World Trade Organisations Strengths and Weaknesses

At the time of its birth in 1995, there were great expectations for the future of the WTO and its role in the governance of the global economy. For the first time ever, the global trade regime now had a firm legal foundation, a strong organisational basis, and an effective dispute settlement mechanism to ensure the enforcement of multilateral trade rules and disciplines. But this optimism has proved to be misplaced and the multilateral trade regime has been subjected to immense pressures and strains since the late 1990s (Michalopoulos, 1999; Kessie, 1999).This paper briefly discusses the role of WTO. What are the strengths and weaknesses of the WTO system? Do its core rules, principles and dispute settlement procedures fairly reflect the interests of developed and developing countries?

When we look at GATT and the WTO historically, the only major trade liberalization achievement has had been the reduction of (most) industrial tariffs in industrial countries over five decades. In addition, the WTO scored some success eleven years ago in telecoms and financial services. Countries acceding to the WTO have had to liberalize considerably as part of the entry price (Srinivasan, 1999). But in agriculture and services, the record is modest, and developing countries in general have liberalized very little on the altar of the WTO.

By contrast, the WTO is the unique supplier of the global public good of universal rules. This includes rules about market access in the form of tariff bindings and all the other rules that entail precommitment in policy behavior, generating greater certainty and a richer information environment. The rules also reduce power asymmetry between strong and weak or large and small players. Perhaps we have not done enough to emphasize the WTO’s rule-making role. The image of an institution hell-bent on prizing open markets has been dominant, weakening the WTO’s legitimacy in the minds of many critics. This is not an argument against liberalization—far from it but rather a comment on the balance of the message, the WTO’s public image, and therefore the effectiveness of the institution.

A danger, of course, is that the WTO could begin to look more like a “talk shop” than a place to conduct substantive trade policy business. This is a matter of balance, and it would be important to ensure that dialogue did not replace a negotiating agenda nor blunt commitment to effective dispute settlement. The benefits that enhanced dialogue could bring are essentially twofold. First, it would improve the knowledge base for informed decisions and discussions on trade policy. Information and data are simply lacking in a wide range of areas, and improving this situation in the context of an engagement in dialogue could make a contribution to enhanced cooperation and increased welfare. And, second, dialogue promotes understanding and sensitizes parties to the needs, priorities, and perspectives of their counterparts. To the extent that this occurs, it will help to shape the contours of cooperation and increase the likelihood of mutually beneficial outcomes. This idea is not entirely novel in GATT and the WTO.

In 2008, global trade grew by 2 percent in volume, but the WTO expects it to fall by 9 percent in 2009—the biggest contraction in trade since World War II (WTO press release, 2009). Whereas most members of the WTO appear to have kept the worst domestic protectionist pressures under control, there is growing evidence of countries adopting, or threatening to adopt, trade-restricting or trade distorting measures to protect key national businesses and jobs. For some scholars and practitioners, the current financial crisis questions the utility of the WTO in addressing its elements. While recognizing the primacy of the financial crisis, the articles in this special issue resist the assertion of irrelevance. Rather, we would suggest that the financial crisis throws into sharp relief some of the issues that the WTO needs to address if it is to remain relevant in the twenty-first century. Specifically, are WTO rules sufficient to withstand the pressures for retaliation that will ensue if domestic protectionist policies are enacted? This is particularly important given the increasingly hidden or murky nature of much contemporary protectionism. It thus becomes all the more important for the WTO to reach agreement on the Doha Round (Srinivasan, 1999).

The new welfare gains from the Doha Round may not be massive, but the need to lock them and stop previous reforms from being reversed is crucial to the health of the trade system coming out of the economic crisis if trade is to be an important spur to recovery. In addition, the health of the WTO remains an important indicator of the prospects for cooperative multilateralism in the twenty-first century more generally. When the global economic crisis eventually bottoms out, as we should assume it will, the longer-standing issues of the governance of, and the disciplinary remit of, theWTO will still need to be addressed. Given the importance of trade liberalization operating under a rules-based system to the enhancement of aggregate global economic welfare, the role of theWTO will axiomatically regain any salience it has been judged to have lost in the heat of the 2008–2009 crisis. It is the longer-term issues that are central themes of this issue of Global Governance (WTO press release, 2009)…

Variable Geometry and Possibilities for Special and Differential Treatment and the Push to Operationalize

Special and differential treatment in the WTO is premised on the notion that developing country members has different needs than developed country members, and that WTO disciplines should be modified to reflect those different needs. In particular, many developing countries face difficulties in implementing the WTO agreements, dealing with the adjustment costs of trade liberalization, and engaging in international trade to reap the full benefits of WTO membership.4 Thus, the preamble to the Marrakesh Agreement Establishing the World Trade Organization recognized that “there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development.” (Meredith, 2007) Paragraph 2 of the Doha declaration reiterated this and confirmed that “in this context, enhanced market access, balanced rules, and well targeted, sustainably financed technical assistance and capacity-building programmes have important roles to play” (Meredith, 2007)

Special and differential treatment takes a range of forms throughout the WTO agreements. The WTO secretariat has identified six categories of special and differential treatment provisions in the WTO agreements. Although these categories overlap and are somewhat arbitrary, they provide a useful way of classifying and assessing the provisions. (Kessie, 1999) The categories are:

1. Provisions aimed at increasing the trade opportunities of developing country members, such as the exemption from the most-favored-nation rule for developed country members providing preferential tariff treatment to products from developing country members pursuant to Generalized System of Preferences (GSP) schemes. (Kessie, 2002)

2. Provisions under which WTO members should safeguard the interests of developing country members, such as the requirement that members explore the possibility of constructive remedies8 before imposing antidumping duties on developing country members. (Kessie, 2002)

3. Flexibility of commitments and actions, and use of policy instruments, such as the understanding that developed country members “do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to trade” of developing country members (socalled nonreciprocity). (Kessie, 2002)

4. Transitional time periods. For example, the prohibition on import substitution subsidies does not apply to developing countries for five years or to Least Developed Countries (LDCs) for eight years from the creation of the WTO.

5. Technical assistance, such as assistance from the WTO secretariat and developed country WTO members in implementing WTO rules.

6. Provisions relating to LDC members (which also fall within one of the other categories). For example, members agree to exercise “due restraint” in bringing dispute settlement actions against LDC members (Kessie, 2002).

Given the long-standing recognition of the different needs and interests of developing countries in the WTO, and the inclusion of a broad range of special and differential treatment provisions in most if not all WTO agreements, why does special and differential treatment need to be operationalized in the sense of making them more workable? The 2007Warwick Commission report identified the two most important answers. First, most of the existing provisions are merely aspirational, vague, or unenforceable. Second, they do not adequately reflect the differences among developing countries (and LDCs) in the WTO, (Meredith, 2007) which includes Brazil, China, Barbados, Bangladesh, and, most recently, Cape Verde. WTO members and others have long lamented these two key problems. A third, perhaps more controversial, reason for operationalizing special and differential treatment is to redress the unbalanced outcome of the Uruguay Round, whereby developing countries are typically seen as having given more than they received. (Meredith, 2007)

For these and related reasons, the push to operationalize special and differential treatment has come from a number of sources, including the WTO itself, as noted above. Most recently, the Warwick Commission recommended that “efforts be redoubled to design clear, concrete [special and differential treatment] provisions based on solid analysis of development needs and cognisant of the reality that differing needs among developing countries call for differentiated measures,” although it did not indicate specifically how this should be achieved. In any case, neither special and differential treatment nor its Operationalization is a panacea for developing countries in the WTO.

Critical Mass Approaches to WTO Obligations

Some argue that the consensus rule in WTO rule making frustrates work, makes it harder to ensure that the WTO agenda can keep up with the times, and favors an excessively status quo and lowest-common-denominator approach to decisions in the WTO, especially but not only in relation to questions of agenda formation. Others argue that the linkage between consensus and the Uruguay Round-style “single undertaking” resulted in over commitment among many WTO members, engendering resistance to any further extension of the WTO agenda (Finger, 2002). According to this view, the single undertaking experience poisoned the atmosphere in the debate over the Singapore issues, and led to their rejection (except trade facilitation) on grounds that were independent of any serious consideration of their merit.

The removal of veto power through a relaxation of consensus via critical mass decision making and acceptance of an additional degree of variable geometry under WTO rules are not strictly the same thing (Finger, 2002). Consensus decision making could still be required while less than the full membership accepted new obligations. Alternatively, critical mass agreements could be legitimized by decisions among those parties accepting new obligations, with no veto rights on the part of those who are not accepting new obligations. In the latter case, critical mass applies both to defining the obligations in a new policy area for a subset of the membership as well as to decisions about the outcome and its adoption.

For any consideration of this more varied approach to defining the functions of the multilateral trading system, the point at which veto rights disappear is vital. For those with an interest in developing the WTO agenda, the argument might well be that those taking on new obligations should also be allowed to decide what is in the WTO and what is out, provided the interests of all WTO parties are protected (Finger, 2002). For those who eschew agenda expansion, or value their veto for reasons other than the particular issue at hand, the argument may well be that agreements adding obligations for some and rights for all could in principle go ahead, but that any decision even to start negotiating, or about the adoption of results, would still have to be taken on a consensus basis. This is the nub of the issue when it comes to designing new ways of ensuring the WTO’s relevance while protecting the rights of all members. This is a core issue for the future functioning of the WTO.

Dispute Settlements within WTO

The Dispute Settlement Mechanism (DSM) of the World Trade Organization (WTO), which is officially known as the Dispute Settlement Understanding (DSU), has been in place since January 1, 1995 (Finger, 2002). Its introduction was hailed as “the victory of law over politics” in international trade. Within the more specific context of the WTO, several studies have tackled the question of the distributional effects of the WTO dispute settlement system, mainly focusing on the status of developing countries after the introduction of the new system (Michalopoulos, 1999; Kessie, 1999). However, these studies seldom go beyond fact-finding, and they are usually too narrowly focused on specific sectors or not well organized to test general hypotheses. It is a debatable whether legal arrangements of international relations favor stronger/richer powers or weaker/poorer powers. Some scholars have argued that legalization will favor weaker actors in disputes, for strictly binding rules and procedures can protect the weak from the arbitrary use of power by the strong (Whalley, 1996).

As Cameron and Campbell (1998, p. 57) contend, resolving disputes through a judicial route is “particularly beneficial for smaller countries, as without the rules and procedures of the DSU and the extensive obligations in the WTO agreements, they would not have the necessary bargaining power vis-à-vis the larger powers (Srinivasan, 1999).” Some observers of the Uruguay Round (UR) negotiations, which led to the establishment of the WTO and the introduction of the DSU, also confirm that ‘redressing the strong’ was one of the prime goals for developing countries. “It was the negotiating objective of developing countries to press for the adoption of measures that would strengthen the multilateral trading system and enhance its capability to act as a bulwark against protectionism, bilateralism, and unilateralism” (Kessie, 1999, pp. 98–99). In addition to redressing the strong, the dispute settlement mechanism of the WTO can help weaker/poorer states by reducing the costs of monitoring the member states’ trade practices, which had usually been too high for them (Sevilla, 1998; Hoekman and Mavroidis, 2000). Compared to the GATT system, they claim that the new WTO system has introduced certain innovations in the monitoring mechanism that reflect developing countries’ interests, such as the Trade Policy Review Mechanism (TPRM). Thus, as long as a certain level of independence in the legal mechanisms is guaranteed, the legal arrangement for dispute resolution, compared to a purely power-based bargaining mechanism, is likely to produce more equal outcomes among the actors, mitigating power/wealth disparities. These perspectives correspond to the analogy of “domestic law” where the rule of law prevails over power (Lindblom, 1977; Weil, 1983), and their proponents maintain that international legal mechanisms possess a strong normative quality (Frank, 1995).

Developing countries usually have few legal resources available for complaining or defending disputes under the legal system (Kim Van Der Borght, 1999; Michalopoulos, 1999; Reinhardt, 1999). According to this logic, the lack of financial capacity, personnel, and information for legal activities inevitably results in unfavorable outcomes for developing countries. Another inherent disadvantage against developing countries is the asymmetry in enforcement capability. Although the WTO introduced strictly binding rules and procedures in the litigation, the panel/appellate body decisions are supposed to be implemented on a bilateral basis. Even when a powerful state does not comply with panel decisions, the retaliation option (suspension of concessions or retaliatory sanctions) is not viable for a weaker state in many cases due to a lack of enforcement power at the retaliation stage (Hoekman and Mavroidis, 2000). In addition, many developing countries are exposed to the direct and indirect threat of negative issue-linkages. In other words, their initiation of legal actions may trigger harsh countersuits immediately, or may create negative consequences to aid programs or security relationships, both of which are powerful instruments for stronger states.

Conclusion

The WTO judiciary has enhanced its control over WTO disputes in order to better adjudicate trade controversies. Th e strengthening of this control is evidenced by the increasing fact-finding powers that the WTO judiciary enjoys today and in the freedom to develop legal argumentations apart from those exposed by parties during dispute settlement proceedings. While these are the centre pieces of this project, there are also isolated and timid attempts that, although they do not express a deliberate intention to expand such control over the complaining parties’ right to set the terms of reference, have had the effect of attenuating this right by allowing the WTO judiciary to adjudicate disputes slightly beyond the terms of reference when to do so has been necessary in order to provide a proper resolution to the conflict (Srinivasan, 1999). WTO judiciary could assume more control over disputes in which developing and least developed countries are complainants against developed ones in order to rule on claims not included in the terms of reference originally established. Two conditions must be met to ensure a lawful adjudication of such a claim by a panel: first, the developing country complaining Member must adopt the claim later in panel proceedings; and second, the panel must ensure the developed country respondent sufficient opportunity to respond in facts and law to such new claim.