World Trade Organization Research Paper

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1.    Background  Objectives

The World Trade Organization (WTO) was formed in 1995 as an outgrowth of earlier arrangements set up by the  governments  of 23 countries  under  the  General Agreement on Tariffs and Trade (GATT) in 1947. The objectives set for the WTO largely mirror those which emerged in the postwar  years for the GATT.  Prior to 1947, when the  GATT  was formed,  there  had  been substantial discussion  between  governments   of  the appropriate postwar financial and trade arrangements which would govern the global economy.  In the area of international finance,  the International Monetary Fund  had  been formed  with a mandate to maintain exchange  rate  parities,  and  to  do  this  by extending loans to countries  coming under exchange rate pressure.  These,  in  turn,  were  to  be  repaid  when  such pressures  subsequently   receded.  In  the  area  of  international development and infrastructure financing, the World Bank had been founded  with the objective of providing  financing  for roads,  bridges, dams,  and other  forms  of  infrastructure  through  concessional financing.

These arrangements were put  in place at the 1944 Bretton   Woods   Conference   but  in  the  trade   area things  were left hanging  for  some  time  further.  By early 1946, however, there was movement to also negotiate   a  charter   for  a  wide-ranging   new  international  trade  organization which  would  lay  down rules  concerning  the  conduct  of international trade and allowable interventions in trade by national governments.    This   negotiation   was   initiated    in Havana, but  as 1947 advanced  it became  clear to a subset of countries  that  this negotiation was in some difficulty in being too broad, and having a focus which was excessively interventionist. In the fall of 1947, a number  of countries  therefore  decided to engage in a separate   negotiation  which,   among   other   things, would provide  a framework  for the recording  of the results of an initial tariff cutting conference which had been planned.  The GATT  was born  of this separate negotiation, and as a temporary arrangement pending the ratification of the wider International Trade Organization (ITO).

The ITO charter was not ratified by the US Congress in 1951 on  the  grounds  that  it contained  too  many compromises with free trade principles. So the GATT, born  as  a  temporary arrangement, was  left  as  the major arrangement in the postwar  years between national  governments  available  to guide the conduct of global international trade  policy. At first seen as a minimalist  organization, with  only  limited  expectations  of it, it subsequently  grew through a series of successful negotiating rounds which were fueled in the1950s by the creation of the European Community and,  to  a lesser degree,  the  entry  of Japan  into  the GATT in 1955. This Round-based liberalization reached its high point  in the 1960s with the Kennedy Round  (1964–7) of trade  negotiations, during  which there  were  substantial reductions   in  tariff  barriers, largely attributed at the time to the cooperation negotiated   with  the  framework  of  the  GATT.  The later Kennedy  Round  (1973–9) was to a large degree an echo of the Kennedy Round, and the ambitious and still controversial later Uruguay Round (1986–94) was driven by the perceived need to broaden  trade negotiations beyond now low tariffs.

2.    Basic Elements Of The WTO Structure

In  essence, the  GATT  as it evolved after  1947 and became permanent in the World Trade  Organization in 1994 embodies three key elements which each contribute to oversight of the conduct  of world trade and  the  ways in which  national  governments  allow each other to intervene in that trade. The first is a series of mutually agreed limits (or rules) on the use of trade restricting  measures  by national  governments.  These were initially set out in the General  Agreement  itself, but have been interpreted and elaborated on both by further negotiation and through the dispute settlement process within the GATT.  The second is progressive liberalization, to be achieved through negotiations on trade barriers  and reductions  in trade barriers.  These negotiating  Rounds,  guided  by reciprocal  exchanges of  concessions  between  member  governments,   occurred  in the 1960s and  1970s (in the Kennedy  and Tokyo Rounds), and in the 1980s through to 1994 (in the Uruguay  Round).

The third element in the GATT structure,  and subsequently  incorporated into the WTO, is an institutional presence maintained through the operation of its  Secretariat. Importantly,  the  Secretariat   largely oversees  the  conduct   of  dispute  settlement  panels, which, in effect, define the enforcement mechanism for the rules of the trading system within the WTO system. These  dispute   settlement   panels   have   accelerated greatly in their use in recent years, culminating in decisions in a number  of key areas, including recently in  banana  trade   (see  the  statement  by  the  WTO Director General to the WTO General Council, March 8, 1999).

3.    Broader Objectives

While these three elements of rules, progressive liberalization, and dispute settlement define the structure  of  the  WTO,  at  a  broader level its  objectives reflect a firm belief that  it is important to restrict  the use of new trade  measures  globally  so as to prevent outbreaks of retaliatory trade  wars that  some people think characterized the 1930s. At this time, there was a rapid increase in trade barriers  in the United  States mandated under  the 1930 Smoot-Hawley Tariff Act, and through the retaliation which followed in Europe. In the 1930s depression,  world trade  volumes shrank rapidly, some suggest by as much as 70 percent over a two  year  period  (Kindleberger  1973). A central  objective therefore set for the GATT  was to prevent the world economy from going back to anything reminiscent of the 1930s, fueled by breakdown in international cooperation in the trade area.

Another   broad   objective  relates  to  the  potential gains from progressive global trade liberalization. It is widely believed in many circles that international trade represents  the engine of growth  for many economies around the world. While this is still contested by some, those involved with the WTO often point to the much more rapid growth of trade than income in the world economy  since 1945, and  the accelerating  growth  of trade  in recent years. In the mid-1990s, for instance, trade  growth  was approximately three  times income growth in the global economy, and many attribute this to the liberalization achieved within the trading system under  the WTO in these years (UNCTAD Handbook of International  Trade  and Development 1999, 1993, 1995).

While these two overarching  objectives, preserving international cooperation and going further  with new liberalization, are generally agreed to be those under- pinning the GATT/WTO system, there has been much debate  over other  objectives  for global  trade  policy. One  concerns   the  relationship  between  trade   and development   and  whether  the  rules  of  the  trading system through WTO should be designed so as to help fuel the growth and development of developing countries,   and   facilitate   their   wider  participation in the trading  system, and  hence the achievement  of growth and development. The developing countries generally believe that  growing trade  is an important part of their developmental  process, and have aggressively  pursued   their   interest   in  this  set  of  issues in the WTO in recent years. At the same time, many cling to longstanding positions that the WTO (and the GATT)  has de facto operated as a rich man’s club, and that  poorer  countries  do not actively participate in it because they are effectively excluded from it because of the structure of GATT bargaining (Srinivasan 1998).

Another   area  which  has  taken  on  a  high  profile recently  concerns  the  use of trade  policy to  achieve nontrade objectives. These considerations came into play in the Uruguay  Round  with the introduction of intellectual  property into the trade  negotiations. The idea was that international norms and standards could be  agreed  in  intellectual  property  protection  which could  then  be  enforced  through dispute  settlement allowing retaliatory actions  covering trade  in goods. The  discussion  of  international trade  policy  instruments   in  this  case  was  not   so  much   to  achieve liberalization and  new growth  of trade  as to enforce arrangements in a nontrade area  through the use of trade  threats  and  sanctions.  Some trade  economists have expressed concerns over these developments since they  raise  the  prospect  of higher  rather  than  lower trade barriers from the WTO because of the linkage of trade to nontrade areas.

Beyond intellectual  property, a similar structure  of linkage prevails in other  related  proposals  which are now before the WTO. These were at the heart  of the conflict  at  the  1999 Seattle  Ministerial  meeting  last autumn,  and   involved  the  proposed   use  of  trade measures to achieve environmental objectives and the use  of  trade   measures  to  enforce  labor   standards (UNCTAD 1999).

In summary, the WTO reflects a structure  based on three pillars which is widely believed by many economists to have been extremely successful in most of the postwar  years  in  both  promoting world  trade  and preventing any increases in trade barriers.  The broadening  of the  WTO  agenda  in the  Uruguay  Round, however, has converted it into much more than a trade organization. It now deals with the new issues which were introduced into  the  Uruguay  Round  (services, investment, and intellectual property) and threatens to broaden  further  to  also  cover  environmental  issues and labor standards (Crome 1998).

4.    Current Issues In The WTO

The WTO currently  faces a range of issues, many of which have their origins in previous negotiations and, to   a   large   degree,   the   Uruguay    Round,   while others  span  the  openness  of WTO  processes  (transparencies),  the  political  acceptability   of  WTO  decisions and  NGO  participation, even to the survivability of the WTO itself. Shorter term, key issues lie in the area of agriculture;  a key sector for global trade, insofar   as   it   was   effectively   excluded   from   the GATT / WTO system in 1947 by provisions included in GATT  Articles 11 and 16. GATT  Article 11 specifies that  all use of  import  quotas  is to  be banned,  but special provisions  apply to allow these to be used in agriculture;  GATT  Article 16 has similar provisions applying to export subsidies. The reasons for these exemptions for agriculture  reflect a belief in 1947 that the agricultural sector had been vital to the war effort and  cultural  identification with the family farm  and the agricultural sector as central  to national  identity justify protection. In addition, some countries (such as Japan)  held the view that  national  security objectives implied  that  countries  should  be allowed  to be self-sufficient in agriculture  through trade protection.

For   all  these   reasons,   agriculture   was  initially outside  the  framework  of the  GATT  structure  and subsequent developments in the trading system including a special GATT  waiver for the United  States in 1955 and the 1957 European Common  Agricultural Policy further intensified this situation (Ritson and Harvey 1997). Europe, which was a net food importer of  large  proportions  in  the  1950s,  first  excluded imports under the Common  Agricultural Policy. Then with high prices in their  domestic  support  programs and stockpiles, Europe  became a significant net food exporter.  This led to global export  subsidy wars and major  conflict  more  generally  in  agriculture  in  the 1980s.

The Uruguay  Round  represented  the first attempt to  deal with agriculture  in a substantive  way in the GATT,  and introduced new disciplines. These left the original  concessions  in  place  but  put  in  place  an overarching  structure  which aimed to reduce levels of support  to  farmers,  to  cut  export  subsidies,  and  to convert all existing trade restrictions  into transparent border measures (tariffication). Agriculture,  however, was  left  as  an  area  after  the  Uruguay   Round   for further  negotiation (Hathaway 1987). Approaching the  Seattle  Ministerial  meeting,  agriculture  and  services largely define the so-called ‘built-in agenda’ for future negotiations under the WTO. (For information on built-in  agenda,  see WTO  Secretariat’s  note.  Implementation of  the  provisions  for  Review,  Future Work  or  Negotiations in the  WTO  agreement  and related  decisions  and  Declarations of  7  May  1998 (WTO  document  WT / L / 271).) New  conflicts  cover such matters  as to whether  or not  there should  be a ban   on  export   subsidies,  a  ban   which  given  the European structure  of agricultural supports would be difficult for them to implement.  The issue of and the rationale for agricultural protection on existence value grounds  is a further  source of conflict.

Another  area  of current  discussion  is textiles and clothing. In the Uruguay  Round, the developed countries  agreed to terminate their use of textile and clothing trade restrictions under the Multifibre Arrangement  (Trela  1994). These restraints  go back  to the early 1960s, when a series of short-term agreements between the US and Asian exporters became subject to mutually agreed trade restraint on the grounds of allowing time for domestic adjustments which would accompany   free  trade  to  take  place  in  the  United States. The initial time agreed was one year, but this was first renewed and then converted into longer term agreements of five years, and subsequently  multi-lateralized  to include other  OECD  countries  in 1974 (Whalley and Hamilton 1996).

In 1994 under  the Uruguay  Round  decisions,  the developed countries agreed to terminate the Multifibre Arrangements (MFA), but at the same time have been effectively tightening  their  trade  restrictions  they are committed  to eliminate,  despite an agreed phase-out plan for the MFA. Many developing countries are therefore skeptical over what may happen  in the year 2004. Developing country negotiators have compared the developed country  position  on MFA  elimination as akin to walking off a cliff (Nguyen et al. 1993). How this is to be resolved is yet another  issue.

New  issues also  pose  future  issues for  the  WTO despite their inclusion in the Uruguay  Round  agreement.  These include  services, investment,  and  intellectual property. In the case of intellectual  property, the  phase-in  period  is long  with  special  delays  on implementation given for certain types of developing countries. Its full impact will be felt in the twenty-first century. In services, a whole structure  of restraint  on trade measures was agreed, but very little substantive liberalization to include in the structure,  and  hence, what happens  next is very much an issue of debate.

Future issues also  include  the  trade  and  environment and later standards issues which have been at the heart of a lot of the discussion and debate in Seattle. In the environmental area, the issue is the extent to which trade-restricting measures can be used to achieve environmental objectives. The trade and environment conflict was greatly accelerated in the early 1990s because  of a dispute  between  the United  States  and Mexico  over  the  use  of  trade  restrictions   on  tuna which had been caught in ways which generated large incidental kills of dolphin  (the activities of the GATT (1990)).  The  measures  mandated by  US  courts  in response  to  actions  taken  under  US law by various environmental NGOs in the US were subsequently not deemed to be GATT  compatible  by a GATT  dispute panel   (Seattle   Ministerial   Conference—Trade and Environment: Proposals  on the Possible Implications for  Developing  Countries). The  GATT  and  subsequently  the  WTO  acquired  a reputation among  environmental  groups   as  being  environmentally unfriendly and hostile to environmental considerations. This perception  persists and was in part behind some of the conflict which prevailed in Seattle. How this is all to be worked out in the future is now a central issue for the WTO, who in turn would perhaps like to see the trade  and  environment issue  diffused  with  the  environmental problems  dealt with in another  forum.

The trade and labor standards is also another  high-profile issue because of the claim in some circles and primarily in Europe  that imports occur from factories where child labor  is used in unacceptable conditions: long working days, poor lighting, children who could be subject to deformities as a result of their activities in carpet factories and other locations.  The free traders, however,  see this  as a dangerous  form  of new protectionism which will be supported by labor groups in OECD   countries   who  have  an  incentive  to  show opposition to imports from countries with low wages.

All of these, then,  are current  issues, and  current matters for the GATT and the WTO. The overarching issue, however, remains one of the contribution of the WTO to global economic performance. In the 1930s, Ragnar Nurkse  posed the question  of whether or not trade  was the engine or handmaiden of growth;  did trade drive growth as being a major, perhaps even sole, determinant within  national  economies  or did trade merely grow because the wider economies themselves were growing? This question posed by Ragnar Nurkse has  never  been  adequately resolved  in the  research community,  but strong views prevail on these matters nonetheless. Free traders generally believe that strong economic performance requires an open trade regime. This is despite the performance in Japan  in the 1950s and  1960s  and  in  some  other  countries   that  have adopted  more  protectionist trade  for them,  and  the fact  that   some  countries   have  liberalized  and  not grown. On the other hand, it seems clear that countries such  as  Korea  who  have  generally  moved  towards strong  outward  orientation and  Taiwan  have grown rapidly as a result of their trade orientation.

The stance one takes on the issue of the role of trade in future global growth largely determines  how much importance one attaches to the WTO. As a vehicle for preventing the world economy reverting to the 1930s, as part  of the  mechanism  which avoided  the  major cataclysmic  recessions  in the  1940s and  1950s comparable  to  the  1930s,  and  as  a  vehicle  for  fueling substantial liberalization through the 1960s and 1970s, it  seems  clear  that  the  GATT  and  the  WTO  have much pride that they can claim in their actions. However, issues such as whether  or not the system favors rich countries over poor countries, whether the system is inequality  enhancing  at  the  expense  of the  poor, and whether the system is closed and highly nontransparent and hence not in accordance  with principles of good governance,  remain.  How these issues are to be worked  out  will largely determine  both  the acceptability and the profile of the WTO in the years which follow. The attempts that follow in the next few years to  move  forward   from   the  Seattle  Ministerial   of December,  which in the short  term has proved  to be destructive  for the WTO, will largely determine  both the acceptability  and  the profile  of the WTO  in the future.

Bibliography:

  1. Crome J 1998 The Present Outlook for Trade Negotiations in the World Trade Organization. World Bank, Geneva
  2. Hathaway D E 1987 Agriculture and the GATT: Rewriting the Rules. Institute of International Economics, Washington, DC
  3. Kenen P B (ed.) 1994 Managing the World Economy: Fifty Years After Bretton Woods. Institute  for International Economics, Washington, DC
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