The alphabet soup of multilateral organizations dealing with international economics (the IMF, the OECD, the G8 and the WTO, to name but a few) is inherently confusing to the casual observer. Indeed, most people know little more about the World Trade Organization (WTO) than the impressions they glean from headlines about seemingly banal disputes over trade in bananas and beef. Yet, alarmingly, globaphobes the world over are becoming increasingly vocal in their criticism of the WTO in the run up to its third ministerial meeting in Seattle later this month. These groups and individuals wrongly portray the WTO as the "tool" of big business and argue that it is, among other things, destroying jobs, harming the environment, and lowering labor standards across the world. As the process of globalization advances, the WTO will have an increasingly important role to play in refereeing the global economy. If we are to have an informed, constructive debate about that role, policymakers and the wider public need a clear, impartial understanding of the current structure, power, and responsibilities of the WTO.
The WTO does not and cannot dictate national government policy. Rather, it is
a system of rules designed to ensure open, fair, and undistorted commerce at the international
level. Sovereign nations choose individually to become members of the WTO and to play by
its rules with 134 joining to date and many more waiting in line.1 If a country wishes to pursue a policy that does not fit within WTO rules, it is free to do so, but must then pay "compensation" (usually in the form of higher trade barriers from other members).
The WTO is a new institution and represents a distinct change from the prior
system. Though the idea for a world trade body was raised in the 1940s, the WTO did not formally come into existence until 1995. Prior to this, global trade was governed by a treaty the General Agreement on Tariffs and Trade (GATT) with no formal institutional structure. Hence, many of the mechanisms enshrined in the WTO will need adapting and refining as the global
economy develops over the coming years.
We need a constructive debate about the appropriate role of the WTO in the
emerging global economy. There are several areas where constructive criticism of the WTO system is useful, including: streamlining the way nations settle disputes; strengthening the capacity of developing countries to participate in WTO negotiations and disputes; and increasing openness and transparency of WTO procedures and decision-making. Policymakers must address
these issues and advance constructive agendas to counteract the more extreme and globaphobic
views voiced by critics.
The notion of a world trade organization is not a new one. Indeed, the architects of the
postwar Bretton Woods system initially proposed the creation of an International Trade
Organization (ITO) to address issues as wide ranging as restrictive domestic business
practices, commodity agreements, labor standards, and international investment
rules.2 The charter for this organization was never approved by the U.S. Congress and thus the proposal failed. The global trade community resorted instead to ratification of the GATT a minimalist treaty covering the nuts and bolts of trade such as
tariffs, subsidies, quantitative restrictions, antidumping, and state trading.
The creation of the WTO on January 1, 1995, was a very significant, but largely
ignored, change to the global trading system. The WTO is an institution charged with enforcing
global trade rules and, as such, has greater power than the GATT. For example, under the
GATT treaty, any one member nation could veto joint actions or decisions and thus block policy
changes and prevent the resolution of disputes. Under the new WTO, member states lost this right to veto and face the possibility of "losing" a dispute and being forced to change their behavior or pay compensation.
The WTO is not a huge bureaucracy. It employs approximately 500 people at its
headquarters in Geneva and has an annual budget of 117 million Swiss Francs (roughly
$180 million). By comparison, the International Monetary Fund (IMF) has a staff of 2,700 and
annual budget of $48 billion. The WTO is also much smaller than most federal government
departments for example, the U.S. Department of Education has a staff of 4,900 and an
annual budget of $38 billion.3 The staff of the WTO
Secretariat in Geneva is primarily engaged in supplying technical support for the various councils, committees, and ministerial conferences; providing technical assistance for developing countries; and analyzing world trade.
The system of rules enshrined in the WTO is based on three core principles:
1. Most Favored Nation Treatment (MFN). This principle, now known in
the United States as normal trade relations (NTR), states that members of the WTO have to
treat all other members equally countries cannot discriminate between trading partners.
For example, if a country lowers the customs duty on an import from one country, it
has to do the same for all countries that belong to the WTO. In general, this principle has
helped ensure that trade liberalization is genuinely multilateral and as broad as
possible, though there are exceptions for regional trading blocs (like the European Union and
NAFTA) and anti-competitive practices (such as dumping).
2. National Treatment. This principle states that imported and locally
produced goods should be treated equally once they are in the same market. For example, once a
car produced in the United States has crossed the border and entered the Mexican market,
it is subject to the same laws, regulations, and taxes as a car produced in Mexico. This
principle helps to ensure that one of the main benefits of trade increased competition from foreign suppliers fully applies in practice.
3. Binding commitments. This principle ensures that when countries agree
to reduce their barriers to trade, they promise not to increase those barriers again at some future
date. For industrial goods, this usually means binding tariff rates to a specified ceiling effectively
promising that tariffs will not be raised above that level. This principle helps ensure
stability and predictability in international markets, encouraging long-term strategic planning and
investment.4
These three principles have been remarkably successful in reducing global barriers to
trade and investment and encouraging trade. Since the inception of GATT in 1948, there
have been eight rounds of international trade negotiations, and average tariffs have fallen
from 40 percent in 1940 to about 4 percent today, equivalent to a tax cut of $100-200 billion a
year, according to the World Bank. World exports have increased from 7 percent to more
than 14 percent of global output over the same period.5
The WTO builds on these three basic principles and formalizes much of the earlier
work undertaken through the GATT. The WTO encompasses a formal institutional
structure and a strengthened and overhauled dispute settlement process. It monitors
trade negotiations and the implementation of trade agreements, and helps develop a
broader agenda of trade policy formation and analysis.
The new dispute settlement process instituted with the creation of the WTO marks a
shift from an approach based on consensus to one based on formal litigation. Under
the new rules, members may bring a challenge if another member is seen to be in
violation of WTO rules. A "dispute panel" of experts is convened, hears both sides, and makes a ruling. If the defendant country wishes, it may appeal and an "appellate panel" then
has to make a second or appeal ruling. Decisions are binding. If the panel rules against a
member country, that country must modify their offending regulations, compensate
the complaining parties, or face retaliation in the form of increased tariffs on their
exports.
Since the creation of the WTO in 1995, 60 cases have been completed through the
WTO dispute settlement process.6 Thirty-
one cases involved the United States, with the United States formally winning
eight and losing five. The majority of disputes (18 of the 31 involving the United
States) were, however, settled by negotiation and did not reach the point of a
panel decision.
One area of potential reform of this process is the selection and operation of dispute
settlement panels. The current pool of potential panelists is fairly limited and not
widely representative of the world economy. These members face limited resources (many
working in this capacity only part time) and severe time constraints when making decisions.
Moreover, hearings are closed to the public and official documents are rarely released. Many
NGOs have called for the formal acceptance of "amicus briefs" by interested outside parties to
disputes. Though such briefs were accepted in a recent panel deliberation, the WTO has made not
made this a formal policy.7
Environment. The founding charter of the WTO formally addresses the
intersection of trade and the environment. The opening paragraph states that parties
to the WTO should "allow for the optimal use of the world s resources in accordance with
the objective of sustainable development, seeking to both protect and preserve the
environment." The rules enshrined in the WTO also allow exceptions, specifically to
achieve environmental objectives. Countries may impose trade measures "necessary
to protect human, animal, or plant life or health" or "relating to the conservation of
natural resources." The WTO also established a Committee on Trade and the Environment
(CTE) to look more closely at areas of policy overlap.
Cooperation with Other Institutions. The founding charter of the WTO also
directs the trade body to work with the IMF and the World Bank to achieve greater
coherence in global economic policymaking. Such links and cooperation have been slow to evolve and would do much to ensure a more balanced approach to economic development and
growth. Many commentators have also suggested that the WTO should work with other international agencies such as the International Labor Organization (ILO).
The World Trade Organization is a cooperative, multinational institution designed
to protect and promote a rules-based system of global commerce. Though the organization
itself is young, its rules, statutes, and regulations have evolved over the last forty years
and have formed the basis of the international trade system since the Second World
War. In recent years, critics on both the left and the right have criticized the WTO on a
range of issues claiming it undermines hard-won local laws, degrades the environment,
and destroys jobs. Much of this criticism is based on fundamental misunderstandings
about what the WTO does and does not do. Increased openness and transparency on
the part of the WTO would not only make the institution more accessible to
non-specialists, it would increase common understanding of its vital role in the international economy. Such an understanding would then allow an informed debate about ways to strengthen and reform the WTO to better achieve the ultimate goal of raising living standards well into the next century.
The WTO has an increasingly useful and expanding Web site with sections covering the
legal basis, history, structure, and policy propositions for the upcoming Ministerial
Meeting in Seattle at www.wto.org
A good history of the international economic system can be found in "The Bretton
Woods-GATT System: Retrospect and Prospect After Fifty Years," edited by Orin Kirshner. (M.
E. Sharpe Inc, 1995).
1. Currently more than 30 countries have formal application procedures pending
with the WTO.
2. These issues were covered in separate chapters of the Havana World Trade
Charter, which was never ratified.
3. Thirty-six hundred of these are employed in Washington, DC, with the rest
employed across the states. Source: U.S. Department of Education website:
4. A country can change its bindings but only after negotiating with its trading
partners and probably facing the costs of compensation.
5. The World in 2020: Towards a New Global Age, Organization for Economic
Cooperation and Development, Paris, 1997.
6. As of September 1, 1999. Over 100 cases are currently pending, with 55
involving the United States. For detailed information see
7. The case was the shrimp-turtle case between the United States and India,
Malaysia, Pakistan, and Thailand. Many developing countries oppose the release of official
documents, arguing that they may include sensitive business or political information.
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