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World Development case study: World Trade Organization

How useful is the World Trade Organization?

Much of the world’s press and many of its political leaders hailed an agreement reached at a World Trade Organization (WTO) conference at the end of 2013 as a ‘breakthrough agreement’. The agreement itself did not represent a major success for world trade but it is the first global agreement the Organization has managed to achieve in the 18 years of its existence. How useful is the WTO to the development of countries in a global economy?

The WTO was established in 1995 but it really has a much longer history than that. After the Second World War many countries were economically depressed and the Allied countries, led by the US, thought that it was vital to promote the spread of liberal capitalism, economic co-operation and increased world trade as a means of preventing future global conflict and the spread of communism. As a result of the Bretton Woods Conference in 1944, the 44 Allied countries signed an agreement to set up institutions that would regulate the global monetary system – the World Bank and the International Monetary Fund. The original intention was to create a third institution to handle the trade side of international economic co-operation. This was to be known as the International Trade Organization (ITO), which was to be a specialized agency of the United Nations. The draft ITO Charter was ambitious and complex. It included rules on employment, commodity agreements, restrictive business practices, international investment and services. The aim was to create the ITO at a UN Conference on Trade and Employment in Havana, Cuba, in 1947.

However, the US refused to sign the original ITO charter, with the result that it was never ratified. Instead, over the following years there were a series of General Agreements on Tariffs and Trade (GATT) on specific trade-related issues that were a consequence of negotiations in Geneva (1964-7), Tokyo (1973-9), Uruguay (1986-94) and the current round of negotiations that began at Doha in 2001. Each round of negotiations included separate Ministerial Conferences to evaluate progress. At the Uruguay round of talks, countries reached an agreement to replace GATT with the World Trade Organization. The WTO was founded on 1 January 1995 but China only joined in 2001 and Russia was not granted membership until 2012, after 19 years of negotiation. There are currently 159 member states.

The objective of the WTO and GATT has always been to lower trade barriers to help trade flow as freely as possible because increasing trade is seen as important for economic development. This neoliberal view of global trade is based on the belief that unrestricted flows of goods and services will sharpen competition, motivate innovation and breed success in participating countries.

The WTO has three major functions:

  • To host negotiations between member countries
  • To remove obstacles to trade
  • To resolve conflicts of interest between member countries.

Essentially, the WTO is a place where member governments go, to try to sort out the trade problems they face with each other. The first step is to talk. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. The bulk of the WTO's current work comes from the 1986-94 negotiations called the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade (GATT).

At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations. These documents provide the legal ground-rules for international commerce. They are essentially contracts, binding governments to keep their trade policies within agreed limits. Although negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives.

The system’s overriding purpose is to help trade flow as freely as possible – so long as there are no undesirable side-effects – because this is important for economic development and well-being. That partly means removing obstacles. It also means ensuring that individuals, companies and governments know what the trade rules are around the world, and giving them the confidence that there will be no sudden changes of policy. In other words, the rules have to be ‘transparent’ and predictable.

This is a third important side to the WTO’s work. Trade relations often involve conflicting interests. Agreements, including those painstakingly negotiated in the WTO system, often need interpreting. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation.

WTO Website

The complexity and range of issues involved in global trade has often meant that progress at trade talks has been very slow. In the last decade, agriculture, industrial tariffs and non-tariff barriers and services have caused particular problems. The developed nations, (including the EU, the US and Japan) have significant differences of opinion about the nature of trade from developing countries (led by India, Brazil, China and South Africa). A lot of problems have been caused by the imposition of tariffs imposed by the developed nations on goods coming from developing countries. The maintenance of agricultural subsidies, which operate as trade barriers, has been a serious source of conflict between the US and the EU. The banana trade war between the EU and the US began in 1991 over tariffs that were imposed by the EU on bananas imported from Latin America but owned by companies based in the US. The dispute only concluded in 2012 when the EU agreed gradually to reduce the tariff over an eight-year period.

The WTO has been criticized by groups with opposing views of world development. Supporters of trade liberalization have questioned the efficiency of its multilateral approach to trade negotiations because it makes successful negotiations very hard to achieve. Their evidence is the lack of progress in the whole of the Doha round towards getting rid of agricultural subsidies in the developed world. They believe that a unilateral or regional approach would speed up trade liberalization by reducing the number of countries involved in the talks. On the other hand, global justice movements such as Occupy see the WTO as an organization that provides support for the continuing spread of neoliberal capitalist economics, as an organization dedicated to delivering the goods for Western transnationals at the expense of poor people.

GATT and the WTO have tackled some very difficult challenges. The early round of GATT talks concentrated on reducing tariffs, the Kennedy Round of the 1960s was concerned with an Anti-Dumping Agreement (selling heavily subsidized products at very cheap prices to other countries) and the Tokyo Round in the 1970s tackled trade barriers that do not take the form of tariffs. These might include measures that were apparently for environmental protection (such as limits on exhaust emissions that excluded EU and US cars from Japanese markets) or consumer protection laws that acted as a barrier to imports.

The success of the early GATT talks in reducing tariffs led governments to introduce more imaginative means of protecting sectors from increased foreign competition. Economic recessions in the 1970s and 1980s caused high unemployment and factory closures and encouraged governments in the developed countries to look for market sharing arrangements with competitors and increased subsidies to agriculture to maintain their hold on agricultural trade. Both of these things undermined the effectiveness of GATT and increased trade conflicts. The WTO was criticized for its ineffectiveness in dealing with global trade issues such as this. The DOHA round of talks that began in 2001 appeared to be heading for failure at the Bali ministerial conference and the announcement of an agreement between the 159 member countries of the WTO came as a surprise to many.

The Bali Agreement 2013

The agreement reached in Bali was the first global trade agreement reached by WTO since it was formed in 1995.

The package of measures agreed by the WTO in Bali has three main elements:

Trade facilitation
This is a binding pledge by all WTO countries to make it easier for goods to cross borders. It involves simplifying customs procedures, removing red tape and rooting out corruption. Hailed by the WTO as one of the biggest reforms since it was founded in 1995, the benefits to the global economy have been estimated at between $400bn (£244bn) and $1tn. Poorer countries will be given time and financial help to improve infrastructure and training.

Food security
Talks in Bali almost foundered owing to US pressure on India to stop stockpiling subsidized grain. New Delhi said the domestic support was needed to feed India’s poor. A ‘peace clause’ was agreed in which India was allowed to keep its regime in place but only on the basis that the agreement was temporary, with a permanent deal to be concluded within four years.

Help for the least developed countries
Many Western countries have already agreed duty-free and quota-free access to their markets for goods from more than 30 of the world’s poorest countries. Those that have not done so for at least 97% of products ‘shall seek’ to improve product coverage. In addition, there will be simplified ‘rules of origin’ for the world’s poorest countries. The WTO says these will help the least well-off countries identify products as their own goods, making it easier to get preferential treatment in importing countries.

The Guardian, 18 December 2013

The outcome of the conference has been received with varying degrees of enthusiasm depending on where the commentators lie on the neoliberal capitalist and global-justice spectrum.

‘The WTO’s Bali agreement represents the rejuvenation of the multilateral trading system that supports millions of American jobs and offers a forum for the robust enforcement of America’s trade rights.’ - US President Barack Obama.

‘The Bali package is hardly going to make a difference for poor countries, but at least it keeps the negotiations on food security alive. Negotiators now have to find a long-term solution to change the rigged rules that stand in the way of developing countries’ food-security policies.’ - Romain Benicchio, senior policy adviser with Oxfam.

‘Not even the measures to protect the least developed countries were achieved here. They (developed countries) keep only empty promises by an organization whose aim is to deliver trade liberalization and business for corporations.’ - Lucia Ortiz, co-ordinator of the Economic Justice Programme of Friends of the Earth International.

Failure to reach a comprehensive agreement on a key part of the negotiation package, subsidized agricultural exports, has been criticized by many development organizations. The Bali draft agreement states that WTO members have to reduce their subsidized exports. The talks were brought to the brink of failure by the insistence of the US that the Indian government should stop subsidizing food crops. The deal that was eventually agreed lets India, and other developing nations, continue to subsidize their crops because of the need to maintain food security. However the agreement also obliges India to report details of its food-subsidy programme or face trade-dispute challenges at WTO. Developed countries also subsidize some parts of their agriculture but claim that some importing countries depend on supplies of cheap, subsidized food from the major industrialized nations. They suggest that farmers in poorer countries may receive a boost from higher prices caused by reduced export subsidies but they will need temporary assistance to make the necessary adjustments to deal with higher-priced imports. Many development organizations see this as just an excuse to continue to pay subsidies to politically powerful farming groups.

The other major component of the Bali deal is an agreement on ‘trade facilitation’ that has been welcomed by developed nations. Basically it involves measures to reduce trade costs by cutting red tape and paperwork in customs procedures. Some have estimated that trade facilitation could cut global trade costs by more than 10%. This would raise annual global output by over $400 billion. Supporters of the measure claim that benefits will flow disproportionately to developing economies. The counter claim is that many developing countries do not have the infrastructure to facilitate the speedier processing of goods that are being traded across international boundaries. The British government has welcomed the agreement and claimed that Britain could gain as much as a billion pounds a year from the facilitation agreement.

Does the World Trade Organization help world development?

Assessing the value of the WTO to world development is always going to depend on which political criteria you adopt. One approach is to ask is whether the world would be a better place without the WTO and its predecessor GATT. If the global economy is going to be dominated by liberal economics and transnational corporations, then a case can be made that an organization such as the WTO is probably needed – even if its achievements are underwhelming. If its record of achieving successful agreements is to be improved it will probably have to abandon its policy of seeking full accord on all policies from all member nations. The process is too unmanageable and is a recipe for deadlock. The latest agreement was actually reached after taking only some of the elements from a much wider agenda that was originally proposed for discussion. The result is a limited agreement that does not impress many people.

Another route for potential progress would be to move from multilateral talks involving all members to ‘plurilateral’ talks where groups of countries agree to try and reach an accord on liberalizing the rules on a good or service with other countries joining in as it suits them. The idea would be to simplify the attempts to reach agreements and also to offer inducements to countries to participate or get left behind by the countries who have reached agreement. The agreements reached may turn into global agreements or not. The limited nature of the Bali agreement is at least partial recognition that the negotiation process needs to be simplified if the organization is to have any relevance in the future.

Individuals and organizations that see the global dominance of liberal economics as a catastrophe for global development just see WTO as a part of the problem. It provides a structure for the developed and wealthy nations to impose their rules on the weaker and less developed countries. Negotiations are never conducted between equal partners and the dice are loaded in favour of the developed countries. What use is a referee if they only give decisions that favour the home side?

Between these two opposing views there are a lot of people who see no alternative to an organization such as WTO but also believe that its continued usefulness to development depends on finding ways of working that are more flexible, less cumbersome and more representative of the views of developing countries

Reading and Resources

The World Trade Organization website. Useful for historical detail and the aims and objectives of the organization.

Larry Elliott, The Guardian, 18 December 2013

Dr Kamal Monno, The Nation, 16 January 2014

Editorial, The Economist, 9 December 2013

Friends of the Earth International, Radio Mundo Real, 19 December 2013

Alan Bjerga, Bloomberg News, 8 December 2013

Australia Network News, 8 December 2013

Andrew Walker, BBC News, 7 December 2013

John Hilary, The Guardian, 25 November 2009 (‘Time to kill off Doha’)