At the United Nations conference held at Geneva in 1947, twenty three countries including United States of America signed General Agreement on Tariffs and Trade (GATT). During the same year, a charter was put on the table for setting up, within the United Nations Organisation, of a new agency to be called International Trade Organisation (ITO). Fifty nations signed the charter in Havana the following year, but it was never subsequently ratified by the required number of countries. The purpose of the agreement was to promote international trade free of barriers in the aftermath of World War II, and to draw up proposals for the implementation of policies based on those principles set in the agreement. It covered all the issues like tariffs, quotas, taxes, international commodity agreements and whatever was considered to have a bearing on the development of international trade, and was based on policies of non-discrimination and tariff reductions.
GATT has been expanded and updated through a series of multi-year conferences. The most famous have been the Kennedy Round (1963-1967), the Tokyo Round (1973-1979), and the Uruguay Round (1986-1994). The Uruguay Round ended with the decision to dissolve GATT and establish the more powerful and more institutionalised World Trade Organization (WTO) in 1995. The WTO replaced GATT as an international organization, but the General Agreement still exists as the WTO’s umbrella treaty for trade in goods. Trade lawyers distinguish between the GATT 1994, the updated agreement, and the GATT 1947, the original agreement which is still the heart of GATT 1994.
The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30 others are negotiating membership. By definition, the World Trade Organization (WTO) deals with the rules of trade between nations at a global or near-global level. But there is more to it than that. There are a number of ways of looking at the WTO. It’s an organization for liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a place for them to settle trade disputes. It operates a system of trade rules. (But it is not a Superman, just in case anyone thought it could solve — or cause — all the world’s problems!). The WTO is like a table. People sit round the table and negotiate, and resolve trade disputes.
Essentially, the WTO is a place where member governments try to sort out the trade problems they face with each other. Therefore, the first step is to talk. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. Where countries have faced trade barriers and wanted them lowered, the negotiations have helped to liberalize trade. But the WTO is not just about liberalizing trade, and in some circumstances its rules support maintaining trade barriers — for example to protect consumers or prevent the spread of disease.
WTO also ensures that individuals, companies and governments know what the trade rules are around the world, and gives them the confidence that there will be no sudden changes of policy. In other words, the rules have to be “transparent” and predictable.
/ Characteristics of WTO Trading System
The World Trade Organisation is based on the following core-principles or characteristics:
Trade without discrimination:
The main principle in the charter of the World Trade Organisation is to promote international trade without any discrimination. This principle is further elaborated into two – MFN and national treatment:
(a) Most-favoured-nation (MFN) – treating other people equally: Under the WTO agreements, countries cannot normally discriminate between their trading partners. If a member country grants a special favour (such as a lower customs duty) to another member country, she has to do the same for all other WTO members.
This principle is also known as most-favoured-nation (MFN) treatment. It is so important that it is the first article of the GATT, which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
However, some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group —discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.
(b) National treatment – Treating foreigners and locals equally: Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.
National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.
First of all it should be noted here that the WTO is not for free trade at any cost. It is all about lowering trade barriers between trading countries. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed.
Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through ‘progressive liberalization’. Developing countries are usually given longer to fulfil their obligations.
Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition — choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable.
One way of making investment stable and predictable is to ‘bind’ the member countries to their commitments. For example, ceilings on customs tariff rates, etc. However, a country can change its bindings, but only after negotiating and compensating its trading partners.
There are other ways as well to improve predictability and stability. One way is to discourage the use of quotas and other measures used to set limits on quantities of imports. Another way is to make countries’ trade rules as clear and transparent as possible. Many WTO agreements require governments to disclose their policies and practices publicly within the country or by notifying the WTO. The regular surveillance of national trade policies through the Trade Policy Review Mechanism provides a further means of encouraging transparency both domestically and at the multilateral level.
Promoting fair competition:
WTO is a system of rules dedicated to open, fair and undistorted competition. The rules on non-discrimination — MFN and national treatment — are designed to secure fair conditions of trade. So these rules also apply on dumping and subsidies. Many of the other WTO agreements aim to support fair competition, for example, in agriculture, intellectual property, services, etc.
Encouraging development and economic reform:
The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements. Over 3/4th of WTO members are developing countries and countries in transition to market economies. During the seven and a half years of the Uruguay Round, over 60 of these countries implemented trade liberalization programmes autonomously. At the end of the Uruguay Round, developing countries were prepared to take on most of the obligations that are required of developed countries. But the agreements did give them transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions — particularly for the poorest or ‘least-developed’ countries such as Bangladesh, Cambodia, Djibouti, Central African Republic, Guinea, Madagascar, Myanmar, Nepal, Uganda, etc. A ministerial decision adopted at the end of the round says better-off countries should accelerate implementing market access commitments on goods exported by the least-developed countries, and it seeks increased technical assistance for them. More recently, developed countries have started to allow duty-free and quota-free imports for almost all products from least-developed countries.
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The following common benefits of the WTO’s trading system doesn’t claim that everything is perfect, otherwise there would be no need for further negotiations and for the system to evolve and reform continually:
helping trade to flow smoothly, and
providing countries with a constructive and fair outlet for dealing with disputes over trade issues.
It is also an outcome of the international confidence and cooperation that the system creates and reinforces.
Around 300 disputes have been brought to the WTO since it was set up in 1995. Without a means of tackling these constructively and harmoniously, some could have led to more serious political conflict.
In addition, smaller countries can perform more effectively if they make use of the opportunities to form alliances and to pool resources. Several are already doing this.
Superficially, restricting imports looks like an effective way of supporting an economic sector. But it biases the economy against other sectors which shouldn’t be penalized — if you protect your clothing industry, everyone else has to pay for more expensive clothes, which puts pressure on wages in all sectors.
Governments need to be armed against pressure from narrow interest groups, and the WTO system can help. The GATT-WTO system covers a wide range of sectors. So, if during a GATT-WTO trade negotiation one pressure group lobbies its government to be considered as a special case in need of protection, the government can reject the protectionist pressure by arguing that it needs a broad-ranging agreement that will benefit all sectors of the economy.
The WTO agreements help in reducing corruption and bad government. But, quite often, governments use the WTO as a welcome external constraint on their policies. This cannot be done because it would violate the WTO agreements.
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of the WTO are often based on fundamental misunderstandings of the way the WTO
works. Following are most common
misunderstandings or criticisms on WTO:
Moreover, the rules written into the agreements allow barriers to be lowered gradually so that domestic producers can adjust.
The WTO does not support the giant multinational companies. The WTO is an organisation of governments. The private sector, non-governmental organizations and other lobbying groups do not participate in WTO activities except in special events such as seminars and symposiums.