The World Trade
Organization
CHAPTER 7
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Introduction
Chapter covers key aspects of the World
Trade Organization (WTO
 Introduces International Monetary Fund (IMF)
and World Bank
 Discusses General Agreement on Tariffs and
Trade (GATT)

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The General Agreement on
Tariffs and Trade

In July 1944 United States and Britain held a conference (Bretton
Woods) for a set of post-war, economic institutions including setting up
 International Bank for Reconstruction and Development (World Bank)
 International Monetary Fund

In December 1945 United States attempted to launch idea of an
International Trade Organization (ITO)
 Met for a first set of negotiations in London—twenty-three founding members
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were present and signed General Agreement on Tariffs and Trade (GATT)
In 1948 ITO charter was agreed to at a United Nations Conference
In 1950 US announced it would not seek US Congressional ratification of
Havana Charter, effectively terminating ITO plan
• Was in response to pressures from isolationist members of the US Congress
 Consequently, vehicle for post-war trade negotiations became GATT
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The General Agreement on
Tariffs and Trade

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Between 1946 and 1994, the GATT provided a
framework multilateral trade negotiations
Rounds reduced tariffs among member countries in
many (but not all) sectors
 Average tariff on manufactured products imposed by

industrial countries fell from 35% to 4%
However GATT Secretariat could not always effectively
enforce negotiated agreements without legal standing of
ITO
• Resolved in 1994 with Marrakesh Agreement

Provided for creation of World Trade Organization (WTO)
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What Does GATT Entail?

Most important principle—nondiscrimination
 Important sub-principles
• Most-favored-nation

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Each member must grant treatment to each other member as
favorable as it extends to any other member country
 For instance if Japan lowers a tariff on Indonesia's exports of a
certain product, it must also lower its tariff on the exports of that
product from all other member countries
Exceptions are allowed and preferences are granted
• National treatment

Addresses internal, domestic policies such as taxes
 Foreign goods within a country should be treated no less
favorably than domestic goods with regard to tax policies
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What Does GATT Entail?

A second important GATT principle
 General prohibition of quotas or quantitative
restrictions on trade
• Reflects a longstanding view that price distortions
(tariffs) are preferred to quantity distortions in
international markets
• Quantitative restrictions were one of the most
significant impediments to trade prior to GATT
• Exceptions are allowed
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GATT Exceptions—
Agricultural Products

Applied when certain domestic programs were in
place
 Granted to address US agricultural programs
• Used for decades to reduce US imports of sugar, dairy products
and peanuts
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In addition, United States insisted export subsidies
be allowed for agriculture
 Generally prohibited by GATT
European Union became the most vociferous
supporter of these exemptions in 1980s and 1990s
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GATT Exceptions—Textiles
and Clothing

In 1961, a US-initiated conference of major textile traders
was convened
 Developed the Short Term Arrangement Regarding International
Trade in Cotton Textiles
• Withdrew cotton textile trade from the MFN system for a period of one
year

In October 1962, Long Term Arrangement Regarding
International Trade in Cotton Textiles replaced STA
 Allowed importers to curb imports in cases of “market disruption” via
bilateral or unilateral action

In December 1972, a GATT fact-finding study on world
textile trade was completed
 Resulted in Arrangement Regarding International Trade in Textiles or
the Multi-fiber Arrangement
• General, multilateral framework for managing textile and clothing trade
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Reaction to GATT Exceptions

Exceptions generated negative feelings on
the part of developing countries
 Agriculture, textiles, and clothing are products
countries first turn to in their trade and
development process
 Developing countries wondered how they could
have a fair chance to participate in the trade and
development process
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GATT—Tariff Bindings

Tariffs are bound at an agreed-upon level often above applied levels

• To introduce a degree of predictability into the world trading system
GATT introduced stipulations with regard to subsidies, countervailing
duties, and antidumping duties
 Levels may not be increased in the future
 Applied rates below bound rates may be increased
 General purpose of the binding principle
 Use of subsidies is not supposed to harm trading interests of other members
• If subsidies cause “material injury” or “threat thereof” to a domestic industry of
another country

That country can apply countervailing duties or tariffs on its imports of product from
subsidizing country
 Leaves room for different interpretations/controversy
• “Dumped” goods are defined as exports sold at a price below those charged by
the exporter in its domestic market

Allowed for antidumping duties or tariffs to be imposed under certain circumstances
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The World Trade
Organization
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The initial Bretton Woods vision of an International Trade
Organization ended in 1950
In 1990 Canada proposed a Multilateral Trade Organization
to address weaknesses of the GATT Secretariat
In 1991, the Director General of GATT, Authur Dunkel
released a draft agreement for the Uruguay Round that
became known as “the Dunkel text”
 Included a draft charter for MTO
By the end of 1993, text of the Uruguay Round contained a
final charter for a World Trade Organization (WTO)
 Marrakesh Agreement is actually “Marrakesh Agreement
Establishing the World Trade Organization”
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Marrakesh Agreement

Marrakesh Agreement and WTO is sometimes referred to as
a “tripod” in that it primarily addressed the following areas
 Trade in Goods—an Agreement on Agriculture and an Agreement on
Textiles and Clothing
 Trade in Services as specified in General Agreement on Trade in
Services
 Intellectual Property as specified in Agreement on Trade-Related
Aspects of Intellectual Property Rights

Included a WTO charter
 Established WTO as a legal international organization
 Stipulated that “WTO shall provide the common institutional
framework for the conduct of trade relations among its members”
 Defined the functions of WTO
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Table 7.2 Administrative
Structure of the WTO
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Table 7.2 Administrative
Structure of the WTO
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Trade in Goods

Agreement on Agriculture addresses three
outstanding issues concerning international trade in
agricultural goods
 Market access
• Replaced a quota-based system with a system of bound tariffs
and tariff-reduction commitments


Known as tariffication—represents a significant change of regime

“Green box” measures—are exempt from any reduction
commitments
“Amber box” measures—are not exempt
• Non-tariff measures (quotas) are now prohibited
Domestic support
• Distinction is made between

 Export subsidies
• Use has not been eliminated but limited to specified situations
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Agreement on Agriculture

Best viewed as a change in rules
 Not as a significant program for the liberalization
of trade in agricultural products

Hope that further liberalization of tariffied
quotas will take place in the current Doha
Round of trade negotiations
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Agreement on Textiles and
Clothing
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Requires countries reintegrate textile and clothing
sectors back into GATT framework
At the end of ten-year period, all quotas on textile
and clothing trade must be removed
Are stated in terms of product categories listed in
an ATC Annex
Noteworthy points
 Integration is in terms of volume, not value
 Importing countries expanded Annex to include many
items never subject to MFA
 Safeguard clause can be invoked to slow down its
implementation
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Trade in Services


Composes more than 20% of total world trade and has at
times grown faster than trade in goods
General Agreement on Trade in Services (GATS)—
significant outcome of Uruguay Round
 Represented first time services were brought into a multilateral trade
agreement
 Negotiations were difficult due to fact that trade in services is less
tangible than trade in goods

Defined trade in services as occurring in one of four modes
 Mode 1: Cross-border trade
 Mode 2: Movement of consumers
 Mode 3: Foreign direct investment or FDI
 Mode 4: Movement of natural persons
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Trade in Services

Cross-border trade
 Mode of supply that does not require physical movement of
producers or consumers
• For example, Indian firms provide medical transcription services to US
hospitals via satellite technology

Movement of consumers
 Consumer travels to the country of producer
• For example, tourism services

Foreign direct investment
 Services that require a commercial presence by producers in country
of the consumers
• For example, financial services

Temporary movement of natural persons
 Non-commercial presence by producers
• For example, consulting, construction, and instructional services
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Difficulty Negotiating GATS
Resistance from a number of developing
countries
 United States and European Union
supported it
 Prevailed upon developing countries to allow

negotiations to move forward

Each member was allowed to specify
nondiscrimination exemptions on a “negative
list” of sectors upon entry into the agreement
 Were to last for 10 years
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Positive List Restrictions
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GATS prohibited certain market access restrictions
 Number of service suppliers
 Total value of service transactions
 Total number of operations or quantity of output
 Number of personnel employed
 Type of legal entity in the case of FDI
 Share of foreign ownership in the case of FDI
These requirements were optional if a member
identified ones they want to maintain in a second
positive list
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Protocols to GATS
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Second GATS Protocol: Revised Schedules of
Commitments on Financial Services, 1995
Third GATS Protocol: Schedules of Specific
Commitments Relating to Movement of Natural
Persons, 1995
Fourth GATS Protocol: Schedules of Specific
Commitments Concerning Basic
Telecommunications, 1997
Fifth GATS Protocol: Schedules of Specific
Commitments and Lists of Exemptions from Article
II Concerning Financial Services, 1998
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Intellectual Property


An asset in the form of rights conferred upon a product of
invention or creation by a country’s legal system
Agreement on Trade-Related Aspects of Intellectual
Property Rights
 Most contentious aspect of Marrakesh Agreement
 Defined intellectual property as belonging to one of six categories
•
•
•
•
•
•
Copyrights
Trademarks
Geographical indications
Industrial designs
Patents
Layout designs of integrated circuits
 Applied the principle of nondiscrimination to intellectual property
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TRIPS Agreement

Sets out obligations for members
 Copyrights
• Members must comply with 1971 Berne Convention on copyrights
 Trademarks
• Goods and services are to be protected for a term of no less than seven years
• Provisions for the registration of trademarks must be made and are renewable
indefinitely
 Geographical indications
• Members must provide legal means to prevent false use of geographical
indications
 Industrial designs
• Members must protect “independently created industrial designs that are new or
original”
 Patents
• Exceptions exist and include protection of public order, human, animal, and plant
life
 Layout designs of integrated circuits
• Distribution of protected layout designs is forbidden
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TRIPS Agreement

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Citizens and firms in developed countries own most of the
world’s IP
Developing countries currently often have less IP protection
than developed countries
 Especially in the case of patents
Raises cost of many goods and services to developing
countries
 Represents a transfer from developing country consumers to
developed country producers
 Allows for greater transition periods for developing countries for the
six obligations
• Developed countries must have instituted the above obligations by 1996
• Developing countries must have instituted them by 2000
• Least developed countries have until 2005
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TRIPs Agreement


In short to medium time frames welfare gains may be
absent
Some economists from developing countries consider
TRIPs to be a welfare-worsening, “non-trade” agenda item
that has no place in WTO
 Lacks efficiency gains that characterize trade and restricts freedom
of countries to choose intellectual property regime that is best for
them


Represents a significant concession on the part of
developing world
Most contentious area of agreement is AIDS drugs
 US government has pressured countries to honor US patents on
AIDS drugs
• Could price drugs above the reach of AIDS patients in certain countries,
increasing AIDS mortality rates
 Meeting in 2001 offered flexibility with regard to public health
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Benefits to Developing
Countries from TRIPS?
Economist Keith Maskus (2000) argues
 Increased inward FDI and technology transfer
 Increased domestic innovation
 TRIPs imposes short-term costs in the hopes
of generating long-term benefits

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Dispute Settlement
Marrakesh Agreement included an
Understanding on Rules and Procedures
Governing the Settlement of Disputes
 Original GATT was unclear about resolution
of disputes—Marrakesh Agreement
attempted to clarify dispute settlement
procedures
 WTO includes councils on trade in goods and
services as well as a council on TRIPs
 Should help minimize occurrence of disputes

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Figure 7.2 Dispute
Settlement in the WTO
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Dispute Settlement

If the consultation process fails to settle a dispute
within 60 days, the complaining member may
request the establishment of a panel
 Composed of three or five “well-qualified governmental or

non-governmental individuals”
Function is to assist DSB in dispute settlement process
• Consults the parties involved and provides DSB with a written
report of its findings
• DSB has 60 days to adopt report by consensus unless a party to
dispute decides to appeal
 The appeal of a panel report is referred to an appellate
body
• Reviews the appeal and submits its report to the DSB
• Any DSB member can effectively insist on the adoption of the
appellate body report
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Dispute Settlement

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Dispute settlement procedure applies to all aspects
of the Marrakesh Agreement
Improves procedures of old GATT and makes a
significant contribution to the conduct of
international trade
Effectiveness of procedures depends on members’
commitment to it
 A country has option of ignoring outcome of the dispute
settlement process
• Complaining member has right to impose retaliatory tariffs on a
volume of imports from the other country determined by the DSB
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The Environment

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In 1991, the GATT reactivated a long-dormant Working
Group on Environmental Measures and International Trade
(EMIT)
GATT dispute resolution panel issued its controversial
opinion in the now-famous tuna-dolphin case
 Ruled against US law banning imports of Mexican tuna that involved
dolphin-unsafe fishing practices
 Argued import ban violated general prohibition against quotas and
United States had not attempted to negotiate cooperative
agreements on dolphin-safe tuna fishing
• US environmental community reacted strongly against the GATT panel
ruling, casting the GATT as anti-environment

Trade-environment issue has loomed large over the WTO ever since
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Committee on Trade and the
Environment


EMIT was replaced by Committee on Trade and the
Environment
Most developing country members of WTO have taken a
dim view of the work of CTE
 Fear the possibility of further protection against their exports on
environmental grounds, what they term “green protection”
 Often view environmental matters as non-trade issues that have no
place in the trade policy agenda of the WTO

Many trade economists support the developing-country view
that environmental issues represent an “intrusion” into WTO
trade agenda
 Suggest environmental agenda could result in an inappropriate “one
size fits all” approach to environmental policies across WTO
members
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Committee on Trade and the
Environment

In 1999, WTO formally took up trade and
environment issue
 Report argued increased trade can have both positive

and negative impacts on the environment
Emphasizes trade-driven growth cannot always be
counted upon to deliver improvements in environmental
quality through increased incomes
• Consequently, these higher incomes must be “translated into
higher environmental quality” through mechanism of international
cooperation
• Also emphasized that government subsidies to polluting and
resource-depleting sectors such as agriculture, fishing, and
energy can exacerbate the environmental consequences of trade
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