World Trade Organization and Developing Countries - Dissertation Example

Country: Program: or Assigned World Trade Organization and Developing Countries Introduction The World Trade Organization (WTO) is an important body that affects the lives of billions of people all over the world. The greater part of the population of the world, however, is in developing nations. How does the WTO relate with the concerns of developing countries? How can we reform the WTO to serve the interests of developing nations better? 2) The World Trade Organization (WTO)1 a) History and Overview As of 23 July 2008, the World Trade Organization is composed of 153 countries. It succeeds the General Agreement on Tariffs and Trade (GATT) that was established in 1947 or immediately after World War II. The WTO was formally established on 1 January 1995 after a series of negotiations in the Uruguay Rounds from 1986 to 1994. The Uruguay Round refers to a series of meetings planned in Uruguay in 1986 for 1986 to 1994 and held in several cities: Montreal in 1988, Geneva in 1989, Brussels in 1990, Geneva in 1991, Washington in 1992, Tokyo in 1993, and Marrakesh in 1994. It was in Marrakesh where agreements related to the establishment of the WTO were signed to take effect in 1995. Originally, the Uruguay Round targeted 15 topics to discuss within the institutional framework of the GATT but ended organizing an organization called the World Trade Organization to replace the GATT. The 15 GATT topics originally targeted to be discussed were tariffs, non-tariff barriers, natural resource products, textiles and clothing, agriculture, tropical products, GATT articles, Tokyo Round codes, anti-dumping, subsidies, intellectual property, investment measures, dispute settlement, the GATT system, and services. According to the WTO, merchandise trade has grown by 6% annually since the 1950s and total trade as of 2000 was 22 times the volume of 1950. The 153 country members of the WTO account for over 97% of world trade as per the WTO’s estimate. The WTO, through its 2009 publication, defines her main function2 as one of ensuring that trade flows as “smoothly, freely, fairly, and predictably” as possible. The components of the WTO main function cover the following (WTO 2009): 1. Administration of WTO trade agreements 2. Serve as forum for trade negotiations 3. Handling of trade disputes 4. Monitoring of national trade policies 5. Provision of technical assistance and training for developing countries The WTO holds office in Geneva, Switzerland and had a budget of 189 million Swiss francs and a secretariat staff of 625 in 2009. An important difference between a multilateral trade agreement like the GATT and the WTO and a trade relationship outside of the GATT/WTO framework is that the GATT/WTO includes a most-favored nation (MFN) principle (Bown 2004, 678). The MFN principle of the GATT/WTO requires all member countries to provide equal treatment to all member nations of the GATT/WTO. Under the rule, if a country extends a benefit to one nation, the same benefit must be extended to all the member nations of the WTO. b) Structure and Mechanisms The WTO’s highest-level decision-making body is the Ministerial Conference that meets at least every two years. As articulated by WTO 2009, below the Ministerial Conference is the General Council. The General Council is normally composed of ambassadors and heads of delegations of countries that meet several times a year in Geneva. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body that are the alter egos of the former. Below the General Council are the Goods Council, working groups, and Intellectual Property (TRIPS) Council that all report to the General Council. In addition, many specialized committees, working groups, and working parties deal with specific agreements and other areas (e.g., environment, development, applications for membership, and regional trade agreements. The WTO 2009 publication claims that the WTO typically makes decisions by consensus. Although decisions via majority vote is possible under WTO rules, the 2009 publication claims that majority vote has never been employed in the WTO and was dismissed as extremely rare and rarely used even in the GATT. Sometime in 2009, the trade disputes filed at the WTO reached 400 cases but various scholars have commented that most of the cases do not come from developing countries but from the developed ones. Moreover, various scholars have argued that the mechanisms for resolution of trade disputes in the WTO are skewed in favor of the developed countries. 3) Problems and Concerns of Developing Countries Global Exchange, one of the most vocal oppositionist to the WTO based in the United States provides twelve reasons3 to oppose the WTO in 2008. The Global Exchange argued that the top twelve reasons are: 1) The WTO is undemocratic; 2) The WTO will not make people safer; 3) The WTO tramples human rights; 4) The WTO privatize essential services; 5) The WTO is destroying the environment; 6) The WTO is killing people; 7) The WTO increase inequality; 8) The WTO increases hunger; 9) The WTO hurts poor and small countries in favor of powerful ones; 10) The WTO undermines local decision making and national sovereignty; 11) There are alternatives to the WTO; and 12) The tide is turning against free trade and WTO. The Global Exchange document, however, is in a propaganda format. Nevertheless, we discuss some of the arguments that are relevant to our topic. The Global Exchange argued that the WTO is undemocratic because “WTO rules are written by and for corporations with inside access to the negotiations.” The Global Exchange claims, for instance, that US trade representatives get inputs from 17 industry sector advisory committees while the inputs from human rights organization, citizens, and environmental groups are ignored. With regard to defending developing country interests, the Global Exchange has claimed that the WTO has allowed instead the “dumping of heavily subsidized industrially produced food into poor countries, undermining local production and increasing hunger.” The Global Exchange strongly criticized the WTO claims to the use of consensus in decision-making. It alleged that “in reality, many important decisions get made in a process whereby poor countries’ negotiators are not even invited to closed-door meetings---and then ‘agreements’ are announced that poor countries didn’t even know were being discussed”. The Global Exchange asserted that practices of this sort “disadvantages poor countries from representing their interests”. The Global Exchange also alleged that free trade that is being promoted by the WTO has not worsened inequality such that the richest 20 percent of the world’s population consume 86 percent of the world’s resources while poorest 20 percent consume only 14 percent. 4) Focus on the Dispute Settlement Mechanism of the WTO We focus on the Dispute Settlement Mechanism of the WTO for its ability to uphold the interests of developing nations. Busch and Reinhardt (2003, 719) has stressed that it has long been observed that developing countries made scant use of dispute settlement under the GATT and the WTO and the reasons for this are not clear. They noted that earlier it was expected that the scant participation in the GATT would cease to exist with the re-establishment of the GATT as WTO (Busch and Reinhardt 2003, 719). It was expected that with the WTO, “right will triumph over might” and developing countries would use multilateral dispute settlement for trade concerns (Busch and Reinhardt 2003, 719). At the same time, however, Busch and Reinhardt noted that most observers participated more in the WTO rather than in the GATT (Busch and Reinhardt 2003, 719). They argue that although dispute settlement places the defendant to concede out of fear of being ostracized in the community of nations, developing nations failed in exacting concessions from defendants (Busch and Reinhardt 2003, 720). They emphasized that the developing nations have not secured significantly greater concessions under the WTO than under GATT (Busch and Reinhardt 2003, 720). Further, they point out that the result is “a new and growing gap between rich and poor member states in the performance of the dispute settlement component of the global trade regime” (Busch and Reinhardt 2003, 720). For Busch and Reinhardt, the implication of this is that developing countries need more assistance before litigation commences. Bown 2004 argued that the WTO system has been fair and claimed that he has documented experience that provides empirical evidence of equal treatment under the WTO rules. Bown’s notion of equality within the WTO is predicated on the implementation of MFN in which all nations are equally treated within the WTO framework. Writing in 2004, Bown argued that the evidence that as not been discussed in the MFN is whether there is evidence in the GATT/WTO system that treats members unequally or in a discriminatory manner. He concluded that power measures, such as the threat of credible retaliation by the plaintiff, allow defendant government to live up to their commitments under the WTO. Reviewing his earlier works, Bown argued the GATT/WTO reciprocity principle, i.e., “if the plaintiff in the dispute has made valuable market access commitments to the defendant that it can threaten to withdraw as retaliation, the defendant is better able to follow through with the (reciprocal) liberalization” (Bown 2004, 681). In addition, countries that are not direct parties to the dispute increase by 0.76% to 0.99% for every 1% increase in exports gained by the plaintiff in the dispute over the defendant (Brown 2004, 682). However, it can be surmised that many of the examples in Bown 2004 were developed country disputes, particularly the case of the European Union versus Japan on the issue of alleged discrimination by Japan on European pork. Bown’s 2004 framework of analysis works this way: where a country has violated its GATT/WTO obligations by protecting her import-competing sector more than it had agreed to under GATT/WTO rules, that country will find herself confronted with costs. One such cost is the international stigma associated with going against the GATT/WTO rules (Bown 2004, 683). For the defendant government to commit to liberalization, therefore, requires that the costs associated with defying the GATT/WTO rules must be lower compared to the benefits of compliance and the dynamics involved in country membership in the GATT/WTO push countries to liberalize. The work of Bown 2004 provides ample empirical evidence that shows that GATT/WTO has been promoting global equality in the sense of the MFN rule it doesn’t assess whether the dispute mechanism of the WTO are adequate to defend developing country interests in the WTO dispute mechanism. Meanwhile, one author argues that the dispute mechanism of the WTO has “implications for inequality between developed and developing countries” (Smith 2004, 542). In Smith’s view, “moves to establish binding, third party arbitration in international law generally favor smaller, less powerful states.” However, as we have seen in the WTO 2009 publication, the majority vote was never employed in the WTO and was rarely used even in the GATT. What seems to follow that so long as WTO decisions use consensus, the decisions will not favor smaller and less powerful states. According to Smith (2004), the WTO has conducted several procedural reforms in dispute settlement over several years. In dispute settlements, the WTO has broadened access of third parties in appeal proceeding, opened avenues to submissions of concerns from private individuals and organizations, and endorsed the representation of governments by private counsel (Smith 2004, 542). The institutional interests of the WTO have conflicted with those of developing nations (Smith 2004, 542). At several times, even the official name of the WTO talks (example: “Doha Development Agenda”) reflected an acknowledgement that developing nations have “perceived inequities in the WTO system” (Smith 2004, 543). The most prominent criticisms on the WTO are in the areas of intellectual property, agriculture, and trade remedies (Smith 2004, 543). Another criticism that was raised on the WTO pertains to the “failure of developed countries” to implement commitments in areas of particular importance to developing nations, such as textiles (Smith 2004, 543). Ecuador and Mexico have focused on inequities on rules providing remedies to countries found to be in violation of WTO commitments (Smith 2004, 543). Jamaica, Africa, and a coalition of developed countries “have emphasized basic asymmetries in legal expertise and resources that make it difficult for them even to follow the expanding jurisprudence of the WTO, much less to assert and defend their rights as a litigants” (Smith 2004, 543). At the same time, however, the tradition of consensus decision-making also “provides a useful leverage for developing countries” because they can potentially veto any proposal (Smith 2004, 544). Unfortunately, however, a veto does not guarantee that a system will not evolve over time that will be unfavorable to the interest of developing nations (Smith 2004, 544). Related to this, Smith pointed out “developing countries have been one-third less likely to file complaints against developed states in the WTO than under the post-1989 GATT regime” (Smith 2004, 546). The vast majority of developing countries have never participated in a formal dispute (Smith 2004, 547). According to Smith 2004 (547-549), developing countries face four difficulties in utilizing the mechanism for settlement of disputes in the WTO. The first difficulty is that multilateral rules are systematically biased in favor of the developed countries, particularly for the United States, European Union, Canada, and Japan. The second difficulty is that there structural inequalities in the international economy that deter developing countries from filing cases in the WTO. This is because developed countries can threaten to withdraw benefits that they provide to developing countries like development aid or unilateral trade preferences. The third difficulty is that litigation of case in the WTO can be prohibitively costly for developing nations and some developing nations lack institutional and financial resources to pursue their interests effectively. Developing country delegates are very few in Geneva, for example, and the price of retaining private counsels are prohibitively high even at subsidized rates. In contrast, the costs of litigation are “routinely borne by private industry, whose attorneys actively assist government lawyers in preparing case of interests” (Smith 2004, 548). Finally, the fourth difficulty and which constitutes as the extreme obstacle is that remedies rely “almost exclusively on economic sanctions” (Smith 2004, 548). Smith notes that any system of decentralized sanctions tend to favor large economies. The sanctions will not work if the country imposing the sanction has a small economy because the sanction will not hurt a large economy a bit. Bown and Hoekman (2005) blame poor countries on why the WTO dispute settlement system is not working fine. They say that the poorest WTO member countries fail to engage as either complainant or interested parties in formal dispute settlement activity with regard to their market access. They argue, however, that the lack of participation from countries in matters related to dispute settlement arises from the high cost of litigation. Bown and Hoekman propose that to address the problem, private sector participation must be enlisted as well to share in the cost of litigation. However, as we have seen in the analysis of Smith (2004), cost is only one of the factors that can restrain developing countries from participating actively in concerns related to dispute settlement. The possibility that developed countries may retaliate on developing countries for their positions in dispute settlement is one of the important concerns that will have to be addressed to improve the WTO dispute settlement process. Bohl (2009) identified the problems that affect developing country access to WTO dispute settlements. The author noted that member states with small economies “tend to shy away from participating in trade disputes or are unable to access the system” (Bohl 2009, 131). For Bohl, the reasons for failure to access the WTO dispute settlement by developing nations arise from “lack of resources, lack of institutional capacity, and a lack of political will” (Bohl 2009, 132). Further, another problem is that smaller countries do not use the mechanism for dispute settlement because their trade volumes are small and yet the costs for availing the dispute settlement mechanism under the WTO are expensive (Bohl 2003, 132). In dramatizing her point, the author pointed out that at the time of her writing in 2009, despite the great number of developing nations, only one least developed country (using the United Nation definition) has initiated a trade complaint under the WTO through its Dispute Settlement Body (Bohl 2003, 132). Another data shows however, that with 380 WTO trade disputes at the time of her writing, only 18% of the total complaints under the WTO came from countries that are developing countries but the term “developing countries” is an expanded definition rather than the one adopted by the United Nation (Bohl 2003, 132-133).4 According to Bohl (2009), one problem that affects participation of developing countries in the dispute settlement process is that determining facts is expensive. Private firms charge from US$250 to US$1,000 per hour in legal representation fees and the total costs in fees can be from US$100,000 to US$1,000,000 and the said estimates are even conservative (Kohl 2003, 144). In a complex case, such as the case for the Japanese Fuji and Kodak, the cost can exceed 10 million dollars (Kohl 2003, 144). Further, the cost of supporting the litigation can inflate further the bill. The cost of supporting the litigation with data collection, analysis, and hiring of experts for testimonies increase the cost by more than US100,000 or US$200,000 (Kohl 2003, 144). Unfortunately, the costs do not stop there because WTO litigation is considered more expensive for developing countries because they do not benefit from economies of scale (Kohl 2003, 149). Another problem that affects developing country participation is the lack of procedural petition mechanism in the WTO. Developing countries lack the legal and political capacity in international trade. Similar to Smith (2004), Bohl (2009) identified fear of possible political reprisal as another factor that deters developing countries from participating in the WTO dispute settlement process. In addressing the problems related to the deterrent to developing country participation to in the dispute settlement process, Bohl recommended that the WTO must institutionalize a fact-finding body. In addition, Bohl suggested the discovery process of a dispute must also be formalized to enhance developing country participation. In addition, Bohl stressed the importance of fostering public-private partnerships. The public-private sector partnership will promote collaboration among entities that can enlist the participation of developing countries in the WTO dispute settlement mechanism. For instance, the private sector can be enlisted to help pitch in to the cost of developing country participation. The private-public sector partnership can also exchange information that can help towards the settlement of disputes. 5) Conclusion In sum, we see that literature indicates that developing country participation that can lead to benefits for developing countries in the WTO is weak. The sources of such weaknesses are the costs involved in acquiring data, litigation, lobby work, personnel, and the like. Most importantly, the weaknesses in developing country participation in the affairs of the WTO, particularly in dispute settlements that can be used to advance the interest of developing countries, probably lie in the fear by developing in developed country retaliation. In view of the foregoing, this work recommends that the WTO adopt the recommendations of Bohl (2009). In particular, based on the recommendations of Bohl (2009), the WTO should consider adopting the following: 1. Institutionalize fact-finding mechanisms within the WTO so that the cost associated with developing country participation in dispute settlement can be significantly reduced. It is the obligation of all parties anyway to see to it that facts are available and adequate anyway and the interest for this should not come not only from the developing country complainant but also from the world body itself. 2. Foster private-public partnership so the private sector can be enlisted to help finance the cost of litigation as necessary. In addition, however, constraining developed countries against retaliating against developing countries in a dispute is an extremely important agenda. There are two remedies on the matter. The first remedy is to strengthen the bloc of developing countries in the WTO. If the European Union can form a union or alliances of European countries to go over the MFN and get away with it scot-free then there is more reason for developing to bind with each other and protect each other. The EU, for instance, under the WTO rules is treated as a unitary economic unit. Thus, any concession or benefit granted by a country of a member-country of the EU is not treated as a concession to third party-country. Thus, developing countries cannot invoke the MFN and argue that since a benefit was extended by a European country to another European country, the same benefit must be extended to developing countries. Countries under the EU umbrella are considered a unity and, thus, benefits extended to a European country by another European country is not extendable to developing countries. In contrast, under the MFN, a benefit extended by a developing country will have to be extended to other countries of the WTO. There is a strong basis, therefore, on the need for a strong developing country bloc within the WTO and Europe is the best teacher for developing countries on the matter. Unity of action can be important and developing countries must have the option to impose a sanction on developed countries when this matter becomes necessary. On its own, a small nation or a nation with a small gross domestic product cannot impose a sanction on a large or high-GDP developed nation. The developed nations must have the option of collectively imposing a sanction on developed countries should they unjustly retaliate against developing countries in trade disputes. Hopefully, the option will not be utilized by the developing countries and it is the position of this paper that developing countries should avoid using the option even if they acquire the power of having that option. This is because the collective prosperity of the world lies in world trade and not in trade wars. Finally, the second remedy is to build up mechanisms within the WTO so that developed countries can be constrained from retaliating against developing countries in trade disputes. At the moment, however, the mechanisms that can be used for this are not immediately clear. The forward step is for the matter to be discussed in the WTO ministerial meetings so the developed countries can provide suggestions on how this matter can be realized. A WTO mechanism that can prevent retaliation by developed countries against developing nations who stood up to complain before the WTO of alleged unjust acts by developed countries is preferable to a collective action of the developing nations even as the latter must have the option of exercising such a right and option. 6) Bibliography Bown, Chad. “Trade Policy under the GATT/WTO: empirical evidence of the equal treatment rule.” Canadian Journal of Economics 37, no. 3 (August 2004): 678-720. Bohl, Kristin. “Problems of Developing Country Access to WTO Dispute Settlement.” Chicago-Kent Journal of International & Comparative Law, 2009, 131-200. Bown, Chad and Bernard Hoekman. “WTO Dispute Settlement and the Missing Developing Country Cases: Engaging the Private Sector.” Journal of International Economic Law, 2005. Busch, Marc and Eric Reinhardt. “Developing Countries and General Agreement on Tariffs and Trade/World Trade Organization Dispute Settlement.” Journal of World Trade 37, no. 4 (2003), 719-735. Global Exchange. “Top Ten Reasons to Oppose the World Trade Organization.” San Francisco, 2008. Available in http://www.globalexchange.org/campaigns/wto/toptenwto2008.pdf (accessed 5 April 2010). Smith, James. “Inequality in International Trade? Developing Countries and Institutional Change in WTO Dispute Settlement.” Review of International Political Economy 11, no. 3 (August 2004): 542-573. World Trade Organization (WTO). The World Trade Organization. Geneva: The World Trade Organization, 2009. World Trade Organization (WTO). “The Uruguay Round.” The WTO Official Website, 2010. In http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm (accessed 5 April 2010). Read More