The WTO as an Institution

1
The WTO as an Institution
EC246 International Trade Institutions and
Policy

• Holger Breinlich
• University of Essex

2
Overview of Lecture

• Earlier attempts and the WTOs foundation in 1994
• WTO Organisation
• Structure
• Functioning and decision-making
• WTO Membership
• Dispute settlement in the WTO
• The WTO as a negotiating forum
• Summary and Learning Outcomes

3
Earlier Attempts and the WTOs Foundation
4
WTO Earlier Attempts

• 1948, Havana ITO
• 1955, GATT review session OTC
• 1963 UN EcoSoC ideas for a UN agency regulating
  international trade gt GATT to become this
  agencys Committee on Tariffs to implement
  decisions by UNCTAD and other relevant UN policy
  decisions

5
WTO Birth

• 1990 Canadas proposal for an MTO came as a
  surprise (not envisaged in Punta del Este, 1986)
• Motivated by a wish to create a single
  institutional framework for world trade
• Subsequently supported by EU
• Initially opposed by US, then agreed upon
  (including the name change)
• 1 January 1995, Geneva WTOs foundation
• Established following decisions embodied in the
  Final Act of the Uruguay Round signed on 15 April
  1994 in Marrakech

6
WTO Legal Basis

• The 1994 Marrakech Agreement
• Establishes the WTO, and
• Charges it to provide the common institutional
  framework for the conduct of trade relations
  among its members in matters for which agreements
  and associated legal obligations apply (Art. II)
• Four annexes define the substantive rights and
  obligations of members
• Annex 1 has three parts
• Annex 1A GATT 1994 (GATT 1947 as amended by the
  Uruguay Round)
• Annex 1B GATS (General Agreement on Trade in
  Services)
• Annex 1C TRIPs (Trade-Related Intellectual
  Property Rights)

7
WTO Legal Basis

• Annexes (cont.)
• Annex 2 Procedures for settling conflicts
  between members (DSU Dispute Settlement
  Understanding)
• Annex 3 Trade Policy Review Mechanism (TPRM)
• Annex 4 Plurilateral Trade Agreements (Tokyo
  Round codes that were not multilateralised during
  Uruguay Round and therefore bind only
  signatories)
• General functions of the WTO
• Facilitate operation and implementation of
  multilateral trade agreements
• Serve as a negotiating forum for members
• Administer the dispute settlement mechanism
• Provided surveillance of trade policies
• Cooperate with the World Bank and the IMF
• Assist developing countries in trade policy
  issues, through technical assistance and training
  programmes

8
WTO Organisation
9
WTO Structure

• Ministerial Conference trade ministers and other
  officials
• Highest decision-making body
• Brings together all members (countries or customs
  unions, e.g. EU)
• Meets at least once every two years
• General Council meets around 12 times a year
• As a trade policy review body (TPRB), or
• As a dispute settlement body (DSB)
• Three subsidiary councils on each of the 3 parts
  (GATT, GATS and TRIPS) of the Multilateral
  Agreement

10
Source WTO
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WTO Structure

• Separate committees outside the Multilateral
  Agreements (e.g. Trade and Environment)
• Additional committees and working parties inside
  each of GATT, GATS and TRIPs
• Committees to administer the Plurilateral
  Agreements (only binding on signatories)
• Appellate Body
• New negotiating forum for Doha-Round issues

12
WTO Day-to-Day Functioning

• WTO Secretariat operates in the background
• Provides technical and logistic support
• Organises meetings
• Prepares background documentation (when requested
  by the committees or the Council)
• Very little formal power to take initiatives
• Secretariat relatively small (ca. 600 staff) but
• Close cooperation with civil servants in member
  countries (ministries of trade, foreign affairs,
  agriculture )
• All in all at least 5,000 people involved
• Secretariat in Geneva acts as coordinator

13
WTO Day-to-Day Functioning

• (GATT-)WTO Director-General
• Eight so far, including the current one, Pascal
  Lamy (2005-2009, already reappointed for
  2009-2013)
• With creation of WTO, choice shifted from
  officials to politicians
• Acts as a broker, not as a decision-maker (but
  traditionally has had some informal influence,
  e.g. Arthur Dunkel)

14
WTO Budget and Contributions

• WTO budget relatively small CHF 185 mill. in
  2008
• WTO budget revenue comes from assessed
  contributions calculated as
• Members share in total trade of all WTO members
• 3-year average of the most recent trade figures
• If share less than 0.12, minimum contribution is
  due
• Ten largest members make up 2/3 of contributions
• Voluntary contributions by developed economies
  for specific purposes in developing countries
• Technical assistance
• Training of officials

15
WTO Decision Making

• Decision-making in WTO follows GATT practices and
  is based on negotiation/bargaining, consultation
  and consensus
• Consensus is the modus operandi. Does not mean
  unanimity is, in fact weaker than unanimity
• No fundamental objection on an issue by all
  parties present at negotiations
• Those not present or abstaining (from a vote) do
  not count
• Imposes conservative tendencies
• Proposals for change adopted only if not opposed
• Advantages?

16
WTO Decision Making

• Voting if no consensus reached and only where
  provisions allow one member one vote system
  (IMF, WB weighted voting)
• Unanimity amendments on general principles, e.g.
  nondiscimination
• Three-quarters majority
• Interpretations of WTO provisions
• Waivers of WTO disciplines (for a member)
• Two-thirds majority
• Amendments related to issues other than general
  principles
• Accession
• Simple majority no other rules specified and
  consensus cannot be reached

17
WTO Membership
18
WTO Membership

• 153 members as of today
• A further 30 countries have observer status
  (usually as a first step in the accession
  procedure)
• Membership open to any state or separate customs
  territory possessing full autonomy in the conduct
  of its external commercial relations
• Terms of accession must be agreed between
  applicant and WTO members (Art. XII)

19
WTO Membership

• Accession procedure evolves in stages
• Government letter to WTO Director-General
  (usually observer status at this point)
• General Council establishes a working party of
  interested members to examine the application
• Government seeking accession submits a detailed
  memorandum describing its trade regime
• Based on memorandum, working party checks for
  consistency with WTO rules and negotiates
  concessions by entrant (tariffs, commitments on
  services/property rights etc.)
• Report by the working group with a draft
  Decision and Protocol of Accession and the
  negotiated tariff schedule attached to it ? vote
  (2/3 to approve)

20
WTO Accession

• Overall, 40 countries have joined the WTO after
  1995
• Economic importance of China and Russia
  weighed/weighs heavily on WTO negotiations and
  prospects
• Total duration of negotiations a few years up to
  decades (e.g. China 15 years, Russia 16 years
  and running)

21
WTO Accession

• Accession requirements have become much more
  stringent since the WTOs foundation (? GATT)
• Average tariff rates higher than 10 unlikely to
  be accepted (? 20 in existing developing-country
  members)
• IPR protection played major role in accession of
  China
• Reasons for increasing demands on new-joiners
• WTO more far-reaching than GATT benefits of
  joining bigger
• During Cold War, U.S. foreign policy objectives
  often dominated trade policy objectives
• Perception among major trading powers (EU, U.S.)
  that accession should be used to encourage
  countries to adopt more market-oriented policies

22
WTO Dispute Settlement Procedures
23
WTO Dispute Settlement Procedures

• Disputes arising under any WTO agreement are
  dealt with by
• The Dispute Settlement Body (DSB),
• which is simply the WTO Council changing name for
  this role
• DSB is the authority to
• Establish panels
• Scrutinise implementation of recommendations
• Authorise retaliatory measures if the losing
  party does not abide by the panels
  recommendations

24
WTO Dispute Settlement Procedures

• As under GATT 1947, complaints may take three
  forms
• Violation complaints one or more WTO disciplines
  (e.g. national treatment) or negotiated
  commitments violated
• Nonviolation complaints
• No specific WTO rules are violated but a measure
  nullifies a previously granted concession
• Measure must be i) implemented by a government,
  ii) alter the competitive situation and iii)
  be unexpected (from the point of view of the
  previous negotiations)
• Since WTO-legal, cannot demand change (but
  compensation)
• Examples subsidy-related cases under GATT
  Kodak-Fuji (1996), French ban on asbestos
  products (1996)
• Situation complaints anything that is captured
  by the above but has same effects (rare)

25
WTO Dispute Settlement Stages

• Consultation and mediation
• Request for a panel to DSB
• Panel work
• Examination of facts and arguments
• Meetings with the parties and interested third
  parties
• Interim review
• Drafting of conclusions and recommendations
• Panel report circulated to the parties and the
  DSB
• Adoption decision or appeal
• Implementation
• Immediately or after a reasonable period of
  time
• If not implemented, claimant can ask for
  compensation or have retaliatory measures
  authorised

26
Comparison to GATT

• Dispute settlement under WTO strengthened
• Blocking of panel establishment or adoption of
  panel report no longer possible for a single
  party
• Time limits on various stages of the process
• Improved surveillance of panel report
  implementation
• Automaticity of approval of retaliation in case
  of non-compliance with panel recommendations
• Increased use of DSP as a consequence
• Ca. 400 cases since the WTOs creation (threefold
  increase)
• United States and EU account for over 40 of
  cases
• Increased use by developing countries (30 of
  cases)
• New types of cases not admitted under GATT (IPRs,
  agriculture, textiles, clothing etc.)

27
Violation Complaints The Banana Case

• EU had long tradition of granting preferential
  access for bananas produced in African, Caribbean
  and Pacific (ACP) countries to the detriment of
  Central and South American countries
• 1993 As part of the Single Market, EU adopted a
  complex import licensing system, favouring ACP
  suppliers (dual tariff-quotas)
• Latin American countries and U.S. repeatedly
  brought the matter to GATT/WTO and won each time
• 1994 Banana Framework Agreement with Costa Rica,
  Colombia, Nicaragua and Venezuela, allocation of
  quotas to these countries
• 1996 Ecuador, Guatemala, Honduras, Mexico and US
  contested EU banana regime as discriminating
  against their producers
• 1997 WTO panel report found EU regime in
  violation of WTO nondiscrimination rules
• 1998 EU revised the regime, but kept the dual
  tariff rate quotas
• 1999 US (191 mill.), Ecuador (200 mill.)
  authorised to retaliate
• 2001 Compromise, EU agrees to replace quotas by
  simple tariffs in the medium-run and to change
  quota allocation in the short-run

28
Nonviolation Complaints Kodak-Fuji

• U.S. had since long argued that presence of
  Japanese corporate groups (Keiretsu) undermines
  market access for U.S. firms
• 1996 U.S. brings Fuji-Kodak conflict to the WTO
• Fujis control of film wholesalers in Japan
  asserted to prevent Kodak sales in Japan
• No direct violation of GATT/WTO principles but
  effect similar to a violation of the national
  treatment principle
• Crucially, assertion that Japanese government
  (through its competition policy) was partly
  responsible for the situation
• 1998 Panel report does not support U.S. demands
• No evidence of impact of government measures on
  U.S. market access
• In addition, single-brand wholesale distribution
  common in national film markets

29
The WTO as a Negotiating Forum
30
The WTO as a Negotiating Forum

• As the GATT, the WTO provides a forum for
  exchanging market access commitments
• Technically speaking, WTO sets rules for the
  non-cooperative game of international trade
  negotiations
• Non-cooperative can gain at the expense of
  other countries (or at least interest groups
  within countries) overall outcome could make
  everyone worse of
• Actions can impose externalities on other
  countries
• Externalities usually addressed through actions
  by central authority (e.g. pollution taxes)
• Not possible in international trade negotiations
  alternative is to enable negotiations between
  countries

31
The WTO as a Negotiation Forum

• Negotiations difficult since MTNs are a form of
  barter (no money available)
• Two kinds of sources of inefficiencies arise
• Need double coincidence of wants need to find
  good ( trade barrier concessions) Im interested
  in and whose owner is interested in my
  counter-offer
• In addition, might be impossible to equate
  traders valuations of not easily divisible goods
  such as market access (would be no problem if
  money existed)

32
Negotiation Stages

• WTO negotiations (rounds) can be divided into
  several stages
• Catalyst stage a policy vision of a government
  or interest group
• Prenegotiation stage discussion of a possible
  negotiating agenda
• Negotiation stage formal government-level
  bargaining
• Postnegotiation stage implementation of
  agreements
• Important elements of negotiations
• Issue linkage
• Coalitions
• Lobbying
• Principal supplier approach

33
Important Negotiation Elements

• Issue linkage
• Linking issues (e.g. IPR protection and
  agricultural market access during Uruguay round)
  often necessary to break negotiation deadlocks
• Allows to achieve reciprocity (details on some
  formulas later but generally quite subjective)
• Coalition formation, two purposes
• Achieve agreement between subgroups which
  couldnt be achieved in fully multilateral
  negotiations (e.g. codes of practice on NTBs
  during Tokyo Round)
• Increase bargaining power (Cairns group during
  Uruguay Round, developing countries during Tokyo
  Round)

34
Important Negotiation Elements

• Lobbying by domestic groups
• Only governments or equivalent authorities in
  trade matters (e.g. EU Commission) can
  participate in the WTO negotiation process
• Governments are not monolithic but represent
  multiple, often conflicting interests member
  states (EU), industry associations, trade unions,
  NGOs
• Lobbying generally seen as part of the democratic
  process and encouraged by most OECD countries.
  For example, in the EU
• Hundreds of international federations and
  multinational firms have representations in
  Brussels
• All in all ca. 13,000 professional lobbyists (one
  per Commission staff member!)

35
Important Negotiation Elements

• Principal supplier approach
• MFN clause creates potential for free-riding,
  possible conflict between MFN and reciprocity
  principle
• One solution is that requests for market access
  concessions are only requested by the largest
  (principal) supplier who then offers something in
  exchange
• Easiest case country A is principal supplier of
  good I and country B principal supplier of good
  II
• Many countries A makes concessions to B, B to C
  and C again to A
• Often concessions made contingent on final-round
  concessions by smaller suppliers (sometimes leads
  to late breakdown of negotiations, nothing is
  agreed upon until everything is agreed upon)

36
Negotiation Formulas

• How are reciprocal concessions negotiated?
• Specific (item-by-item)
• Specify conditions for individual items (e.g.
  tariffs in particular sectors)
• Used for first five GATT rounds (before Kennedy
  round)
• Again used in Uruguay round
• General (across-the-board) apply same
  tariff-cutting formula to many sectors
• Linear cut in tariffs (e.g. Kennedy round)
  identical percentage reduction, i.e. tnew told
  r (r is b/w 0 and 1)
• Harmonization cuts reduce higher tariffs by
  more, example tnew (r told) /(r told) where
  r 14 or 16 (Swiss formula, used in Tokyo
  round)
• Usually many sectors exempted (which are then
  negotiated item-by-item)

37
Negotiation Formulas

• How are market access offers evaluated?
• Trade coverage tariff reduction multiplied
  with original volume of imports of a product
  (example)
• 50-equivalent
• 50 tariff cut on US1 million imports
  equivalent to 25 tariff cut on US2 million
  import good etc.
• Generally E (M dT)/50
• Average cut (weighted) average reductions
  should match up. Example
• 15 tariff cut on two US1m-import goods 10
  cut on US3m-import good plus 30 cut on
  US1m-import good
• Average cut is 15 in both cases

38
Negotiation Formulas

• Two (unused) superior measures would be
• Net welfare gains of trading partners
• Effective protection
• Calculation of net welfare gains generally not
  feasible
• Effective protection vs. nominal protection
• Nominal rate of protection increase in price as
  compared to free trade (usually done as
  comparison domestic vs. world market price NRP
  (P- PW)/PW)
• Effective rate of protection increase in value
  added as compared to free trade/world market
  conditions ERP (V-VW)/VW
• Differences arise if goods use imported inputs
• Generally ERP gt NRP since governments protect
  high-value added sectors

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Summary and Learning Outcomes

• Studied background and functioning of the WTO
• Organisational structure and decision making
• Accession procedure
• Dispute settlement procedures (plus case studies)
• WTO negotiation procedures
• General nature barter, non-cooperative games
• Negotiation stages
• Important negotiation elements
• Negotiation approaches and formulas