The World Trade Organization and the World Trade System

CHAPTER TWO

The World Trade Organization and the World Trade System

Economic production has gone global during the last twenty years. Not so long ago, world trade involved almost exclusively the exchange of finished goods. Toyota, for instance, produced cars in its Japanese factories and exported these vehicles to, say, the United States. Today, intermediate goods-goods that are assembled together into finished goods -make up a growing proportion of trade. Toyota now sources the components for its autos from producers throughout the world and these components are shipped to factories in the United States (and fifteen other countries) where workers assemble them into cars and trucks sold to American consumers as well as exported to more than twenty countries around the world. Global production networks such as these (often called "global value chains") are increasingly common in today's global economy. Consider Nutella, a cocoa-hazelnut spread produced by the Italian Ferrero Group. Ferrero sources the cocoa they use for Nutella in Nigeria and it draws its hazelnuts from Turkey. It sources its sugar from Brazil, while the Vanillin comes from China and the Palm Oil comes from Malaysia. Ferrero transforms these various ingredients into its tasty spread in nine factories located throughout North and South America, Europe, and Australia. The entire production network is managed from corporate headquarters in Alba, Italy.

The fragmentation of production into these global networks (a development we look at more closely in Chapter Eight) has been made possible by the dramatic liberalization of and associated rapid growth of world trade flows. Global trade has grown during the last seventy years at an average rate of about six percent per year. As a result, annual world merchandise trade has risen from eighty-four billion dollars in nineteen fifty-three to sixteen trillion dollars in twenty sixteen. Never before has international trade grown so rapidly for such a long period. Even more importantly, trade has consistently grown more rapidly than the world's economic output. Consequently, each year a greater proportion of the goods and services produced in the world are created in one country and consumed in another. Indeed, globalization is a consequence of these differential growth rates.

None of this has occurred spontaneously. Even though one could argue that the growth of world trade reflects the operation of global markets and the cost-reducing impact of telecommunications technology, all markets rest on political structures. This is certainly the case with international trade. World trade has grown so rapidly over the last seventy years because an international political structure, the World Trade Organization, and its predecessor, the General Agreement on Tariffs and Trade, has supported and encouraged such growth. Most political scientists who study the global economy believe that, had governments never created this institutional framework after World War Two, or had they created a different one, world trade would not have grown so rapidly. Internationalization, therefore, has been brought about by the decisions governments have made about the rules and institutions that govern world trade.

Because trade plays so important a role in our lives, and because trade is made possible by the political institution that structures trade relationships, understanding the political dynamics of the world trade system is vital. This chapter begins developing that knowledge. It provides a broad overview of the World Trade Organization's core components. It then examines how the global distribution of power shapes the creation and evolution of international trade systems. It then explores some contemporary challenges to the World Trade Organization, focusing on the rise of developing countries as a powerful bloc within the organization and the rise of civil society groups as powerful critics of the organization from the outside. The chapter concludes by examining regional trade arrangements, considered by many the greatest current challenge to the World Trade Organization.

WHAT IS THE WORLD TRADE ORGANIZATION?

The World Trade Organization (located on the shore of the beautiful Lac Leman in Geneva, Switzerland) is the hub of an international political system under which governments negotiate, enforce, and revise rules to govern their trade policies. Between nineteen forty-seven and nineteen ninety-four the General Agreement on Tariffs and Trade fulfilled the role now played by the World Trade Organization. In nineteen ninety-five, governments folded the General Agreement on Tariffs and Trade into the newly established World Trade Organization, where it continues to provide many of the rules governing international trade relations. The rules at the center of the world trade system were thus established initially in nineteen forty-seven and have been gradually revised, amended, and extended ever since.

The World Trade Organization is small compared with other international organizations. Although one hundred sixty-four countries belong to the World Trade Organization, it has a staff of only about six hundred forty people and a budget of roughly two hundred million dollars (as of late twenty seventeen). The World Bank, by contrast, has a staff of about ten thousand people and an operating budget of close to two point five billion dollars. As the center of the world trade system, the World Trade Organization provides a forum for trade negotiations, administers the trade agreements that governments conclude, and provides a mechanism through which governments can resolve trade disputes. As a political system, the World Trade Organization can be broken down into three distinct components: a set of principles and rules, an intergovernmental bargaining process, and a dispute settlement mechanism.

Two core principles stand at the base of the World Trade Organization: market liberalism and nondiscrimination. Market liberalism provides the economic rationale for the trade system. Market liberalism asserts that an open, or liberal, international trade system raises the world's standard of living. Every country-no matter how poor or how rich-enjoys a higher standard of living with trade than it can achieve without trade. Moreover, the gains from trade are greatest-for each country and for the world as a whole-when goods can flow freely across national borders unimpeded by government-imposed barriers. The claim that trade provides such gains to all countries is based on economic theory we examine in detail in Chapter Three. For our purposes here, it is sufficient to recognize that this claim provides the economic logic upon which the World Trade Organization is based.

Nondiscrimination is the second core principle of the multilateral trade system. Nondiscrimination ensures that each World Trade Organization member faces identical opportunities to trade with other World Trade Organization members. This principle takes two specific forms within the World Trade Organization. The first form, called Most-Favored Nation, prohibits governments from using trade policies to provide special advantages to some countries and not to others. Most-Favored Nation is found in Article One of the General Agreement on Tariffs and Trade. It states,

any advantage, favor, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.

Stripped of this legal terminology, Most-Favored Nation simply requires each World Trade Organization member to treat all World Trade Organization members the same. For example, the United States cannot apply lower tariffs to goods imported from Brazil (a World Trade Organization member) than it applies to goods imported from other World Trade Organization member countries. If the United States reduces tariffs on goods imported from Brazil, it must extend these same tariff rates to all other World Trade Organization members. Most-Favored Nation thus assures that all countries have access to foreign markets on equal terms.

World Trade Organization rules do allow some exceptions to Most-Favored Nation. The most important exception concerns regional trade arrangements. Governments are allowed to depart from Most-Favored Nation if they join a free-trade area or customs union. In the North American Free Trade Agreement, for example, goods produced in Mexico enter the United States duty free, whereas the United States imposes tariffs on the same goods imported from other countries. In the European Union, goods produced in France enter Germany with a lower tariff than goods produced in the United States. A second exception is provided by the Generalized System of Preferences, enacted in the late nineteen sixties. The Generalized System of Preferences allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than they apply to the same goods coming from other advanced industrialized countries. These exceptions aside, Most-Favored Nation ensures that all countries trade on equal terms.

National treatment is the second form of nondiscrimination found in the WTO. National treatment prohibits governments from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms. National treatment is found in Article Three of the GATT, which states that the products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.

In plainer English, national treatment requires governments to treat domestic and foreign versions of the same product ("like products" in GATT terminology) identically once they enter the domestic market. For example, the U.S. government cannot establish one fuel efficiency standard for foreign cars and another for domestic cars. If the U.S. government wants to advance this environmental goal, it must apply the same requirement to domestic and foreign auto producers. Together, MFN

and national treatment ensure that firms in every country face the same market opportunities and barriers in the global economy.

These two core principles are accompanied by hundreds of other rules. Since nineteen forty-seven, governments have concluded about sixty distinct agreements that together fill about thirty thousand pages. These rules jointly provide the central legal structure for international trade. As a group, these rules constrain the policies that governments can use to control the flow of goods, services, and technology into and out of their national economies. Some of these rules are proscriptive, such as prohibition against government discrimination. Others are prescriptive, such as requirements for governments to protect intellectual property. Many of these rules state instances in which governments are allowed to protect a domestic industry temporarily and then delineate the conditions under which governments can and cannot invoke this safeguard. All rules entail obligations to other WTO members that constrain the ability of governments to regulate the interaction between the national and the global economies.

All WTO rules are created by governments through intergovernmental bargaining. Intergovernmental bargaining is the WTO's primary decision-making process, and it involves negotiating agreements that directly liberalize trade and indirectly support that goal. To liberalize trade, governments must alter policies that restrict the cross-border flow of goods and services. Such policies include tariffs, which are taxes that governments impose on foreign goods entering the country. They also include a wide range of non-tariff barriers such as health and safety regulations, government purchasing practices, and many other government regulations. Intergovernmental bargaining focuses on negotiating agreements that reduce and eliminate these government-imposed barriers to market access.

Rather than bargain continuously, governments organize their negotiations in bargaining rounds, each with a definite starting date and a target date for conclusion. At the beginning of each round, governments meet as the WTO Ministerial Conference, the highest level of WTO decision making. Meeting for three or four days, governments establish an agenda detailing the issues that will be the focus of negotiation and set a target date for the conclusion of the round. Once the Ministerial Conference has ended, lower-level national officials conduct detailed negotiations on the topics embodied in the agenda. Periodic stock takings are held to reach interim agreements. Once negotiations have produced the outlines of a complete agreement, trade ministers meet at a final Ministerial Conference to conclude the round. National governments then ratify the agreement and implement it according to an agreed timetable.

To date, eight of these bargaining rounds have been concluded, and a ninth, the Doha Round, began in two thousand one. These bargaining rounds are usually extended affairs. Although the earlier rounds were typically concluded relatively quickly, the trend over the last thirty years has been for multiyear rounds. Governments launched the Uruguay Round, for example, in nineteen eighty-six (though they began discussing a new round in nineteen eighty-two) and concluded negotiations in December nineteen ninety-three. Governments launched the Doha Round in two thousand one with plans to conclude the round by late two thousand five. Yet, in late twenty seventeen, governments remain unable to reach agreement. The growing length of bargaining rounds reflects the complexity of the issues at the center of negotiations and the growing diversity of interests among WTO member governments.

The rules established by intergovernmental bargaining provide a framework of law for international trade relations. Participation in the WTO, therefore, requires governments to accept common rules that constrain their actions. By accepting these constraints, governments shift international trade relations from the anarchic international environment in which "might makes right" into a rule-based system in which governments have common rights and responsibilities. In this way, the multilateral trade system brings the rule of law into international trade relations.