Lecture 5 ib 404 institutional framework for international business
- 1. LECTURE 5 WORLD TRADE ORGANISATION Understanding Principles and Organization
- 2. Organization of WTO TheWTO is run by its member governments. All major decisions are made by the membership as a whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken by consensus. In this respect, theWTO is different from some other international organizations such as theWB and IMF. In theWTO, power is not delegated to a board of directors or the organization’s head. 2
- 3. Procedure WhenWTO rules impose disciplines on countries’ policies, that is the outcome of negotiations among WTO members. The rules are enforced by the members themselves under agreed procedures that they negotiated, including the possibility of trade sanctions. But those sanctions are imposed by member countries, and authorized by the membership as a whole. This is quite different from other agencies whose bureaucracies can, for example, influence a country’s policy by threatening to withhold credit. 3
- 4. Highest authority: the Ministerial Conference The countries make their decisions through various councils and committees, whose membership consists of allWTO members. Topmost is the ministerial conference which has to meet at least once every two years. The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements. 4
- 5. Second level: General Council in three guises Day-to-day work in between the ministerial conferences is handled by three bodies: 1. The General Council 2. The Dispute Settlement Body 3. TheTrade Policy Review Body All three are in fact the same — the Agreement Establishing theWTO states they are all the General Council, although they meet under different terms of reference.Again, all three consist of allWTO members.They report to the Ministerial Conference. 5
- 6. Third level: councils for each broad area of trade, and more Three more councils, each handling a different broad area of trade, report to the General Council: 1. The Council forTrade in Goods (Goods Council) 2. The Council forTrade in Services (Services Council) 3. The Council forTrade-Related Aspects of Intellectual Property Rights (TRIPS Council) The three are responsible for the workings of the WTO agreements dealing with their respective areas of trade. Again they consist of allWTO members.The three also have subsidiary bodies 6
- 7. Third level Six other bodies report to the General Council.The scope of their coverage is smaller, so they are “committees”. But they still consist of allWTO members.They cover issues such as trade and development, the environment, regional trading arrangements, and administrative issues.The Singapore Ministerial Conference in December 1996 decided to create new working groups to look at investment and competition policy, transparency in government procurement, and trade facilitation. Two more subsidiary bodies dealing with the plurilateral agreements (which are not signed by allWTO members) keep the General Council informed of their activities regularly. 7
- 8. Fourth level: down to the nitty-gritty Each of the higher level councils has subsidiary bodies. The Goods Council has 11 committees dealing with specific subjects (such as agriculture, market access, subsidies, anti-dumping measures and so on). Again, these consist of all member countries. Also reporting to the Goods Council is theTextiles Monitoring Body, which consists of a chairman and 10 members acting in their personal capacities, and groups dealing with notifications (governments informing theWTO about current and new policies or measures) and state trading enterprises. 8
- 9. Fourth level: down to the nitty-gritty The Services Council’s subsidiary bodies deal with financial services, domestic regulations, GATS rules and specific commitments. At the General Council level, the Dispute Settlement Body also has two subsidiaries: the dispute settlement “panels” of experts appointed to adjudicate on unresolved disputes, and the Appellate Body that deals with appeals. 9
- 10. Head of Delegations (HOD) and other body: the need for informality Important breakthroughs are rarely made in formal meetings of these bodies, least of all in the higher level councils. Since decisions are made by consensus, without voting, informal consultations within theWTO play a vital role in bringing a vastly diverse membership round to an agreement. One step away from the formal meetings are informal meetings that still include the full membership, such as those of the Heads of Delegations (HOD). 10
- 11. Principles of the trading system TheWTO agreements are lengthy and complex because they are legal texts covering a wide range of activities.They deal with many economic issues. But a number of simple, fundamental principles run throughout all of these documents.These principles are the foundation of the multilateral trading system. Trade without discrimination Freer trade: gradually, through negotiation Predictability: through binding and transparency Promoting fair competition Encouraging development and economic reform 11
- 12. Trade without discrimination Most-favoured-nation (MFN): treating other people equally Under theWTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and have to do the same for all otherWTO members. This principle is known as most- favoured-nation (MFN) treatment. National treatment:Treating foreigners and locals equally Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market.The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. 12
- 13. Freer trade: gradually, through negotiation Lowering trade barriers is one of the most obvious means of encouraging trade.The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed. 13
- 14. Predictability: through binding and transparency promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition — choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable. 14
- 15. Promoting fair competition TheWTO is sometimes described as a “free trade” institution, but that is not entirely accurate.The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition. The rules on non-discrimination — MFN and national treatment — are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies.The issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade. 15
- 16. Encouraging development and economic reform TheWTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements. The agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries. 16
- 17. The case for open trade The economic case for an open trading system based on multilaterally agreed rules is simple enough and rests largely on commercial common sense. But it is also supported by evidence: the experience of world trade and economic growth since the SecondWorld War. Tariffs on industrial products have fallen steeply and now average less than 5% in industrial countries. During the first 25 years after the war, world economic growth averaged about 5% per year, a high rate that was partly the result of lower trade barriers. World trade grew even faster, averaging about 8% during the period. 17