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World Trade Organization(WTO), Facts That Will Blow Your Mind

Updated on October 29, 2013

The World Trade Center

The World Trade Organization (WTO) has a total membership of 153 countries as of July 2008. The membership runs the organization through a secretariat and arrives at major decisions wholly. To achieve this they rely on bi-annual meetings of their ministers or regular ambassadors meetings held at the organization’s headquarters in Geneva, Switzerland. The organization is majorly responsible for international economic affairs as it plays a major role in global governance. This essay describes structure and roles of the World Trade Organization and further looks at the balance of payments and tariffs regulations within the organization.

All agreements of the WTO start with negotiations, even the formation of the WTO itself was agreed upon after seven years of negotiations, known as the Uruguay Round, to succeed the General Agreement on Tariffs and Trade (GATT) in January 1995. The agreements are mostly legal texts on many activities. However, there are principles that form the core of these agreements. The principle of the Most-Favoured-Nation (MFN) requires that countries do not discriminate between other trading partners. Secondly, the National treatment principal ensures that both foreigners and locals equally. The WTO agreement emphasizes the importance of trade as a vehicle for achieving sustainable development. Today goods, services and intellectual property are covered under various WTO agreements. Apart from the Uruguay Round of negotiations, there have been eight other rounds and currently the Doha Round launched in Doha, Qatar in November 2001 is in progress. There are WTO councils and committees that promote transparent formulation of trade policies by governments. All member states are individually scrutinized periodically on their trade policies and practices. Some WTO agreements are not signed by all members and therefore become “plurilateral” agreements.

In order to protect their local industries, governments impose importation quotas on goods that disrupt local prices because their international price is lower than the local price. These quotas give a defined volume of imports that is allowed to be imported to a country without inflating supply levels and hurting local prices. Even when the price margin of domestic and international prices is desirable for importers, they cannot continue to import after the import quota limit has been reached. As a result, demand of the good in the international market, made up by importers, lowers and so does the international price. One of the effects of this is low foreign exchange earnings for the exporting country and a subsequent curtailed development progress of the world when the situation is magnified. To free up trade and promote development the GATT 1947 agreement and its successor the WTO 1995 agreement generally rule out quantitative restrictions in international trade. The agreements understand the need for regulation of trade to protect individual country markets and provide sustainable earning brought about by predictable markets. To this end, the agreements allow the use of duties, taxes or other charges to regulate trade. The WTO aims to realize a transparent non-discriminatory import/export regulation tariff applied only at the border exit or entry. Thereafter the WTO uses rounds of negotiations to lobby for the reduction of the tariffs.

Tariffs

Tariffs are custom duties levied on imported goods so that they do not have a price advantage to similar domestically-produced goods. Tariffs also raise revenues for governments which are useful to build reserves usable in maintaining equilibrium of balance-of-payments.

The WTO is uninterested in the earnings by individual countries, and concerns itself with matters of trade distribution and how trade is influenced by quota administration. A tariff-rate quota does not limit import quantity. To define it economically as a two-tiered tariff, in a given period, a lower in-quota tariff is applied to the first given units of imports and a higher over-quota tariff is applied to all subsequent imports. Tariff rate quotas are favored as a form or international trade regulation because they do not limit quantities imported. An importer is free to pay the over-quota tariff and still profit when the margin between the domestic and international price is desirably higher than the over-quota tariff. Hence, imports can still be expanded even when the quota limits are reached. This explains why a tariff quota is considered less restrictive than a standard quota. However in cases where the over-quota tariff results to prohibitively expensive imports, then a country’s imports are observed to be of the same levels as when a traditional quota is in place. This arises because importers are less motivated to import when the profit margins are minimal.

New tariff rates when adopted become the listed tariffs. The first tariff cuts started in developed countries and were phased in over five years from 1 January 1995. Tariffs are charged on single product or a group of products as defined by WTO agreements. Countries commit not to raise their tariffs above the bound tariff rate and can only raise their rates after agreeing on compensation terms with other countries concerned.

Balance-of-Payments

A negative balance of trade where net earnings from exports are less than payments for imports contributes to a deficit in the balance of payments. All components of the BOP are supposed to sum to zero. In the case where a deficit in trade arises, a country is forced to seek other ways like using up their reserves, if they have enough, or receive loans from other countries. Within the rules of the WTO are provisions created for the sole purpose of safeguarding a member’s external financial position. They allow members to impose import restrictions to protect their balance of payments. The same provisions ask members to continuously relax restrictions when situations that warrant them improve, consequently members are supposed to abolish the restrictions when there is no longer a justification for their placement. Requests by countries to impose import restrictions so as to safeguard their balance of payments are handled by the Committee. When presented with a restriction request together with supporting evidence, the Committee Chairman drafts a report reflecting main discussion points and recommendations. Upon approval by the committee, the report is handed over for adoption at the next General Council. In some cases the Committee might find that a member’s request to implement import restrictions is inconsistent with provision of balance-of-payments. The Committee then requests the Member to factor in the provisions or withdraw the request and if the Member does not do so the consultation terminate. Other members are then free to use the provisions on dispute settlement.

Korea is an example of a country that has been able to successfully lobby to be allowed to impose import restrictions, and after development of adequate capacity in the industries concerned it has withdrawn those restrictions. The Korean government was able to eliminate its Import Diversification Program by the end of 1996. Only consumer products were targeted by the program and the list of product coverage had gradually increased until 1981 before gradually reducing to zero in June 1999. Japan was the trading partner most affected by the import restrictions; however it did not raise a formal complaint with the Dispute Settlement Body. Instead it decided to argue its case by lobbying through the ministerial annual meetings which allows room for political considerations.

In theory specialization dictates that the Member most capable of producing a given commodity efficiently should be left to do so while other Members produce what they are best at producing. A free market then provides a means by which a member obtains that which they do not produce, at a fair price. The balance-of-payment provisions in WTO offer temporary relief and are not the best way of ensuring that equilibrium in the balance-of-payments exists. Articles XII and XVIII of GATT, which is the precursor of WTO, state the need for Members to use the productive resources most economically so that a lasting equilibrium of the balance-of-payment is maintained .

In 1997 the Korean government agreed to receive assistance from the IMF to overcome its financial crisis. The government was able to successfully implement a liberalization of its financial services and trade. As a result, there was no longer need to impose import restrictions due to balance of payments reasons. By deciding to receive assistance from the IMF the Korean government avoided a dispute that might have arisen when it became too much for Japan to withstand the import restrictions.

Dispute Settlements and the Appellate Body

A dispute-settlement system offering an incremental level conflict resolution mechanism forms the center of the international trading order. It is made up of the Appellate body is based in Geneva, Switzerland that was established in 1995 in order to properly regulate international trade that is characterized by international trade disputes among non-governmental organizations and member country governments. The Appellate Body consists of seven members serving four-year terms who are eligible for reappointment once. It is the ultimate authority of dispute resolution in the World Trade Organization structure and therefore its reports are accepted as final to all disputing parties. However the reports have to be adopted by the Dispute settlement body. At a level below the Appellate body is the panel that adjudicates upon consultation processes that are started when disputes emerge.

Challenges facing WTO

The WTO is accused of asserting its jurisdiction in areas where it has inadequate capabilities of dispute resolution. For example the Beef Hormones dispute was a general conflict of environmentalists and international trade yet the panel tasked with its settlement did not identify compatible interpretive environmental regimes and trade principles that required further development for attainment of the two goals. Over time and with the expansion of the membership of the WTO, the reaching of a consensus among member states has been difficult. In fact only the Uruguay Round is considered to be a truly comprehensive round. It is credited with the creation of disciplines to govern service and trade-related intellectual property rights (TRIPS). In WTO agreements there are special provisions for developing countries that make up two thirds of its membership. These include; extended time periods for agreement and commitment implementation, support and help in building trade capacity, handling of disputes and implementation of technical standards. All these provisions are provided by the WTO through annual technical corporate missions and courses in Geneva for government officials as aid for trade. The WTO thrives on rules established to ensure universality and openness while ensuring that there is no discrimination.

All is not rosy in the Current Doha round of negotiations. There is an increasing lobbying voice demanding that social responsibilities in environmental care, unemployment problems and considerations for the young and the vulnerable be factored in multilateral trade agreements. This lobby group is made up of N.G.Os, environmentalists and militant trade unions. Without WTO trade would be unfavorable for developing countries. But even with the WTO most developing countries feel that they’re getting a raw deal when it comes to benefits of multilateral trade liberalization. The preferential treatment that the lobby groups want from the WTO is the use of trade restrictions to enforce preferred standards. These standards are necessitated by the increased sophistication of consumer goods and their production processes as claimed by the lobby group. On the other hand, developing countries feel that these are opportunities being exploited for protectionist purposes. More importantly, developing countries state that they are sovereign and should not be compelled to follow minimum environmental and labor standards. In the event that members fail to resolve an impasse and the WTO multilateral trading system collapses, international trade will not cease. There are bilateral Free Trade Area agreements among countries as well as Regional Trading Agreements and exclusive trading blocs that countries would turn to.

The future of WTO is depends on the winner between two groups with opposing views. One view is that there is a vacuum in global governance and the WTO is best suited to assume more responsibilities. The argument is that a trading system should not act alone and must include development goals and social and environmental issues. The other view is that WTO should in fact narrow its agenda given that the United Nations already handles issues of development, human rights and labor. Instead of expanding the mandate of WTO, that of the United Nations should be strengthened.

The World trade Organization exists mainly to regulate international trade on a near global level. It forms a forum where trade disputes between governments of the member countries can be settled through negotiations. The WTO agreements recognize the need to introduce gradually any changes especially for developing countries. Therefore, timeframes for the fulfillment of their obligations are stretched accordingly. As more rounds of negotiations are held and more members join, new issues are being raised as well as new goals for the WTO in terms of achieving a pure free market international trade. The Appellate Body as the top organ of the disputes handling mechanism handles appeals arising from disputes judged by the panel.

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