World Trade Organization – WTO

World Trade Organization – WTO

World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.

• WTO has 164 members (including European Union) and 23 observer governments (like Iran, Iraq, Bhutan, Libya etc). 
• Since its formation in 1995, WTO has helped reduce barriers to trade in both goods and services and created a dispute resolution system that has reduced the threat of trade wars.

Evolution of WTO

• WTO is the successor to the General Agreement on Tariffs and Trade (GATT), which was created in 1947.
  • GATT was the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995.
• The Uruguay Round (1986-94) of GATT led to WTO’s creation and it began operations on 1st January 1995.
  • The Agreement Establishing the WTO, commonly known as the “Marrakesh Agreement”, was signed in Marrakesh, Morocco in 1994.
• Main difference between GATT and WTO was that GATT mostly dealt with trade in goods, the WTO and its agreements could not only cover goods but also trade in services and other intellectual properties like trade creations, designs, and inventions.

Features of WTO

• Organizational Structure of WTO:
• Ministerial Conference – is the topmost decision-making body which meets every 2 years.
• General Council – meets regularly to carry out the functions of WTO
• also functions under different rules as Trade Policy Review Body and the Dispute Settlement Body.
• WTO was expected to play larger role for improved living standards, employment generation, trade expansion with increasing share for developing countries and overall sustainable development.
  • Trade Liberalization was seen as means for achieving these objectives
• Basic principles of Trade Liberalization that were to be followed were:
  • Non-discrimination – Countries will not discriminate one from another. It had to be achieved through Most Favoured Nations status i.e., neutral trading relations and National treatment to non-domestic producers.
  • Reciprocity – The concessions conferred by countries had to be mutual
• These principles are implemented through Ministerial Conferences, taking consensus-based decisions based on ‘One country, One vote’ which demonstrates democratic structure and processes of WTO.

Throughout history, trade has played an important role in supporting economic development and promoting peaceful relations among nations. WTO has played a crucial role in the international trade, global economics and the political and legal issues arising in the international business because of globalization.

WTO’s Contribution to the World

• Ease of Business – has emerged as the world’s most powerful institution for reducing trade related barriers between the countries and opening new markets.
• Economic integration – by building binding rules for global trade in goods and services, WTO has facilitated dramatic growth in cross-border business activity.
  • Since its formation, value of world trade has nearly quadrupled, while the real volume of world trade has expanded by 2.7 times.
• Global Peace – maintains world peace and bilateral relations between its member countries by resolving trade related disputes through negotiations, consultations, and mediation.
• Gave the weak a stronger voice – small countries would be weaker without the WTO. Differences in bargaining power are narrowed by agreed rules, consensus decision-making and coalition building.
• National Incomes – domestic reforms and market-opening commitments have resulted in the lasting boost to national income of the member nations.
• Upliftment of Poor Countries – The least-developed countries receive extra attention in the WTO. All the WTO agreements recognize that they must benefit from the greatest possible flexibility, and better-off members must make extra efforts to lower import barriers on least-developed countries’ exports.
• Poverty Reduction – Free trade resulted in halving of average tariffs, cut cost of living and reduced extreme poverty rate in developing countries.
• Increased Global Value Chains – predictable market conditions fostered by the WTO, have combined with improved communications to enable the rise of global value chains.
  • trade within these value chains today accounts for almost 70% of total merchandise trade.
• Health care – amendment to IP Agreement eased poor economies’ access to affordable medicines.
• The decisions in the WTO are typically taken by consensus among all members and they are ratified by members’ parliaments. This leads to a more prosperous, peaceful, and accountable economic world.

India’s participation in an increasingly rule based system in the governance of international trade is to ensure more stability and predictability, which ultimately would lead to more trade and prosperity.

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India at WTO

India is a founder member of the General Agreement on Tariffs and Trade (GATT) 1947 and its successor, the WTO.

India has interest in the liberalization of services trade and wants commercially meaningful access to be provided by the developed countries.

India is persistently demanding for a permanent solution on public stock holding subsidies at WTO, to ensure food and livelihood security.

India strongly favours extension of higher levels of protection to geographical indications for products like Basmati rice, Darjeeling tea, and Alphonso mangoes at par with that provided to wines and spirits under the TRIPS agreement.

India is against the pressure by developed countries on inclusion of non-trade issues such as labour standards, environmental protection, human rights, rules on investment, competition policy in the WTO agreements.

• as they are directed in the long run at enforcing protectionist measures against developing countries.
• based on non-trade issues, the developed countries like USA and European Union are trying to ban the imports of some goods like textile, processed food etc.

However, disagreements over agricultural subsidies and intellectual property rights, separate bilateral and regional free trade agreements along with rising Protectionism and US-China trade war have reduced its effectiveness due to which there have been calls for reforming WTO.

Reasons for crumbling of WTO

• Growing Protectionism – Over the past two years, various governments have introduced trade restrictions covering a substantial amount of international trade – affecting $747 billion in global imports in the past year alone.
  • WTO has been less effective in addressing them, including US China trade war. This raised questions over WTO’s credibility.
• Changing World order – In the earlier phase of WTO, the rule-based trade had favoured the Western nations.
  • But with the rise of developing countries and their increasing share in world trade, rule-based nature is perceived by US and EU as unfavourable and have attacked them by resorting to policies of protectionism.
  • Eg: China via trade war, Solar panel case against India in Dispute Settlement Body.
• Rising sectarianism – Major powers like the US, the EU, China, and Russia are increasingly carving out the zones of influence, which leads to onslaught on multilateralism.

Using national security as veil – The countries are using the national security as a justification for tariffs. Countries exploit a loophole in WTO law that permits its members to take any action they consider necessary to defend “essential security interests”.

• Process Loopholes – Ministerial Conferences are accused of being opaque and overly technical.
  • green room meetings prohibit participation of majority of countries; hence becoming disproportionately advantageous to developed countries.
  • consensus-based rule making has become a root cause in stagnation in reforms.
• Nature of Agreements – Agreements signed under WTO are alleged to be discriminatory and exclusionary in functioning.
  • WTO do not have any agreement to deal with digital enabled trade i.e., e-commerce.
  • issue over generic medicines, compulsory license and import substitution – developed countries accuse developing countries over flouting of TRIPS, whereas developing countries accuse pharmaceutical companies of ever-greening of patents.
• Dispute Resolution – The dispute resolution mechanism is costly and lengthy. It is majorly resorted to by developed countries and developing countries are victims to the mechanism. There is politicization of the Appellate Body appointment and reappointment process.
  • The U.S. has systematically blocked the appointment of new Appellate Body members (“judges”) and de facto impeded the work of the WTO appeal mechanism.
• Side stepping WTO – Since the launch of the Doha Round, countries have turned to free trade agreements (FTAs) in order to gain significant trade access in new markets and to explore new trade-related issues that are currently not addressed within the WTO.
  • As more FTAs have been concluded, the central role of the WTO in liberalizing trade has been called into question.
• Definition of ‘Developing Country’ – a contentious issue
  • The “developing country” status allows a member of the WTO to seek temporary exception from the commitments under various multilateral trade agreements ratified by the organisation.
  • US had slammed WTO for allowing countries like India and China to engage in unfair trade practices under ‘developing country’ status.

Chinese mercantilism (try to influence trade and business, especially by encouraging exports and putting limits on imports), the USA’s aggressive use of unilateral tariff measures, and the inability of WTO members to reach consensus on expanding its disciplines to important new sectors in the modern economy reinforce the critique of the WTO.

Why WTO remains Relevant?

WTO is still one of the three international organizations (IMF and World Bank) which by and large formulate and coordinate world economic policy.

Since its inception, WTO has played a vital role in integrating and opening the world trade, which cannot be ignored.

Rules-based multilateral trading system – WTO ensures that global trade is based on universal rules suited to and accepted across the world.

stimulates global growth – by removing trade barriers WTO provides more markets to world’s resources thus stimulating global growth.

WTO regulates 98% of global trade flows – Tariff reduction along with technological advances have driven extraordinary expansion of global trade.

Trade act as a powerful force for Inclusive Growth – by lowering poverty and by opening opportunities for small firms, women, farmers as well as fishermen.

Administers signed agreements – WTO administers existing multilateral trade agreements, for example Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement.

WTO also preserves member’s autonomy as members are free to enter into preferential trade agreements and free trade agreements.

As nations’ economies have become more and more inter-dependent, breakdown of a trade organization will be major blow to international trade order.

As WTO is a member led organization, all countries i.e., developing and developed have to join hands to improve its structure and processes. As the developed nations lose interest in multilateralism in trade, India should actively try to arrest the organisation’s slide. Being a voice of the developing world, India should be more actively engaged to make the WTO a more equitable organisation.

Way Forward

• WTO should move to Plurilateral trade negotiations – where like-minded countries can come forward to discuss issues specific to them and form rules with respect to the common issue.
• launch negotiations to address the intertwined issues of agricultural subsidies and market access, while recognising that food security concerns will not disappear.
• Form agreement regarding e-commerce – E-commerce should benefit the SMEs and women entrepreneurs for the development of rural economy.
• Reform trade policy in Services – has to address monopolistic practices, financial regulations, and irregular immigration.
• Policies need to become more inclusive – All member countries need to understand different levels of development of different countries.
  • agreements on agriculture should be restructured to address concerns of developing countries and least developed countries.
  • need social security laws, skill upgradation, flexible mobility of workers within the international agreements.
• Collective Bargain – Like Minded Groups like G-33, African community has to increase their collective bargain in order to demand favourable provision in agreements on agriculture, services, intellectual property etc.
• Change in mindset – Developed countries like US and EU have to be convinced of the larger role WTO played in their growth and maintenance of open trade system.
  • The time has come for the emerging economies and the developing world to have a greater say in how to shape multilateralism and its institutions. The developed nations have to realize this truth.
• Restoring the WTO dispute settlement mechanism, especially the revival of its Appellate body, is also crucial for the organization’s efficient functioning.
• Given the pressing issues around climate change, increased efforts to align trade and environmental sustainability could help to both tackle climate change and reinvigorate the WTO.

Today, the world is going through the protectionism, trade war (like USA & China), and Brexit making global economy squeezed. The role of WTO in future is very crucial to preserve global liberalized economic system evolved since the end of the 2nd World War.

It is right time when countries like USA giving threat to withdraw from WTO making it dysfunctional, India and other emerging economies like Brazil, South Africa etc can provide a strong base for strong WTO with saving interests of developing countries.

Also, the COVID-19 crisis has revealed the urgent and enduring need for international cooperation and collaboration, as no country can fight the pandemic alone. WTO can help mitigate the effects of the pandemic by giving clear directions on ensuring that supply chains remain free and open, recommending a standard harmonized system with classification for vaccines, and by the removal of import/export restrictions.

Previous Year Questions

What are the key areas of reform if the WTO has to survive in the present context of ‘Trade War’, especially keeping in mind the interest of India? (2018)

“The broader aims and objectives of WTO are to manage and promote international trade in the era of globalization. But the Doha round of negotiations seems doomed due to differences between the developed and the developing countries.” Discuss in the Indian perspective (2016)

WTO is an important international institution where decisions are taken to affect countries in a profound manner. What is the mandate of WTO and how binding are their decisions? Critically analyse India’s stand on the latest round of talks on Food security (2014)