This International Explainer takes a closer look at the purpose, rules and controversies of the WTO.Q: What is the WTO?
The WTO effectively polices international trade. It sets the rules and works towards reducing tariffs (charges imposed by countries on non-domestic goods and services). Its predecessor was the General Agreement on Trade and Tariffs (GATT), created in 1948 to set common rules on the international trade of goods. The 8th round of GATT negotiations in 1994, the ‘Uruguay Round’, led to a far wider range of agreements than before, extending to trade in services such as banking and intellectual property rights, paving the way for the WTO’s creation in 1995.
The WTO currently has 164 members and 23 observer governments. Being a sovereign state is not a requirement for membership, hence Hong Kong and Taiwan’s inclusion, and the current 28 member countries of the EU are represented as one single member.
Q: What principles influence how the WTO operates?
5 principles are key to the WTO’s organisation:
- Non-discrimination: Most Favoured Nation (MFN) rule and national treatment policy – The latter relates to countries not treating their domestic products favourably compared to imports, while MFN requires a WTO member to apply the most favourable conditions for trade in a sector to all members. MFN does allow for some exceptions, permitting preferential treatment of developing countries, and within free trade areas, or customs unions.
- Reciprocity – This principle requires that more is to be gained from when a nation negotiates than any unilateral liberalization.
- Binding and enforceable commitments – While a country may change its ‘ceiling bindings’, or limits, on tariff reduction commitments, it must negotiate with its trading partners, which may mean compensation for the loss of trade. If satisfaction is not obtained, aggrieved countries may seek redress through dispute settlement procedures.
- Transparency – Among other measures, members are required to publish their trade regulations and to notify the WTO of changes in trade policies.
- Safety Values – WTO members may restrict trade on health grounds and the environment
Q: How is the WTO organised?
The WTO bases itself on a consensus model to reach trade barrier reduction agreements, although in practice the more advanced economies tend to dominate. Like GATT before it, the chief way it seeks agreement on actions to reduce trade restrictions is via negotiation rounds.
The WTO’s headquarters are in Geneva, Switzerland. Its day-to-day running is organised by its Secretariat, led by the Director-General, currently former Brazilian diplomat Roberto Azevêdo (pictured above). The WTO’s highest decision-making body is the General Council, which comprises representatives of all member governments and meets bi-annually.
The Dispute Settlement Body (DSB) and Appellate Body (AB) help manage disputes between members, where one member may accuse another of not abiding by WTO rules or discriminating against it. The DSB and AB, in consultation with the WTO Secretariat and Director-General, determine case-specific panels who examine and seek to settle disputes. Where possible, mutually agreed solutions are sought.
Q: What reduction in trade barriers since its existence has the WTO achieved?
The Nairobi Package of 2015 saw members reach an agreement to end agricultural export subsidies, which will affect how the UK is able to subsidize farmers post-Brexit. In January 2017, for the first time an amendment was passed to a WTO accord, the WTO Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, providing a legal basis for developing countries to access affordable medicine under WTO rules. However, illustrative of the snail-like pace in further reducing tariffs and trade barriers, the original motion to amend TRIPS was passed 12 years before!
Q: What are the ongoing controversies of the WTO?
China’s push to be designated a ‘market economy’ is a major source of contention, as the status would reduce the ease with which countries can use the WTO international settlement body to pass anti-dumping procedures against Chinese firms. China claims it should automatically have gained the status in December 2016, but the EU and USA contend that China still subsidizes domestic industries far too significantly, and that State-Owned Enterprises (SOEs) own too great a proportion of the Chinese economy to merit it.
A longstanding criticism of the WTO is that it favours more advanced economies at the expense of developing nations, yet the USA has increasingly complained of bias against it. In one interview in October 2017, President Trump stated:
The WTO, World Trade Organization, was set up for the benefit for everybody but us. They have taken advantage of this country like you wouldn’t believe… As an example, we lose the lawsuits, almost all of the lawsuits in the WTO… Because we have fewer judges than other countries. It’s set up as you can’t win. In other words, the panels are set up so that we don’t have majorities. It was set up for the benefit of taking advantage of the United States
However, empirical evidence suggests that the WTO is, in actual as opposed to alternative fact, more generous in judgments toward the United States than with other nations. The US wins roughly 78% of its claims as a complainant before WTO panels, compared to 69% for the rest of the membership, and it fares better than average when the recipient of a complaint too.
Notwithstanding this, the WTO’s function as the body which settles international trade disputes is endangered as the Trump Administration has decided to block new appointments to the Appellate Body. There now exist just 4 AB judges instead of 7, and a minimum 3 are required to oversee a dispute.
The US government has justified the move by citing concerns about judicial activism among AB judges, through legal rulings creating new obligations for the US, and discontent with judges post-retirement continuing overseeing cases until their conclusion.
Next week in Part 2, we’ll be taking a closer look at some of the more recent trade disputes the WTO has had to manage.