The Role of WTO in International Business

In this increasingly globalized scenario, companies need to be globally competitive in order to survive. Knowledge and understanding of different countries’ economies and their market is a must for establishing oneself as a global player. Now the business has gone beyond the boundaries of a nation and has turned into the international business. It’s quite necessary to understand the meaning of international trade and the international organization popularly known as World Trade Organization (WTO) and its contribution towards the international business and smooth trading between countries.

International trade is defined as a contract where two parties (These parties may operate their business in different countries trading in goods and services) enters into the transaction of buying and selling of goods and services irrespective of national boundaries. This involves the import and export trade where one country either sells goods or service to other country or buys goods and service from other country. Followings are the five essentials for such international trades –

1. The contract of sale of goods.
2. The contract of carriage of goods.
3. The contract of insurance for the goods.
4. The compliance with exports and imports authorities in terms of formalities and documentation required.
5. The mechanism for payment set up by the buyer.

Since no nation can produce all its needs by itself alone, international trade has become not only a means by which nations source those goods and services they lack or do not have in sufficient quantities but also a subject of international politics either for achieving, promoting or maintaining peace between international trading partners or countries. As a result of external developments in countries with which countries inter-depends or depends on for the essential products and sometimes wars are also fought to preserve the national security. Its has been a common observation that one of the reasons for US going into the Gulf wars on the side of Kuwait against Iraq was US’s intention to preserve the vulnerability of its economy to oil crisis if it’s cut off from oil purchase from the Gulf by the hostile Iraq that had annexed the oil-rich portions of Kuwait.

The allied countries involved in World War 2nd realized at the end of the war that the trade tensions among the allied countries contributed on outbreak of World War 2nd. They felt the need for an organization for international cooperation which can work among countries to establish a discipline in economic relations in order to prevent future disputes. However, the resolution passed in 1946 by the United Nations Economic and Social Council [ECOSOC] to prepare a protocol to establish a world organization whose parties would jointly establish rules for trade among them, was to be embodied in the International Trade Organization [ITO]. The first attempt by an international body to bring out fair and uniform guidelines for international trade at both private and international levels was at the Havana Conferences [1947 and 1948] consequent to which a charter for ITO [The Havana Charter] was drafted. Somehow, the ITO did not receive necessary support but the GATT (General Agreement on Tariffs and Trade) which was drafted parallel with the Havana Charter after negotiations in Geneva, was adopted by a provisional protocol under which the signatories agreed to apply GATT until ITO could take over supervisions of international trade. When ITO collapsed, GATT used to order the international trade relationships of the signatories. Multilateral negotiations went for a series of rounds, and the the Uruguay Round of which brought the World Trade Organization into existence, and it has become an umbrella organization with responsibility for the GATT.

The World Trade Organization is therefore the organization which was set up out of the Uruguay Round of General Agreement on Tariffs and Trade negotiations in 1995 and which became the successor to and replacement of the General Agreement on Tariffs and Trade [GATT] and it inter alia regulates trade and tariffs worldwide and settles trade disputes amongst members. The “Dunkle Text’ contained a charter for a Multilateral Trade Organization [MTO] aimed at providing an institutional framework within which the results of the Uruguay Round could operate. Within the MTO was established a new dispute settlement mechanism and a Trade Policy Review Mechanism [TPRM]. There was a framework which, provided annexes of the more important areas such as the General Agreement on Trade in Services [GATS] and The Agreement on Trade Related Intellectual Property [TRIPS] which were a part of the Text. (David Hartridge 2000)

Contrary to the position of almost all contracting parties to GATT for the retention of MTO, at the insistence of the US, it was changed to WTO. GATS has two parts, the short framework agreement which is substantially similar to the GATT and the schedules of national commitments which members have undertaken and which form a part of the Agreement in the same way that tariffs are part of the GATT. (David Hartridge 2000)

However, in GATS, governments freely choose which services to include in their schedules and in the committed sectors, they are free to maintain limitations on the degree of market access and national treatment they are prepared to guarantee. Therefore, negotiations for further liberalization will involve negotiators pressing their partners to include more sectors in their schedules and to remove some of the limitations they still maintain. The Agreement provides for every means by which services can be traded and supplied and is not limited to cross-border trade as with GATT, but also consumption abroad, which means the freedom of shippers to use foreign transport providers, the right to set up any type of business to supply the service in the export market [establishment trade], and the temporary movement abroad of individuals to provide a service, all of which show that GATS is also concerned with foreign direct investment. (David Hartridge 2000)

It has been argued by Professors Gabriel Moens and Peter Gillies that the aims of GATT are equality of treatment for both imported and exported goods and the creation of a world wide open trading system and that the essential GATT principle is that of non-discrimination from which three other principles are derived, namely the most-favoured-nation principle, the national treatment principle and the reciprocity principle. They also argued that the GATT and WTO Agreements are essentially the multilateral acceptance of disciples upon the exercise of sovereignty whereby parties agree to limits upon what they will and will not do in respect of trade regulation, for instance in the setting of tariffs and other barriers to trade in goods and services and investment and that this does not necessarily mean a surrender of sovereignty of state since countries still retain the power to take actions under domestic regulation in violation of their international obligations. This writer respectfully partially disagrees with the learned professors because as a member of the international community and signatory to any treaty, a member state is bound to fulfill its treaty obligations failing which it might be sanctioned should it use its domestic regulations to circumvent what it voluntarily bound itself to perform by an international agreement. The principle of pacta sunt servanda will apply in that case. (Cavendish 1998)

The role of WTO in international trade is as stipulated in the Agreement establishing it (Article III of the Agreement establishing WTO) and includes:

1. Facilitating the implementation, administration and operation and furthering the objectives of the agreement establishing it and other Multilateral Trade Agreements and providing the framework for the implementation, administration and operation of the Plurality Trade Agreements. (Article III of the Agreement establishing WTO)
2. Providing the forum for negotiations among its Members concerning their multilateral trade relations in matters dealt with under the agreements in the Annexes to the Agreement setting it up and for the results of such negotiations as may be decided by the Ministerial Conference. (Article III of the Agreement establishing WTO)
3. Administering the Understanding on Rules and Procedures Governing the Settlement of Disputes or the Dispute Settlement Understanding which is Annex 2 to the agreement setting it up. (Article III of the Agreement establishing WTO)
4. Administering the Trade Policy Review Mechanism in Annex 3 of the agreement setting it up. (Article III of the Agreement establishing WTO)
5. Cooperating as appropriate with the International Monetary Fund and the International Bank for Reconstruction and Development [a.k.a. the World Bank] with a view to achieving greater coherence in global economic policy making. (Article III of the Agreement establishing WTO)

This is aimed at building better understanding and coordination between a trade organization like WTO and monetary institutions like IMF and World Bank. It may be said in passing that these are two financial institutions without good reputation with developing countries and that are seen by them to have been recommending economic reforms and structural adjustment programmes that destroy, rather than rebuild, their economies.

A lecturer has argued that the ultimate goal of the multilateral institution of GATT and WTO (Dr Ademola ) is the provision of free global trade and economic relationship among members and that GATT is designed to achieve free trade and to improve market access by-

(a) Having all protection take the form of tariffs;

(b) Holding multilateral negotiation at which those tariffs are lowered and bound;

(c) Ensuring that these agreements are implemented by requiring that any increase in a bound tariff must be compensated by the reduction of another;

(d) Providing a mechanism by which signatories can settle disputes.

The success of WTO in its role of increasing world trade is measured in accordance with the volume and growth of world trade and although this went up by 25% in the last 8 years, the benefits of that increase are not equitably shared among member states. For instance, only 0.03% of the world trade represented by the least developed countries which accounts for 20% of the world’s population.

By 2003, the WTO had 145 members, including China which joined at the end of 2001. Another 25 countries, including the Russian Federation and Saudi Arabia, were negotiating for membership into the organization. Since its formation, the WTO has remained at the forefronts of efforts to promote global free trade. Its creators expressed the hope that the enforcement mechanism granted to the WTO would make it a more effective policeman of global trade rules than the GATT had been. The great hope was that the WTO might emerge as an effective advocate and facilitator of future trade deals, particularly in areas such as services. The experience so far has been encouraging, although the collapse of WTO talks in Seattle in late 1999 raised a number of questions about the future direction of the WTO. (Frances Williams, 1997)

The first few years in the life of the WTO suggest that its policing and enforcement mechanism are having a positive effect. Between 1995 and early 2003, more than 280 trade disputes between member countries were brought to the WTO.(WTO Website) This record compares with a total of 196 cases handled by the GATT over almost half a century. Of the cases brought to the WTO, three-forth had been resolved by late 2002 following informal consultation between the disputing countries. Resolving the remainder has involved more formal procedures, but these have been largely successful. In general, the countries involved have adopted the WTO’s recommendations. The fact the countries are using the WTO represents an important vote of confidence in the organization’s dispute resolution procedures. (Frances Williams, 1997)

The Uruguay round of GATT negotiations extended global trading rules to cover trades in services. The WTO was given the role of brokering future agreements to open up global trade in services. The WTO was also encouraged to extend its reach to encompass regulations governing foreign direct investment, something the GATT had never done. Two of the first industries targeted for reform were global telecommunication and financial services industries. (Frances Williams, 1997)

The WTO tackled telecommunications first. The goal of the WTO was to get countries to agree to open their telecommunication market to competition, allowing foreign operators to purchase ownership stakes in domestic telecommunication providers and establishing a set of common rules for fair competition. The benefits claimed for such agreement were threefold. (Frances Williams, 1997)

First, advocates argued that inward investment and increased competition would stimulate the modernization of telephone networks around the world and lead to higher quality services. Second, supporters maintained that the increased competition would benefit customers through lower prices. Estimates suggested that a deal would soon reduce the average cost of international telephone calls by 80 percent and save users $1,000 billion over three years (Alan Cane 1997). Third, the WTO argued that trade in other goods and services invariably depends on flow of information matching buyers and sellers. As telecommunication services improve in quality and decline in price, international trade increases in volume and becomes less costly for traders. Telecommunication reform, therefore should promote cross-border trade in other goods and services. (Frances Williams, 1997)

A deal was reached February 15, 1997. Under the pact, 68 countries accounting for more than 90 percent of world’s telecommunication revenue pledged to start opening their markets to foreign competition and abide by common rules for fair competition in telecommunication. Most of the world’s biggest markets, including United States, European Union and Japan were fully liberalized by January 1, 1998, when the pact went into effect. All forms of basic telecommunication services are covered including voice telephony, data and fax transmission, and satellite and radio communications. Many telecommunication companies responded positively to the deal, pointing out that it would give them a much greater ability to offer their business customers “one stop shopping” – a global, seamless service for all their corporate needs and a single bill.(Frances Williams, 1997)

The global trade in telecommunication sector is recently supported by a major deal between India’s Bharati Airtel and Africa’s Zain which stood successfully on the ground stone established by WTO. The total cost of the deal is expected to be 10.7 billion dollars. Where 9 billion dollars and 1.7 billion through debt and the rest is to be paid in the following year, which is about 700 million dollars. The entire process is managed with 1.9% rate of interest. 15 African countries and various regulators were positive with Bharti’e entry in Africa. This deal was driving their common agenda to create employment, establish higher tele-density, improved quality of service. Business network partners were excited to open their shop floors in the country to support Bharti’s expansion.

Zain African Assets offer a good strategic fit for Bharti’s future growth prospects citing pressure on domestic revenues. Domestic scenario too is improving with stabilization of tariffs & rollout of new players getting delayed due to the ban on imports of Chinese equipments on security grounds. Further, the much-delayed mobile number portability (MNP) could be a non-starter as the government has rejected the proposal of US-based Telcordia Technologies, one of the two companies chosen to implement MNP.(Prabhudas Liladher Report 2010)

Another example of United States — Import Prohibition of Certain Shrimp and Shrimp Products also justifies that the WTO is working in favor of its member countries but also it gives the right to its member countries to have the right to take trade action to protect the environment (in particular, human, animal or plant life and health and endangered species and exhaustible resources). The WTO does not have to “allow” them this right but this has to be taken care by its member countries that the member countries cant discriminate among other member countries to meet the goal of environment, species and resource protection.

WTO case Nos. 58 (and 61). Ruling adopted on 6 November 1998

Seven species of sea turtles have to date been identified. They are distributed around the world in subtropical and tropical areas. They spend their lives at sea, where they migrate between their foraging and nesting grounds. Sea turtles have been adversely affected by human activity, either directly (their meat, shells and eggs have been exploited), or indirectly (incidental capture in fisheries, destruction of their habitats, pollution of the oceans). (Charles W L Hill & Arun Kumar Jain 2007) & WTO Case No. 58& 61

In early 1997, India, Malaysia, Pakistan and Thailand brought a joint complaint against a ban imposed by the US on the importation of certain shrimp and shrimp products. The protection of sea turtles was at the heart of the ban. The US Endangered Species Act of 1973 listed as endangered or threatened the five species of sea turtles that occur in US waters, and prohibited their “take” within the US, in its territorial sea and the high seas. (“Take” means harassment, hunting, capture, killing or attempting to do any of these.) Under the act, the US required that US shrimp trawlers use “turtle excluder devices” (TEDs) in their nets when fishing in areas where there is a significant likelihood of encountering sea turtles. (Charles W L Hill & Arun Kumar Jain 2007) & WTO Case No. 58& 61

Section 609 of US Public Law 101–102, enacted in 1989, dealt with imports. It said, among other things, that shrimp harvested with technology that may adversely affect certain sea turtles may not be imported into the US — unless the harvesting nation was certified to have a regulatory programme and an incidental take-rate comparable to that of the US, or that the particular fishing environment of the harvesting nation did not pose a threat to sea turtles. In practice, countries that had any of the five species of sea turtles within their jurisdiction, and harvested shrimp with mechanical means, had to impose on their fishermen requirements comparable to those borne by US shrimpers if they wanted to be certified to export shrimp products to the US. Essentially this meant the use of TEDs at all time. (Charles W L Hill & Arun Kumar Jain 2007) & WTO Case No. 58& 61

In the report of Appellate Body’s ruling on this case, the Appellate Body made clear that under WTO rules, countries have the right to take trade action to protect the environment (in particular, human, animal or plant life and health) and endangered species and exhaustible resources). The WTO does not have to “allow” them this right. It also said measures to protect sea turtles would be legitimate under GATT Article 20 (i.e. XX) which deals with various exceptions to the WTO’s trade rules, provided certain criteria such as non-discrimination were met. (Charles W L Hill & Arun Kumar Jain 2007) & WTO Case No. 58& 61

The US lost the case, not because it sought to protect the environment but because it discriminated between WTO members. It provided countries in the western hemisphere — mainly in the Caribbean — technical and financial assistance and longer transition periods for their fishermen to start using turtle-excluder devices. It did not give the same advantages, however, to the four Asian countries (India, Malaysia, Pakistan and Thailand) that filed the complaint with the WTO.(Charles W L Hill & Arun Kumar Jain 2007) & WTO Case No. 58& 61

The WTO is an international body which not only takes are of the international trades but also actively participates on business improvisation. It always put required effort to keep the peaceful trans-boundary trades and to solve the disputes if arises among the member countries. We cant think of international trade happening in absence of WTO and all the members are following the protocols set by WTO. Although there are various views on role of WTO but as far as my view is concerned, WTO plays an important positive role for the international trades and its always beneficial for the countries to trade trans-boundary being the member of the WTO.

Citations:

Alan Cane, “Getting Through: Why Telecommunication Talks Matter,” Financial Times, February 14, 1997

Article III of the Agreement establishing WTO

Charles W L Hill and Arun Kumar Jain (2007). The Political Economy of International Business: Country Focus – Shrims, Turtles and the WTO, pp 174-175

Dr Ademola O. Popoola, Head Department of International Law, Faculty of Law, Obafemi Awolowo University, Ile-Ife in his unpublished paper titled, “Some aspects of the Law of International Trade”.

Frances Williams, “Telecoms: World Pact Set to Slash Costs of Calls,” Financial Times, February 17, 1997

Information provided on WTO website at http://www.wto.org/english/tratop_e/dispu_e/dispu_status/e.htm (Accessed: 04 Aug 2010)

International Trade and Business: Law, Policy and Ethics” published by Cavendish Publishing Australia Pty Limited, 1998 at page 447.

Paper presented by David Hartridge, Director, WTO at the XXVIIth IRU World Congress & Exhibition, titled “Mobility of People and Goods 2000+” “New Round of Negotiations on Trade in Services in the World Trade Organization” in Brussels on 18 May, 2000.

Prabhudas Liladher Report (2010) : Bharti Airtel : Ringing Again. Available at http://www.moneycontrol.com/news_html_files/news_attachment/2010/Bharti_Airtel.pdf (Accessed: 5 Aug 2010)

WTO Case No 58 & 61: India etc versus US: “shrimp – turtle” Available at http://www.wto.org/english/tratop_e/envir_e/edis08_e.htm (Accessed: 06 Aug 2010)