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The goal of the World Trade Organization’s agreements is to foster an environment conducive to free trade

WTO and the Rules of Global TradeARTICLE

By Karen Lynch

There is renewed focus of late on the World Trade Organization (WTO) and its rules for international trade. Lengthy preparation for the organization’s 11th Ministerial Conference in December 2017 has led to calls from the business world to expand and update WTO rules.

Businesses are turning to the WTO as growth in global trade of goods and services slowed to between 1.9 and 2.5 percent in 2016, which the World Bank characterized as “the lowest growth in trade volumes since the Great Recession of 2008–20091 .” At the same time, focus has shifted away from regional trade negotiations.

That low growth in global trade appears to be structural as well as cyclical. According to the International Chamber of Commerce (ICC), while slow global economic growth has certainly contributed to the slowdown in international trade growth, national policies are also contributing. “Governments all across the world have become more innovative in protecting domestic business against competition from abroad,” said the ICC, citing a new trend in local content requirements as one barrier of growing concern.2 “What is needed now is new liberalization that raises the underlying potential for growth,” the ICC says in its proposed agenda for the WTO’s upcoming Ministerial Conference.3

The WTO is the forum where 164 member nations negotiate global trade rules, primarily through multi-year rounds of multilateral negotiations such as the current Doha Round, and settle disputes over tariff and non-tariff trade barriers. Although the Doha Round has dragged on for over 15 years, the WTO did recently ratify an important global agreement on trade facilitation aiming to reduce cross-border administrative burdens.

Both the WTO and associated “business focus groups” are looking to develop new mechanisms to move beyond the Doha Round. In addition to the ICC, two of these focus groups recently submitted their priorities to the WTO, including a multilateral cross-border investment agreement, new trade rules for e-commerce, sector-specific agreements and “plurilateral” agreements (within subsets of WTO member nations)4

What Are the WTO Rules of Global Trade?

Current WTO rules are codified in three agreements: The General Agreement on Tariffs and Trade (GATT), covering international trade in goods; the General Agreement on Trade in Services (GATS); and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The GATT was established after World War II, while the GATS and TRIPS both came into force in 1995.

The goal of these agreements is to foster an environment conducive to free trade. The most important rules mainly serve to do the following:

  • rein in anti-import tariffs;
  • ease customs procedures;
  • discourage domestic laws and taxes that may be classified as protection; and
  • reduce quotas and subsidies

The rules are based on a set of common principles. These include non-discrimination, freer trade, predictability, and promotion of economic development and growth. For example, the “most favored nation” (MFN) principle states that if a country grants any tariff or non-tariff treatment to one WTO member state, it must grant the same to all members.

Lengthy GATT and GATS schedules list commitments that individual countries have made to allow different products and service providers into their markets. The WTO achieves the principle of predictability through these binding commitments and by enforcing transparency. For example, a bound commitment might be a ceiling on customs tariffs. “A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade,” the WTO explains5. Transparency, then, is maintained because member countries have agreed to regular notifications to all WTO members; further, the WTO conducts regular reviews of member nations’ trade policies.

The complexity of international trade and its rules, and the national interests at stake, almost naturally produce disputes, which the WTO often acts to settle. A 2016 Japanese government report highlighted many dispute issues. Perusing its country-by-country analysis of international trade practices over the years surfaces myriad issues large and small, such as the short notice given by one country when adjusting value-added tax refunds at the time of export,6 or the “unfairly” long-term continuation of anti-dumping duties by another.7 The WTO’s handling of disputes is addressed later in this article.

What is the GATT?

The GATT is the foundation on which the WTO was built, and remains at the core of the organization. The GATT has evolved considerably over the nearly 70 years since it went into effect among 23 nations, growing in both membership and scope. The Uruguay Round, a pivotal set of multilateral negotiations from 1986 to 1994, marked a definitive point in the evolution from the “old GATT.” Current WTO rules emerged from the Uruguay Round, which agreed to the formation of the WTO itself while updating the rules of international trade in areas including:

  • Establishing fixed timetables for resolving disputes;
  • Changing a process that had enabled member states to block adoption of rulings in cases they were losing (replacing a consensus process with a more automatic adoption, barring a consensus to reject); and
  • Emphasizing prompt settlement of disputes and introducing flexibility in cases considered as urgent (e.g., accelerating resolution where perishable goods are involved).8

Though the GATT is decades old, it remains a living accord subject to ongoing negotiations. “While trade commentary often views trade in goods to be free of frictions, the reality is that trade barriers are still inhibiting trade to a substantial degree,” the ICC said in its previously cited agenda.9 The group called for a renewed focus on international trade in goods, including measures to remove both tariff and non-tariff barriers. It raised the possibility of forging sector-specific trade agreements, because “there are specific sectors where there seems to be a greater willingness among WTO members to consider substantial tariff reductions.”10

What is the GATS?

Since the WTO’s General Agreement on Trade in Services came into force in 1995, services have become increasingly important to the global economy. In the U.S., services accounted for 78 percent of private sector gross domestic product (GDP) and 82 percent of private sector employment in 2015.11 However, negotiations to review and update the GATS have stalled

To further liberalize international trade, developed economies have pursued new negotiations. One proposed pact is the Trade in Services Agreement (TiSA),12 being negotiated by what the WTO calls a “plurilateral” subset of its members (implying a smaller group than participate in multilateral trade agreements). Those 23 members, including Australia, the EU and the U.S., account for about 70 percent of global trade in services.13 Negotiations on TiSA started in April 2013, but have faltered in recent months.

A published report on various countries’ TiSA negotiating stances revealed wide differences in offers to revise market access for sectors including delivery services, e-commerce, energy services, finance, telecommunications, and air, maritime and road transport services.14 Now, “services need to become a key deliverable for the 11th WTO Ministerial Conference,” urged one of the WTO’s business focus groups15.

Another issue is that GATS currently includes exemptions that were granted on a one-time basis when the agreement was forged (or when a particular country later joined the WTO). However, as time has passed, “the schedules of market access commitments by members under the GATS are currently much more restrictive than existing levels of openness,” the WTO business focus group said16.

What is TRIPS?

Intellectual property (IP) is an area in which many see the need for more work. TRIPS covers some aspects of copyright and related rights; trademarks, including service marks; geographical indications, including appellations of origin; industrial designs and patents; and the design of integrated circuits. It includes standards, enforcement and dispute-settlement provisions that build on older accords such as the Paris Convention of 1883 (covering industrial patents, trademarks and other property).

However, digital IP and other aspects of the global digital economy are not sufficiently covered by the GATS and TRIPS, business leaders say. “To date, the WTO has made little progress on digital trade,” according to the ICC17. The digitization of the global economy has created new types of international trade barriers for the WTO to address, the group said.

Enforcing WTO Rules

The WTO enforces its own rules with panels of trade and legal experts set up to arbitrate disputes under the auspices of the WTO Dispute Settlement Body. The resolution process can take approximately 15 months. Many disputes are handled through a less formal consultation process, though some consultations have been known to take years.

In a typical dispute, one country claims that another has violated trade rules, but would prefer not to take action that could escalate into a trade war. Taking a claim to the WTO avoids unilateral actions, such as raising tariffs or other retaliatory measures. 18

For example, a WTO panel took up a dispute filed in 2012 between two Latin American countries. One of them was seen to be imposing retaliatory measures against countries that it said did not cooperate with it for “tax transparency purposes,” and the other country challenged eight of the measures imposed. Ultimately, in 2016, a WTO appellate body found that the retaliation had not broken WTO rules and that countries could restrict trade with tax havens for such reasons as protecting the soundness of their own financial systems or upholding national laws.19

In early 2017, new disputes have emerged over international trade in goods. For instance, a large Southeast Asian country revealed plans to file a complaint with the WTO against duties on its biodiesel exports to a major regional bloc.20 Two of the biggest economies in Asia are currently locked in a spat over steel21, after one imposed an import duty – a development for which the WTO has set up an arbitration panel. One of the longest-running trade battles engaged the EU and U.S. in a 16-year dispute over bananas, until the EU lowered its tariff as agreed in a side deal.22

Enforcement is another area in which businesses are asking for additional measures. “Today, non-tariff barriers often represent a greater burden on trade than tariffs and should therefore be rigorously dismantled,” said the WTO business focus group.23 It called for a new mechanism to discuss and clarify potential disputes over non-tariff barriers.

The Takeaway

WTO rules constitute the playbook for global trade. A slowdown in international trade and the emerging global digital economy have caused some business groups to seek expanded and updated rules. Consideration of new and different trade rules will be on the table at the WTO’s Ministerial Conference in December 2017.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1.Trade Developments in 2016: Policy Uncertainty Weighs on World Trade, World Bank; http://documents.worldbank.org/curated/en/228941487594148537/pdf/112930-v1-revised-PUBLIC-1706109-Global-Trade-Watch-Report-Web.pdf
2. Building for Success: A World Trade Agenda for the Buenos Aires Ministerial, International Chamber of Commerce; https://www.importgenius.com/how-it-works
3. Ibid.
4.“Trade Dialogues: Business Focus Groups Issue Final Recommendations,” World Trade Organization; https://www.wto.org/english/news_e/news17_e/bus_06apr17_e.htm
5.“Principles of the Trading System,” World Trade Organization;https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm
6.“Problems of Trade Policies and Measures in Individual Countries and Regions: Chapter 1,” Japanese Ministry of Economy, Trade and Industry; http://www.meti.go.jp/english/report/data/2016WTO/pdf/01_01.pdf
7.“Problems of Trade Policies and Measures in Individual Countries and Regions: Chapter 3,” Japanese Ministry of Economy, Trade and Industry; http://www.meti.go.jp/english/report/data/2016WTO/pdf/01_03.pdf
8.WTO: Understanding the Rules,” World Trade Organization; https://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm
9.Building for Success: A World Trade Agenda for the Buenos Aires Ministerial, International Chamber of Commercehttps://iccwbo.org/publication/building-success-world-trade-agenda-buenos-aires-ministerial/
10. Ibid.
11.Trade in Services Agreement (TiSA) Negotiations: Overview and Issues for Congress, Congressional Research Service; https://fas.org/sgp/crs/misc/R44354.pdf
12.Ibid.
13.Ibid.
14.“TiSA Negotiations Fall Victim to the Trump Tremor,” live mint; http://www.livemint.com/Opinion/gWxmZFXTyoLg1tDMOtJXRL/TiSA-negotiations-fall-victim-to-the-Trump-tremor.html
15.WTO Business Focus Group 2: Market Access, Trade in Services and Investment Facilitation, World Trade Organization; https://www.b20germany.org/fileadmin/user_upload/documents/BFG2_recommendations_FINAL_logos.pdf
16.Ibid.
17.Building for Success: A World Trade Agenda for the Buenos Aires Ministerial, International Chamber of Commerce; https://iccwbo.org/publication/building-success-world-trade-agenda-buenos-aires-ministerial/
18.“WTO: Understanding the Rules,” World Trade Organization; https://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm
19.“Argentina Wins WTO Appeal in Case Targeting Panama Tax Practices,” Reuters; http://www.reuters.com/article/us-argentina-panama-wto-idUSKCN0XB2D4
20.“Indonesia Plans to File WTO Complaint over Biodiesel Duties,” Channel News Asia ; http://www.channelnewsasia.com/news/asiapacific/indonesia-plans-to-file-wto-complaint-over-biodiesel-duties/3611390.html
21.“WTO sets up panel to resolve steel dispute with India, Japan,” Hindustan Times; http://www.hindustantimes.com/business-news/wto-sets-up-panel-to-resolve-steel-dispute-with-india-japan/story-D2eGfqNXiEaKCFd4dDNb8K.html
22.“E.U. Ends 16-Year Banana Trade Battle,” Wall Street Journal ; https://www.wsj.com/articles/SB126089161812692163
23.WTO Business Focus Group 2: Market Access, Trade in Services and Investment Facilitation, World Trade Organization; https://www.b20germany.org/fileadmin/user_upload/documents/BFG2_recommendations_FINAL_logos.pdf

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