THE WORLD TRADE
The WTO was created in 1995 as one of the outcomes of the Uruguay Round of multilateral trade talks. The Uruguay Round, which concluded in 1994 after eight years of complex and sometimes contentious negotiations, was a landmark in the history of the trading system. Agriculture and textiles and clothing became subject to stronger multilateral disciplines, and the trading system was extended to include intellectual property and trade in services. The WTO establishes the rules of the trade policy game for its members, which
increasingly include developing countries. (Membership at the time of writing stood at 144, but more than 50 developing countries have yet to join the WTO.) A good understanding of how the WTO works and what it does is a necessary condition for maximizing the benefits of membership.
The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy game, not with the results of the game. Five principles are of particular importance in understanding both the pre-1994 GATT and the WTO: nondiscrimination, reciprocity, enforceable commitments, transparency, and safety valves.
Nondiscrimination has two major components: the most-favored-nation (MFN) rule, and the national treatment principle. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these three areas. This is especially true of the national treatment principle, which is a specific, not a general commitment when it comes to services. The MFN rule requires that a product made in one member country be treated no less favorably than a “like” (very similar) good that originates in any other country. Thus, if the best treatment granted a trading partner supplying a specific product is a 5 percent tariff, this rate must be applied immediately and unconditionally to imports of this good originating in all WTO members. In view of the
small number of contracting parties to the GATT (only 23 countries), the benchmark for MFN is the best treatment offered to any country, including
countries that are not members of the GATT. National treatment requires that foreign goods, once they have satisfied whatever border measures
are applied, be treated no less favorably, in terms of internal (indirect) taxation than like or directly competitive domestically produced goods (Art. III, GATT). That is, goods of foreign origin circulating in the country must be subject to taxes, charges, and regulations that are “no less favorable” than those that apply to similar goods of domestic origin. The MFN rule applies unconditionally. Although exceptions are made for the formation of free trade areas or customs unions and for preferential treatment of developing countries, MFN is a basic pillar of the WTO. One reason for this is economic: if policy does not discriminate between foreign suppliers,
importers and consumers will have an incentive to use the lowest-cost foreign supplier. MFN also provides smaller countries with a guarantee that larger countries will not exploit their market power by raising tariffs against them in periods when times are bad and domestic industries are clamoring for protection or, alternatively, give specific countries preferential treatment for foreign policy reasons. MFN helps enforce multilateral rules by raising
the costs to a country of defecting from the trade regime to which it committed itself in an earlier multilateral trade negotiation. If the country desires to raise trade barriers, it must apply the changed regime to all WTO members. This increases the political cost of backsliding on trade policy because importers will object. Finally, MFN reduces negotiating
costs: once a negotiation has been concluded with a country, the results extend to all. Other countries do not need to negotiate to obtain similar
treatment; instead, negotiations can be limited to principal suppliers.
National treatment ensures that liberalization commitments are not offset through the imposition of domestic taxes and similar measures. The
requirement that foreign products be treated no less favorably than competing domestically produced products gives foreign suppliers greater certainty regarding the regulatory environment in which they must operate. The national treatment principle has often been invoked in dispute settlement cases brought to the GATT. It is a very wide-ranging rule:
the obligation applies whether or not a specific tariff commitment was made, and it covers taxes and other policies, which must be applied in a nondiscriminatory fashion to like domestic and foreign products. It is also irrelevant whether a policy hurts an exporter. What matters is the existence of discrimination, not its effects.
Reciprocity is a fundamental element of the negotiating process. It reflects both a desire to limit the scope for free-riding that may arise because of the
MFN rule and a desire to obtain “payment” for trade liberalization in the form of better access to foreign markets.As discussed by Finger and Winters
in Chapter 7 of this volume, a rationale for reciprocity can be found in the political-economy literature. The costs of liberalization generally are concentrated in specific industries, which often will be well organized and opposed to reductions in protection. Benefits, although in the aggregate usually greater than costs, accrue to a much larger set of agents, who thus do not have a great individual incentive to organize themselves politically. In such a setting, being able to point to reciprocal, sector-specific export gains may help to sell the liberalization politically. Obtaining a reduction in foreign import barriers as a quid pro quo for a reduction in domestic trade restrictions gives specific export-oriented domestic interests that will gain from liberalization an incentive to support it in domestic political markets.
A related point is that for a nation to negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral liberalization. Reciprocal concessions ensure that such gains will materialize.
Binding and Enforceable Commitments
Liberalization commitments and agreements to abide by certain rules of the game have little value if they cannot be enforced. The nondiscrimination
principle, embodied in Articles I (on MFN) and III (on national treatment) of the GATT, is important in ensuring that market access commitments are implemented and maintained. Other GATT articles play a supporting role, including Article II (on schedules of concessions). The tariff commitments
made by WTO members in a multilateral trade negotiation and on accession are enumerated in schedules (lists) of concessions. These schedules
establish “ceiling bindings”: the member concerned cannot raise tariffs above bound levels without negotiating compensation with the principal suppliers of the products concerned. The MFN rule then ensures that such compensation—usually, reductions in other tariffs—extends to all WTO
members, raising the cost of reneging. Once tariff commitments are bound, it is important that there be no resort to other, nontariff, measures that have the effect of nullifying or impairing the value of the tariff concession. A number of GATT articles attempt to ensure that this does not occur. They include Article VII (customs valuation), Article XI, which prohibits quantitative restrictions on imports and exports, and the Agreement on Subsidies and Countervailing Measures, which outlaws export subsidies for manufactures and allows for the countervailing of production subsidies on imports that materially injure domestic competitors (see Chapter 17, by Pangestu, in this volume). If a country perceives that actions taken by another government have the effect of nullifying or impairing negotiated market access commitments or the disciplines of the WTO, it may bring this situation to the attention of the government involved and ask that the policy be changed. If satisfaction is not obtained, the complaining country may invoke WTO dispute settlement procedures, which involve the establishment of panels of impartial experts charged with determining whether a contested
measure violates the WTO. Because the WTO is an intergovernmental agreement, private parties do not have legal standing before the WTO’s dispute settlement body; only governments have the right to bring cases. The existence of dispute settlement procedures precludes the use of unilateral retaliation. For small countries, in particular, recourse to a multilateral
body is vital, as unilateral actions would be ineffective and thus would not be credible. More generally, small countries have a great stake in a
rule-based international system, which reduces the likelihood of being confronted with bilateral pressure from large trading powers to change policies that are not to their liking.
Enforcement of commitments requires access to information on the trade regimes that are maintained by members. The agreements administered
by the WTO therefore incorporate mechanisms designed to facilitate communication between WTO members on issues. Numerous specialized
committees, working parties, working groups, and councils meet regularly in
. These interactions allow for the exchange of information and Geneva
views and permit potential conflicts to be defused efficiently. Transparency is a basic pillar of the WTO, and it is a legal obligation, embedded in Article X of the GATT and Article III of the GATS.WTO members are required to publish their trade regulations, to establish and maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO. These internal transparency requirements
are supplemented by multilateral surveillance of trade policies by WTO members, facilitated by periodic country-specific reports (trade policy reviews) that are prepared by the secretariat and discussed by the WTO General Council. (The Trade Policy Review Mechanism is described in
Box 6.1.) The external surveillance also fosters transparency, both for citizens of the countries concerned and for trading partners. It reduces the scope for countries to circumvent their obligations, thereby reducing uncertainty regarding the prevailing policy stance. Transparency has a number of important benefits. It reduces the pressure on the dispute settlement
system, as measures can be discussed in the appropriate WTO body. Frequently, such discussions can address perceptions by a member that a
specific policy violates the WTO; many potential disputes are defused in informal meetings in
. Transparency is also vital for ensuring “ownership” of the WTO as an institution—if citizens do not know what the organization does, its legitimacy will be eroded. The trade policy reviews are a unique source of information that can be used by civil society to assess the implications of the overall trade policies that are pursued by their governments. From an economic perspective, transparency can also help reduce uncertainty related to trade policy. Such uncertainty is associated with lower investment and growth rates and with a shift in resources toward nontradables (Francois 1997). Mechanisms to improve transparency can help Geneva
lower perceptions of risk by reducing uncertainty. WTO membership itself, with the associated commitments on trade policies that are subject to binding
dispute settlement, can also have this effect.
A final principle embodied in the WTO is that, in specific circumstances, governments should be able to restrict trade. There are three types of provisions in this connection: (a) articles allowing for the use of trade measures to attain noneconomic objectives; (b) articles aimed at ensuring “fair competition”; and (c) provisions permitting intervention in trade for economic reasons. Category (a) includes provisions allowing for policies to protect public health or national security and to protect industries that are
seriously injured by competition from imports. The underlying idea in the latter case is that governments should have the right to step in when competition becomes so vigorous as to injure domestic competitors.
Although it is not explicitly mentioned in the relevant WTO agreement, the underlying rationale for intervention is that such competition causes
political and social problems associated with the need for the industry to adjust to changed circumstances. Measures in category (b) include the right to impose countervailing duties on imports that have been subsidized and antidumping duties on imports that have been dumped (sold at a price below that charged in the home market). Finally, under category (c) there are provisions allowing actions to be taken in case of serious balance of payments difficulties or if a government desires to support an infant industry.
The Uruguay Round and the establishment of the WTO changed the character of the trading system. The GATT was very much a market access–oriented institution: its function was to harness the dynamics of reciprocity for the global good. Negotiators could be left to follow mercantilist logic, and the end result would be beneficial to all contracting parties. This dynamic worked less well for developing countries, where the burden of liberalization rested much more heavily on the shoulders of governments. Even if they wanted to, their scope to use the GATT was often limited because exporters had fewer incentives and were less powerful than in industrial countries. The reciprocal, negotiation driven dynamic also worked much less well for issues that were “lumpy” and where the terms of the debate revolved around what rules to adopt, not around how much of a marginal change was appropriate. Disengagement was not an option during the Uruguay Round (because of the “single undertaking”), so the task was to come up with a balanced package that ensured gains for all players. One can argue whether the package that emerged from the round was a balanced one; views on this point differ widely. Whatever the conclusion, it is clear that the approach taken toward ensuring and supporting implementation of WTO agreements by developing countries was not an effective one. Limiting recognition of this problem to the setting of uniform transition periods was clearly inadequate. The case for uniform application of agreements that involve reducing trade barriers—tariffs and a nontariff barrier— is very strong. But in other areas requiring minimum levels of institutional capacity, such as customs valuation, a good case can be made that implementation should be linked to national capacity and international assistance (Hoekman 2002). A lesson from post–Uruguay Round experience and thinking is that trade policy should be made more central to the development process and development strategies. This needs to be done at both the national and international levels. At the national level it is necessary in order to ensure that governments have a basis on which to resist efforts to negotiate agreements in an area. Governments must be able to identify what types of rules will promote development and what types would lead to an inappropriate use of scarce resources. At the international level such a change is necessary in order to enhance the communication between trade and development assistance bodies in member countries. One reason for the implementation assistance problems that were encountered in the late 1990s was that the best-endeavors commitments on assistance that were made by industrial country trade negotiators were not “owned” by counterpart agencies in their governments that controlled development assistance money. Progress on both fronts would do much to ensure that future negotiations do not give rise to problems of the type that were created in the Uruguay Round.
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