World Trade Organization: Its Role and Effectiveness - Essay Example

A Critique on the World Trade Organization: Its Role and Effectiveness The World Trade Organization (WTO) has been touted as the world’s equalizer such that world economies, from the affluent to the down-trodden, are regarded as partners who are accorded the same rights, privileges and benefits. This paints an ideal scenario however this paper will reveal the reality that discrimination and inequity has endured and persisted even with the constitution and noblest intentions of the united super body. Indeed, the consultative and collegial nature of the WTO proceedings evince a democratic process under the one nation one vote rule and with the globalization thrust of the WTO, economic growth and development should have propelled economic equilibrium but nonetheless some countries still remain in the quagmire of poverty and unable to cope with the demands of the multilateral trading agreements. This paper will likewise demonstrate that the equality clause remains a lip-service during the process of negotiations and deliberations until it is submitted to the floor for approval as comments and oppositions registered by developing and least developed economies over the inclusion of certain provisions or requests for amendments and modifications to the multilateral agreements and/or decisions are overturned by the sheer number, extreme pressure or overwhelming influence of developed economies that suggested revisions or changes to safeguard the interest of the less developed countries were not given due course at all even though anchored on meritorious grounds. The revolutionary measures introduced by the WTO under the Most-Favored-Nation and National Principles were considered as breakthroughs in world trading to level the field but on the contrary, it became an avenue to oppress the poor and it is the task of this paper to critically analyze the issues for its failure to alleviate poverty and spawn economic growth and development as WTO set out to achieve from the beginning, to include a perspective in the settlement of disputes. Before the advent of WTO, the trade relations between countries could be traced back to the first century of the Common Era where a Greek Manuscript Traveler named Periplus Maris Erythraei recorded transactions between the Romans and the Indians. In West Asia, Asian nomads used camels to travel towards their trading destinations to trade silk and spices. Some countries used ships and boats to sail the seas to trade with other countries. During the middle ages, the first printed paper money was made by Song Dynasty and England was able to gain market rights and trading privileges. The Dutch East India Trading Company was established on 1602 but closed on 1799 due to bankruptcy (History of International Trade). During the reign of Napoleon III, an agreement called the Free Trade Agreement (FTA) between France and Britain was established that ended in 1860. Shortly after the implementation of the FTA, in1868, Japanese Meiji Restoration welcomed industrialization as well by means of free trade. Then in 1946, a model was introduced called the Bretton Woods System as standards for commercial and financial relations amongst the world’s major industrial states designed to maintain peace between independent states and prevent depressions from occurring (History of International Trade). Trading between nations continued and subsequently, twenty three countries gave their approval on the establishment of the General Agreement on Tariffs and Trade (GATT) in 1949 (History of International Trade) to strengthen and standardize trading regulations. The GATT however ended in 1994 lasting only for four decades. The remaining members of the GATT became the founding members of the World Trade Organization (WTO) that was established on 1 January 1995 as single institutional framework to oversee the implementation of the GATT through its subsidiary bodies. The WTO is still functioning under the same framework as that of the GATT of 1947 however it codified, among others, the inclusion of the Most Favored Nation principle and the rules to settle disputes (WTO, 1995). The Most Favored Nation principle is not a new trade policy. It was previously utilized by the world powers even prior to its incorporation in the WTO Agreement in 1995. Under its predecessor, it was a bilateral agreement binding between the contracting nations only and it was also referred to as conditional most favored nation treatment (Gordon, 1965). Individual nations rely on good faith in negotiating with its counterpart nation hoping that it will reciprocate with equivalent favor. However, the negotiations and resulting agreements sometimes resulted in lopsided agreement where the rich and powerful nation obtaining a better deal. To eliminate the imbalance in this process, the Most Favored Nation was crafted into the WTO and to trigger economic activity even to the least developed nations. The Most Favored Nation enunciated under the WTO encompasses all trade relations in goods known as the General Agreement on Tariffs and Trade (GATT) as well as services known as the General Agreement on Trade in Services (GATS). The Most Favored Nation clause is supposed to provide a secure and stable trading ground for all nations as all trading partners are treated equally without discrimination such that when one state is conferred a lower tariff rate, the privileges extends to all other trading partners. The main objective of WTO is to tear down trade barriers and discrimination between partner nations to create a competitive and open market to all nations. A nation who is signatory to the WTO shall treat all its trading partners equally and any act which is deemed discriminatory may be subject of a protest which may be properly ventilated under the Dispute Settlement Board. The WTO likewise espouses non-discriminatory treatment for goods traded in the local market, whether such goods are produced locally or imported this is known as the National Treatment principle. However, the receiving state is not precluded from imposing import duties or taxes notwithstanding that locally produced or manufactured products were not subject to same tax as the national treatment principle may be invoked only after the products have entered the local market. The National Treatment principle is embodied in the WTO to preclude nations from favoring its own products over its counterparts. Human nature and experience would support the fact that nations would push locally produced goods to be patronized by the locals or nationals and this has been outlawed and frown upon by the WTO. Globalization has erased the barriers between nations and therefore, no disparity in treatment should be accorded local or imported products. No undue benefit should be given to locally products as it is characterized as discriminatory thus any nation perceived to have breached the open market policies should be held accountable pursuant to the Dispute Settlement Board. Not only are goods subject of the WTO rules but it goes beyond to include liberalization of trade services known as the General Agreement of Trade in Services (GATS) which covers all services except those in the exercise of governmental authority and in the air transport sector, air traffic rights and all services directly related to the exercise of traffic rights. However, nations’ compliance is not restrictive and allowed some level of flexibility in the performance of its obligations pursuant to GATS. Liberalization or globalization of trade in services may be gleaned as anti-national or anti-local as foreign nationals may be recruited to perform services which may be provided by the locals. However, the rationale for trade service globalization is to deliver more efficient services such as infrastructures, telecommunications and power services which are considered essentials to trigger economic growth. And, more importantly, trade liberalization in services would generate quicker and more efficient transfer of technology as competing interest would vie for the most innovative and advance mechanism for economic growth and development. As customary in any undertaking, disputes may arose from a breach, violation, infringement or misunderstanding in the implementation or application of WTO agreements thus the WTO provided for a route to resolve any issues under Dispute Settlement Understanding. Disputes are therefore products of infringement or contravention of WTO agreements. WTO members who are aggrieved may bring actions against their fellow members deemed to be violating the agreement through the multilateral system set forth under the WTO rules. Unilateral action against the erring member is not sanctioned as there are remedies provided under the system to seek relief for any transgressions. Disputes however may not be limited between the protagonists and the aggrieved as other member nations may claim that their interests were violated thus may invoke protection as well. Under the WTO a more systematic and structured procedure was introduced. Unlike its predecessor, WTO provided specific stages and period with which to settle the controversies to avoid a long and protracted process with no end in view. Therefore, if a case is lodged, from its commencement to its termination, the process should not exceed 15 months, including any appeal. Following the consultative nature of the WTO process, any complaint lodged shall commence with consultations to explore the possibility of settling the issues between the contending parties. And should the differences remain unresolved, the WTO director-general may mediate upon the request of the contending parties. Should consultation, mediation or conciliatory proceeding fail to bring the parties to settle the matter, a panel shall be constituted and/or appointed upon request of the complaining party. The Members of the panel shall be chosen in consultation with the countries in dispute, if the contending parties disagree on who shall sit in the panel, the WTO director-general shall appoint the panel members. The panel shall be composed of three to five experts from different countries who shall receive evidence to resolve the matter. The panel’s report shall be conclusive unless rejected by consensus in the Dispute Settlement Body. Meanwhile, the panel’s final report may be assailed by the contending parties within six months from its issuance unless it is a matter of urgency which in such cases, the period is reduced to 3 months. The proceedings demonstrated above is summary where each side in the dispute shall submit its position in writing to the panel before the initial hearing. During the hearings, all parties who have manifested their interest in the case shall be given opportunity to prove their cases including a right of rebuttal should it be warranted. Thereafter, the panel shall submit its factual findings including the issues and arguments to the contending parties, giving each party two weeks to comment. Upon stipulation on the factual findings, an interim report containing the findings and conclusions shall be furnished the contending parties and should they disagree, they are given one week to request for a review. Since time is of the essence, any review conducted shall be disposed of mandatorily within two weeks. After the termination of the review, a final report shall be submitted for the perusal of the contending parties. And thereafter, submitted to all WTO members. If the panel found that the acts complained of infringes or violates a WTO agreement or an obligation, it will require that an undertaking shall be made to comply with WTO rules. The report may include recommendations on how compliance may be undertaken. The report partakes the Dispute Settlement Body’s ruling or recommendation within 60 days unless a consensus rejects it. An appeal may be undertaken by either or both sides on points of law such as legal interpretation only. Review on existing evidence cannot be a valid ground for appeal as well as introduction of new issues shall not be entertained. The appeal may uphold, modify or reverse the panel’s ruling which process should not exceed 60 days but it may be extended to an absolute maximum of 90 days. The Dispute Settlement Body has 30 days to accept or reject the appeals report but rejection may be undertaken only by consensus. However, even after a finding of violation is issued, trade sanctions shall not immediately issue. WTO is more concerned for the losing party to comply with the ruling or recommendations within 30 days from the adoption of the report to implement the recommendations. Indeed, all opportunities will be accorded the losing party to comply with the recommendations and shall extend concession to give a “reasonable period of time” to comply should it be impractical to comply immediately. If notwithstanding all considerations extended, the losing party still failed to comply then an agreement to determine a mutually acceptable compensation shall be entered into. Twenty days thereafter, if no compensation is agreed upon, only then may the complaining party request for limited trade sanctions known as suspend concessions or obligations against the other side. The process is long and tedious however the outcome is still may still be lopsided and in the meantime, status quo and the contractual obligations of the companies engaged in the trade will have to comply with their obligations and contract even if it is deemed discriminatory. Then at the end of the long process if the protagonist includes a nation whose economic might controls more than a tenth of the world’s economy. The likelihood of that nation abiding in full or on time to the ruling of the Dispute Settlement Body is wistful thinking. In short the primary problem of the WTO in settling disputes is that it is not mandatorily enforceable. The WTO since its inception was to replace the GATT which was considered iniquitous. The concepts of the Most Favor Nations and the National Treatment are concept that would have made the international market localized. A closer examination of the two concepts would reveal differently. Most Favored Nations simply means that whatever benefits one nation confers to one or some nation it should be uniformly applied to other nations. This involves the compulsion to legislate the details of the trade agreements which law would now form part of the law of the land. To illustrate: Trade agreements between nation starts when one or some products are traded with another country. The process starts from small businessmen wanting to sell something made locally from their country to another country. However, trade barriers are normally set-up by countries to ensure that their country’s own products are protected from the entry of similar products abroad which will openly compete with the local products. To lower these trade barriers the group of businessmen will lobby their government to enter into a trade agreement with the other country. Since the other country also has some products that it needs to trade with, a trade agreement beneficial to all parties concerned shall be executed which is not always the case as some inessential products are traded in accommodation. Trade barriers such as taxes and tariffs are imposed to balance the amount of trade between two countries. As an example: Country A has several tons of wheat amounting to US$10Million it wishes to trade with Country B. However, Country B who also produces wheat in the amount of US$5Million has a market that can only accommodate about US$10Million of wheat. The entry of extra wheat in the market would eventually lower the price of wheat forcing the local producers in Country B to lose its investment. Country B, therefore do not have any choice but to increase the tariff for wheat to ensure that the wheat coming from Country A will have a higher price than that of the local wheat. During trade negotiations or treaty, these market valves are loosened to ensure that other items in another industry can also be traded with another country. This normally would indicate a win-win situation. In another example, let us consider Country C and Country D. Country C produces oil that Country B cannot produce. In their trade agreement Country B would therefore not only relax tariffs in oil, it may in fact put it at zero to ensure that only market forces will increase the prices and not the taxes. The WTO mandates that tariffs the way it was given to Country C should be the same with the tariff given to Country A when laws codifying these requirements are passed. This would lead to the eventual collapse of the local industry for Country B. Small countries are normally vulnerable to this kind of trade inequities imposed by WTO because they either do not have the natural resources or even the human resources to trade with other countries. The WTO’s concept presupposes that all country have the same resources to produce products in the same quality and cost as the other country. Reality however is light years away far from this economic utopia. Countries have different national priorities due to their geographic locations, national collective consciousness and cultural nuisances. In the same manner that countries are not as blessed with the natural resources granted to other nations. Poor nations trade because of their needs rich nation trade because they have excess capacity or production. Poor nations enter into agreements hoping to get a better deal rich nation enter into agreements hoping to get the best deals. In the international market when everything else is equal the primary motivation is still the price. Those that have excess capacity can always drill-down their prices down to bare bones. Most Favored Nations therefore do not create a level playing field it only highlights the disparity between the rich nations and the poor nations. National Treatment is the practical version or result of the Most Favored Nation concept. National treatment mandates that all imported products are accorded the same treatment as those products produced or manufactured locally. In the earlier example, Country A produces the same product as Country B unabated entry of the product would result to the collapse of the local industry due to the excess demand that lowers the price of products (Law of Supply and Demand). The WTO should create synergy amongst nation for the protection of the economy of smaller nations. If the aim is to provide lower priced but higher quality products for the consumers then WTO would be able to provide this for a limited period of time. The theory is that an open market would encourage local manufacturer to produce quality products because the price element is already a done deal due to the operation of the WTO and GATT. In this logic lay the inequities of the whole concept. In order to create quality products, capital investment is a primordial requirement which is readily available in more progressive countries. Quality product may still be produced in developing countries, but the lack of technology may prevent them to mass produce that could lower down their prices. In another area, price is dictated by the law of supply and demand. A market flooded with excess production capacity will have a lower price than items with limited supply. Lower price can lead to the closure or collapsed of any industry spells disaster to the market. And the most badly hit by a collapse of industries are the poorer nation. It is an economic certainty that over time demand increases due to population. When this happen the only industry that can expand their operation are the existing ones. WTO’s concept of free market is laudable but in its current format it lacks the mechanism to protect smaller economies from being over ridden by the larger ones. It failed to take into consideration the time for smaller economies to develop their own capacities and capabilities in response to the already existing capacities of the larger economies. WTO also failed to take into consideration the investment needed to build the capacities of the industries of the smaller countries. Granted that investors can still set-up shop or factories in developing countries the proceeds of such endeavor will still redound to the benefit of the economy of the larger nation. In trade negotiations normally an icing on the cake is normally in the form of factories being set-up in the developing country’s boundaries that will employ thousands of its citizens. However the outputs of these manufacturing plants are still the local market. What happened is that the company just lowered or eliminated its shipping cost by having the manufacturing plants closer to its market. At the end of the day the production facilities are just a cost saving tool for the company. What is worst, in some countries due to the operation of the GATS companies that set-up shops in developing countries are normally given tax holidays or breaks. Not only do these companies reap the benefits of having eliminated the shipping cost of its products by raking in more profit. They also get to enjoy larger net revenue because of tax holidays or breaks. WTO, GATT and GATS are innovations that will create an open global market in the future, however getting to point A from Point B is another matter that was not taken into considerations. Ehring, L. De Facto Discrimination in WTO Law: National and Most-Favored-Nation Treatment - or Equal Treatment? [online] Available from: [Accessed 22 December 2010]. Kwa. A. Focus on the Global South: Power Politics in the WTO. updated 2nd ed. January 2003 [online] Available from: [Accessed 22 December 2010]. Maps of the world. History of International Trade. n.d. [online] Available from: [Accessed 22 December 2010]. Gaillard, E., 2005. 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