Unit – IV World Trade Organisation

(1) ITO, GATT AND WTO

 International Trade Organisation and GATT

The original intention behind the GATT or International Trade Organisation (ITO), as
it was initially proposed, was the creation of a third institution to handle trade issues. While
ITO was to supervise international trade, the other two “Bretton Woods” institutions, the
World Bank and the International Monetary Fund, had under their ambit international
development issues and international money flows respectively.
ITO was formed not only against the backdrop of the Second World War but also the
period before that, in 1930 when the United States Congress adopted the Smoot-Hawley
Tariff Act resulting in that country’s average tariffs rising from 38% to 52%.
Over 50 countries participated in negotiations to create ITO, which was supposed to
be a specialised agency of the United Nations. The draft ITO Charter included rules on
employment, commodity agreements, restrictive business practices, international investment,
and services.
The first round of negotiations resulted in 45,000 tariff concessions involving $10
billion of trade, about one-fifth of the then World’s trade. The combined package of trade
rules and tariff concessions became known as the GATT which came into force in January
1948, while the ITO Charter was still being negotiated. But even before the talks concluded,
23 of the 50 participants decided in 1946 to negotiate to reduce and bind customs tariffs.
These 23 countries became the founding GATT members (officially known as contracting
parties).1
Although the ITO Charter was finally agreed at a UN conference on trade and
employment in Havana, in March 1948, ratification in some national legislatures proved
impossible. The most serious opposition came from the US Congress, even though the
American government had been one of the driving forces behind ITO. It was at the Torquay
Round that the United States indicated its inability to support the idea of ITO which in effect,
proved to be its death knell. Thus, the GATT became the only multilateral instrument
governing international trade until the WTO was established on January 1, 1995.

1
GATT – Original 23 signatories. Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba,
Czechoslovakia, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern
Rhodesia, Syria, South Africa, the United Kingdom and the United States.
 The World Trade Organisation (WTO) oversees a multilateral system that deals with
the rules of trade between nations on a global level. The working of the WTO is largely based
on the Uruguay Round of negotiations that took place from 1986 to 1994.
The WTO has its origins in the General Agreement on Tariffs and Trade of 1947 and
subsequent round of negotiations. Trade rounds took place between 1947 and 1994, in which
focus was put on tariffs in the first five rounds. In the later rounds, non-tariff issues, non-
tariff barriers, anti-dumping measures were negotiated. In the final round the following
subjects were covered–
Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles,
agriculture, creation of WTO.
GATT had mainly dealt with trade in goods; the WTO agreements cover trade in
services and in intellectual property besides dispute settlement procedures.
The WTO agreements include agriculture, textiles and clothing, banking,
telecommunications, government purchases, industrial standards and product safety, food
regulations, and more.
Though there have been several Ministerial Conferences after Uruguay Round, the
objectives of a new round of negotiations were formulated only under the “Doha
Development Agenda” launched in 2001 at the fourth Ministerial Conference at Doha, Qatar.
Though the GATT, over a period of 47 years – from 1948 to 1994, provided the rules
for much of world trade, it remained a provisional agreement.

Trade Rounds at a Glance

Year Place Subjects covered Participating

countries

1947 Geneva Tariffs 23

1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960-61 Geneva Tariffs 26
Dillon Round (focus on worldwide reduction of tariffs)
1964-67 Geneva Tariffs and anti-dumping measure 62
Kennedy Round (First sign of the focus shifting to non-
tariff issues)
1973-79 Geneva Tariffs, non-tariff measures, “framework” 102
 Tokyo Round agreements
(highlight on non-tariff barriers)
1986-94 Geneva Tariffs, non-tariff measures, rules, 123
Uruguay Round services, intellectual property, dispute
settlement, textiles, agriculture, creation
of WTO, etc.

(2) Structural Format of WTO

 Objectives of the WTO
The Preamble to the agreement establishing the World Trade Organisation indicates
the following objectives–
(a) raising standards of living;
(b) ensuring full employment;
(c) large and steadily growing volume of real income and effective demand;
(d) promoting development, expanding the production of trade in goods and services
while allowing for the optimal use of world’s resources in accordance with the
objective of sustainable development;
(e) protecting and preserving the environment; and
(f) enhancing the means of doing so in a manner consistent with the respective means
and concerns at different levels of economic development.
It also contains a resolution to develop an integrated, more viable and reasonable
multilateral trading system encompassing the General Agreement on Tariffs and Trade
(GATT) and the results of post-trade liberalisation efforts and all the results of the Uruguay
Round of Multilateral Trade Negotiations.
There is also a perceptible desire for making positive efforts to ensure that the
developing countries, and specially the least developed among them, secure a share in the
international trade commensurate with the needs of their economic development and also
enter into reciprocal and mutually advantageous arrangements to reduce tariffs and other
barriers in order to eliminate the discriminating treatment in international trade relations.

 Package approach
 The World Trade Organisation is envisaged to build on GATT which had gone
through stresses and strains in the journey for over four decades. The WTO in Article III,
indicates a very important fact. It is that the legal instruments and the agreements are binding
on all the members. Earlier, members of the GATT as they liked, had option, to go out of
certain provisions under the Agreement. For WTO, it is a total package and members have to
either take it as a package or be out of the system. This is expected to lead to strengthening of
the organisation.

However, the Plurilateral Trade Agreement provides an exception to the total-package

rule in as much as it does not create either obligation or rights for members that have not
accepted such Agreement.

 WTO Forum for Settlement of Disputes

Article III of the WTO also provides, inter alia, that “WTO shall administer the
procedures governing the Settlement of Disputes (referred to as Dispute Settlement
Understanding (DSU)) as given in Annexure 2 to this agreement.”
This certainly is an improvement on GATT. The dispute resolving mechanism of
WTO gives it the teeth to take action against the defaulting member under certain
circumstances.
Through this mechanism, the WTO can ensure that all the members who have joined
this Agreement must conform to the provisions and in case of their inability to follow all
provisions, appropriate action will be taken. However, all this is contingent upon making a
complaint and existence of a dispute.
So far, the general experience is that the dispute panel has been faithfully discharging
its duty and it is not influenced by either the developed country’s interest or the interest of the
developing countries. Its efficiency has earned confidence of the participating countries.
There is also a review mechanism called Trade Policy Review Mechanism (TPRM),
mention of which is made in Annexure 3 to the Agreement. Finally, a linkage is sought to be
established between WTO and International Monetary Fund and the International Bank for
Reconstruction and Development. Thus WTO, like World Bank or IMF, may be regarded as
the World Trade forum. This was indeed sought to be achieved through the mechanism of
ITO in 1947. Unfortunately this could not be done.

WTO IN A NUTSHELL
Agreement Establishing WTO
 (At a Glance)

Umbrella Goods Services Intellectual Property

Basic Principles GATT GATS TRIPs
Additional details Other goods Services annexes
agreements and
annexes
Market access Countries’ schedules Countries’ schedules
commitments of commitments of commitments and
(MFN exemption)
Dispute Settlement Dispute Settlement
Transparency Trade Policy
Reviews

 Specific Functions of WTO

1. To facilitate implementation, administration and operation, and further the objectives
of this agreement.
2. To provide forum for negotiations among its members.
3. To administer the understanding on rules and procedures governing the settlement of
disputes.
4. To administer the Trade Policy Review Mechanism.
5. To achieve greater coherence in global policy-making in cooperation with the
International Bank for Reconstruction and Development (the World Bank).

 Entering or Withdrawing
Any State or separate customs territory possessing full autonomy in the conduct of its
external commercial relations may accede to the WTO on terms to be agreed between other
members and itself.

Any member can withdraw from the organisation and it comes into effect upon the
expiry of six months from the date of the member’s withdrawal notice given to the Director
General of WTO.

 Decision Making

The decision to amend the basic principles such as Most Favoured Nation (MFN) or
National Treatment has to get the unanimous consent of all members.
 Interpretation of the provisions of the agreements and waiver of members’ obligation
to follow the provisions is required to get the backing of three-quarters majority of the
members present and voting.

Accession of members requires a two-thirds majority.

Generally, the effort is towards a consensus-based decision making. Decisions can be

made at the Ministerial Conference that is held once every two years or the General Council
that works towards implementing the decisions made at the Ministerial Conference or the
various committees that work under the General Council. The most important committees are
those related to Trade of Goods, Trade in Services and Intellectual Property. (From the
operational point of view)

Structure of the WTO

Ministerial Conference (once in two years)

1. Committee on Trade and Development

2. Committee on Balance of Payment
3. Committee on Budget, Finance and Administration.
–(Regular Sitting)
General Council
I. Settlement of Disputes
II. Trade Policy Review Mechanism
III. Plurilateral Trade
1) Civil Aircraft
2) Government Procurement
3) Dairy Agreement
4) Bovine Meat
IV. Council of Trade in Goods
1) Agriculture
2) Sanitary and Phytosanitary
3) Textile and Clothing
4) Technical Barriers to trade
5) Trade Related Investment Measures (TRIMs)
6) Anti-Dumping
 V. Council for Trade in Services
1) Basic Telecommunications
2) Maritime Transport
3) Movement of Natural Persons
4) Financial Services including Banking and Insurance
5) Environmental Services
6) Professional Services
7) Air-Transport Services
VI. Council for Trade Related Intellectual Properties (TRIPs)
1) Copyrights and related Rules
2) Trademarks
3) Geographical Indication
4) Industrial Design
5) Patents
6) Lay-out Design of Integrated Services
7) Protection of Undivided Information
8) Control of Anti-Contractual Licenses

The Ministerial Conference which meets once in every two years.

Apart from the General Council, there is also a trade policy review body and Dispute
Settlement Body referred to earlier.
The decision of Ministerial Conference is given effect to by General Council which
works through committees.
The most important committees from the operational point of view are Committee on
Trade of Goods, Committee on Trade in Services and Committee on Intellectual Property,
i.e., TRIPs. There is also a Committee for Balance of Payment which deals with cases where
such restriction indeed is availed of on the ground of precarious balance of payment situation.
India is one of the countries which have taken recourse to this concession.

Different Committees
There is a Committee on Budget, Finance and Administration. There is a Committee
on Trade and Development. Finally, there is a Committee on Trade and Environment, which
has become a highly controversial and yet an important issue for re-negotiation given the
conflicting stand of the developed countries and some of the developing countries. All these
committees shall set down their respective rules and procedures subject to the approval of
their respective councils. For all the committees, the membership is open to representatives of
all committees.
The Plurilateral Trade Agreement is not binding on all members.
Article V of the Agreement is indicating the details of relations with other
organisations.
As regards the Secretariat, details of which are given in Article VI, basically it is the
Director General who is responsible to the WTO. Similarly details on Committee on Budget,
Finance, and Administration are given in Article VII and finally as regards the status of the
WTO, it has been made clear in Article VIII.
The Contracting Parties of WTO agreement agreed to accord legal personality and
also to accord such privileges and immunities to the organisation and to its officials as are
necessary for the exercise of certain functions.

 Basic Principles of WTO

1) Most-Favoured-Nation (MFN) or Non-discrimination Between Members:
Every member has to be treated equally without any discrimination. If a member
grants another member a special favour, such as lower customs duty rate for a product, the
same lower duty has to be applicable for all other WTO members. Thus, non-discrimination
between members is the essence of the MFN principle. The importance that is given to the
MFN principle is evident from the fact that it is the first article of the GATT that governs
trade in goods and it also appears under Article 2 of the General Agreement on Trade in
Services (GATS) and under Article 4 of the Agreement on Trade-related Aspects of
Intellectual Property Rights (TRIPs).
The WTO allows some exceptions to the MFN principle. For example, countries can
set up a Free Trade Agreement (FTA) that applies only to goods traded within the group and
thus discriminate against goods from countries that are not members of the FTA. However, it
should be noted that the formation of an FTA should not result in higher tariffs for non-
members.
Members can also give developing and least developed countries special access to
their markets (Generalised System of Preferences) or raise barriers against products that are
considered to be traded unfairly (Dumping and Subsidies) from specific countries. However,
overall, members have to follow strict conditions if they propose to deviate from the MFN
principle.

2) National Treatment or Non-discrimination Between Goods:

Under this principle, imported goods that have entered the domestic market should be
given the same treatment as that given to locally produced goods. This principle of national
(or same) treatment is applicable to foreign and domestic services, and to foreign and local
trademarks, copyrights and patents.
The importance given to the principle of “national treatment” can be gauged from the
fact that it is also found in all the three main WTO agreements, appearing as it does under
Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPs.
National treatment only applies once a product, service or item of intellectual property
has entered the market. Therefore, charging customs duty on imports is not a violation of
national treatment even if locally produced products are not charged an equivalent rate.

3) Freer Trade: Gradually Through Negotiation:

The third principle is concerned with the lowering of trade barriers. The barriers
concerned include customs duties (or tariffs) and measures such as import bans or quotas that
selectively restrict import quantities. Often issues such as red tape and exchange rate policies
have also been discussed under this principle.

4) Predictability: Through Binding and Transparency:

This principle is about members making a promise not to raise trade barriers. In the
WTO, when countries agree to open their markets for goods or services, they “bind” their
commitments. For goods, these bindings amount to ceilings on tariff rates.
A country can change its binding (Tariff ceilings) only after negotiating with its
trading partners. One of the achievements of the Uruguay Round of multilateral trade talks
was to increase the amount of trade under binding commitments. In agriculture, 100% of
products now have bound tariffs.
Under predictability and stability, the use of quotas and other measures used to set
quantitative limits on imports are discouraged. The members are also required to make their
trade rules as “transparent” as possible and also 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 (TPRM) provides another means of
encouraging transparency both at the domestic and at the multilateral level.

5) Promoting Fair Competition:

The rules on non-discrimination – MFN and national treatment – create conditions of
fair trade for all members. Many of the WTO agreements such as the one on dumping
(exporting at below cost to gain market share), subsidies in agriculture, intellectual property,
services, have clauses that promote fair competition.
The WTO agreements cover goods, services and intellectual property and include
individual countries’ commitments to lower customs tariffs and other trade barriers, and to
open and keep open services markets, set procedures for settling disputes and prescribe
special treatment for developing countries.
Thus, essentially, members are required to follow a system based on rules that are
nothing but actually agreements that member governments have themselves negotiated and
signed.

 Tariffs: Cuts and Bindings

The bulkiest results of the Uruguay Round are the 22,500 pages listing individual
countries’ commitments on specific categories of goods and services. These include
commitments to cut and “bind” their customs duty rates on imports of goods. Developed
countries’ tariff cuts were for the most part phased in over five years from January 1, 1995.
The result was a 40% cut in their tariffs on industrial products, with the average tariff falling
from 6.3% to 3.8%.
The Uruguay Round package has been improved in several ways since 1995. For
instance, on March 26, 1997, 40 countries, accounting for more than 92% of world trade in
information technology products (Information Technology Agreement or ITA), agreed to
eliminate import duties and other charges on these products by 2000 (by 2005 in a handful of
cases). As with other tariff commitments, each participating country has to apply its
commitments on an MFN basis, and this also applies to members who have not signed the
ITA.

 More Bindings
 Developed countries increased the number of imports whose tariff rates were “bound”
from 78% of product lines to 99%. For developing countries, the increase was considerable;
from 21% to 73%. Countries in transition from centrally planned economies to a free-market
economy increased their bindings from 73% to 98%.

 The Built-in Agenda

Many of the Uruguay Round Agreements had built-in timetables for future work.
There were well over 30 items in the original built-in agenda. For example, Maritime
Services, Services and environment, Government Procurement of Services, Basic Telecoms,
Financial Services, Intellectual Property, Textiles and Clothing, Dispute Settlement, etc.