The World Trade Organization (WTO), the successor of General Agreement on Tariffs and Trade (GATT), was formed in January 1995. It comprises of 153 member nations and 30 observers’ countries and accounts for approximately 97% of world trade and is ‘the only international organization dealing with the global rules of trade between nations (Griffin & Pustay 2009). The main objective of the WTO ‘is to make sure that trade flows as smoothly, predictably and freely as possible’ by encouraging the liberalization of multinational trade in goods, services and intellectual property. The GATT was established in 1948 and is the only multilateral organization that lays down agreed-upon rules for international trade. The GATT was initially mostly limited to a tariff agreement, over time, as average tariff levels fell; it increasingly came to focus on nontariff trade policies and domestic policies which are having an impact on trade (Hoekman and Mattoo 2002).
The WTO differs in a number of important aspects from the GATT. The GATT has been a rather flexible institution; bargaining and deal-making lay at its central part, with main opportunities for countries to “opt out” of specific disciplines. In contrast, WTO rules is relevant to all members, who are focus to binding dispute settlement procedures. This is attractive to groups looking for to introduce multilateral disciplines on a variety of subjects, ranging from the environment and labour standards to rivalry and investment policies to animal rights.
WTO has 5 main functions:
To facilitate the implementation, administration and operation of the WTO agreement. The WTO agreement creates an integrated legal order and establishing the WTO is to provide a unified institutional framework for the conduct of the international trade among WTO members (Hajnal 2001).
To provide a forum for trade negotiations. This is where the WTO provides a forum for negotiations among members concerning their multilateral trade relations in issues dealt with in the WTO agreement (Hajnal 2001).
To settle international trade disputes. The need of settling disputes is necessary, because the rules-based system would be less effective if the rules could not be enforced. The WTO’s procedure underscores the rule of law, and it makes the trading system more secure and predictable. The system is based on clearly-defined rules, with timetables for completing a case (WTO 2007).
To monitor national trade policies. Transparency regarding the trade policies and practices of WTO members is essential to the smooth functioning of the international trading system (Hajnal 2001). All WTO members are reviewed, the frequency of each country’s review varying according to its share of world trade (WTO 2007).
To cooperate with the International Monetary Fund (IMF) and the World Bank. One of the tasks expressly assigned to the WTO is to cooperate with the IMF and the World Bank to achieve greater coherence in global economic policy-making (Hajnal 2001).
3.1 Basic Principles
There are five principles for WTO which are important in understanding both the GATT and the WTO and these principles are the foundation of the multilateral trading system:
Non discrimination, reciprocity, enforceable commitments, transparency, and safety valves
Non discrimination has two major components: a) the most favored nation (MFN) rule, and b) the national treatment policy. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these areas (Hoekman et al. 2002).
a) Most-favored-nation (MFN): treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favor (such as a lower customs duty rate for one of their products) and one have to do the same for all other WTO members. Purpose is to ensure equality of opportunity to import from or export to other WTO members
b) The National Treatment Policy is a principle that ensures that liberalization commitments are not offset through the imposition of domestic taxes. It requires that foreign products should be treated no less favorable than competing domestically produced products (Hoekman et al. 2002).
2. Reciprocity is a fundamental element of the negotiating process. It reflects both a desire to limit the scope for free-riding that may arise because of the Most Favored Nation rule and a desire to obtain “payment” for trade liberalization in the form of better access to foreign markets (Hoekman et al. 2002). Also, according to which the benefits of any bilateral agreements between contracting parties regarding tariff reduction and market access are extended simultaneous to all other contracting parties (Landau 2001).
Binding and enforceable commitments is essential because when countries agree to open their markets for goods or services in the WTO, they “bind” their commitments. A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade (Hoekman et al. 2002).
Transparency talks about that enforcement of commitments require access to information on the trade regimes that are maintained by members. The agreements administered by the WTO have mechanisms which are designed to facilitate communication between WTO members on issues. These interactions allow for the exchange of information and views and permit potential conflicts to be defused. Examples on transparency can be when WTO publishes their trade regulations (Hoekman et al. 2002).
Safety valves are a final principle in the WTO saying that in specific circumstances, governments are given the power to be able to restrict trade. There are three types of provisions in this connection: (a) articles allowing for the use of trade measures to attain noneconomic objectives; (b) articles aimed at ensuring “fair competition”; and (c) provisions permitting intervention in trade for economic reasons (Hoekman et al. 2002).
The World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT) have been enormously successful over the last 50 years at reducing tariff and other trade barriers among an ever-increasing number of countries
3.2 The comparison of GATT and WTO
GATT is a multilateral trade agreement with the authority to regulate the trade regulations of its member governments. As an international treaty, it has no authority over individuals, private firms, or public corporations. Rather, it governs the interactions of countries that voluntarily agree to abide by its rules.
There are many similarities between the GATT and the WTO, but the basic principles remain the same. The WTO continues to operate by consensus and to be member driven. There were,
however, a number of major changes. Most obviously, the coverage of the WTO is much wider. A change of great importance is that in contrast to the GATT, the WTO agreement is a “single undertaking”; all its provisions apply to all members. Under the GATT there was great flexibility for countries to “opt out” of new disciplines, and in practice many developing countries did not sign specific agreements on issues such as customs valuation or subsidies.
WTO is much more important for developing countries than the GATT was. Also important were changes in the area of dispute settlement, which became much more “automatic” with the adoption of a “negative consensus” rule. (All members must oppose the findings in a dispute settlement to block adoption of reports). (Crowley 2003).
Effectiveness and ineffectiveness of WTO
The overriding objective of the World Trade Organization is to help trade flow smoothly, freely, fairly and predictably .One thing is clear, through all of the WTO’s activities, and that is the fact that the organization supports trade expansion for all of its members who are equipped to export its domestic products. It allows all members to have a distinct, formalized meeting ground where all nations can openly discuss their trade expectations, tariff initiatives, and call discussion surrounding competition and its effects on the global economy.
Up until the World Trade Organization’s inception, the process of mediating trade disputes often met with continuing conflict. Today, the WTO is beset with problems (Herman 2005) and despite its drawbacks, the organization seems well on its way to establishing a position of permanence in the global trade community. Another effectiveness of the WTO corresponds to the economic benefits of free trade. The Australian Department of Foreign Affairs and Trade estimated a … “50 per cent cut in tariff and non-tariff protection for agriculture, manufactures and … services would total some US$400 billion annually. Of this, Australia would expect … to gain around US$5 billion”. (www.dfat.gov.au).
Ineffectiveness of WTO
The WTO has been criticized for its inability to enforce its members’ agreements. Kwa (2004) stated that the WTO is undemocratic because small countries are powerless and weak countries are forced to join “to avoid the political and economic repercussions of displeasing the powerful Members”. The WTO’s role of promoting free trade does not acknowledge the limitations of comparative advantage in the ‘real world’ including, the factor Proportions Hypothesis and specialization. Specialization depends on both the availability and cost of resource factors; these in turn depend on a range of factors such as government policy (http://www.economics.unimelb.edu.au/). According to Keohane and Joseph (2001), NGOs by arguing for increased transparency and participation hope to improve accountability by opening up negotiations and by providing outside views and critique.
Critics further challenge comparative advantage as the ‘holy dogma’ of free trade and globalization. The WTO’s role of promoting free trade does not acknowledge the limitations of comparative advantage in the ‘real world’ including, the Factor Proportions Hypothesis and specialization. Specialization depends on both the availability and cost of resource factors; these in turn depend on a range of factors such as government policy (Ha-Joon 2006).
Most of the information surrounding the practices of discussing new objectives within the WTO does, indeed, support the assumption that the WTO is slow to move on the requests of its members. Other weaknesses of the WTO include, lack of concern for environmental protection and dictation on food safety, human health and safety (www.oxfam.org).
It has also been suggested, by some, that the World Trade Organisation is biased and prejudice and does not sustain an equitable trading system that helps eradicate poverty in less-developed countries (Zimmerman 2005, p.243). There are some parties that protest the WTO and its role in globalisation because of trade being controlled by multinational corporations, while less-developed countries take a proverbial “back seat” to larger entities. It has even been suggested that the WTO places less restrictions on more economically powerful nations which leave little opportunities for emerging nations. (Jackson2000).
One of the most important challenges that WTO faced is the Concerns of Developing Countries. Developing countries policy and attitudes towards further integration into the international trading system is uncertain. Because of undeveloped supply capacity most of the developing countries have not been able to take full advantage of the opportunities provided by the GATT/WTO (Lal Das 2008).
According to McCormick (2006) studied, Other concerns based on interviews with 71 experts, was the lack of perceived benefits available to developing countries, overstatement of resultant limitations on market access to developing country products, and the limited understanding of and capacity to negotiation many trade and environment issues. If development countries are to participate effectively in the WTO dispute settlement system, there are three main challenges: (a) a relative lack of legal expertise in WTO law; (b) constrained financial resources, including for the hiring of outside counsel; and (c) fear of political and economic pressure (Shaffer 2006).
To be able to change this situation, the developing countries have to have the political determination not to be pushed around in the WTO forum. The countries should also have a resolute will to utilise the forum to serve their interests and minimise the adverse effects on them. Developing countries have to identify their specific interests and objectives in respect of the subjects of the WTO (Lal Das 2007).
Assessment the Effectiveness of the Dispute Settlement Understanding
A central feature of the WTO is its dispute settlement mechanism. The WTO dispute settlement system has had an enormous impact on the world trade system and trade diplomacy. It is unique in international law in its juridical and legalistic system for disputes, with virtually automatic, binding application of its decisions and reports to its members (Jackson 2000).
Looking first at whether punishment was an objective of WTO dispute settlement. There is no reference to punishment in the objectives mentioned in DSU Article 3. That Article is concerned with providing security and predictability, protecting rights and obligations, and clarifying the provisions of the agreements. There is nothing about punishing malefactors.
Of course, there are punitive elements in WTO dispute settlement. When a Member fails to comply with a Dispute Settlement Board (DSB) ruling, fails to withdraw the offending measure , there is the possibility of seeking compensation or getting permission to retaliate (DSU 1994).Those are in a sense forms of sanctions. But their focus is on providing some form of redress for the complainant, not on punishing the respondent.
Remedies and Sanctions; Thinking of the WTO system in terms of providing remedies and imposing sanctions, it is possible to make an assessment of the effectiveness of WTO dispute settlement. According to Schnepf (2009), there are two reasons why the DSU is largely ineffective are; First, WTO dispute settlement has limited effectiveness in respect of remedies because it does not provide any remedy for the complaining Member other than removal of the offending measure. Second, WTO dispute settlement is also limited in effectiveness because the forms of sanctioning that are provided, compensation and retaliation, are largely ineffective.
Nevertheless, to the extent that the lack of effective sanctions is perceived by Members who do not use WTO dispute settlement as an impediment to use. However, one might ask whether this focus on sanctions is really responding to a real problem. After all, some studies of WTO dispute settlement suggest a fairly high compliance rate. In one study of the first ten years of WTO dispute settlement, scholars put the successful implementation rate at 83%.
Even if a case can be made that the implementation rate is high, nevertheless the difficulty of enforcement does seem to be a factor of concern to Members that have yet to use WTO dispute settlement in any significant way, if at all.
Access to Dispute Settlement; According to Iida (2004), the concerns of developing countries about the absence of remedies, apart from removal of the inconsistent measure, and about the ineffectiveness of the sanctioning system direct attention to another area where suggestive judgments about effectiveness can be made. In this regard, it is interesting to note that there are only three developing countries, Antigua and Barbuda (gaming) (Appellate Body Report USA 2005), Chinese Taipei (steel safeguards) and Honduras (bananas) (Appellate Body Report EC 1999) that have brought cases in the WTO but have never had cases brought against them. They have been complainants but never respondents.
Since the dispute settlement system is compulsory, developing countries have little choice when they are brought to dispute settlement as a respondent. Their confidence in the effectiveness of the dispute settlement system may therefore be better measured by the cases in which they come as complainant, and by cases in which they have proceeded beyond the consultations phase to the appointment of a panel (Pitman 2005). The issue of experience in the dispute settlement process is important, because lack of experience is often cited as a reason why developing country WTO Members refrain from bringing cases (Davey 2005). Lack of experience in WTO dispute settlement, lack of expertise in international trade law and the high cost of purchasing that legal experience (generally from US law firms) are frequently seen as reasons for reluctance by developing countries to bring their trade disputes to the WTO (Alvarez 2007). According to Davey (2006), the following key factors lead to the ineffectiveness of the DSU; lack of experience is often cited as a reason why developing country WTO Members refrain from bringing cases; cost, cultural differences, the delay in getting a result, (Brazil Air -103 months) fear of political and economic pressure and the ineffectiveness of remedies if the offending Member fails to comply.
What WTO dispute settlement lacks is criteria for assessing facts. There are no rules on admissibility of evidence although there are rules and presumptions relating to the burden of proof (Alvarez 2007). In this respect the WTO is no different than many other international courts or tribunals where evidence is received largely on the basis of affirmation of the parties.
The capacity of panels to assess both factual and expert evidence is an open question when considering the effectiveness of WTO dispute settlement.
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