The creation of the World Trade Organization
The formation of the World Trade Organization in 1995 was a momentous event, particularly when held up against the history of unsuccessful attempts to establish such an organization. In this text, I analyze the political processes that led to the replacement of the General Agreement on Tariffs and Trade (GATT) with this new organization, and highlight the continuities and differences between the WTO and its predecessor.
Explaining the formation of the WTO
The creation of an international trade organization was a dream that had evaded trade negotiators of the post-war era for almost 50 years. The GATT was considered a poor substitute to the aborted International Trade Organization (ITO). But the attempts to form a multilateral trade organization continued. Some contracting parties of the GATT proposed the formation of a more permanent body, in the form of the Organization for Trade Cooperation, in 1955. But this proposal was no more successful than the ITO had been. The proposal for an international trade organization under UN auspices that was put forth in the Economic and Social Council (ECOSOC) in 1963 also came to naught. But when the Marrakesh Agreement concluded the Uruguay Round of Multilateral Trade Negotiations in 1994, the long-sought multilateral trade organization was born.
Legally, the WTO came into existence on 1 January 1995, with a membership of 128 countries.
The emergence of the WTO in 1995 was partly a response to the changing imperatives of the international trading system in the 1980s. But its creation was also a function of the elaborate negotiation processes that resulted in what Sylvia Ostry has described as a ‘Grand Bargain’. Without the processes of careful compromise and trade-offs, the WTO might have suffered the same fate as the ITO. In this section, we will rely on both sets of explanation – changing imperatives and negotiation processes – to analyze the formation of the WTO. One caveat, however, is worth bearing in mind. The negotiation processes and the resulting Grand Bargain were related very closely to the GATT, even though the
WTO, as an international organization, may superficially resemble the ITO project. Subsequent chapters in this book illustrate that the persistence of GATT practices in the everyday workings of the WTO has had a critical influence on its nature and evolution as an international organization.
The creation of a multilateral trade organization was not on the agenda when the Uruguay Round was launched. But dissatisfaction with the GATT had been brewing in different quarters. Non-tariff barriers had proliferated in the 1970s. The Tokyo Round’s invention of dealing with such barriers through voluntary codes was proving to be largely ineffective. The changing comparative advantage of developed countries, led by the US, demanded that the GATT would have to expand into the new issues of services, intellectual property rights, and investment measures if it wanted to keep the major traders aboard. Developing countries were also faced with new imperatives. The economic downturn of the 1980s led many of them to consider the East Asian model of export-oriented growth, and attempt to counter their widening deficits through an expansion of world trade. To implement such a growth strategy, to reap the benefits of unilateral liberalization, to protect themselves against increasing non-tariff barriers, and to ensure that the new issues were included in a manner and with a trade-off that supported their interests, developing countries had to go to the negotiating table. In response to this rising and active membership with new demands, it was inevitable that the agenda of the GATT was going to expand well beyond the traditional issue-areas of tariffs on goods. The Uruguay Round certainly saw such an expansion, and the old GATT structure was inadequate to deal with it.
One of the central problems facing negotiators in the Uruguay Round was to provide some coherence and integration to the multiple agreements that had emerged by the end of the Tokyo Round. International trade lawyer John Jackson pointed out that some of these codes were inconsistent with each other, and were enforced by different dispute settlement agreements with different memberships. It was recognized that unless a mechanism for coordinating this unwieldy set of agreements was found, the new agreements that were being negotiated in the Uruguay Round would make the system unsustainable. As a solution to this problem, Jackson proposed the creation of a world trade organization.
Coherence was not only a problem internal to the GATT, but also appeared in its dealings with the liberalization programmes that were managed by the World Bank and the IMF. A mechanism was needed to facilitate greater coordination between the GATT, the World Bank, and the IMF for the coherence of the international economic system. A trade organization, which might be able to maintain such external relations with other international organizations, emerged as the solution.
Once the idea of a world trade organization had been voiced, some contracting parties in the GATT began to see its advantages. Canada emerged as an active supporter, as did the EU. John Croome has traced the negotiating history of the Uruguay Round, and points out that the first formal paper for the establishment of such an organization came from the EU in June 1990. Besides meeting the need for greater coherence among the GATT codes, the EU proposal argued that a single dispute settlement system within the auspices of such an organization would be particularly advantageous. It also proposed that the limited nature of the GATT prevented it from taking on important functions such as trade policy reviews of the contracting parties and external negotiations with international organizations. The EU and Canada subsequently produced several detailed proposals together for the creation and running of a multilateral trade organization. But many countries still had to be convinced about the idea.
The suspicion of developing countries towards the idea of a multilateral trade organization was countered by incorporating the creation of the WTO into the Grand Bargain. In return for the inclusion of the ‘new issues’, the Single Undertaking, and the new organization of the WTO with its strengthened dispute settlement mechanism, developing countries were granted the inclusion of agriculture and textiles, and also special and differential treatment through longer time periods for implementing some of the new agreements. Once the Single Undertaking was extended to cover the Agreement establishing the WTO, the only choice that developing countries had was between agreeing to the entire package, including its potential costs, or surrendering all the new opportunities that the Uruguay Round agreements had opened up.
They accepted the whole package and became members of the organization. The US resistance to the organization under discussion was the longest-lasting. Gilbert Winham, drawing on the account by Deputy Director-General Warrant Lavorel, identifies the trade-off in which the US finally gave up its opposition in 1993. The US Chief Negotiator is reported to have said that the administration would be willing to rethink its opposition if all the other problems in the Round could be solved so that the administration would not risk opposition in the Congress by specific constituencies. The US finally dropped its opposition in return for an EU concession on computer chips and a change in the name of the organization from a Multilateral Trade Organization to the World Trade Organization.
The Final Act, marking the completion of the Uruguay Round, was signed in April 1994, at Marrakesh, Morocco. This comprehensive trade agreement covered 29 agreements that included the ‘new issues’ of services, intellectual property rights, and investment measures, and an additional 36,000 pages of national schedules on goods and services.
The creation of the WTO was certainly a response to problems with which the old GATT structure could no longer cope. But its creation was equally a result of the conscious exclusion of certain controversial areas and weak agreements in others. The Agreement on Agriculture was an important step in bringing agriculture into the fold of some general rules. The Agreement left vast scope for continued protectionism to meet the requirements of the major trading nations. The General Agreement on Trade in Services included Mode 4, that is, trade in services through the movement of people, but actual commitments on this mode were few. Unlike the ITO, and in continuation with GATT practices, the WTO coverage did not extend to labour standards, commodity agreements, or monopolistic business practices. The next paper demonstrates that despite attempts to formalize and legalize some of the decision-making procedures, the WTO adhered to GATT practices. These exclusions and weaknesses have, in several instances, created inconsistencies within the WTO, which will also be discussed later. But at least at the time of its creation, these limitations ensured the support of the major trading nations. The foundations of the WTO rested firmly on its limited ambition.
The Centre William Rappard – the building that had housed the GATT Secretariat since 1977 - continues to serve as the home for the WTO. It was the first building erected specifically to house an international organization. Prior to moving into the Centre William Rappard, the GATT Secretariat was housed in the Villas Bocage and Fenêtre, located in close proximity to the Palais des Nations, the UN headquarters in Geneva.
Principles underlying the WTO
Two key principles underlie the agreements of the WTO. Both are GATT-derived and point to the continuities between the WTO and its predecessor.
The idea of non-discrimination holds the key to multilateralism in the GATT and the WTO. In their seminal work on the WTO, Bernard Hoekman and Michel Kostecki identify two components to the principle of non-discrimination: the Most Favoured Nation (MFN) rule and national treatment. The MFN rule in the WTO derives from Article 1 in the GATT.
Paraphrased by Hoekman and Kostecki, the rule ‘requires that a product made in one member country be treated no less favourably than a like good that originates in any other country’. In other words, a concession granted by any one party to another in the WTO must be multilateralized to all other parties. The MFN rule applies to all issues included within the mandate of the WTO. The exceptions allowed are few and clearly specified.
They extend to regional trade agreements, preferential treatment for developing countries, and the invocation of a non-application clause by an existing member against a newly acceding country.
The second aspect of the principle of non-discrimination – national treatment – requires member countries to treat foreign goods no less favourably than domestically produced like goods, once the former have met whatever border measures are applied by the particular country. The national treatment rule is derived from Part II of the original GATT. However, the Protocol of Provisional Application had allowed countries to circumvent national treatment by claiming grandfathering rights. This has changed with the creation of the WTO, in which national treatment is a general obligation in all issue areas, with the sole exception of trade in services.
The second principle underlying all WTO agreements is reciprocity, which also guided all tariff reductions under the GATT. Reciprocity is an important mechanism that limits free riding (that might otherwise become rampant on the strength of the nondiscrimination principle). It also makes the process of agreeing to tariff concessions politically palatable at home. This same principle of reciprocity, however, has been a sore point in the relations of developed and developing countries in both the GATT and the WTO. The Indian delegate is widely cited as having declaimed in the early years of the GATT: ‘Equality of treatment is equitable only among equals. A weakling cannot carry the burden of a giant.’ The principle of non-reciprocity for developing countries was begrudgingly accepted in the GATT in the Tokyo Round through the ‘Enabling Clause’. This provision created a legal basis in the GATT for the Generalized System of Preferences – a system of special and differential treatment (S&D) – that had been established under the auspices of the United Nations Conference on Trade and Development. But this provision itself ironically came with a quid pro quo by the inclusion of the graduation principle, which requires developing countries to return to the game of multilateral reciprocity once they have moved up the development ladder. In the WTO, the provisions of S&D have been further diluted and largely limited to longer time periods for implementation of the agreements and technical assistance to facilitate this.
In addition to these two broad principles, the WTO resembles the GATT through its reliance on transparency, enforceability of the commitments, and the existence of ‘safety valves’ that allow governments to restrict trade under certain circumstances. In fact, the formation of the WTO has enhanced the transparency requirement and enforceability provisions of the agreements. Not only are members required to publish their trade regulations and notify changes, but their policies are subject to surveillance by the Secretariat through the Trade Policy Review Mechanism. Should a country renege on its commitments, the stronger dispute settlement of the WTO can authorize punitive measures.
So how is the WTO different from the GATT?
The preceding have illustrated the continuities between the GATT and the WTO. The latter continues to function as a forum for negotiations and provides a code of conduct as the GATT had done. These continuities, however, beg the question why the WTO has attracted so much more popular angst and apprehension than its predecessor ever did. The answer lies in the legal nature of the WTO, which makes it quite a different animal from the GATT. Despite their many similarities, the two differ markedly in six important ways.
First, the GATT was legally no more than a multilateral treaty among contracting parties; the WTO is an international organization with a membership. Article I of the Agreement
establishing the WTO explicitly refers to the establishment of an organization. The WTO is entrusted with the task of providing ‘the common institutional framework for the conduct of trade relations among its Members’ (Article II). The Agreement specifies an elaborate organizational structure that is to underlie the functioning of the WTO and further enables the organization to cooperate with other international organizations that have responsibilities related to the WTO’s. The WTO enjoys a legal personality that the GATT could not.
Second, as the last chapter explained, the GATT was applied only on a provisional basis; the Protocol of Provisional Application (‘Grandfather Clause’) exempted contracting parties from applying some important GATT articles if they were inconsistent with existent legislation. The WTO, in contrast, was created as an organization in its own right rather than as a provisional measure.
As a result, even though the US managed to preserve one grandfather right, the general principle of grandfather rights no longer exists. This means that member countries can no longer appeal to pre-existing domestic legislation to avoid adherence to the agreements of the WTO. They will have to do whatever it takes, even if this involves amending domestic laws, to abide by the rules of the WTO or risk retaliation.
The third feature of the WTO that distinguishes it from the GATT is that all its agreements (including the Dispute Settlement Understanding, besides the substantive agreements on goods, services, investment measures, and intellectual property rights) are held together by the Single Undertaking. The Single Undertaking means that participating countries cannot selectively apply the range of agreements that exist within the WTO. The Single Undertaking approach presents the polar opposite of the approach that the GATT had evolved by the time of the Tokyo Round. By the end of the 1970s, the GATT had come to include several plurilateral agreements that countries could pick and choose to abide by. The resulting large cluster of over 180 agreements often produced differing purposes, differing memberships, and included agreements that were sometimes inconsistent with the GATT. The Single Undertaking sought to get rid of these legal inconsistencies and complexities. Given the range of issues covered in the Uruguay Round, the Single Undertaking was also a device to catalyse trade-offs among negotiating countries across issues, and thereby facilitate an overall multilateral agreement that met the top priorities of most parties.
When the Uruguay Round was completed, the Single Undertaking concept was developed to mean that all the signatories to the Marrakesh Agreement would have to become members of the WTO. The WTO, and all the agreements within its umbrella, came as a single package, which countries would have to accept on an all-or-nothing basis.
Fourth, the mandate of the WTO was significantly more intrusive than that of GATT. The GATT’s foray into rules on non-tariff barriers (NTBs) had been only through the mechanism of the plurilateral codes. This changed in the WTO through the Single Undertaking. But further, the Uruguay Round expanded the reach of the agreements to issues that went well beyond border measures. The WTO covers not only the traditional area of trade in goods, as per the GATT, but also has agreements on services, trade-related intellectual property rights (TRIPs), and trade-related investment measures (TRIMs). Even in the case of trade in goods, the WTO now extends its regulation to issues such as sanitary and phytosanitary barriers to trade (SPS) and technical barriers to trade (TBT).
Fifth, again in response to the problems that arose from having several different dispute resolution arrangements that matched with the particular plurilateral code of the Tokyo Round, the WTO has a significantly stronger Dispute Settlement Mechanism (DSM).
A detailed discussion of the DSM appears later. Suffice it to note at this point that the WTO’s DSM enjoys the rule of ‘negative consensus’. This means that to overturn the findings of a panel, there has to be a consensus on the overrule (as opposed to the GATT practice, where consensus was required for the adoption of a panel ruling, which gave the losing party the right to block). Further, the Single Undertaking allows cross-issue retaliation under the DSM, so countries can punish violators of agreements where it hurts them most.
Finally, given the new organizational stature of the WTO, the Secretariat has now been formally constituted to replace the Interim Commission for the International Trade Organization (ICITO) of the GATT. It is true that the WTO Secretariat, to this day, remains minuscule in comparison to those of the IMF and the World Bank. But its powers have been considerably expanded since GATT days, including greater surveillance functions through the Trade Policy Review Mechanism.
Given all the above features, members of the WTO are far more deeply bound to its rules than the contracting parties of the GATT ever were. These rules are more intrusive than those negotiated in the GATT; they are more formalized; and they enjoy increased enforceability through the enhanced DSM that the previous regime could not afford. The organizational structure of the WTO provides an excellent illustration of how the WTO builds on some old GATT features but formalizes and legalizes them in a way so unprecedented that the resulting change is a qualitative one.
The adoption of the official logo of the WTO was described by the then Director-General, Mr Renato Ruggiero, as ‘another step in establishing this unique institution on a firm and lasting foundation’.