World Trade Organization (WTO)
The World Trade Organisation (WTO) is a cornerstone of the healthy system of global trade.
By promoting free and fair trade, and resolving related disputes, it plays a crucial role in
encouraging economic growth. This article aims to study in detail the World Trade
Organisation, its objectives, evolution, organisation structure, functions and other related
concepts.
World Trade Organisation (WTO)
World Trade Organisation is a global multilateral organisation established in 1995 for the
rules based trading between the nations of the world.
It is a global membership group that promotes and manages free trade.
It serves as a forum for governments to negotiate trade agreements and settle trade
disputes.
Overall, it aims to help producers of goods and services, exporters, and importers conduct
their international businesses smoothly.
At present, the WTO consists of
164 members (including European Union), and
23 observer governments (like Iraq, Iran, Bhutan, Libya etc).
Key Objectives of WTO
To set and enforce rules for international trade to stimulate economic growth and
employment.
To provide a forum for negotiating and monitoring further trade liberalisation by lowering
trade barriers and applying principles of known discrimination.
To resolve trade disputes and contribute to the peace and stability of the world.
To increase the transparency of decision-making processes, thereby giving the weak a
stronger voice.
To cooperate with other major international economic institutions involved in global
economic management.
To help developing countries take full benefits from the global trading system, thereby
cutting the cost of doing business.
To encourage good governance by reducing arbitrariness.
Evolution of World Trade Organisation
Though the WTO came into existence on 1st January 1995, the history of its establishment
dates back to 1945.
Idea of International Trade Organisation (ITO)
After World War II, Western Countries came out with an idea to create an International
Trade organisation (ITO) to handle the trade side of the international economic
cooperation.
It was conceived as the third international institution along with two “Bretton woods”
institutions and as a specialized agency of the UN.
However, the major countries, including the USA, failed to get this treaty ratified in their
respective legislatures.
Thus, this treaty became a dead letter.
General Agreements on Trade and Tariff (GATT)
An agreement called the General Agreement on Tariffs and Trade (GATT) was signed by 23
countries in Genava, and came into force on Jan. 1, 1948 with the purpose of phasing of
import quotas and reducing tariffs on merchandise trades.
During the period 1948 to 1994, most of the world trade was governed by the General
Agreement on Tariffs and Trade (GATT).
Uruguay Round of 1986-94
With the world trade becoming more and more complex, GATT was not able to deal with it.
The final chapter of the trade negotiations under GATT was the Uruguay Round which was
the most extensive of all.
The Uruguay Round of GATT led to the formation of WTO and a new set of agreements.
Era of World Trade Organisation
The WTO regime was signed during the April 1994 ministerial meeting at Marrakesh,
Morocco, and hence is known as the Marrakesh Agreement.
The contracting parties of GATT 1947 automatically became the members of WTO and then
the agreement was opened to be accession by other countries.
GATT Vs WTO
India and World Trade Organisation
India has been member of the GATT since 1948.
Indian was also a party to Uruguay Round and a founding member of the World Trade
Organisation.
Organisational Structure of WTO
Ministerial Conference (MC)
The Ministerial Conference (MC) sits at the top of the structural organisation of the WTO.
It is the supreme governing body that makes the final decisions on all matters.
It is constituted by representatives of all the member countries, who are usually, Ministers
of Trade of the respective countries.
It usually meets after every 2 years.
General Council (GC)
The General Council is the highest-level decision-making body of the World Trade
Organisation.
It is located in Geneva, and meets regularly to carry out the functions of the World Trade
Organisation.
The General Council (GC) is composed of representatives from all the members.
It is the real engine of the Organisation, which acts on behalf of the Ministerial Conference
(MC).
It also acts as the Dispute Settlement Body (DSB) as well as the Trade Policy Review Body.
Three Councils of WTO
There are three WTO councils operating under the General Council. They include:
Council for Trade in Goods,
Council for Trade in Services, and
Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS)
These Councils, with their subsidiary bodies, carry out their designated specific
responsibilities.
Director General (DG)
The administration of the World Trade Organisation is conducted by the Secretariat,
headed by the Director General (DG)
The Director General (DG) is appointed by the Ministerial Conference (MC) for a tenure of
four years.
The Director General (DG) is assisted by the four Deputy Directors from different member
countries.
Trade Policy Review Body (TPRB)
The General Council meets as the Trade Policy Review Body (TPRB) to undertake trade
policy reviews of members under the Trade Policy Review Mechanism (TPRM) and to
consider the Director-General’s regular reports on trade policy development.
Thus, the TPRB is open to all the members of the WTO.
Dispute Settlement Body (DSB)
The General Council convenes itself as the Dispute Settlement Body (DSB) to deliberate
upon and resolve the disputes among the WTO members.
Such disputes may arise w.r.t. any agreement contained in the Final Act of the Uruguay
Round that is subject to the Understanding of Rules and Procedures Governing the
Settlement of Disputes (DSU).
The DSB has the authority to:
Establish dispute settlement panels,
Refer matters to arbitration,
Adopt panel, Appellate Body and arbitration reports,
Maintain surveillance over the implementation of recommendations and rulings contained
in such reports, and
Authorise suspension of concessions in the event of non-compliance with those
recommendations and rulings.
Appellate Body
The Appellate Body was established in 1995 under Article 17 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (DSU).
The DSB appoints persons to serve on the Appellate Body for a term of four years.
It is a standing (permanent) body of 7 persons that hears appeals from reports issued by
panels in disputes brought by members of the World Trade Organisation.
The Appellate Body can uphold, reverse or modify the legal findings and conclusions of a
panel.
Once adopted by the Dispute Settlement Body (DSB), the reports of the Appellate Body
must be accepted by the parties to the dispute.
The seat of the Appellate Body is in Geneva, Switzerland.
Principles of World Trade Organisation
Non-Discrimination
Non-discrimination is a fundamental principle of the multilateral trading system and is
recognized, in the Preamble of the WTO Agreement, as a key instrument to achieve the
objectives of the World Trade Organisation.
In the Preamble, its members express their desire to eliminate discriminatory treatment in
international trades.
Non-discrimination in the World Trade Organisation is embodied by two principles as
explained below:
Most Favored Nation (MFN)
Pursuant to the WTO agreements, countries cannot discriminate among their trading
partners.
If a Member grants to a country a special favour (e.g. a lower customs duty on any of its
products) it must grant the same favour immediately and unconditionally to all WTO
members.
The MFN principle applies to trade in goods, trade in services, as well as trade-related
aspects of intellectual property.
Exceptions to MFN Rule
Countries can set up a Free Trade Agreement (FTA) that applies only to goods traded within
the group, discriminating against goods from outside.
They can give developing countries and LDCs a special access to their markets.
A country can raise barriers against products that are considered to be traded unfairly from
specific countries.
In services, countries are allowed (in limited circumstances) to discriminate.
National Treatment Obligation
It states that, Imported and locally-produced goods in a country should be treated equally
once the foreign goods have entered the domestic market.
The same should apply to domestic and foreign services, and to local and foreign
trademarks, patents and copyrights.
This principle of “national treatment” is also found in all three main WTO agreements.
Free Trade and Market Access
Lowering trade barriers for encouraging trade is one of the prime objectives of the WTO.
The two main categories of barriers to market access for goods are – Tariff Barriers and
Non-Tariff Barriers.
Thus, the WTO Principles ask for the following in order to achieve its objective of promoting
free trade and market access:
Reducing Tariff Barriers
One outcome of the Uruguay Round was countries’ commitments to cut tariffs and to
“bind” their customs duty rates to levels that cannot be easily increased.
In the Uruguay Round, there was also a significant increase in the number of “bound”
tariffs.
A “bound tariff” is a tariff for which there is a legal commitment not to raise it above the
bound level.
The bound level of the tariff is the maximum level of customs duty to be levied on products
imported into a member country.
Reducing Non-Tariff Barriers
Non-tariff barriers include quantitative restrictions (such as quotas) and other barriers (for
example, lack of transparency in trade regulation, unfair and arbitrary application of trade
regulations, customs formalities, technical barriers to trade and government procurement
practices).
WTO rules prohibit the introduction or maintenance of quantitative restrictions.
The only restrictions on free trade that the WTO permits are duties, taxes or other charges,
and safeguards or emergency actions in limited circumstances.
Promoting Fair Competition
The WTO system of multilateral trading system provides for transparent, fair and
undistorted competition among the various countries.
Rules such as Most Favored Nation (MFN) treatment to all trading parties, equal treatment
to foreign goods, patents and copyrights as with nationals ensure fair competition among
trading countries.
Besides, the WTO agreement provides for discouraging unfair competitive practices, such
as dumping and export subsidies.
Special Concern for Developing Countries
The WTO agreements include numerous provisions giving developing and LDCs special
rights or extra leniency, known as “Special and Differential Treatment”.
It includes provisions that allow developed countries to treat developing countries more
favourably than other members of the World Trade Organisation.
Other measures include:
Extra time given to developing countries for fulfilling their commitments in respect of
various WTO agreements.
Provisions designed to increase developing countries’ trading opportunities through greater
market access.
Provisions requiring the members of the World Trade Organisation to keep and protect the
interests of developing countries while adopting any domestic or international measures
(e.g., in anti-dumping, safeguards, technical barriers to trade).
WTO Dispute Settlement Mechanism
The responsibility of settling disputes lies with the Dispute Settlement Body (DSB), which
consists of all the members of the World Trade Organisation.
The detailed process of Dispute Settlement by the World Trade Organisation is as follows:
Process of Dispute Settlement
First stage: Consultation up to 60 days, aimed at settling the trade disputes through
conciliation.
Second stage (up to 1 year): In case the consultations fails to settle the dispute, the DSB
forms a Dispute Panel.
The report of the Dispute Panel can be rejected only through consensus among the DSB
members.
Appeal Stage: Either side can appeal the Dispute Panel’s ruling.
Each appeal is heard by three members of a permanent 7-membered Appellate Body.
The Appellate Body can uphold, reverse or modify the Dispte Panel’s rulings.
The Dispute Settlement Body has to accept or reject the report of the Appeallate Body;
Rejection of its report is only possible by consensus.
Present Issue with Dispute Settlement Mechanism
The sanctioned strength of the Appellate Body (AB) is seven members.
The Appeallate Body members are appointed through consensus among the member
countries.
The AB must have quorum of 3 judges to hear a particular case.
US has been blocking appointment of members to the Appellate Body (AB) as it feels that
the AB is “unfair” and biased against it.
Since December 10, 2019, the AB has been left with only 1 Judge and the quorum required
to hear a case is minimum 3 judges. Hence, the Appellate Body has become dysfunctional.
WTO Agreements
The World Trade Organisation oversees about 60 different agreements, all of which have
the status of international legal texts.
Member countries, on accession, must sign and ratify all WTO agreements.
Some of the most important agreements are shown as follows:
WTO Agreements
WTO Agreement on Agriculture (WTO AoA)
The WTO Agreement on Agriculture (AoA) was negotiated during the Uruguay Round of the
General Agreement on Tariffs and Trade (GATT).
WTO AoA entered into force with establishment of the World Trade Organisation (WTO) on
January 1, 1995.
Its objective is to reform agricultural trade by creating a fair and market-oriented system,
enhancing stability and predictability for both importing and exporting nations.
The WTO Agreement on Agriculture applies to the following categories of agricultural
goods:
Basic agricultural products (such as wheat and live animals),
Products derived from basic agricultural products (such as flour and meat), and
Most of the processed agricultural products (e.g. chocolate and sausages),
Wines, spirits, and tobacco products, and
Fibers (such as cotton).
Three Pillars of WTO Agreement on Agriculture
The WTO Agreement on Agriculture (WTO AoA) has three pillars – Market Access, Export
Competition, and Domestic Support.
Market Access
Market Access requires that tariffs (like custom duties) fixed by individual countries be cut
progressively to allow free trade.
It also requires countries to remove non-tariff barriers and convert them to Tariff duties.
Export Competition
Export subsidies are presumed to have trade-distorting effects.
They allow exporters, who benefited from such subsidies, to sell below the cost of
production.
In that way, export subsidies reduce world prices undercutting exporters in other countries.
Each Member undertakes not to provide export subsidies other than in conformity with this
Agreement and with the commitments specified in that Member’s Schedule.
Domestic Support
This pillar is based on the assumption that not all subsidies distort trade to the same
extent.
Accordingly, it puts domestic support into two categories – Green Box and Amber Box.
Trade Related Intellectual Property Rights
What is Intellectual Property (IP)?
Intellectual Property (IP) refers to intangible creations of the human intellect.
Artistic works like literature and music, as well as some discoveries, inventions, phrases,
words, designs, and symbols, can all be protected as intellectual property.
What is Intellectual Property Right (IPR)?
Intellectual Property Right (IPR) refers to the legal right that protect creations of the mind,
such as literary and artistic works, inventions, designs, and symbols, names, and images
used in commerce.
Types of Intellectual Property Rights (IPRs)
Patent
A Patent is a legal document that grants an inventor the exclusive right to make, use, and
sell an invention for a specified number of years.
A patent gives the patent-holder an exclusive right to prevent others from making, using
and selling the patented invention for a certain period (typically 20 years from the filing
date).
In India regulated under Patents Act 1970, (Amended in 2006).
Period – typically 20 years from the filing date.
Copyright
A copyright protects the expression of literary or artistic work.
It gives the copyright-holder the exclusive right to control reproduction or adaptation of
such a work.
In India regulated under the Copyright Act 1975, (Amended in 2012).
Period – 60 years.
Trademarks
A trademark is a distinctive sign which distinguishes the products or services of one
business from that of others.
Trademarks are often closely linked to brands.
In India regulated under the Trademark Act 1999.
Period – 10 years.
Industrial Design
Industrial Design is a type of Intellectual Property Right (IPR) that gives the holder an
exclusive right to make, use and sell articles that embody the protected design, to selected
people only.
Protection rights are provided for a period of 10 years.
In India regulated under the Designs Act 2000.
Trade Secrets
A trade secret refers to any formula, process, practice, design, or compilation of
information that is used by a business to obtain an advantage over its competitors.
As the name suggests, Trade Secrets are not disclosed to the world at large. Eg. The
composition formula of Maggi or Pepsi.
Geographical Indication
A Geographical Indication (GI) is a sign used on products that have a specific geographical
origin and possess qualities or a reputation that are due to that origin.
In order to function as a Geographical Indication (GI), a sign must identify a product as
originating from a specific place.
Additionaly, the characteristics, qualities, or reputation of the product must be essentially
due to the place of origin. For Eg. Banarasi Saree, Darjeeling Tea, etc.
These rights are generally enjoyed by a community rather than individuals only.
In India regulated under the Geographical Indication of Goods (Registration and Protection)
Act 1999.
Period – 10 years.
WTO Agreement on TRIPS
The WTO seeks to establish an appropriate framework for the protection of intellectual
property rights (IPRs) in order to bring greater order to international trade.
With the same objective, a consensus was developed on the TRIPS Agreement in
Marrakesh in April 1994.
TRIPS Agreement took effect on 1 January 1995.
Some of the salient points of agreement are:
It establishes minimum standards for the regulation of many forms of Intellectual
Properties (IPs) by national governments, as applied to nationals of other WTO member
nations.
It covers all legally recognized intellectual property rights, including patents, copyright and
related rights, geographical indications, trademarks, industrial designs, layout designs of
integrated circuits, and undisclosed information.
It incorporates and improves upon protection levels of the earlier frameworks like Paris
Convention (for industrial property rights) and the Berne Convention (for copyrights).
Developed countries were given a transition period of one year from the date of entry into
force of the WTO TRIPS Agreement; developing countries and transformation countries
were given five years (i.e. until January 2000); and Least Developed Countries were given 11
years (until January 2006).
The transition period for the Least Developed Countries (LDCs) to implement TRIPS was
further extended to 2013, and until 1st January 2016 for pharmaceutical patents, with the
possibility of further extensions.
Flexibilities under TRIPS
Compulsory Licensing
Compulsory licensing is when a government allows someone else to produce the patented
process or product, without the consent of the patent owner.
Compulsory licensing and government use of a patent without the authorization of its
owner can be done only under some specific conditions, such as national emergencies
and other circumstances of extreme urgency etc.
Parallel Importing
It refers to marketing the products by the patent owner (or trademark or copyright-owner,
etc.) or with the patent owner’s permission in one country and importing into another
country without the approval of the patent owner.
The products are indeed legal but are unauthorized as they are imported without the
permission of the Proprietor.
Sanitary and Phyto-Sanitary Measures (SPS)
The Sanitary and Phytosanitary Measures (the ‘SPS Agreement’) was incorporated into the
World Trade Organization on 1 January 1995.
It is concerned with the application of food safety, and animal and plant health regulations
in cross-border trade of biological goods.
As a part of SPS, all nations undertake measures to ensure that food products are safe for
consumers and also to prevent the spread of diseases or pests among animals and plants.
Sanitary and Phytosanitary measures apply not only to domestically produced food or local
plant and animal diseases but also to products coming from other countries.
These Sanitary and Phytosanitary measures (SPS) may be applied in many forms, such as:
Requiring products to come from a disease-free area
Specific treatment or processing of products
Setting of allowable maximum levels of pesticide residues
Using only certain permitted additives in food
Sanitary and Phytosanitary measures allow countries to set their own standards, subject to
the following conditions.
Regulations must be based on science.
They should be applied only to the extent necessary to protect human, plant or animal life
or health.
They should not unjustifiable or arbitrarily discriminate between countries with identical or
similar conditions.
General Agreement on Trade in Services (GATS)
The treaty was signed to create a multilateral trading system for the service sector, in the
same way the General Agreement on Tariffs and Trade (GATT) creates for merchandise
trade.
GATS was negotiated at the Uruguay Round, whose results entered into force in January
1995.
The major aims of the GATS are:
To create a reliable and credible system of international trade rules
To ensure equitable and fair treatment of all participants (principle of non-discrimination)
To stimulate economic activity through guaranteed policy frameworks; and
To promote trade and development through progressive liberalization.
Obligations under GATS
Obligations contained in the GATS may be grouped into two broad categories – General
Obligations and Specific Commitments.
General Obligations under GATS
These apply directly and automatically to all members and services sectors.
MFN and Transparency are the two key obligations under this head.
Specific Commitments
These are the commitments concerning national treatment and market access in
specifically designated sectors.
Such commitments are laid down in the schedule of individual country, the scope of which
may vary widely between Members.
4 Modes of Services under GATS Negotiations
Negotiations in services under GATS are classified in 4 modes:
Cross-border Supply
It is defined to cover service flows from the territory of one member country into the
territory of another member country.
For eg. Business Process Outsourcing (BPO), KPO or LPO services.
Consumption Abroad
It refers to situations where a consumer (such as a tourist or a patient) moves into another
member’s territory to obtain a service.
Commercial Presence
It implies that a service supplier from one member country establishes a territorial
presence, including through ownership or lease of premises, in the territory of another
member country to provide a service.
For example, domestic subsidiaries of hotel chains or foreign insurance companies.
Presence of Natural Persons
Consists of persons of one Member country entering the territory of another Member
country to supply a service (such as doctors, accountants, or teachers).
E.g. Indian IT companies sending their engineers for onsite work in US/Europe or Australia.
The Annex on Movement of Natural Persons specifies that member countries are free to
operate measures regarding residence, citizenship, or access to the employment market
on a permanent basis.
Agreement on Trade Related Investment Measures (TRIMS)
The Agreement on TRIMS of the WTO is based on the fact that there is a strong connection
between trade and investment.
Restrictive measures on investment are trade distorting.
According to the TRIMS provision, the member countries should not adopt the investment
measures which distort and restrict trade.
The objective of TRIMS is to ensure fair treatment of investments in all member countries.
WTO gives a list of prohibited investment measures like local content requirements,
domestic employment, export obligation, technology transfer requirement, etc. That
violate trade.
TRIMS also provides for few exemptions to developing countries.
Agreement on Subsidies and Countervailing Measures (SCM)
Subsidies are used throughout the world by countries as a tool for realizing government
policies.
They can take the form of grants, tax exemptions, low-interest financing, equity infusion,
and export credits and are generally categorized as either specific subsidies, which are
limited to specific businesses and industries, or nonspecific subsidies, which are not
limited.
Subsidies usually take the form of:
Export subsidies;
Subsidies contingent upon the use of domestic goods over imported goods;
Industrial promotion subsidies;
Structural adjustment subsidies;
Regional development subsidies; and
Research and development subsidies.
The WTO SCM Agreement defines the term “subsidy”, which contains three basic
elements:
A financial contribution,
By a government or any public body within the territory of a Member,
Which confers a benefit.
All three of the three elements in the above definition must be satisfied in order for a
subsidy to exist.
Sometimes some subsidies can cause injury to domestic industry of one country due to
subsidized imports of other countries, hence causing a situation of unfair competition and
a surge of imports.
Members can take Countervailing Measures, such as imposing antidumping duties or
countervailing duties, against such subsidies.
However, imposition of countervailing measures can be done only in a transparent manner
and with a specified sunset period.
Countervailing Duty
It is imposed on imported goods to counterbalance the subsidy provided by the exporter
country.
Anti-Dumping Duty
At times countries resort to subsidizing production or exports so heavily that exporters are
able to sell goods below the domestic price or even the cost of production in foreign
markets.
It is aimed at wiping out the target country’s industry.
Anti-Dumping Duty aims to counterbalance such subsidization.
Conclusion
World Trade Organization Agreements (WTO Agreements) are essential for regulating
international trade, providing the rules and frameworks necessary to ensure that trade
flows smoothly and predictably. They cover a wide range of issues and sectors, reflecting
the complexity of global trade. Despite the challenges, the WTO and its agreements play a
critical role in facilitating international commerce and fostering economic cooperation
among nations.
Challenges and Issues with WTO
China’s State Capitalism: Given the size and growth of Chinese economy, the nature of
China’s economic system has created tensions in the global trading system. The rulebook
of the World Trade Organisation is inadequate for addressing the challenges posed by the
Chinese economy.
Plurilateral Vs. Multilateral Agreements:
The debate has arisen between the developing and developed countries w.r.t. the nature of
trade negotiations under the World Trade Organisation. While the developed countries have
been pushing for plurilateral agreements, developing countries led by India want the
continuation of multilateral framework in order to take into account the special needs and
interests of poor and developing countries.
Agreement on Fishery Subsidies:
Its member countries are presently negotiating a multilateral treaty of Fishery Subsidies,
which seeks to prohibit and ban certain forms of fisheries subsidies that contribute to
overfishing and overcapacity. While the developed countries have been insisting that larger
developing countries like India and China should not continue to get special and
differential treatment, India has argued that special and differential treatment should be
built into the fisheries subsidies agreement.
Agreement on e-Commerce
: The developed countries led by the USA have put forward a number of proposals which
include tackling barriers that prevent cross-border sales, addressing forced data
localisation requirements, and permanently banning customs duties on electronic
transmissions, among others. India has clearly stated that it is against any binding rules in
e-commerce.
Permanent Solution to Public Stock Holding:
India has been demanding a permanent solution on Public stockholding in order to
implement National Food Security Act. At the Bali Ministerial Conference (December
2013), India secured a “peace clause”. Under this clause, if India exceeds the 10% subsidy
limit set by the Agreement on Agriculture (AoA), other member countries will not initiate
legal action through the dispute settlement mechanism.
In 2014, India forced developed countries to clarify and assure that the peace clause will
continue indefinitely until a permanent solution is found.
Lack of Transparency:
There is no universally accepted definition of what qualifies as a developed or developing
country. Members can self-designate as developing countries to receive “special and
differential treatment,” a practice that is often contested.
Defunct Dispute Settlement Body:
The Dispute Settlement Body (DSB) has been lying defunct since last many years due to
non-appointment of judges in the Appellate Body (AB).
Suggested Reforms in WTO
New Set of Rules: Modernizing the World Trade Organisation will require the development
of a new set of rules for dealing with e-commerce and digital trade.
Tackling Chinese Threats: World Trade Organisation also needs to deal more effectively
with China’s trade policies and practices, including threats arising from the state-owned
enterprises and industrial subsidies.
Environmental Sustainability: Given the pressing issues around climate change, enhancing
efforts to align trade policies with environmental sustainability could address climate
challenges and rejuvenate the World Trade Organisation.
Conclusion
The World Trade Organisation remains a cornerstone of the global trading system. As the
global economic interaction becomes more and more complex, its role in facilitating
international trade, resolving disputes, and fostering economic cooperation is more critical
than ever. Necessary reforms must be carried out in the World Trade Organisation to
address emerging trade issues and ensure that the benefits of global trade are shared
equitably.
