evidence from Eastern Europe indicates that as international and national markets converge, a country loses control over particular sectors of the economy because reduced export duties encourage an influx of foreign goods into the domestic economy. In addition, the terms of trade liberalization tend to favor more industrialized economies at the expense of the developing countries. Issues such as preferential market access to developing markets are more pronounced on paper, but less important in practice (Michalopoulos 24).

China`s Example

China joined the WTO in 2001, ten years later, the country had made significant progress becoming the second largest economy in the world in terms of GDP, the 4th largest exporter of commercial services, and the leading merchandise exporter and the leading destination for foreign direct investment among developing economies. As indicated in figure 2 below, China`s GDP has increased consistently year over year from 2001. Moreover, China has managed to create a transparent and unified policy framework that conforms to the WTO rules. In particular, as at 2010, the country had repealed and amended over 3,000 rules, regulations, and laws. The country`s trade volume has been increasing at 30% per annum, with trade representing 74.2% of its GDP in 2010 (Permanent Mission of China to the WTO 7).

 

 

Source: Permanent Mission of China to the WTO (8).

Other than the benefits, China accession to the WTO has also brought some challenges. Firstly, the tariff level in the country is relatively lower that has created significant pressure from imported goods. Although China is a developing country, its tariff level is lower than some of the developed economies as seen in figure 3 below.

Source: (Permanent Mission of China to the WTO 27).

Secondly, the country is heavily dependent on processing trade. Most of the exports are merely assembled in the country and are neither made in or by China. In addition, despite its impressive growth, China is still a developing economy and its GDP per capita is one of the lowest in the world at $4,428 as captured in figure 4 below.

Source: Permanent Mission of China to the WTO (32).

MFN Status

Most-Favored-Nation (“MFN”) status requires WTO member countries to give the most favorable regulatory and tariff treatment accorded to the products of any particular member at the time of exports or imports of similar products to all             WTO members. This is the foundation of the WTO principle. Therefore, this means that if country X who is a member of the WTO negotiates with country Z, which may not be a member of WTO, to reduce the tariff on bananas to 4%, the same tariff rate (4%) has to apply to all WTO member countries. In essence, a country must accord all the WTO members equal treatment with respect to the same issue (Gopalan, Ammar, and Kenneth 445).

MFN status is not a new concept. Before the GATT, countries often incorporated an MFN clause in their bilateral trade arrangements, and this significantly contributed toward trade liberalization. When GATT was formed, unconditional MFN clause was incorporated in the GATT not between countries, but on multilateral dimension, and this has led to trade stability in the world. Therefore, the MFN status is an important principle in the promotion of multilateral trading system. Granting an MFN status has several benefits to trade Firstly, a country that gives MFN on its imports will source its imports from the efficient supplier. However, for this to work, tariffs have to be uniform across countries. Secondly, MFN permits smaller countries to compete will large countries because the smaller countries are able to enjoy the preferential treatment that big countries accord to one another. MFN benefits smaller countries because it reduces the cost associated with their exports, thereby making them more competitive. This in turn, boosts their exports and the economic growth in their respective countries. In addition, giving an MFN status benefits the domestic economy because operating a uniform set of tariffs against all trading partners not only simplifies the rules, but also makes them more transparent. Moreover, MFN tends to restrict domestic special interests from seeking protectionist measures (Gopalan, Ammar, and Kenneth 446).

The negative impact of MFN is that once country X grants MFN to country Z, it must do the same to all the other WTO member states. This implies that the country can no longer be able to safeguard its domestic industries from cheap products produced in foreign markets. As a result, some of the domestic companies may be pushed out of business because they cannot compete. Without tariffs, some countries may subsidize particular sectors in the economy, which allows their exports to be relatively cheaper. Such practices can make companies in trade partner’s country to go out of business. This is often referred to as dumping.  For example, many countries were happy to receive the MFN status from the U.S. because they could readily export their products to the U.S. market at reduced cost. However, many of them soon realized that their domestic agricultural sectors were threatened by cheap imports from European Union and U.S. markets measures (Gopalan, Ammar, and Kenneth 447).

India has granted the most favored nation treatment to counties such as Bangladesh and Pakistan. The Pakistan MFN was granted in 1996. Pakistan had made commitments to reciprocate and grant India MFN status, however, to date Pakistan is yet to honor its commitment. Instead, there are calls in Pakistan to grant the MFN status to China. Under WTO, all member countries are required to accord each other MFN treatment with respect to trade in goods. However, despite the fact that both India and Pakistan are WTO members, Pakistan has refused to give India MFN status for what it calls strategic considerations. Bilateral trade between the two countries in the 2012/2013 period stood at $2.6 billion (Gopalan, Ammar, and Kenneth 448). Other than India, the United States has granted the MFN status to nearly all the WTO members.

How the WTO Reconcile the Principle of Equal Treatment and With the Preferential Treatment

            Regional trading blocs create preferential treatment for the participating countries while maintaining a common trade barrier against non-participating countries. Examples of regional trade agreements include: the North American Free Trade Agreement (NAFTA), the European Union (EU); the Association of Southeast Asian Nations (ASEAN), and the Australia-New Zealand Closer Economic Relations Agreement. Because of NAFTA, countries such as Canada and Mexico receive preferential trade terms when dealing with the United States compared to other countries such as China who are members of the WTO. Therefore, such regional blocs can give outcomes that contradict the MFN principle given that participating countries are treated differently from non-participating countries. This can adversely affect the non-participating countries, and goes against trade liberalization (Japanese Ministry of Economy, Trade and Industry215).

As a way of reconciling the equal treatment (MFN) and with the preferential treatment (regional integration), article XXIV of the GATT states that regional blocs can be permitted as an exception to the equal treatment rule (MFN). However, certain conditions have to be met. Firstly, all barriers to trade in addition to tariffs have to be completely abolished with respect to almost all forms of trade in the integrated area(Japanese Ministry of Economy, Trade and Industry 218).The objective of this requirement is to ensure that the regional bloc creates more trade and stop countries from setting up preferential trade areas that exclude particular sectors of the economy such as sectors that are less import-competitive.Secondly, tariffs and other trade barriers applicable to non-participating countries must never be increased higher than or become more restrictive than they were before the region integrated. WTO is cognizant of the fact that regional trading blocs destroy some trading opportunities by imposing high barriers on non-members; however, WTO believes that these blocs result in more trade between participating countries than they actually damage. These regional trading blocs also permit countries to attempt to test new arrangements that can later be adopted over a broad area. In addition, the blocs promote economic and political success as they encourage participating nations to implement political, social, and economic reforms (Japanese Ministry of Economy, Trade and Industry 218).

How WTO settles Disputes

Dispute resolution by WTO goes through numerous stages. There are two methods through which disputes can be resolved once a complaint has been launched: (a) the parties can reach a mutually agreeable solution; and (b) through adjudication. The processes involved in settling disputes are as follows.Firstly, consultations are done between the parties at dispute.  This is followed by adjudication by panels, and if need be by the Appellate Body. The final stage in the process is implementing the ruling; including putting in place countermeasures in case the party that lost the case fails to implement the ruling (World Trade Organization 1).

Consultations and Proceedings

On October 19th 2010, El Salvador made a request for consultations with the Dominican Republic to discuss safeguard measures that the latter had imposed on imports of polypropylene bags and tubular fabric. El Salvador was worried about particular aspects of the safeguard measures and the resulting investigation because they appeared to be inconsistent with several Articles of the GATT 1994. After the consultations, on December 20th 2010, El Salvador made a request for a panel to be established. This was followed by the establishment of a panel on March 11, 2011. The panel conducted consultations with the affected parties, and on January 31, 2012 released its report to members (WTO 1).

Findings

The findings indicated that Dominican Republic`s actions were inconsistent with its obligations under several Articles of GATT 1994 including Article XIX: 1(a) of the GATT 1994 and Articles 3.1, 4.2(c) and 11.1(a); Articles 2.1 and 4.1(c) of the Safeguards Agreement and Article XIX:1(a) of the GATT 1994 and Articles 2.1, 3.1, 4.1(a), 4.2(a) and 4.2(c) of the Safeguards Agreement and Article XIX:1(a) of the GATT 1994) . El Salvador won the case. The final report was adopted by the Dispute Settlement Body (DSB) on 22nd February 2012 (WTO 1).

Implementation

On March 23 2012, the Dominican Republic notified the DSB that it will promptly implement the recommendations in the DSB report in a manner that complies with its WTO obligations.  On 21st April 2012, the Dominican Republic complied by withdrawing the safeguard measure that was at the center of the dispute and restored the MFN that existed prior to this safeguard (WTO 1).

 

 

 

 

 

 

Works Cited

Dembowski, Hans. ‘A Brief History of the WTO’. Development and Cooperaton., 2011. Web. 15 Apr. 2015.< http://www.dandc.eu/en/article/brief-history-wto>

Gopalan, Sasidaran, Ammar A. Malik, and Kenneth A. Reinert. ‘The Renewed Hope of Multilateralism in South Asia: Applying the MFN Principle to Pakistan-India Trade’. Global Policy 4.4 (2013): 445-448. Web.

Japanese Ministry of Economy, Trade and Industry.Chapter 1: Most-Favoured-Nation Treatment principle. 2011. Print. <http://www.meti.go.jp/english/report/downloadfiles/2011WTO/2-1MFN.pdf>

Kwak Kyung and Gabrielle Marceau. Overlaps And Conflicts Of Jurisdiction Between The World Trade Organization And Regional Trade Agreements. Oxford: Oxford University Press, 2006. Print.

Michalopoulos Constantine. “Trade And Development In The GATT And WTO: The Role of Special and Differential Treatment for Developing Countries”. PolicyResearch Working Paper.World Bank, Washington DC, 2000. Print

Permanent Mission of China to the WTO. ‘China in the WTO: Past, Present and Future’ <https://www.wto.org/english/thewto_e/acc_e/s7lu_e.pdf>

United Nations Environment Programme.Environment and Trade: A Handbook. Nairobi, Kenya: UNEP/IISP.

World Trade Organization. ‘WTO organization chart’. World Trade Organization. 2015. Web. 15 Apr. 2015. < https://www.wto.org/english/thewto_e/whatis_e/tif_e/org2_e.htm>

WTO.’Dominican Republic — Safeguard Measures on Imports of Polypropylene Bags and Tubular Fabric’. World Trade Organization. 2015. Web. 15 Apr. 2015. < https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds418_e.htm>