World Trade Organization (WTO)

The World Trade Organization is an international organization that supervises trade among its member nations. On April 15, 1994, 123 nations signed the Marrakesh Agreement to replace GATT with WTO, and it officially started off on January 1,1995. It is headquartered in Geneva, Switzerland.

To stabilize the world economy after the Second World War, the Bretton Woods Conference of 1944 put forward the proposal for creation of an International Trade Organization (ITO). It would complement the International Monetary Fund and the Bank for Reconstruction and Development (now known as World Bank). Although the proposed ITO could not materialize,  the General Agreements on Tariffs and Trade (GATT) survived as a treaty agreement between 23 of the 50 signatory states of the ITO, and came into existence on January 1, 1948. Its purpose was reduction in tariffs and similar trade barriers and elimination of preferential treatment so that international trade would become a level playing field for all nations. GATT was a series of rules and multilateral agreements applied on a provisional basis. It had contracting parties rather than members and dealt only with trade in goods. A major drawback of GATT was exclusion of agriculture along with textile and apparel industry in its agreements.

The next couple of decades saw globalization, which lead to a continuous rise in the trade volumes with newer countries entering the mix. It necessitated the need of a  full-fledged organization to oversee this growth. During the 8th round of trade negotiations under the GATT, also known as Uruguay Round, the seeds for an intergovernmental organization were laid. This round of negotiations went on for 8 years from 1986 to 1995 and at its conclusion; the World Trade Organization was born.

Unlike GATT, the WTO has members rather than contracting parties and covers services and intellectual property rights along with trade in goods. It has a much more effective dispute settlement and enforcement mechanism binding to all its members

There are many ways to look at WTO:

  • An organization that liberalizes trade
  • A platform for governments to negotiate trade agreements
  • An operator of a system of trade rules
  • A place for settling trade disputes

WTO already had a strong background when it began with GATT. It picked up from where the Uruguay rounds ended and build further upon its discussions such as reforms in sensitive sectors of agriculture and textiles. WTO is run by its member governments with the major decisions taken by the members as a whole. The ministers of these member nations or their ambassadors meet at least once every two years. WTO’s goals which had been established during the preamble to the Marrakesh Agreement itself included:

  • Improving the global standard of living
  • Ensure employment for all
  • Growth of income as well as the demand for goods to improve the possibility of trade
  • Increase the rate of production for improving trade in goods and services.

These goals were to be achieved in accordance with sustainable development giving high priority to protection and preservation of the environment. The preamble specifically mentioned the need to assist developing and least developed countries to get a foothold in the growing share of international trade. WTO also conducts periodic research and analysis of global trade and provides assessment of the global economic picture through annual publications and research reports.

WTO is known to follow certain principles in its application of trade policies. Five of these core principles are:

  • Non-Discrimination: There are two major components associated with this point. One is Most Favored Nation (MFN) rule and other is national treatment policy. These two policies are embedded into the WTO rules and are not mere principles. MFN rules states that the most favorable condition of trade for any product will apply to all similar products. If one member of the of the WTO offers preferential treatment, then that will apply to all other members as well. On special permission from granting countries, preferential treatment can be given, especially to neighboring countries and Least Developed Economies. However, the granting country has the discretion to remove this special treatment anytime. Sometimes, domestic goods are given priority over imported goods in terms of taxes and domestic regulations. The national treatment policy tries to curb this phenomenon. The imported goods cannot be treated less favorably after the payment of import duties and crossing the national border.
  • Binding and Enforcement commitments: The trade negotiations have always been bilateral, i.e., between two countries. But, when countries become WTO members the tariff commitments become multilateral. The commitments made by the members are listed in a schedule and the rates become “Bound” meaning committed and difficult to increase. These rates act as the ceiling beyond which the rates cannot be increased according to WTO rules, thus increasing market security for traders and investors.
  • Transparency: Every member country of the WTO may have their own trade regulations however, these regulations are to be published and notified to WTO members and WTO secretariat before its implementation. The members are also required to respond to any requests for information by other trading members, leading to transparency.
  • Single Undertaking: Joining the WTO comes with a large set of rules and agreements, which apply equally to all the member states and they cannot choose to join selective agreements. The members must join on an ‘all or nothing’ basis.
  • Safety Valves: The WTO agreements have measures which enable governments to restrict certain goods or trade. This rule goes against the MFN rule we discussed earlier, but under conditions of threat to environment, public, animal and plant health, WTO permits members to take protective action.

The dispute settlement body of the WTO has a much better framework than what the GATT had earlier. Let’s take an example in which Venezuela lodged a complaint against the United States for discrimination against gasoline imports. US had set more stringent standards for imported gasoline compared to its domestic refineries. In this regard, Venezuela submitted a complaint in January 1995 and was later joined by Brazil in April. About an year later, the dispute panel came out with its final report suggesting it agreed to Venezuela’s grievances, to which the US appealed. Four months later the appellate body also submitted its report suggesting it agreed that the US had violated the national treatment principle and was given 15 months to make changes to its regulations. Over 6 months later, the US and Venezuela agreed on a new regulation. Thus the dispute was settled in a brisk manner even with a major member like US being on the line of fire.

Organizational Structure of the WTO:

The Ministerial Conference is the main governing body of the organization and consists of trade ministers from all the member states. They determine the agenda of the organization and all final decisions on agreements are issued with the consensus of these ministers. They meet at least once every two years.

General Council: This council consists of senior representatives and ambassadors of the member states who are working permanently at the Geneva Headquarter of WTO and are responsible for the daily workings and management of the organization. The general council is the decision making body of the organization and other bodies report directly to the council.

  • Council for Trade in Goods: There are total of 11 committees that work under goods council. All committees are given specific tasks such as market access, agriculture, custom valuation etc.
  • Council for Trade-Related Aspects of Intellectual Property Rights: This council is responsible for Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement introduced for the first time in international trade when WTO replaced GATT. It sets standards for intellectual property regulations applied to WTO members. It requires the members to provide copyright rights, patents, trademarks etc and provides enforcement procedures, remedies and dispute resolution procedures.
  • Council for Trade in Services: This council oversees the functioning of the General Agreement of Trade in Services (GATS). It is responsible for implementation of Annex 1C of WTO agreements and can set up subsidiary bodies for the same.

Dispute Settlement Body: As the name suggests, this is the dispute settlement wing of the organization. It consists of all the WTO members. A dispute resolution panel is set up for each complaint or dispute. A dispute resolution panel is set up for each dispute and it is their duty to ensure all WTO agreements are complied before giving a verdict. The appeal against a verdict goes to the Appellate Body which has permanent members unlike dispute resolution panel. Settlement of disputes by mutually agreed solution is given priority. The whole process is very seam lined and takes no more than an year for a verdict and no more than 16 months if appealed. The final decision of the Appellate Body can be challenged only with the full consensus of the Dispute Settlement Body.

Trade Policy Review Body: This body is a result of the Uruguay Round of negotiations. It reviews the trade policies that the member states implement, the results of which indicate if member states are adhering to WTO principles.

You can download the full organizational chart here.