World Trade Organization (WTO) as the name suggests, is the organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
But why do nations trade? Whatever happened to Swadeshi and self sufficiency?
- Different factor endowments – simplest and obvious logic is every country does not possess everything. As we do not have sufficient oil reserves, we can’t do anything but import oil. But we also import things we can produce from simplest of things such as toys to complex things such as mobile phones.
- Choice -from consumers perspective, it gives them more choices <you can buy iphones or Samsung galaxy, micromax or freedom 251>.
- Market– Similarly it gives bigger market to industries (economies of scale, a concept that cost decreases as the size of an industry increases) <from sale in India to sale to the whole world>
- Specialization – If countries didn’t trade, or traded only those things which they did not have (essentially raw materiel), they will have to produce everything. It will hamper specialization. Every country will become jack of all trade, master of none. Trade allows countries to specialize in things they do the best based on their comparative and competitive advantage.<If India is good at producing apples and China at oranges, India should only produce apples and exchange them for oranges>
- Competition and efficiency – Also domestic industries will not face any competition from outside world, less competition, less incentive to become efficient or to innovate , consumers suffer. Thus trade forces industries to become more efficient.
- Reduction in hostility – Apart from these economic reasons, as countries trade, they become interdependent on each other and thus chances of hostilities or major wars decrease. New ideas also flow along with trade.
Discussion so far suggests that in an ideal world we should all promote free trade as it increases efficiency and benefits consumers. But the world is not ideal. There are some problems with free trade and hence need for protecionism–
- In developing economies, industries may not even get a chance to grow because they face competition from more established foreign firms <thus the argument for protecting nascent industries by higher tariffs>
- Trade can lead to over-specialisation <workers at risk of losing their jobs should world demand fall> <suppose India produced only apples and suddenly some virus infest the crop, there wouldn’t be anything else to sell to the world or someone produces better variety of apple somewhere else, Indian apples would lose market> <recall situation of Cuba when sugar prices fell>
- What if other country started cheating, subsidizing exports to capture the market abroad and when all domestic industries are killed, increasing the prices <every country must play by the same rules>
It’s clear that trade can not be totally free in a not so ideal world. Countries need some policy levers to allow domestic industries to grow and diversify their economies. Also there’s need for a watchdog/referee who can adjudicate when other countries start cheating.
Let’s now discuss barriers to trade
In spite of all the benefits of trade, we all know countries regularly resort to measures which discourage trade (especially imports) to protect domestic industries <hence called protectionist measure> even though they might hurt consumers <problem of silent majority v/s vociferous minority discussed in chapter 2 of economic survey>
Tariff barriers- custom duties which make imported goods costlier than domestically manufactured goods <it’s imposed to earn revenues for the govt, protect interest of domestic industry>
Non tariff barrier– Here countries do not impose custom duties but retard flow of trade in other ways.
Quantitative restrictions- Crude way of doing it is imposing quantitative restrictions on goods imported <quotas, say only up to 100 m tonne of sugar can be imported> or making licenses compulsory to export goods to home country or that only certain licenses can import goods or embargo <banning trade of certain goods with certain countries>
Standards setting and administrative delays– But countries now employ sophisticated ways to retard flow of trade. Customs official can simply delay clearance of cargo <hence trade facilitation agreement> or can set standards <product using child labor/ environmentally degrading techniques will not be allowed, the problem with TPP> or simply cheat by providing export subsidies or domestic subsidies.
Two kinds of trade barriers that are allowed for protection of health, safety, environmental protection but are often misused
- Technical barriers to trade-technical regulations, standards, and conformity assessment procedures can be set for the protection of human health and safety, or protection of the environment.
- Sanitary and Phyto Sanitary Measures – It allows countries to set their own standards for food safety and animals and plant health standards.
But both the measures specify that standards must not be arbitrary i.e they must be scientific. Also they should not be discriminatory.
WTO’s role is to reduce these barriers to trade, set rules of the game and adjudicate when one member country accuses other of cheating.
Let’s learn about WTO in detail
Headquarter: Geneva, Switzerland <where are the HQs of IMF and World Bank? Answer in comments>
Members: 164 <Afghanistan the most recent member> < latest member of IMF?>
- US, UK and a few other countries set up, an interim organisation about trade named GATT (General Agreement on Tariff and Trade) in 1947
- GATT was biased in favour of the developed countries and was called informally as the Rich men’s club.
- So, the developing countries insisted on setting up of the International Trade Organisation (ITO)
- That’s the reason, United Nations Conference on Trade and Development (UNCTAD) was set up in 1964 as an alternative, on recommendation of UN committee
- Next development comes in Uruguay Round of GATT, it sought to expand the scope of the organisation by including, services, investment and intellectual property rights (IPR)
- Agreements were ratified by the legislatures of 85 member-countries by year-end 1994.
- On such rectification, the WTO started functioning from Jan 1, 1995 < Marrakesh Agreement>
Why GATT failed to perform? Any Limitations?
- Institutional structure – Only the set of rules and multilateral agreements, it lacked institutional structure
- Limited scope – It didn’t cover trade in services, Intellectual Property Rights(IPR) etc.
- Dispute Resolution Mechanism and Non-tariff barriers – No
- Representation for developing and new states – No (Western monopoly)
Objectives of the WTO
- Raising standards of living and incomes, ensuring full employment, expanding production and trade, optimal use of world’s resources, at the same time extending the objectives to services and making them more precise
- Introduces the idea of sustainable development in relation to the optimal use of world’s resources, and the need to protect and preserve the environment in a manner consistent with the various levels of national economic development
- Recognises the need for positive efforts designed to ensure that developing countries, especially the least developed ones, secure a better share of growth in international trade
- WTO continues the decision-making practice followed under the GATT Decisions will be taken by a majority of votes cast on the basis of one country, one vote . In fact rarely is voting undertaken. Decisions are mostly based on consensus. <What is the basis of voting in IMF? Answer in comments>
Principles of the trading system
A) Non-discrimination –
1) Most favoured nation (MFN) rule
- The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members
- i.e. a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members.
- Grant someone a special favour and you have to do the same for all other WTO members
- Then how do Free Trdae Agreements (FTAs) work? Well as eveywhere, devil is always in detail, FTAs are exempt from this rule.
- Did you know that Pakistan has not yet granted India MFN status though we have grated them that status <for long time, there’s talk of Pakistan granting us non discriminating market access (NDMA) as Pakistanis feel, if they grant us MFN status, they would be favouring us the most, hahaha>
2) The National Treatment Policy
National treatment means that imported goods should be treated no less favorably than domestically produced goods <after the foreign goods have entered the market> and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards, discriminating against imported goods)
- Granting of mutual concessions in tariff rates, quotas, or other commercial restrictions
- It implies that these concessions are neither intended nor expected to be generalized to other countries <contrast MFN and reciprocity.>
C) Binding and enforceable commitments –
- The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions
- These schedules establish “Ceiling bindings”: a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade <i.e can’t increase tariff beyond these levels>
- If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures
D) Transparency –
- The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO
- These internal transparency requirements are supplemented and facilitated by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM)
- WTO system tries also to improve predictability and stability, discouraging the use of quotas and other measures used to set limits on quantities of imports
E) Safety valves –
- In specific circumstances, govts are able to restrict trade
- WTO’s agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health <sanitary and phytosanitary measure, TBT>
Let’s come to main part of WTO -AGREEMENTS
<There were many agreements agreed and ratified, but we found only some which are important for us, so let’s analyse them in brief>
1) Agreement on subsidies and countervailing measures (SCM)
It deals with the provision of subsidies, and the use of countervailing measures to offset injury caused by subsidized imports
Definition of subsidy has 3 basic elements:
- Financial contribution
- By a Government or any public body within the territory of a Member
- Which confers a benefit.
All three of these elements must be satisfied in order for a subsidy to exist SCM applies to non-agricultural products.
It follows the traffic lights approach and classifies subsidies in 3 categories: <scroll up and look at barriers to trade infograph gain>
Subsidies with high trade-distorting effects, such as export subsidies, and those that favour the use of domestic over imported goods are prohibited. [If suppose, Brazil gives subsidy to its product Exported to India, Then India can ban such items from country]
Subsidies that are not specific to an enterprise or industry or a group of enterprises or industries are non-actionable.
[No action at all – actionless]
- Subsidies that are neither red nor green belong to the amber category.
- They are actionable by the trading partners if their interests are adversely hit.
- The affected country can seek remedy through the dispute-settlement procedures or go for countervailing duties.
[Here, India can go either for countervailing duties or dispute-settlement procedure]
2) General Agreement on Trade in Services – GATS
The creation of the GATS was one of the landmark achievements of the Uruguay Round, whose results entered into force in January 1995.
Objectives: same as broad objectives of WTO
What services are covered under GATS?
- GATS applies in principle to all service sectors, with 2 exceptions.
- GATS excludes services supplied in the exercise of governmental authority i.e. services that are supplied neither on a commercial basis nor in competition with other suppliers. Eg.- social security schemes and any other public service, such as health or education, that is provided at non-market conditions.
- Air traffic rights and services directly related to the exercise of such rights are also exempt
Four modes under GATS <refer to the infograph above>
Mode 1: Cross-border supply – There’s no movement of natural persons, no legal presence Eg- an architect can send his architectural plan through electronic means
Mode 2: Consumption abroad – movement of natural perosns to avail services elsewhere, eg.- a tourist using hotel or restaurant services abroad
Mode 3: Commercial presence – legal presence in another country, eg.FDI, joint ventures
Mode 4: Presence or movement of natural persons – here movement of natural person to provide services , eg. India techies going to USA
It’s clear India wants liberalization in mode 1 and mode 4 <our BPO industry plus software industry, techies going to US> while developed world want liberalization in mode 3 <100% automatic FDI>
Let’s understand all 4 modes with an example
- Suppose Apple <USA company> establishes a subsidiary in India. This is supply of services through Mode 3 i.e. Commercial Presence
- An architect of the Apple sends blueprints over the Internet to another firm in India- this is Mode 1 i.e. Cross Border Supply
- An Engineer from the said Apple is deputed to work in the subsidiary in India for a limited period for managerial operations – this is Mode 4 i.e. Movement of Natural Persons
- Certain trainees from the subsidiary in India visit USA and consume both education and tourism services – this is Mode 2 i.e. Consumption Abroad for USA
The Agreement on Trade-Related Aspects of Intellectual Property Rights, sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members.
Areas of intellectual property that it covers are –
- Copyright and related rights, Trademarks including service marks
- Geographical indications (GI) including appellations of origin <Did you remember, Pakistan also claim GI for their Basmati Rice, but recently India got GI tag for Indo-Gangetic plains basmati rice for 6 states>
- Industrial designs, patents including the protection of new varieties of plants
- Layout-designs of integrated circuits; and undisclosed information including trade secrets and test data
3 Main features of Agreement includes –
- Agreement sets out the minimum standards of protection to be provided by each Member
- Each of the main elements of protection is defined, namely the subject-matter to be protected, the rights to be conferred and permissible exceptions to those rights, and the minimum duration of protection
Set of provisions deals with domestic procedures and remedies for the enforcement of intellectual property rights
Dispute settlement –
The Agreement makes disputes between WTO Members about the respect of the TRIPS obligations subject to the WTO’s dispute settlement procedures
4) Agreement on Agriculture (AoA)
- To reform trade in the sector and to make policies more market-oriented.
- This would improve predictability and security for importing and exporting countries alike
The new rules and commitments apply to:
1)Market access : various trade restrictions confronting imports
2)Domestic support: subsidies and other programmes, including those that raise or guarantee farmgate prices and farmers’ incomes
Under this, Subsidies are categorized into 3 boxes –
Green Box –
- In order to qualify for the Green Box, a subsidy must not distort trade, or at most cause minimal distortion
- These subsidies have to be govt-funded (not by charging consumers higher prices) and must not involve price support
- They tend to be programmes that are not directed at particular products, and include direct income supports for farmers that are not related to <decoupled> current production levels or prices.
<Like in India farmer is supported for specific products and separate support prices are there for rice, wheat etc. An example of Amber box subisdy. On the other hand income support is uniformly available to farmers and crop doesn’t matter, Green box>
- Green box subsidies are therefore allowed without limits, provided they comply with relevant criteria
- They also include environmental protection and regional development programmes, research and development subsidies etc
- Developed countries have shifted most of their subsidies to green box, hence even though they provide more subsidies than us, they still get away with it
Blue Box –
- Only Production limiting Subsidies under this are allowed. They cover payments based on acreage, yield, or number of livestock in a base year <such as subisdies for leaving the land fallow>
- Targets price are allowed to be fixed by govt and if market prices are lower, so farmer will be compensated with difference between target prices and market prices in cash. This cash shall not be invested by farmer in expansion of production
- Loophole here is that there no limit on target prices that can be set and those are often set far above market prices deliberately.
- USA currently isn’t using this method, instead here EU is active.
Amber Box –
- All domestic support measures for agriculture, considered to distort production and trade (with some exceptions) fall into the Amber Box and this is Aggregate measure of support (AMS) i.e AMS is trade distorting subsidy in monetary terms
- It required member countries to report their total AMS for the period between 1986 and 1988, bind it, and reduce it according to an agreed upon schedule <de minimis level>
What is De-Minimis provision?
- Under this provision developed countries are allowed to maintain trade distorting subsidies or ‘Amber box’ subsidies to level of 5% of total value of agricultural output. For developing countries this figure was 10%
- So far India’s subsidies are below this limit, but it is growing consistently
- This is because MSP are always revised upward whereas Market Prices have fluctuating trends
- In recent times when crash in international market prices of many crops is seen, government doesn’t have much option to reduce MSP drastically
- By this analogy India’s amber box subsidies are likely to cross 10% level allowed by de Minimis provision and hence the Bali deal for public stock holding and MSP <India is seeking permanent solution to this problem>
3) Export subsidies:
- These can be in form of subsidy on inputs of agriculture, making export cheaper or can be other incentives for exports such as import duty remission etc.
- These can result in dumping of highly subsidized (and cheap) products in other country. This can damage domestic agriculture sector of other country
- These subsidies are also aligned to 1986-1990 levels, when export subsidies by developed countries was substantially higher and Developing countries almost had no export subsidies that time
Special safeguard mechanism (SSM)
- A tool that will allow developing countries to raise tariffs temporarily to deal with import surges or price fall
- is meant to protect the interests of resource-poor and subsistence farmers in the developing nations
- Critics claim that SSM could be repeatedly and excessively invoked, distorting trade
- In turn, the G33, a major SSM proponent, has argued that breaches of bound tariffs should not be ruled out if the SSM is to be an effective remedy
- SSM is quite important in a scenario in which west has significant powers to subsidize their production and in turn, exports
- At the 2005 WTO Ministerial Conference in Hong Kong, members agreed to allow developing countries to designate an appropriate number of tariff lines as Special Products (SPs) based on food security, livelihood security and rural development
- They would be given extra flexibility in market access for these products
- For instance if wheat is important for food security and livelihoods, India many not fully open up this sector but obviously USA wouldn’t agree on that
Special and Differential Treatment (S&D)
Special treatment under WTO to Developing and least developed countries. Special safeguard mechanism (SSM) is a demand under this.
- longer time periods for implementing Agreements and commitments
- measures to increase trading opportunities for developing countries
- provisions requiring all WTO members to safeguard the trade interests of developing countries
- support to help developing countries build the capacity to carry out WTO work, handle disputes, and implement technical standards, and
- provisions related to least-developed country (LDC) Members
A few more points before concluding the topic
Plurilateral agreements – For the most part, all WTO members subscribe to all WTO agreements. After the Uruguay Round, however, there remained four agreements, originally negotiated in the Tokyo Round, which had a narrower group of signatories and are known as plurilateral agreements <contrast with multilateral agreements>
- Trade in civilian aircraft
- Govt Procurement
- Dairy products <terminated in 1997>
- Bovine Meat <terminated in 1997>
Single Undertaking Principle – Nothing is agreed until everything is agreed. Negotiations proceed simultaneously, not sequentially, and all Members must accept all the results
Dispute Settlement Process
- You don’t like what other country is doing, raise a complaint with WTO
- 1st step is mediation, talk with the other country, see if problem can be resolved
- No resolution, a dispute settlement panel is formed, hears both parties, gives it’s verdicts
- Not satisfied with it’s orders, appeal with the appellate body, decision is final
- What if country doesn’t comply with the orders? well there’s very little that WTO can do. Other country is free to take retaliatory measures