Benefit 3: A system based on rules rather than power makes life easier for all

The WTO cannot claim to make all countries equal.

But it does reduce some inequalities, giving smaller countries more voice, and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of their numerous trading partners.

Decisions in the WTO are made by consensus.

The WTO agreements were negotiated by all members, were approved by consensus and were ratified in all members’ parliaments.

The agreements apply to everyone.

Rich and poor countries alike have an equal right to challenge each other in the WTO’s dispute settlement procedures.

This makes life easier for all, in several different ways.

Smaller countries can enjoy some increased bargaining power.

Without a multilateral regime such as the WTO’s system, the more powerful countries would be freer to impose their will unilaterally on their smaller trading partners.

Smaller countries would have to deal with each of the major economic powers individually, and would be much less able to resist unwanted pressure.

In addition, smaller countries can perform more effectively if they make use of the opportunities to form alliances and to pool resources.

Several are already doing this.

There are matching benefits for larger countries.

The major economic powers can use the single forum of the WTO to negotiate with all or most of their trading partners at the same time.

This makes life much simpler for the bigger trading countries.

The alternative would be continuous and complicated bilateral negotiations with dozens of countries simultaneously.

And each country could end up with different conditions for trading with each of its trading partners, making life extremely complicated for its importers and exporters.

The principle of non-discrimination built into the WTO agreements avoids that complexity.

The fact that there is a single set of rules applying to all members greatly simplifies the entire trade regime.

And these agreed rules give governments a clearer view of which trade policies are acceptable.

Benefit 2: The system allows disputes to be handled constructively

There could be a down side to trade liberalization and expansion.

More trade means more possibilities for disputes to arise. Left to themselves, those disputes could lead to serious conflict. But in reality, a lot of international trade tension is reduced because countries can turn to organizations, in particular the WTO, to settle their trade disputes.

Before World War 2 that option was not available.

After the war, the world’s community of trading nations negotiated trade rules which are now entrusted to the WTO.

Those rules include an obligation for members to bring their disputes to the WTO and not to act unilaterally.

When they bring disputes to the WTO, the WTO’s procedure focuses their attention on the rules.

Once a ruling has been made, countries concentrate on trying to comply with the rules, and perhaps later renegotiating the rules — not on declaring war on each other.

Around 300 disputes have been brought to the WTO since it was set up in 1995.

Without a means of tackling these constructively and harmoniously, some could have led to more serious political conflict.

The fact that the disputes are based on WTO agreements means that there is a clear basis for judging who is right or wrong.

Once the judgement has been made, the agreements provide the focus for any further actions that need to be taken.

The increasing number of disputes brought to GATT and its successor, the WTO, does not reflect increasing tension in the world.

Rather, it reflects the closer economic ties throughout the world, the GATT/WTO’s expanding membership and the fact that countries have faith in the system to solve their differences.

Sometimes the exchanges between the countries in conflict can be acrimonious, but they always aim to conform with the agreements and commitments that they themselves negotiated.

Benefit 1: Peace - The system helps to keep the peace

This sounds like an exaggerated claim, and it would be wrong to make too much of it.

Nevertheless, the system does contribute to international peace, and if we understand why, we have a clearer picture of what the system actually does.

Peace is partly an outcome of two of the most fundamental principles of the trading system: helping trade to flow smoothly, and providing countries with a constructive and fair outlet for dealing with disputes over trade issues.

It is also an outcome of the international confidence and cooperation that the system creates and reinforces.

History is littered with examples of trade disputes turning into war. One of the most vivid is the trade war of the 1930s when countries competed to raise trade barriers in order to protect domestic producers and retaliate against each others’ barriers.

This worsened the Great Depression and eventually played a part in the outbreak of World War 2.

Two developments immediately after the Second World War helped to avoid a repeat of the pre-war trade tensions.

In Europe, international cooperation developed in coal, and in iron and steel.

Globally, the General Agreement on Tariffs and Trade (GATT) was created.

Both have proved successful, so much so that they are now considerably expanded — one has become the European Union, the other the World Trade Organization (WTO).

How does this work?

Crudely put, sales people are usually reluctant to fight their customers.

In other words, if trade flows smoothly and both sides enjoy a healthy commercial relationship, political conflict is less likely.

What’s more, smoothly-flowing trade also helps people all over the world become better off.

People who are more prosperous and contented are also less likely to fight.

But that is not all.

The GATT/WTO system is an important confidence-builder.

The trade wars in the 1930s are proof of how protectionism can easily plunge countries into a situation where no one wins and everyone loses.

The short-sighted protectionist view is that defending particular sectors against imports is beneficial. But that view ignores how other countries are going to respond.

The longer term reality is that one protectionist step by one country can easily lead to retaliation from other countries, a loss of confidence in freer trade, and a slide into serious economic trouble for all — including the sectors that were originally protected.

Everyone loses.

Confidence is the key to avoiding that kind of no-win scenario.

When governments are confident that others will not raise their trade barriers, they will not be tempted to do the same.

They will also be in a much better frame of mind to cooperate with each other.

The WTO trading system plays a vital role in creating and reinforcing that confidence.

Particularly important are negotiations that lead to agreement by consensus, and a focus on abiding by the rules.

10 benefits of the WTO trading system

From the money in our pockets and the goods and services that we use, to a more peaceful world — the WTO and the trading system offer a range of benefits, some well-known, others not so obvious.

The world is complex.

This booklet is brief, but it tries to reflect the complex and dynamic nature of trade.

It highlights some of the benefits of the WTO’s trading system, but it doesn’t claim that everything is perfect—otherwise there would be no need for further negotiations and for the system to evolve and reform continually.

Nor does it claim that everyone agrees with everything in the WTO.

That’s one of the most important reasons for having the system: it’s a forum for countries to thrash out their differences on trade issues.

That said, there are many over-riding reasons why we’re better off with the system than without it.

Here are 10 of them.

The Uruguay Round

It took seven and a half years, almost twice the original schedule. By the end, 123 countries were taking part.

It covered almost all trade, from toothbrushes to pleasure boats, from banking to telecommunications, from the genes of wild rice to AIDS treatments.

It was quite simply the largest trade negotiation ever, and most probably the largest negotiation of any kind in history.

At times it seemed doomed to fail.

But in the end, the Uruguay Round brought about the biggest reform of the world’s trading system since GATT was created at the end of the Second World War.

And yet, despite its troubled progress, the Uruguay Round did see some early results.

Within only two years, participants had agreed on a package of cuts in import duties on tropical products — which are mainly exported by developing countries.

They had also revised the rules for settling disputes, with some measures implemented on the spot.

And they called for regular reports on GATT members’ trade policies, a move considered important for making trade regimes transparent around the world.

A round to end all rounds?

The seeds of the Uruguay Round were sown in November 1982 at a ministerial meeting of GATT members in Geneva.

Although the ministers intended to launch a major new negotiation, the conference stalled on agriculture and was widely regarded as a failure.

In fact, the work programme that the ministers agreed formed the basis for what was to become the Uruguay Round negotiating agenda.

Nevertheless, it took four more years of exploring, clarifying issues and painstaking consensus-building, before ministers agreed to launch the new round.

They did so in September 1986, in Punta del Este, Uruguay.

They eventually accepted a negotiating agenda that covered virtually every outstanding trade policy issue.

The talks were going to extend the trading system into several new areas, notably trade in services and intellectual property, and to reform trade in the sensitive sectors of agriculture and textiles.

All the original GATT articles were up for review.

It was the biggest negotiating mandate on trade ever agreed, and the ministers gave themselves four years to complete it.

Two years later, in December 1988, ministers met again in Montreal, Canada, for what was supposed to be an assessment of progress at the round’s half-way point.

The purpose was to clarify the agenda for the remaining two years, but the talks ended in a deadlock that was not resolved until officials met more quietly in Geneva the following April.

Despite the difficulty, during the Montreal meeting, ministers did agree a package of early results.

These included some concessions on market access for tropical products — aimed at assisting developing countries — as well as a streamlined dispute settlement system, and the Trade Policy Review Mechanism which provided for the first comprehensive, systematic and regular reviews of national trade policies and practices of GATT members.

The round was supposed to end when ministers met once more in Brussels, in December 1990.

But they disagreed on how to reform agricultural trade and decided to extend the talks. The Uruguay Round entered its bleakest period.

Despite the poor political outlook, a considerable amount of technical work continued, leading to the first draft of a final legal agreement.

This draft “Final Act” was compiled by the then GATT director-general, Arthur Dunkel, who chaired the negotiations at officials’ level.

It was put on the table in Geneva in December 1991.

The text fulfilled every part of the Punta del Este mandate, with one exception — it did not contain the participating countries’ lists of commitments for cutting import duties and opening their services markets.

The draft became the basis for the final agreement.

Over the following two years, the negotiations lurched between impending failure, to predictions of imminent success.

Several deadlines came and went.

New points of major conflict emerged to join agriculture: services, market access, anti-dumping rules, and the proposed creation of a new institution.

Differences between the United States and European Union became central to hopes for a final, successful conclusion.

In November 1992, the US and EU settled most of their differences on agriculture in a deal known informally as the “Blair House accord”.

By July 1993 the “Quad” (US, EU, Japan and Canada) announced significant progress in negotiations on tariffs and related subjects (“market access”).

It took until 15 December 1993 for every issue to be finally resolved and for negotiations on market access for goods and services to be concluded (although some final touches were completed in talks on market access a few weeks later).

On 15 April 1994, the deal was signed by ministers from most of the 123 participating governments at a meeting in Marrakesh, Morocco.

The delay had some merits.

It allowed some negotiations to progress further than would have been possible in 1990: for example some aspects of services and intellectual property, and the creation of the WTO itself.

But the task had been immense, and negotiation-fatigue was felt in trade bureaucracies around the world.

The difficulty of reaching agreement on a complete package containing almost the entire range of current trade issues led some to conclude that a negotiation on this scale would never again be possible.

Yet, the Uruguay Round agreements contain timetables for new negotiations on a number of topics.

And by 1996, some countries were openly calling for a new round early in the next century.

The response was mixed; but the Marrakesh agreement did already include commitments to reopen negotiations on agriculture and services at the turn of the century.

These began in early 2000 and were incorporated into the Doha Development Agenda in late 2001.

What happened to GATT?

The WTO replaced GATT as an international organization, but the General Agreement still exists as the WTO’s umbrella treaty for trade in goods, updated as a result of the Uruguay Round negotiations.

Trade lawyers distinguish between GATT 1994, the updated parts of GATT, and GATT 1947, the original agreement which is still the heart of GATT 1994.

Confusing? For most of us, it’s enough to refer simply to “GATT”.

The post-Uruguay Round built-in agenda

Many of the Uruguay Round agreements set timetables for future work.

Part of this “built-in agenda” started almost immediately.

In some areas, it included new or further negotiations.

In other areas, it included assessments or reviews of the situation at specified times.

Some negotiations were quickly completed, notably in basic telecommunications, financial services.

(Member governments also swiftly agreed a deal for freer trade in information technology products, an issue outside the “built-in agenda”.)

The agenda originally built into the Uruguay Round agreements has seen additions and modifications.

A number of items are now part of the Doha Agenda, some of them updated.

There were well over 30 items in the original built-in agenda.

This is a selection of highlights:

1996

Maritime services: market access negotiations to end (30 June 1996, suspended to 2000, now part of Doha Development Agenda)

Services and environment: deadline for working party report (ministerial conference, December 1996)

Government procurement of services: negotiations start

1997

Basic telecoms: negotiations end (15 February)

Financial services: negotiations end (30 December)

Intellectual property, creating a multilateral system of notification and registration of geographical indications for wines: negotiations start, now part of Doha Development Agenda

1998

Textiles and clothing: new phase begins 1 January

Services (emergency safeguards): results of negotiations on emergency safeguards to take effect (by 1 January 1998, deadline now March 2004)

Rules of origin: Work programme on harmonization of rules of origin to be completed (20 July 1998)

Government procurement: further negotiations start, for improving rules and procedures (by end of 1998)

Dispute settlement: full review of rules and procedures (to start by end of 1998)
1999

Intellectual property: certain exceptions to patentability and protection of plant varieties: review starts

2000

Agriculture: negotiations start, now part of Doha Development Agenda

Services: new round of negotiations start, now part of Doha Development Agenda

Tariff bindings: review of definition of “principle supplier” having negotiating rights under GATT Art 28 on modifying bindings

Intellectual property: first of two-yearly reviews of the implementation of the agreement

2002

Textiles and clothing: new phase begins 1 January

2005

Textiles and clothing: full integration into GATT and agreement expires 1 January

Source: www.wto.org

The GATT years: from Havana to Marrakesh

The WTO’s creation on 1 January 1995 marked the biggest reform of international trade since after the Second World War.

It also brought to reality — in an updated form — the failed attempt in 1948 to create an International Trade Organization.

Much of the history of those 47 years was written in Geneva.

But it also traces a journey that spanned the continents, from that hesitant start in 1948 in Havana (Cuba), via Annecy (France), Torquay (UK), Tokyo (Japan), Punta del Este (Uruguay), Montreal (Canada), Brussels (Belgium) and finally to Marrakesh (Morocco) in 1994.

During that period, the trading system came under GATT, salvaged from the aborted attempt to create the ITO.

GATT helped establish a strong and prosperous multilateral trading system that became more and more liberal through rounds of trade negotiations.

But by the 1980s the system needed a thorough overhaul.

This led to the Uruguay Round, and ultimately to the WTO.

GATT: ‘provisional’ for almost half a century

From 1948 to 1994, the General Agreement on Tariffs and Trade (GATT) provided the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce.

It seemed well-established, but throughout those 47 years, it was a provisional agreement and organization.

The original intention was to create a third institution to handle the trade side of international economic cooperation, joining the two “Bretton Woods” institutions, the World Bank and the International Monetary Fund.

Over 50 countries participated in negotiations to create an International Trade Organization (ITO) as a specialized agency of the United Nations.

The draft ITO Charter was ambitious.

It extended beyond world trade disciplines, to include 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.

Meanwhile, 15 countries had begun talks in December 1945 to reduce and bind customs tariffs.

With the Second World War only recently ended, they wanted to give an early boost to trade liberalization, and to begin to correct the legacy of protectionist measures which remained in place from the early 1930s.

This first round of negotiations resulted in a package of trade rules and 45,000 tariff concessions affecting $10 billion of trade, about one fifth of the world’s total.

The group had expanded to 23 by the time the deal was signed on 30 October 1947. The tariff concessions came into effect by 30 June 1948 through a “Protocol of Provisional Application”.

And so the new General Agreement on Tariffs and Trade was born, with 23 founding members (officially “contracting parties”).

The 23 were also part of the larger group negotiating the ITO Charter.

One of the provisions of GATT says that they should accept some of the trade rules of the draft.

This, they believed, should be done swiftly and “provisionally” in order to protect the value of the tariff concessions they had negotiated.

They spelt out how they envisaged the relationship between GATT and the ITO Charter, but they also allowed for the possibility that the ITO might not be created.

They were right.

The Havana conference began on 21 November 1947, less than a month after GATT was signed.

The ITO Charter was finally agreed in Havana in March 1948, but ratification in some national legislatures proved impossible.

The most serious opposition was in the US Congress, even though the US government had been one of the driving forces.

In 1950, the United States government announced that it would not seek Congressional ratification of the Havana Charter, and the ITO was effectively dead.

So, the GATT became the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995.

For almost half a century, the GATT’s basic legal principles remained much as they were in 1948.

There were additions in the form of a section on development added in the 1960s and “plurilateral” agreements (i.e. with voluntary membership) in the 1970s, and efforts to reduce tariffs further continued.

Much of this was achieved through a series of multilateral negotiations known as “trade rounds” — the biggest leaps forward in international trade liberalization have come through these rounds which were held under GATT’s auspices.

In the early years, the GATT trade rounds concentrated on further reducing tariffs.

Then, the Kennedy Round in the mid-sixties brought about a GATT Anti-Dumping Agreement and a section on development.

The Tokyo Round during the seventies was the first major attempt to tackle trade barriers that do not take the form of tariffs, and to improve the system.

The eighth, the Uruguay Round of 1986-94, was the last and most extensive of all.

It led to the WTO and a new set of agreements.

The Tokyo Round: a first try to reform the system back to top

The Tokyo Round lasted from 1973 to 1979, with 102 countries participating.

It continued GATT’s efforts to progressively reduce tariffs.

The results included an average one-third cut in customs duties in the world’s nine major industrial markets, bringing the average tariff on industrial products down to 4.7%.

The tariff reductions, phased in over a period of eight years, involved an element of “harmonization” — the higher the tariff, the larger the cut, proportionally.

In other issues, the Tokyo Round had mixed results.

It failed to come to grips with the fundamental problems affecting farm trade and also stopped short of providing a modified agreement on “safeguards” (emergency import measures).

Nevertheless, a series of agreements on non-tariff barriers did emerge from the negotiations, in some cases interpreting existing GATT rules, in others breaking entirely new ground.

In most cases, only a relatively small number of (mainly industrialized) GATT members subscribed to these agreements and arrangements.

Because they were not accepted by the full GATT membership, they were often informally called “codes”.

They were not multilateral, but they were a beginning.

Several codes were eventually amended in the Uruguay Round and turned into multilateral commitments accepted by all WTO members.

Only four remained “plurilateral” — those on government procurement, bovine meat, civil aircraft and dairy products.

In 1997 WTO members agreed to terminate the bovine meat and dairy agreements, leaving only two.

Did GATT succeed?

GATT was provisional with a limited field of action, but its success over 47 years in promoting and securing the liberalization of much of world trade is incontestable.

Continual reductions in tariffs alone helped spur very high rates of world trade growth during the 1950s and 1960s — around 8% a year on average.

And the momentum of trade liberalization helped ensure that trade growth consistently out-paced production growth throughout the GATT era, a measure of countries’ increasing ability to trade with each other and to reap the benefits of trade.

The rush of new members during the Uruguay Round demonstrated that the multilateral trading system was recognized as an anchor for development and an instrument of economic and trade reform.

But all was not well.

As time passed new problems arose.

The Tokyo Round in the 1970s was an attempt to tackle some of these but its achievements were limited.

This was a sign of difficult times to come.

GATT’s success in reducing tariffs to such a low level, combined with a series of economic recessions in the 1970s and early 1980s, drove governments to devise other forms of protection for sectors facing increased foreign competition.

High rates of unemployment and constant factory closures led governments in Western Europe and North America to seek bilateral market-sharing arrangements with competitors and to embark on a subsidies race to maintain their holds on agricultural trade.

Both these changes undermined GATT’s credibility and effectiveness.

The problem was not just a deteriorating trade policy environment.

By the early 1980s the General Agreement was clearly no longer as relevant to the realities of world trade as it had been in the 1940s.

For a start, world trade had become far more complex and important than 40 years before: the globalization of the world economy was underway, trade in services — not covered by GATT rules — was of major interest to more and more countries, and international investment had expanded.

The expansion of services trade was also closely tied to further increases in world merchandise trade.

In other respects, GATT had been found wanting.

For instance, in agriculture, loopholes in the multilateral system were heavily exploited, and efforts at liberalizing agricultural trade met with little success.

In the textiles and clothing sector, an exception to GATT’s normal disciplines was negotiated in the 1960s and early 1970s, leading to the Multifibre Arrangement. Even GATT’s institutional structure and its dispute settlement system were causing concern.

These and other factors convinced GATT members that a new effort to reinforce and extend the multilateral system should be attempted.

That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO.

Source: ww.wto.org

The case for open trade

The economic case for an open trading system based on multilaterally agreed rules is simple enough and rests largely on commercial common sense.

But it is also supported by evidence: the experience of world trade and economic growth since the Second World War.

Tariffs on industrial products have fallen steeply and now average less than 5% in industrial countries.

During the first 25 years after the war, world economic growth averaged about 5% per year, a high rate that was partly the result of lower trade barriers.

World trade grew even faster, averaging about 8% during the period.

The data show a definite statistical link between freer trade and economic growth. Economic theory points to strong reasons for the link.

All countries, including the poorest, have assets — human, industrial, natural, financial — which they can employ to produce goods and services for their domestic markets or to compete overseas.

Economics tells us that we can benefit when these goods and services are traded.

Simply put, the principle of “comparative advantage” says that countries prosper first by taking advantage of their assets in order to concentrate on what they can produce best, and then by trading these products for products that other countries produce best.

In other words, liberal trade policies — policies that allow the unrestricted flow of goods and services — sharpen competition, motivate innovation and breed success.

They multiply the rewards that result from producing the best products, with the best design, at the best price.

But success in trade is not static.

The ability to compete well in particular products can shift from company to company when the market changes or new technologies make cheaper and better products possible.

Producers are encouraged to adapt gradually and in a relatively painless way.

They can focus on new products, find a new “niche” in their current area or expand into new areas.

Experience shows that competitiveness can also shift between whole countries.

A country that may have enjoyed an advantage because of lower labour costs or because it had good supplies of some natural resources, could also become uncompetitive in some goods or services as its economy develops.

However, with the stimulus of an open economy, the country can move on to become competitive in some other goods or services.

This is normally a gradual process.

Nevertheless, the temptation to ward off the challenge of competitive imports is always present.

And richer governments are more likely to yield to the siren call of protectionism, for short term political gain — through subsidies, complicated red tape, and hiding behind legitimate policy objectives such as environmental preservation or consumer protection as an excuse to protect producers.

Protection ultimately leads to bloated, inefficient producers supplying consumers with outdated, unattractive products.

In the end, factories close and jobs are lost despite the protection and subsidies.

If other governments around the world pursue the same policies, markets contract and world economic activity is reduced.

One of the objectives that governments bring to WTO negotiations is to prevent such a self-defeating and destructive drift into protectionism.

TRUE AND NON-TRIVIAL?

Nobel laureate Paul Samuelson was once challenged by the mathematician Stanislaw Ulam to “name me one proposition in all of the social sciences which is both true and non-trivial.”

Samuelson’s answer? Comparative advantage.

“That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”

Comparative advantage

This is arguably the single most powerful insight into economics.

Suppose country A is better than country B at making automobiles, and country B is better than country A at making bread.

It is obvious (the academics would say “trivial”) that both would benefit if A specialized in automobiles, B specialized in bread and they traded their products.

That is a case of absolute advantage.

But what if a country is bad at making everything?

Will trade drive all producers out of business?

The answer, according to Ricardo, is no. The reason is the principle of comparative advantage.

It says, countries A and B still stand to benefit from trading with each other even if A is better than B at making everything.

If A is much more superior at making automobiles and only slightly superior at making bread, then A should still invest resources in what it does best — producing automobiles — and export the product to B.

B should still invest in what it does best — making bread — and export that product to A, even if it is not as efficient as A. Both would still benefit from the trade.

A country does not have to be best at anything to gain from trade. That is comparative advantage.

The theory dates back to classical economist David Ricardo.

It is one of the most widely accepted among economists.

It is also one of the most misunderstood among non-economists because it is confused with absolute advantage.

It is often claimed, for example, that some countries have no comparative advantage in anything. That is virtually impossible.

Think about it ...

Source: www.wto.org