World Trade Organization (WTO)

Law, Economics, and Politics

Bernard M. Hoekman, Petros C. Mavroidis

• Publisher: Taylor & Francis
• Year: 2015
• eBook ISBN: 9781317585480
• Edition: 2
• Topic: Politics & International Relations
• Subtopic: Peace & Global Development
• Index: Politics & International Relations

The World Trade Organization (WTO) is one of the most important international organizations in existence today. It contains a set of disciplines that affect the ability of governments to impose trade restrictions, and has helped to support the steady expansion of international trade since the 1950s. The WTO has been the focus of vociferous protests by anti-globalization activists and has experienced great difficulties in agreeing to new trade rules since its establishment. At the same time it has become the premier global forum for the settlement of trade disputes and has proven to provide a robust framework for international cooperation in the trade area. This book separates the facts from the propaganda and provides an accessible overview of the WTO's history, structure and policies as well as a discussion of the future of the organization. It also confronts the criticisms of the WTO and assesses their validity.

New to the second edition:

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• discussion of legislative amendments to the WTO Agreement, in particular Aid for Trade, the Agreement on Trade Facilitation and the Bali Package

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• evaluation of case law developments and major disputes since 2007, including analysis of the WTO and the financial crisis – in particular the trade policy responses of WTO Members and institutional response

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• reflection on recent shifts to mega-regional agreements (TPP, TISA, TTIP) and their implications

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• what next post Bali?

Fully updated throughout, this book continues to be essential reading for students of international trade, international political economy, commercial law and international organizations as well as activists and others interested in a balanced account of a key global institution.

1 A very brief history of the trading system

• Accessions and recurring rounds of trade liberalization

• Conclusion

In this chapter, we explain briefly how the world trading system came into place. We will show how a few like-minded countries signed a limited trade treaty in the aftermath of the Second World War—the GATT—and how this managed to provide international trade relations with remarkable certainty and stability, gain the confidence of trading nations and eventually give its place to the WTO.

The genesis of the GATT in 1947 occurred in the inter-war experience of beggar thy neighbor protectionism, competitive devaluation and capital controls.¹ Following the adoption of the so-called Smoot-Hawley Tariff Act, which raised average US tariffs from 38 to 52 percent, US trading partners imposed retaliatory trade restrictions.² A domino effect resulted, as trade flows were diverted to other markets, protectionist measures were taken as a response and further retaliation ensued.

Once the Second World War was over—indeed, before it had been concluded—political leaders sought to establish international institutions to reduce the probability of a repeat performance. New international bodies were designed to manage international relations and monetary and exchange rates (the UN and the International Monetary Fund (IMF)) and to assist in financing reconstruction and promoting economic development (World Bank). While the UN had as an objective to provide a collective response to unilateral aggression, the World Bank and the IMF were entrusted with addressing the causes for aggression. The negotiation of the World Bank and the IMF was deemed necessary because, paraphrasing US statesman Henry Cabot Lodge, the UN system was meant to avoid hell, but was no ticket to heaven. At the Bretton Woods Conference (1944) where it was agreed to create the World Bank and the IMF there was little talk about trade, which was to be addressed in a different forum: the International Trade Organization (ITO). Trade was seen as a central part of the post-war system, as greater trade was expected to support an increase in real incomes, and non-discriminatory access to markets was expected to reduce the scope for political conflicts spilling over into other domains.

The ITO was supposed to be the institutional framework to administer a set of legal documents referred to as the Havana Charter, after the location where the final negotiation of the so-called Preparatory Committee was held in 1948. The ITO Charter regulated trade in goods and commodity agreements, as well as subjects such as employment policy and restrictive business practices. The ITO was an ambitious project. Early on during its negotiation, the members of the Preparatory Committee agreed to bifurcate the negotiation and deal with the GATT, a chapter coming under the aegis of the ITO dealing only with state barriers to trade, on a separate track. Negotiations between 23 countries—12 developed and 11 developing—on the text of the GATT were concluded in 1947.³ Between April and October 1947, the members of the Preparatory Committee conducted a round of tariff negotiations in Geneva. This was the first round of multilateral trade negotiations, and the final outcome formed an integral part of the GATT. The GATT entered into force on January 1, 1948, on a provisional basis, pending the conclusion and the entry into force of the Havana Charter.

Following the decision of the US executive not to submit the ITO Charter to the US Congress for ratification, the ITO Charter never entered into force. Instead, the GATT slowly developed into an institution of its own, despite the fact that its provisions do not refer to a specific institutional umbrella, as that function was supposed to be played by the ITO. Formally just a treaty to liberalize trade in goods, de facto the GATT gradually evolved into an international institution. A consequence of the lack of institutional foundations was that GATT contracting parties operated on an ad hoc basis, with institutional innovations responding to observed needs. This “functional institutionalism” helped to ensure legitimacy because the edifice was built on generally agreed needs. The fact that all decisions were taken by consensus bolstered legitimacy (consensus implied decisions were adopted as long as no party explicitly opposed them). Thus, while participants in the GATT were formally contracting parties to a treaty,⁴ they behaved as members of an organization that operated under a sketchy “institutional umbrella.”

Accessions and recurring rounds of trade liberalization

Accession to the GATT was open to sovereign states and customs territories that possessed full sovereignty over international trade. The latter permitted Hong Kong, China, to become a contracting party to the GATT, and to accede to the WTO.⁵ As of 1994, there were 128 GATT contracting parties, which in turn became founding members of the WTO. As of early 2015 this had expanded to 160, including major countries such as China and Russia, with another 15+ in the process of negotiating their accession (Table 1.1). Compared to the GATT years, accession to the WTO is a much more demanding and rigorous process, often taking years.

Table 1.1 GATT/WTO negotiating rounds and membership

Name of the Round	Chronology	Number of participants
Geneva	1947	19
Annecy	1949	27
Torquay	1950	33
Geneva	1956	36
Dillon	1960–61	43
Kennedy	1962–67	74
Tokyo	1973–79	85
Uruguay	1986–94	128
Doha	2001–?	160+

Source: Adapted from Bernard Hoekman and Michel Kostecki, The Political Economy of the World Trading System (Oxford: Oxford University Press, 2009).

The GATT was negotiated at the end of the Second World War, when the world was divided in two camps, and national sensitivities were a formidable factor affecting the prospects of cooperation with former opponents. In order to facilitate accession to the GATT, Art. XXXV GATT allowed for the possibility that acceding countries not enter into contractual arrangements at all with some incumbent GATT contracting parties. That is, two countries could both be a GATT contracting party without, however, being bound by the GATT in their bilateral relations. The WTO Agreement contains a more detailed version of this institutional possibility (Art. XIII), which states that WTO disciplines shall not apply as between any member and any other member if, at the time either becomes a member, the other does not consent to such application.

The non-application clause is not a reservation to the WTO treaty as no reservations to the WTO Agreement are allowed. The non-application provision essentially allows two countries to claim WTO membership while not having any WTO-covered contractual arrangement between each other. At the entry into force of the WTO (1995), seven reservations were made: five by the United States against Armenia, Moldova, Georgia, Kyrgyz Republic and Mongolia; one by Turkey against Armenia and one by El Salvador against China. Most of these were subsequently revoked.

The subject coverage of the GATT treaty was expanded and modified over time. Some major milestones are noted in Table 1.2. The early years involved accession negotiations, a Review Session in the mid-1950s that led to modifications to the treaty, hollowing out of agricultural policy disciplines to reflect US interests, the creation of the European Economic Community (EEC) in 1957, and the introduction of new provisions relating to economic development of poor countries. The GATT proved very flexible in accommodating political pressures for selective deviations from the rules. In 1962, for example, derogations from the GATT rules in the area of trade in cotton textiles were negotiated. These developed into successive multi-year Multifibre Arrangements (MFA-I through MFA-IV)—a complex system of quantitative restrictions that were inconsistent with the basic principles of the GATT. The GATT de facto tolerated the MFA for four decades. The regime was brought to an end through the negotiation of the ATC (Agreement on Textiles and Clothing) in the Uruguay Round.

Table 1.2 From GATT to WTO: a chronology

Date	Event
1947	Tariff negotiations between 23 founding parties to the GATT concluded.
1948	GATT provisionally enters into force on January 1, 1948, pending ratification of the Havana Charter establishing an ITO.
1950	China withdraws from GATT. The US Administration abandons efforts to seek Congressional ratification of the ITO.
1960–61	Dillon Round of tariff negotiations.
1962	Long Term Arrangement on Cotton Textiles agreed, permitting quota restrictions on exports of cotton textiles agreed as an exception to GATT rules.
1964–67	The Kennedy Round.
1965	Part IV (on Trade and Development) is added to the GATT, establishing new guidelines for trade policies of—and towards—developing countries.
1973–79	The Tokyo Round results in a set of “codes of conduct” on a variety of trade policy areas that countries could decide to sign on a voluntary basis.
1982	A GATT Ministerial meeting—the first in almost a decade—fails to agree on an agenda for a new round.
1986	The Uruguay Round is launched in Punta del Este, Uruguay.
1993	Three years after the scheduled end of negotiations, the Uruguay Round is concluded on the basis of a “Single Undertaking” including new rules on services and intellectual property, and the agreement to create a World Trade Organization.
1994	At a ministerial in Marrakech, the Final Act establishing the WTO and embodying the results of the Uruguay Round is accepted.
1995	The WTO enters into force on January 1 with 128 founding members.
1997	40 governments agree to eliminate tariffs on computer and telecommunication products on a most-favored-nation (MFN) basis (the Information Technology Agreement).
1999	Ministerial meeting in Seattle collapses amid large-scale demonstrations and fails to launch a new “Millennium” Round.
2001	The Doha Development Agenda round of negotiations is launched in Qatar. China joins the WTO.
2002	EU launches negotiations with African, Caribbean and Pacific states to convert unilateral preferences into reciprocal Economic Partnership Agreements.
2003	The “mid-term” Ministerial review meeting in Cancun fails to agree to start negotiations on investment and competition policies and ends in disarray.
2004	In July a negotiating framework is agreed that removes three of the four Singapore issues—leaving only one (trade facilitation).
2005	The final stage of the Agreement on Textiles and Clothing is implemented, abolishing remaining quantitative restrictions on imports imposed by WTO members.
2006	The Doha Round is declared to be in a state of suspension. The US signs its 15th bilateral trade agreement.
2008	After a concerted effort to overcome the stalemate, Doha talks break down again.
2012	The number of preferential trade agreements notified to the WTO passes 450.
2013	WTO Ministerial Conference in Bali results in a mini-package of development-oriented measures, including an Agreement on Trade Facilitation (TFA), the first multilateral deal to be concluded u...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• List of abbreviations
• Introduction
• 1. A very brief history of the trading system
• 2. The WTO in a nutshell
• 3. Trade in goods
• 4. Services, intellectual property, and plurilateral agreements
• 5. Dispute settlement and transparency
• 6. Developing countries and the multilateral trading system
• 7. Whither the trading system?
• Glossary
• Select bibliography
• Index
• Routledge Global Institution Series