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Definition: World Trade Organization from Collins English Dictionary

n

1 an international body concerned with promoting and regulating trade between its member states; established in 1995 as a successor to GATT


Summary Article: World Trade Organization (WTO) from International Encyclopedia of Political Science

The World Trade Organization (WTO) is the heir of the General Agreement on Trade and Tariffs (GATT). The GATT treaty was hastily—almost by default—adopted in 1948, and GATT as an institution was barely known until the mid-1980s. For many years, it had little in common with the International Bank for Reconstruction and Development (IBRD, the World Bank) or the International Monetary Fund (IMF), both founded in 1944 with great unanimity and pomp. However, half a century later, the WTO is widely seen as an institution that is as important as the two others.

Economics and Politics of Trade Policy

Such success is due largely to GATT's capacity to fit well the basic economics and politics of trade policy, a crucial heritage for the WTO. GATT was largely shaped by the views of Cordell Hull, Roosevelt's Secretary of State (and in 1945, he won the Nobel Peace Prize for his role in creating the United Nations). Hull believed in an open world trade regime based on no discrimination among countries as a key instrument of world prosperity and peace. But as Hull was deeply involved in the opening of U.S. markets to foreign goods after 1934, he was well aware that trade policy required both economic soundness and political realism—a difficult blend.

Economic soundness values trade liberalization as the best policy (exceptions are very limited in practice). It is in the best interest of the consumers, and consumers' interest is the widest possible form of “general” interest (it can even include future generations, as in the case of environmental issues).

But consumers are too numerous to build strong coalitions and make their voices heard. This creates a deep political problem because it leaves governments under the pressure of producers alone. Fortunately, producers have opposite interests. On the one hand, domestic producers facing increased competition at home are eager to maintain or increase the level of domestic protection. They are powerful (they are often close to the political establishment in their own countries), few enough to build coalitions easily, and induced to lobby hard (they gain a lot from keeping things unchanged). On the other hand, domestic producers who are able to export to foreign markets support the opening of domestic markets, if this is the price to be paid for opening the foreign markets to which they could export. They are less powerful than protectionist interests: They are often embryonic (they need foreign markets to expand), more diverse, and more focused on foreign markets to conquer than on domestic governments to lobby. Their interests are close to those of the consumers, but their influence stops as soon as they get the market access they want.

In short, liberalizing is not easy and requires political will from governments. Joining efforts in a multilateral (world) forum makes such an endeavor politically easier while amplifying its expected economic benefits. This then is GATT's, and WTO's, role.

GATT's Growing Success (1947-1986)

In 1947, the Havana Conference tried to solve this complex blend of economics and politics by drafting a long charter, reflecting the diverging views between the United States and the rest of the world, led by the United Kingdom. The British view, shaped by John Maynard Keynes, did not see trade as a key instrument to achieving world growth and stability; hence, it was favorable to preferential trade agreements and moderately opposed to protection. The charter ended up as a stack of contradictory provisions. The U.S. Senate evidently recognized this and rejected the charter.

This decision left trade negotiators in a difficult situation. They had already agreed on tariff cuts that needed to be consolidated rapidly. They then took the charter's chapter on Commercial Policy and converted it into the GATT text, with some limited additions.

The GATT text suits political realism by stating three—only three—key rules:

  1. The “most favored nation” (MFN) rule states that a member lowering a tariff (opening up a market) has to do so for the same goods from all the other GATT members—rich or poor, weak or strong.

  2. The “national treatment” rule states that imported and locally produced goods should be treated equally after the foreign goods have entered the market.

  3. The “binding” rule states that, once declared bound, commitments cannot be reneged upon by a member without paying compensation to the other members or risking retaliatory measures from them.

These three rules have little to do with liberalization. A protectionist-minded country can abide by them as easily as a “free trade” country. Their value flows from the trust they create. GATT members are assured that they will not be discriminated against and will have collective ways of dealing with breaches of commitments. This is GATT as a “rule maker.”

GATT “Rounds” promote economic soundness. A Round consists in GATT members negotiating concessions in terms of tariff cuts or other means to open markets. A Round is launched when enough members feel ready to open their economy more (the United States was mostly in charge of testing the waters) and is concluded when members feel that they have got an acceptable deal. The agreements are achieved by consensus, with all the members having the same weight (there is no vote). This is GATT as a “negotiating machinery.”

Such a “collective” liberalization occurred in seven Rounds scattered between 1947 and 1986. It generated a progressive—hence politically manageable—liberalization of the industrial sector in an increasingly large number of countries. As Hull had hoped, trade became a powerful engine of growth: It has grown almost two times faster than domestic production since the 1970s.

Of course, growth is not enough. Issues such as distribution of the benefits from growth are key. But economics and politics converge to suggest that such issues are domestic matters heavily loaded by national values. Hence, they should be handled by domestic policies (taxes, subsidies, regulations) that GATT rules allow in the vast majority of cases, contrary to what is often said.

From GATT to WTO: The Uruguay Round (1986-1995)

This remarkable success—nothing comparable happened during the 19th century—had some serious limits. First, in 1986, GATT was a de facto club of rich (or rapidly becoming rich, like Japan or Korea) members. Most developing countries remained opposed to trade liberalization. Second, GATT Rounds covered only the industrial sector (which ranges from 20% to 30% of GDP for most countries) but not key sectors for developing countries (textiles). Last but not least, agriculture and services were totally untouched.

The key objective of the last GATT Round—the Uruguay Round, 1986 to 1995—was precisely to bring these untouched sectors under GATT rules, by the same token becoming more attractive to developing countries. Agriculture was key to changing the mind-set in countries such as Brazil and Argentina. Services played the same role for India and Pakistan. This new mind-set was boosted by China's rapid growth since its late 1970s reforms (though not yet a GATT member, China was rapidly becoming a more open country than most developing country GATT members).

The Uruguay Round results have been mixed. New market openings were substantial in manufacturing, in particular, with the elimination of nontariff barriers on trade in goods of key interest for developing countries (textiles). But in agriculture, the liberalization process was so badly designed that, despite the rhetoric, market openings were very limited.

Turning to a broader picture, the Round succeeded in expanding the GATT negotiating machinery to services and intellectual property rights. It also established a “litigation machinery,” with a dispute settlement mechanism (DSM) that was much more credible than the one that had existed until 1995. To evaluate some of these results requires caution. Although there is no doubt that the potential gains from liberalization in services are huge, the case of intellectual property rights is more debatable (these rights consist in granting monopoly rights, possibly endangering future competition). A stronger DSM makes it more probable that WTO members will litigate rather than negotiate. Such an evolution (not yet observed) would be worrisome since it assumes a drastic change of mind in the way international relations at large are conceived.

And there were outright failures. The Round was unable to discipline the use of the “escape clauses” (safeguard, antidumping, and antisubsidy), which allow members to reestablish protection too easily. Even more important, the Round adopted the “Single Undertaking” approach—all members shall agree on all the results of a Round (GATT allowed members not to sign some agreements at the end of a Round). Such a condition deeply rigidifies, hence weakens, the WTO negotiating process since it gives an implicit veto to any member.

The WTO: Challenges and Ambitions

While the Uruguay Round was shaping the WTO, an old world was vanishing: Centrally planned economies disappeared, and developing countries opposed to freer trade had begun to open their domestic markets. These changes were epitomized by China's accession to the WTO in 2001 (today, one third of the Chinese provinces are close to becoming as rich as the Central European countries that are members of the European Community).

These sweeping changes induced the WTO to abandon GATT's low-key approach. The cautious preparations of GATT Rounds were replaced by a rush to launch a new Round (the European Community proposed to launch the Millennium Round 5 years before the end of the enforcement of the Uruguay Round). The price was high: The TV cameras that the WTO ministerial meetings attracted made it the favorite target of antiglobalizers of all kinds, disturbing WTO's first years of operation and making cumbersome the launch of the Doha Round in 2001 (technically, the Round has not yet been officially launched).

However, the key challenges facing the WTO are not from the increasingly scattered antiglobalization ranks. Indeed, most Americans, Europeans, Chinese, and Indians realize that even though globalization has its drawbacks, closing their doors to foreign products would be a much more costly solution. Also, the current economic crisis has not so far witnessed any notable move toward reprotection.

The WTO's key challenges will come from the new world that is emerging. First, there is an ongoing tectonic shift among key players. GATT greatly benefited from the benevolent role of the United States. The United States was always very careful to keep in mind the interests of the world economy and not exploit its full power (if the United States had wanted to exploit its leverage fully, it would have concluded bilateral agreements, not pushed for a nondiscriminatory world trade regime). The rise of China and India is slowly making the United States one key player among a few others. Multipolarity is a laudable concept, but it is hard to practice. To what extent the four to six largest economies will be eager to play collectively the benevolent role that the United States played alone for the past 50 years is a crucial open question for the years to come.

The second challenge concerns the WTO negotiating machinery. In trade in goods, the WTO will be doing “GATT business as usual”: eliminate the remaining high industrial tariffs (all the members), bind more firmly and systematically the other industrial tariffs (emerging and developing members), and cut the high protection (tariffs and subsidies) in agriculture (industrial members).

Trade liberalization in agriculture will be particularly crucial. Today, the issue of climate change or water availability is widely seen as antagonistic to the world trade regime relying on GATT-WTO rules. As some critics have pointed out, this is a major mistake. Climate change will require more—not less—trade in agriculture. The half dozen models assessing the impact of climate change have only one common result: The key way to soften the adjustments required by climate change is to facilitate trade among countries. In short, cuts in barriers to trade get a new raison d'être—to be a key tool for fighting climate-driven hunger and water-driven conflicts.

Another big challenge to the WTO negotiating machinery is services. Because they amount to 50% to 70% of GDP, opening these markets will offer huge gains to consumers for many decades to come. But negotiating concessions in services is notoriously difficult. On what basis can opening a domestic audiovisual sector be considered equivalent to the opening of a foreign distribution sector? More crucially, such negotiations require trust in trading partners because services liberalization consists in a dynamic and long process of domestic regulatory reforms, which are often hard to anticipate when negotiating the initial agreements.

Such a trust cannot be delivered by the WTO because the regulatory reform capacities of its members are too heterogeneous. This makes it attractive to negotiate agreements in services among a narrower group of countries (“plurilateral” agreements). Such agreements could be negotiated during (probably more frequent) WTO Rounds, but they could also be initiated outside the WTO and then repatriated under the WTO rules of non-discriminatory binding.

In short, the systemic shift of focus from goods to services suggests that the role of the WTO as a negotiating body may become less prominent. But the role of the WTO as a rule maker is as crucial as ever, buttressed by its capacity for litigation.

See Also:

International Monetary Fund (IMF), International Organizations, Liberalization, Multilateralism

Further Readings
  • Hoekman, B., & Kostecki, M. M.2009 The political economy of the world trading system (3rd ed.). Oxford, UK: Oxford University Press.
  • Hoekman, B., Mattoo, A., & English, P. (Eds.). 2002 Development, trade, and the WTO: A handbook. Washington, DC: The World Bank.
  • Jackson, J. H.2006 Sovereignty, the WTO, and changing fundamentals of international law. Cambridge, UK: Cambridge University Press.
  • Messerlin, Patrick A.
    Groupe d'Economie Mondiale at Sciences Po Paris, France Groupe d'Economie Mondiale at Sciences Po Paris, France
    SAGE Publications, Inc.

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