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THE WORLD TRADE ORGANIZATION
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The World Trade Organization
International trade is the mainstay of the national economies of countries because it allows nations to benefit from the globalization of trade. The economies of the modern world have become increasingly integrated since advancements of the philosophies of Adam Smith and David Ricardo related to the usefulness of the division of labor and the leveraging national comparative advantage during international trade respectively.[1] Notably, the doctrine of mercantilism has given way to liberalized multilateral trading with the United States and Britain championing the opening of the international trading environment and increased trading cooperation between nations. Indeed, free trade is a concept that is widely embraced by nations that wish to benefit from engaging in international trade, although it conflicts with the protectionism that is exhibited by some nations.
The international trading environment thrives in a rules-based system because it facilitates a structured engagement in import and export activities between nations across the world. To this end, various bodies have been formed to oversee the organized conduct of international trade, with the World Trade Organization (WTO) being the current body with a global reach. The WTO is the successor of the General Agreement on Tariffs and Trade (GATT) whose aim was to extend the supervisory mandate of the liberalization of global trade under GATT.[2] Specifically, while GATT focused on the reduction of tariffs on goods among member countries, WTO goes on to include policies on investments, intellectual property and services. Besides, the WTO sought to harmonize and unify the regional trading agreements by arriving at a global regulatory framework that can encourage multilateral trading and dispute resolution mechanisms. However, despite the successes of the WTO in regulating international trade and the benefits conferred to the multilateral trading system, its jurisdiction is being challenged by advanced nations that are seeking regionalism to advance their trading interests. It is imperative that the WTO is reformed to accommodate nations that prefer to employ a strategic mix of trade policies to stabilize and grow their economies. To determine how the WTO should be reformed, it is important to understand why it was formed, where it has succeeded in promoting balanced global trade, and the challenges it currently experiences.
Primary Sources
Matsushita et al. trace the history of the World Trade Organization (WTO) by delving into its formation, structure and functions. The WTO was necessitated by the need to overcome the shortcomings of the General Agreement on Tariffs and Trade (GATT) related to the reduction of trade barriers, the unification of global trading rules and protection of intellectual property rights among others.[3] It was expected that the WTO would improve the organizational structure by making it conform to a specialized agency of the United Nations. This would help gain the compliance of the 164 member countries and structure the dispute resolution mechanism.
Lu and Yu revealed that China’s accession into the World Trade Organization (WTO) in 2001 came with a reduction in tariffs from a high of 42.9 % in 1992 to low of 12.3 % by 2004.[4] Besides, China liberalized its trade after 2001 by reducing the protection to some of its industries through the reduction of tariffs. In the same vein, the tariff disparities between different industries and products were reduced, making tariff regime more predictable and therefore facilitative for international trade. In turn, the tariff cuts reduced the markups placed on export products and raise the productivity of Chinese companies.
Bechtel and Sattler observed that countries that had resolved their trade conflicts through the Dispute Settlement Understanding (DSU) of the World Trade Organization (WTO) experienced improved on trade flows thereafter. For instance, 454 trade disputes had been lodged with the DSU by the end of 2012, which was an indication that the dispute resolution mechanism was widely used by governments, because of the benefits to trade that the resolutions delivered. Notably, export from the complaining country to the defending nation increased by about 7.7 billion US dollars within three years of the ruling by the conflict resolution panel.[5]
However, the WTO has failed developing countries because it had not delivered the promised development. The Doha Round hardly discussed development issues and the interests of the global powers dominated these meeting with the terms of trade favoring the developed countries.[6] Specifically, 15 million cotton farmers in West Africa and 5 million farming families had been relegated to poverty because of the 47 billion-dollar subsidies that have been advanced to cotton farmers in wealthy countries within a decade after the commencement of the Doha Development Round in 2001. Moreover, the trade agreement rules outlined by the WHO remained ambiguous, thus allowing the rich countries to manipulate the poor developing countries. For instance, African countries have been forced to eliminate over 90 % of the trade tariffs by the European Union countries because of the absence of clear trade protection rules.
Moreover, the mandate and effectiveness of the WTO system are being threatened by the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP), because these trade agreements are likely to change the multilateral trading system. Hufbauer and Cimino-Isaacs observed that these two mega-regional pacts are influential to the global trading regime because they bring together countries whose combined wealth is 61 % of the global GDP. This included the United States, whose veto power is opposed by numerous WTO members.[7] These agreements reveal the challenges experienced by the WTO as the shepherd of international trade globally. The challenges include the breakdown of the consensus system as wealthier nations enjoy more bargaining power than their poorer counterparts, the difficulty in enlisting all the 161 members into new accords and the inaccessibility of the dispute resolution body to nations involved in regional and bilateral trade pacts.
Secondary Sources
Lamy, in the book, ‘The Geneva Consensus: Making Trade Work for All’, observes that the World Trade Organization is an example of successful global governance instrument of conveying globalization by regulating international trade. Notably, trade deals and rules have been negotiated, and trade disputes have been resolved through the WTO.[8] However, Lamy contends that the jurisdiction of the WTO goes beyond international trade regulation and lowering of tariffs, and should include the influence of trade on health, employment, food security, the environment and human rights. These issues featured prominently in the WTO summits such as the Doha Development Round, and although they remain unconcluded, other issues such as trade facilitation deals have been a positive development. Clearly, the Doha Development Round needs to be concluded so that the WTO can deliver trading benefits to wealthy countries and poor ones alike.
Börzel and Thomas Risse indicated in their book titled ‘The Oxford handbook of comparative regionalism’ that the WTO has overseen the administration of Preferential Trade Agreements (PTAs), which has facilitated the liberalization of trade between member countries by granting preferential access to each other’s markets.[9] The PTAs were considered as important drivers of institution building and economic advancements regionally, which facilitated the coordination of trade policies and cooperation between trading nations. In 2015, there were 446 PTAs with 259 of them being enforced. Currently, the PTAs were designed to advance the economic and political interests of member countries, including those that have been adversaries. This has been seen as advancing regionalism and protectionism in wealthy countries because they are skewed the advantage of advanced economies like the United States.
However, Singer observes that the WTO has not managed to narrow down the gap between the ten richest and poorest countries because the trading environment remained skewed towards the rich economies globally.[10] Specifically, as indicated in his book, ‘One World: Ethics of Globalisation’, the richest countries continued to dictate the regulations in international trade to their advantage and to the detriment of the undeveloped countries despite the WTO promising to level the international trading environment. Moreover, the foreign aid given by the wealthy countries to the poor ones had remained below the 0.7 % of the gross domestic product (GDP) that has been set by the United Nations.
In the same vein, Dmitrieva conceded that the WTO has warned about the slowing down of the global economy due to the upsurge in trade restrictions that were being imposed by large wealthy countries.[11] The trade restrictions instituted by the Group of 20 countries include new customs procedures, import bans and trade tariffs, which had reached record levels of 481 billion dollars as illustrated in figure 1. However, the same countries have introduced 29 new procedures that aimed at facilitating trade against the 20 restrictions imposed in the period between October of 2018 and May of 2019. This means that the WTO needed to reduce the import-restrictive measures and facilitate the trade-advancing initiatives so that free trade can continue thriving.
Figure 1. Import-restrictive measures implemented by the WTO between 2012 and 2019
Alter, in her article titled, ‘Time for a World Trade Organization 2.0’ observed that the WTO needed revamping to remain relevant in the 21st century. While the WTO, which is the successor of the General Agreement on Tariffs and Trade (GATT), is the guardian of the multilateral trading system in existence today, its effectiveness has been threatened the increase in tariffs and trade restrictions between trading nations for political reasons. Alter argues that countries such as the United States, Japan, and Pakistan had imposed trade tariffs in a display of the political displeasure they had with China, South Korea and India respectively. These actions were acceptable by the WTO, which provided for the dispute resolution mechanism allowing the use of retaliatory tariffs. However, while these actions were injurious to free trade, they were preferable to the reversal of trade deals or closure of national borders at will by governments in a bid to advance their national interests.[12]
Likewise, the World Trade Organization reported that although the import-restrictive measures introduced by the G20 countries between 2018 and 2019 had increased more than threefold since 2012, trade remedy initiations were higher than the trade terminations in the same period as illustrated in figure 2.[13] The WTO indicated that these import-restrictive measures were the highest recorded in recent history. However, the global economic environment was increasingly being complicated by the several trade-restrictive measures that were under consideration, which could potentially hinder the engagement in trade by consumers, businesses and governments significantly. Therefore, the WTO framework needed to be cognizant of the emerging economic issues so that it can remain as a useful international trading regulator.
The influence of the WTO was extending from tangible, tradable goods to intangible ones such as education and other knowledge products. Altbach revealed that the WTO was exploring the inclusion of knowledge products into its regulatory regime, which would allow higher education to be trade freely in the international market.[14] However, Altbach contends that the importation and exportation of higher education would be subjected to the legal arrangements and complex rules, which would threaten the institutional and national control of education.
Comparative Analysis
The WTO and its Creation
The findings from the research revealed that the WTO is an international organization that is charged with the management and promotion of free trade across the globe. It came into operations in 1995 as a replacement of the GATT, which has been formed in 1948 after the International Trade Organization (ITO) was denied ratification by member countries. The negotiations leading to the formation of the WTO were undertaken in the Uruguay Round that spanned between 1986 and 1994, with the signing of the Final Act establishing the body being done in Marrakesh in Morocco.[15]
The Purpose of the WTO
The purpose of the WTO is to facilitate the commencement and conduct of smooth, free and predictable global trade through a structured rules-based system for international commerce. It does this by firstly, administering the multilateral trade agreements in existence. This means that every WTO member is entitled to the trading status of the Most Favored Nation (MFN) that allows them to receive reduced tariffs for exports. Secondly, the WTO manages the ongoing negotiations of new trade agreements. It does so by bringing the 164 members together in a ministerial conference that is held every two years. This conference is the highest decision-making organ of the WTO, and has undertaken important decisions such as approving the accession of China in 2001 and the phasing out of the subsidies for agricultural exports. Thirdly, the WTO settles trade disputes between nations that present their accusations to the Dispute Settlement Body. Most disputes brought before the WTO are related to dumping.[16]
Contributions of the WTO to the Promotion of Balanced Global Trade
The research revealed that the WTO had facilitated the promotion of a balanced global trade by allowing each member country to attain the MFN status. This levels the export environment for member countries in the global stage. Specifically, countries can enjoy lower export tariffs courtesy of their membership to WTO. Through PTAs, member countries can pursue their economic and political interests. Moreover, such trade agreements allow member countries to lower their levels of protectionism, thus advancing free trade activities that are mutually beneficial.
Also, aggrieved member countries have equal access to the conflict resolution mechanism of the WTO. Member countries are encouraged to resolve their trade disputes at the WTO rather than resulting in unilateral actions. In this regard, smaller countries can lodge disputes against larger countries without being intimated by the difference in size. However, the cost of litigation at the panel was exorbitant, which disadvantaged the developing nations while favoring the wealthy ones.[17]
The dispute resolution mechanism used by the WTO is an improvement to that of the GATT because it has a fixed timeline in which disputes should be settled in a year without appeal and up to one year and three months if they include an appeal. Moreover, rulings are adopted automatically unless there is a consensus to their objection. However, the disputing countries are encouraged to settle out of court and as such, only less than half of all cases have reached the court-like process of the full panel.
Challenges Faced by WTO Presently
The WTO faces some challenges that undermine its authority and functioning. Firstly, although reciprocity was a traditional principle of the WTO, its enforcement was challenged by the economic disparities between nations. While full reciprocity was practicable among developed nations with matching economies, it was difficult to implement between developed and developing trade partners because of their economic differences.[18] Full reciprocity involved the equal exchanges of privileges and advantages between trading nations. However, wealthy nations could only confer relative reciprocity to their poor trading partners, which advantaged the advanced economies at the detriment of the developing ones.[19]
Wealthy countries in North America and Europe were ignoring the WTO rules and engaging in multilateral agreements outside the WTO framework. Notably, the United States has spearheaded the TTIP and the TPP pacts that threaten the framework of the multilateral trading system under WTO. Notably, these pacts indicate the resurgence of regionalism in trade and the inability of the WTO to reign on countries that use their state-owned enterprises and multinational corporations to segment the global value chain to their advantage.[20]
Moreover, veto players tended to scare away countries without veto power because the veto holders could manipulate trading agreements and block policy changes that favored the interests of the emerging countries. Veto players infuse politics to the agreement-making process and increase the cost of ratification of trade agreements.[21] This is because they have to be persuaded into an agreement through bribery or insist that the agreements are modified to suit their preferences. In such cases, the WTO may not be able to control or influence the decisions of the veto players in the member countries.
Synthesis
The WTO has been instrumental to the advancement of free trade and the multilateral trading system. It has performed better at facilitating international trade compared to GATT because it has leveled the trading fields between member countries by advocating for a reduction of trade barriers, including trade tariffs. The WTO has also improved trading discipline by providing a rules-based structure with a conflict resolution mechanism. Under the WTO, conflicts are resolved within 15 months at most, which is unlike the previous system in which disputes dragged on for extended periods without resolution.
Veto players and countries with the veto power have undermined the authority and effectiveness of the WTO by withholding their permission to reform the trading policies in the organizations and in their countries. Therefore, the WTO is challenged by the emerging 21st-century trading issues such as the increased assertiveness of the poor countries, which are demanding fairer trading practices from their wealthier counterparts. Moreover, the wealthier countries are receding into protectionism to safeguard their industries and markets, which could undo the advancement of free trade and the liberalized trading system.
Ensuring that the WTO remains relevant in the 21st century requires that the issues raised in the Doha Development Round be revisited and resolved. The Doha Round sought to come up with resolutions that would facilitate the economic growth of developing countries through the removal of restrictive trade barriers. Moreover, policy reforms that would be beneficial to the wealthy and developing countries are required because they would allow countries to choose strategic mixes of trading policies that suit their economic and political interests. This is because it has emerged that countries have unique and diverse economic interests that cannot be separated from political interests. In this regard, the WTO framework should be reformed to accommodate the political interests of member countries and go ahead to reconsider the influence of veto powers.
Bibliography
Altbach, Philip. “Higher education and the WTO: Globalization run amok.” International Higher Education 23 (2015). 1-3.
Bechtel, Michael M., and Thomas Sattler. “What is litigation in the world trade organization worth?” International Organization 69, no. 2 (2015): 375-403.
Börzel, Tanja A., and Thomas Risse. The Oxford handbook of comparative regionalism. Oxford University Press, 2016.
Dmitrieva, Katia. “WTO says global trade restrictions at second-highest on record.” Bloomberg. https://www.bloomberg.com/news/articles/2019-06-24/wto-says-global-trade-restrictions-at-second-highest-on-record.
Harvey, David. The limits to capital. Verso books, 2018.
Hufbauer, Gary Clyde, and Cathleen Cimino-Isaacs. “How will TPP and TTIP Change the WTO System?” Journal of International Economic Law 18, no. 3 (2015): 679-696.
Iriye, Akira. Global community: The role of international organizations in the making of the contemporary world. University of California Press, 2002.
Lamy, Pascal. The Geneva Consensus: making trade work for all. Cambridge University Press, 2013.
Lu, Yi, and Linhui Yu. “Trade liberalization and markup dispersion: evidence from China’s WTO accession.” American Economic Journal: Applied Economics 7, no. 4 (2015): 221-53.
Mansfield, Edward D., and Helen V. Milner. “Votes, Vetoes, and Preferential Trading Agreements.” New Era (2010): 1-47.
Matsushita, Mitsuo, Thomas J. Schoenbaum, Petros C. Mavroidis, and Michael Hahn. The World Trade Organization: law, practice, and policy. Oxford University Press, 2015.
Singer, Peter. One World: Ethics of Globalisation. Orient Blackswan, 2004.
Walker, Aurelie. “The WTO has failed developing nations.” The Guardian, 2011. https://www.theguardian.com/global-development/poverty-matters/2011/nov/14/wto-fails-developing-countries.
WTO. “WTO report shows trad restrictions among G20 continuing at historic high levels.” World Trade Organization, 2019, https://www.wto.org/english/news_e/news19_e/trdev_24jun19_e.htm.
[1] David Harvey. The limits to capital (Verso books, 2018), 137.
[2] Mitsuo Matsushita, Thomas J. Schoenbaum, Petros C. Mavroidis, and Michael Hahn. The World Trade Organization: law, practice, and policy (Oxford University Press, 2015), 23.
[3] Mitsuo Matsushita, Thomas J. Schoenbaum, Petros C. Mavroidis, and Michael Hahn. The World Trade Organization: law, practice, and policy (Oxford University Press, 2015), 24.
[4] Lu, Yi, and Linhui Yu. “Trade liberalization and markup dispersion: evidence from China’s WTO accession.” American Economic Journal: Applied Economics 7, no. 4 (2015): 227.
[5]Michael M. Bechtel and Thomas Sattler. “What is litigation in the world trade organization worth?” International Organization 69, no. 2 (2015): 377.
[6] Aurelie Walker. “The WTO has failed developing nations.” The Guardian, 2011. https://www.theguardian.com/global-development/poverty-matters/2011/nov/14/wto-fails-developing-countries.
[7] Gary Clyde Hufbauer and Cathleen Cimino-Isaacs. “How will TPP and TTIP Change the WTO System?” Journal of International Economic Law 18, no. 3 (2015): 683.
[8] Pascal Lamy. The Geneva Consensus: making trade work for all (Cambridge University Press, 2013), 16.
[9]Tanja A. Börzel and Thomas Risse. The Oxford handbook of comparative regionalism (Oxford University Press, 2016), 323.
[10] Peter Singer. One World: Ethics of Globalisation (Orient Blackswan, 2004), 9.
[11] Katia Dmitrieva. “WTO says global trade restrictions at second-highest on record.” Bloomberg. https://www.bloomberg.com/news/articles/2019-06-24/wto-says-global-trade-restrictions-at-second-highest-on-record.
[12] Karen J. Alter. “Time for a World Trade Organization 2.0.” Wall Street Journal. https://www.wsj.com/articles/time-for-a-world-trade-organization-2-0-11568577021.
[13] WTO. “WTO report shows trade restrictions among G20 continuing at historic high levels.” World Trade Organization, 2019, https://www.wto.org/english/news_e/news19_e/trdev_24jun19_e.htm.
[14] Philip Altbach. “Higher education and the WTO: Globalization run amok.” International Higher Education 23 (2015). 1.
[15] Mitsuo Matsushita, Thomas J. Schoenbaum, Petros C. Mavroidis, and Michael Hahn. The World Trade Organization: law, practice, and policy. Oxford University Press, 2015.
[16] Tanja A. Börzel and Thomas Risse. The Oxford handbook of comparative regionalism (Oxford University Press, 2016), 323.
[17] Mitsuo Matsushita, Thomas J. Schoenbaum, Petros C. Mavroidis, and Michael Hahn. The World Trade Organization: law, practice, and policy (Oxford University Press, 2015), 31.
[18] Akira Iriye. Global community: The role of international organizations in the making of the contemporary world (University of California Press, 2002), 13.
[19] Aurelie Walker. “The WTO has failed developing nations.” The Guardian, 2011. https://www.theguardian.com/global-development/poverty-matters/2011/nov/14/wto-fails-developing-countries.
[20] Gary Clyde Hufbauer and Cathleen Cimino-Isaacs. “How will TPP and TTIP Change the WTO System?” Journal of International Economic Law 18, no. 3 (2015): 683.
[21] Edward D. Mansfield and Helen V. Milner. “Votes, Vetoes, and Preferential Trading Agreements.” New Era (2010): 6.
