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1.7 The World Trade Organization

Learning Objective

  1. Learn the basic intent of the World Trade Organization and its primary activities.

In order to monitor and sustain the complete set of Uruguay Round agreements, the member countries established a new body called the World Trade Organization (WTO). The WTO is a relatively small organization based in Geneva, Switzerland. It has a director-general, currently Pascal Lamy (as of January 2010), and a small staff of economists, lawyers, and others. The goal of the WTO is the same goal as its predecessor, the General Agreement on Tariffs and Trade (GATT): namely, to promote trade liberalization and thereby to foster growth and economic development.

Sometimes the WTO is described as an international organization governing international trade. However, this description can be misleading. The WTO does not make trade rules. The only makers of rules are national governments. In this sense, then, the WTO does not govern anybody. A better way to think of the WTO is as a club of member nations. The club’s purpose is to monitor each member country’s trade policies with respect to the trade agreements that were made in the Uruguay Round. The WTO agreements include thousands of promises for every country, all intending to reduce barriers to trade relative to what the barriers were before the Uruguay Round. The WTO does not represent free trade. At best, the agreements can be described as freer trade.

Besides monitoring each member country’s trade policies, which the WTO fulfills by conducting periodic trade policy reviews of the member countries, the WTO club was also created to deal with disputes. This is surely the most important “power” of the WTO.

The Dispute Settlement Process

Disputes are handled by the Dispute Settlement Body (DSB). The DSB works like a committee that meets regularly to discuss any issues countries may have with respect to each other’s trade policies. The DSB is comprised of one representative from each member country. When they meet, countries have the right to object to the trade policies of another country. However, they cannot object to anything or everything; instead, a country can only object to an unfulfilled promise with respect to one or more of the WTO agreements.

When the Uruguay Round was finalized, each member country went back to its own legislature and changed its trade policies and rules to conform to its new commitments. Sometimes inadvertently and sometimes purposely, some countries do not implement their commitments fully. Or sometimes a country believes that it has fulfilled its commitment, but its trading partner believes otherwise. Or new legislation may violate one of the country’s previous commitments. In these cases, a member country (the complainant) is allowed to register a dispute with the DSB against another member country (the defendant). Resolution of a dispute follows these steps:

  1. Consultations. The DSB first demands that the appropriate government representatives from the complainant country and the defendant country meet to discuss the dispute. They must do this within a strict timetable (less than sixty days) and hopefully will be able to resolve the dispute without external intervention.
  2. Panel formation. If the countries return to the DSB at a later session and report that the consultations failed, then the complainant may ask the DSB to form a panel. A panel consists of three to five independent trade law experts who are hired expressly to make a judgment about the particular dispute. The DSB chooses the panelists in consultation with the disputing countries, or the panelists are chosen by the director-general if the countries cannot agree. The panel is generally given about six months to decide whether the defendant violated some of its promises, whereupon it reports its decision to the DSB. Since a panel report can only be rejected by consensus, no country has veto power over DSB adoption of a report. Thus all panel reports become official decisions. But the process doesn’t yet end.
  3. Appeals. Either country can appeal the decision given in the panel report. A request or appeal sends the issue to an appellate board comprised of three judges drawn from a set of seven, each of whom has a four-year term. As in the U.S. court system, appellate arguments must be based on points of law relating to legal interpretations but cannot consider new evidence or retry the case. As with the original panel reports, appellate decisions are almost automatically adopted by the DSB.
  4. Resolution. If the appellate board concurs with a panel decision that a defendant country has violated some of its WTO agreement commitments, there are two paths to resolution:

    1. Compliance. In the preferred outcome, the defendant country complies with the ruling against it and changes its laws as needed to conform. Sometimes compliance may take time because of delays in a legislative process, so normally the defendant will be given time to rectify the situation. In the process, the country will be expected to report its progress regularly to the DSB.
    2. Suspension of concessions. Sometimes a country refuses to comply with a ruling or it takes longer than the complainant is willing to wait. In this case, the complainant country is allowed by the DSB to suspend some of its previous concessions toward the defendant country. It works like this: Since it has been shown that the defendant has not lived up to all of its previous promises, the complainant is now allowed to rescind some of its own trade-liberalizing promises, but only toward the defendant country. To be fair, the rescission must have an effect on the defendant that is approximately equal in value to the cost imposed by the defendant’s violations.

Dispute Settlement History

Since the WTO began in 1995 there have been over four hundred disputes brought to the DSB. A complete listing can be found at the WTO Web site here (http://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm). A large number countries have been complainants and defendants although the two countries most often on one side or the other are the United States and the EU. Some of the most well-known disputes have involved bananas, steel, hormone-treated beef, and commercial aircraft. Lesser-known cases have involved narrow product groups such as Circular Welded Carbon Quality Line Pipe, Canned Tuna with Soybean Oil, Combed Cotton Yarn, and Retreaded Tires.

Many cases have been raised once, sent to consultations, and then never raised again. In some cases, consultations are sufficient to settle the dispute. Many other cases proceed to panel formation, appeals, and resolution. In many cases, defendants lose and eventually change their laws to comply with the WTO decision. In other cases, defendants lose and because of their refusal to comply, or their procrastination in complying, complainants suspend concessions. In a few cases, countries have refused to comply and faced no consequences. Occasionally, a defendant wins its case against a complainant.

Overall, the WTO dispute process has worked reasonably well. The cases brought, because they are often targeted to narrow industries, do not affect a huge amount of international trade. Nonetheless the existence of a forum in which to register disputes and a mechanism for resolving them (one that includes some penalties for violations) has had a notable effect of reducing the risk of international trade.

Traders know better what to expect from their trading partners because their partners have committed themselves to particular trade policies and to a resolution mechanism in the event of noncompliance. In a sense, then, it is true that the WTO agreements restrict the freedom of a country to set whatever trade policy it deems appropriate for the moment. That loss of sovereignty, though, is designed to prevent countries from choosing more destructive protectionist policies—policies that are very seductive to voters, especially in an economic crisis. If successful, the WTO could prevent a reoccurrence of Smoot-Hawley and its aftermath both now and in the future.

Key Takeaways

  • The WTO’s main purpose is to monitor the trade liberalization agreements reached by GATT member countries in the Uruguay Round.
  • The most important “power” of the WTO is its ability to adjudicate disputes between member countries regarding compliance with the Agreements.
  • Dispute resolution is conducted by the Dispute Settlement Body (DSB), which includes one representative from each WTO government.
  • The four main steps to a WTO dispute case are (1) consultations, (2) panel formation, (3) appeals, and (4) resolution.

Exercise

  1. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

    1. The name of the GATT round that created the WTO in 1995.
    2. The name of the current director general of the WTO.
    3. The term used to describe the process of rescinding one’s trade liberalization promises at the end of a WTO dispute.
    4. The name of the WTO body that handles disagreements related to WTO commitments.
    5. Countries must engage in these immediately after a dispute is raised at the WTO.
    6. This official chooses dispute panel members if the complainant and defendant countries cannot agree.
    7. The length of time served by a WTO appellate judge.
    8. What a country is expected to do after losing a WTO dispute case.
    9. The city in which WTO headquarters are located.
    10. The approximate number of dispute cases filed at the WTO since its inception in 1995.