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A brief history of the WTO

By Prabhash Ranjan

The principle of non-discrimination was meant to be the cornerstone of the World Trade Organisation and the multilateral trading regime. But ten years down the line, it is clear that the trade rules favour developed countries, and the promise of greater market access for developing countries has not been sufficiently realised

The formation of the World Trade Organisation (WTO) in 1995 was a watershed development in the sphere of international trade. It was a major advancement in the multilateral trade regime, with the previous regime embodied in the form of a treaty known as the General Agreement on Tariffs and Trade (GATT).

GATT was signed in 1948 and had close to 30 member countries. Its primary objective was to see that impediments to international trade -- mainly in the form of tariffs -- were reduced or removed in order to facilitate the movement of goods across borders. In the course of six to seven rounds of negotiation, it succeeded in getting countries to lower their tariff rates, thus enabling greater movement of goods.

However, over time, the nature and character of global trade started to get very complex. Countries began to realise that GATT did not have all the answers to the questions posed by the increasingly complicated nature of global trade.

This led member countries to launch a new round of negotiations, from 1986-1994, known as the Uruguay Round (UR). This series of negotiations was much more elaborate and detailed. It not only covered trade in goods but also brought trade in services and intellectual property rights within the ambit of the multilateral trading regime. Even within trade in goods, a far more thorough set of rules was discussed and negotiated. Further, trade in agricultural goods was brought into the fold of the multilateral trading regime in a major way. In GATT, trade in agricultural goods was, at best, minimal and at the fringes of the discussions.

The end of the UR resulted in the formation of the WTO, which established a substantial set of rules regarding trade in goods -- including agricultural goods, included agreements on trade in services and on trade-related aspects of intellectual property rights, as well as a strong and comprehensive mechanism to settle trade disputes between member countries. Notwithstanding these additions, the WTO retained some of the basic characteristics of GATT, such as the principles of non-discrimination embodied in the Most Favoured Nation (MFN) and National Treatment (NT) rules.

Today the WTO, the youngest of the world’s multilateral organisations, is over 10 years old.

It may be instructive to follow the journey of the WTO from 1995 onwards, even though it is difficult to assess the overall impact of the organisation on the global economy or on individual developing countries. It has been good for some, bad for others and a mixed bag for the remaining. It is also difficult to capture all the developments that have taken place from 1995 to 2006. However, one can certainly attempt to outline some of the key developments of the past decade.

Non-discrimination

As mentioned above, the WTO recognised and institutionalised the principle of non-discrimination embodied in the MFN clause, which was present in GATT as well. According to the MFN principle, no WTO member country can discriminate against other member countries. For example, if country X imposes a tariff rate of 5% on steel coming from country Y, it has to impose the same tariff rate on all imported steel, irrespective of the country of origin. This non-discrimination principle of the WTO is said to be the cornerstone of the multilateral trading regime.

However, both GATT and the WTO also recognised certain exceptions to the MFN principle. Preferential Trading Agreements (PTAs) constitute one such exception, which permits two or more countries to sign an agreement to form a free trade area where they can provide preferential access to each other’s products. By signing a PTA, countries would be able to violate the MFN obligation that they have with other WTO member countries and provide preferences to countries that are members of the free trade area.

Ten years into the WTO regime this exception appears to have become the rule, while the primary principle of MFN is becoming an exception. By the end of 2004, about 300 PTAs had been notified with GATT and the WTO. Of these, close on 180 came into existence after 1995 -- that is, after the formation of the WTO. In other words, about 60% of all PTAs in existence today came into effect after the most remarkable advancement in the multilateral trading regime happened, in 1995. Estimates suggest that by the end of 2007 the total number of PTAs will be well above the 300 mark. Today, more than 50% of global trade takes place through PTAs, on a non-MFN basis. Hence, what was considered an exception has now become the rule.

There could be many reasons for this development. 

Industrially developed countries get into PTAs in order to extract benefits that they would be unable to secure through the multilateral trading regime, such as a more stringent intellectual property rights regime, as well as rules relating to competition, investment, labour and the environment. Less economically developed countries are lured into PTAs by the prospect of getting greater market access. However, the growing number of PTAs has created a substantial degree of confusion in the global trade regime, bringing in complicated rules and procedures and creating difficulties for member countries in their administration.

Dispute settlement

One of the major advancements in the multilateral trading regime that the WTO brought in was the setting up of a substantive dispute settlement mechanism. This has, so far, worked well. From 1995 up to the end of 2004, WTO member countries brought 300 complaints to the Dispute Settlement Body (DSB). The panel formed by the DSB, which is a temporary judicial body, successfully decided 80 of these cases. About 50 such cases were appealed with the Appellate Body (AB), a permanent judicial body of the WTO. These figures are quite remarkable, especially compared to the situation in the pre-WTO era -- from 1948 to 1994. During that period, the settlement of disputes was marked by inordinate delays and lack of transparency, with any one country able to delay the implementation of the rulings, and so on. The increasing number of complaints demonstrates the faith that member countries have in the new dispute settlement mechanism, where disputes are decided according to a timeframe, with transparent procedures. And no country can block or delay the implementation of the ruling.

However, the functioning of the DSB within the WTO, over the last 10 years, has also revealed certain limitations in the system. One major problem is the increasing degree of non-compliance with the rulings of the DSB by industrially advanced countries and formations like the United States and European Union. 

The DSB does provide for a retaliatory mechanism whereby the winning country can retaliate against the country that does not comply with its ruling. It is this provision that gives some teeth to the DSB. The intention behind this mechanism is to ensure that countries comply. However, a number of cases have demonstrated that the mechanism has not served its purpose in situations where smaller, economically vulnerable countries are involved in disputes with larger or economically stronger countries. One such case involved Ecuador and the United States. In that dispute, the US refused to comply with the ruling of the DSB, which then authorised Ecuador to retaliate against the US. However, Ecuador did not retaliate because such retaliation would have brought more harm than good to its economy. Notwithstanding the remarkable performance of the WTO’s DSB, therefore, the fact that it has certain lacunae has become clear in the past decade.

Non-tariff barriers

The WTO came into existence at a time when tariffs -- the customs duties that countries levy on goods entering their country -- were very low. The intent of successive rounds of negotiations under GATT, which led to the formation of the WTO, was to reduce barriers to international trade. Reduction of tariff barriers was one of the consequences of this process. Although barriers to international trade in the form of tariffs have come down, other non-tariff barriers have increased manifold after the formation of the WTO.

These non-tariff barriers exist mainly in the form of food standards, technical requirements, antidumping duties, etc. Industrially developed countries often impose stricter food standards on imports from developing countries. These standards are sometimes even stricter than what is warranted under existing international standards. An interesting trend in the imposition of non-tariff barriers after the formation of the WTO has been the growing tendency of developing countries to use these measures. It is important to recall that antidumping rules represent a remedial tool whereby countries impose additional duties on imports that are sold in their markets at prices lower than the domestic price of the imported goods in their country of origin. For instance, India has emerged as the biggest imposer of antidumping duties after the formation of the WTO. 

Doha Round of negotiations

By the late-1990s there was a growing realisation amongst developing countries that the outcome of the Uruguay Round of negotiations was imbalanced. Many trade rules favoured developed countries, and the promise of greater market access for developing countries was not realised. As a result, many of these countries wanted to re-negotiate the WTO agreements.

With this as the basic objective, a new round of negotiations was launched at the fourth WTO Ministerial Conference that took place in Doha in 2001 (the first, second and third ministerial conferences of the WTO were held in Singapore in 1996, Geneva in 1998, and Seattle in 1999). This round covered important topics such as agriculture, industrial goods, services, intellectual property rights, antidumping duties, dispute settlement, etc. 

The Doha Round was supposed to be completed by December 31, 2004. However, it has not been completed to date, mainly due to outstanding differences between developed and developing countries on various issues. As a result of this lack of meeting ground, negotiations are still going on and it is difficult to predict when the round will come to an end.

The three most important issues in the Doha negotiations are agricultural subsidies, agricultural tariffs and industrial tariffs. Developed countries are guilty of providing mammoth subsidies to their agriculture sector. Such large subsidies allow these countries to sell or, rather, dump their produce in international markets at very cheap rates. This dumping depresses international prices and makes trade in agriculture not very remunerative for developing countries.

For instance, domestic subsidies given by the US to its agriculture sector increased from US$ 250 billion in 1995 to US$ 350 billion in 2003. It is this kind of subsidy that has enabled the US to become the world’s third largest exporter of rice in 2003, after Thailand and Vietnam, exporting 3.8 million tonnes of rice. This, despite the fact that it costs twice as much to grow rice in the US than it does in the other two countries. Such excellent export performance has been aided by the US$ 1.3 billion that American rice farmers received as subsidies in 2003, which made up 72% of the total cost of production.

Similarly, developing countries face formidable tariff barriers in developed countries in the form of tariff escalation. For instance, in Japan, the bound tariff (the maximum committed tariff that a country can impose on a particular product) rate on raw sugar is 224%, and the rate climbs to as much as 328% for refined sugar. Canada levies 9% on raw sugar, and 107% on refined sugar. The respective bound tariff rates for raw and refined sugar in the European Union are 135% and 161%, respectively. The story is the same if one looks at the tariff rates on cocoa beans vis-à-vis chocolate, or fresh orange vis-à-vis orange juice. The net effect of these differential tariffs on raw and processed commodities is that it is difficult for developing countries to move up the chain of value-addition. 

On industrial tariffs, although developed countries have low average tariffs, products of export interest attract a much higher tariff. For instance, the average tariff rate in the US for industrial goods is 3.2%, but for textiles and clothing it is more than 8%. Hence, if India exports textiles and clothing to the US at a price of 100 units, those products will cost 108 units in the US whereas any other commodity priced at 100 units would cost only 103 units. In other words, products like textiles and clothing, in which India has a comparative advantage, are made expensive by imposing higher tariff rates. 

Developing countries want developed nations to reform their agriculture sector and open their manufacturing sector to products from developing countries. It is worth recalling that when the Doha work programme was agreed upon it was sold to many developing countries as the Doha Development Agenda. If this is indeed an agenda for development, then developing countries should be given greater access to the markets of developed countries. 

Instead, developed countries are keen to see developing countries steeply reduce their agricultural and industrial tariffs. Developing countries argue that tariffs in agriculture constitute the only protection available to them, and that they cannot reduce them until developed countries drastically reduce their subsidies. Agriculture is a very sensitive sector for developing countries because it is not so much a trade issue as a livelihood issue. It is only through tariffs that they can protect their domestic agriculture and poor farmers from the vagaries of international agricultural trade. Developing countries cannot afford to cut their subsidies till developed countries cut theirs. Otherwise, the markets of developing countries will be flooded with the cheap agricultural imports of developed countries.

After 2001, countries could not agree to a common framework on most of these issues. This impasse was reflected in the collapse of the fifth ministerial meeting of the WTO in Cancun, in 2003. An important development that preceded the Cancun ministerial was the formation of a coalition of 20 major developing countries, comprising India, Brazil, Argentina, China, South Africa, etc. This coalition came to be known as the Group of 20 countries (G20). The primary objective of the group was to put forward the interests of developing countries on agriculture in a collective manner. The formation of the group also marked the emergence of a new power equation within the WTO. Through the G20, developing countries asserted very strongly to the US and the EU that they could not be taken for a ride and that any multilateral rule that came into existence had to take into account the interests of the global South.

In July 2004, all member countries were able to strike a deal whereby they agreed to a framework to establish further modalities. This process was taken forward, albeit marginally, during the sixth ministerial meeting of the WTO in Hong Kong, in December 2005. Hong Kong saw world leaders reiterating their commitment to the Doha work programme. However, after Hong Kong, negotiations have again reached a dead end, with none of the parties willing to soften their stand. As a result, the Doha Round was suspended in July 2006. It is difficult to say when the negotiations will begin again. In the interests of the multilateral trading regime, especially the economies of developing and least developed countries, it would be best that they restart sooner rather than later. 

(Prabhash Ranjan, a trade policy analyst, is visiting faculty to the Indian Law Institute, New Delhi. He was formerly with the Centre for Trade and Development, New Delhi.)

InfoChange News & Features, February 2007