World Trade Organization overview and functions

World Trade Organization

WTO's origins and history

World Trade Organization (WTO) is a trade organization that was created in 1995, being the successor of General Agreement of Tariffs and trade (GATT). The latter provided the rules for the system between 1948 and 1995 and during its existence evolved through seven rounds of negotiations. The last round, also known as Uruguay Round lasted from 1986 to 1994 and led to the creation of WTO. The difference between the two organizations is that GATT regulated the international trade of goods, whereas WTO regulates the international trade of services, creations and designs (e.g. intellectual property) and traded investions in addition to that for goods.

WTO currently serves two main purposes: supervize and liberalize international trade. Additionally, the organization an be seen as 'a place to settle trade disputes', 'a forum for governants to negotiate trade agreements' or an entity that 'operates a system of trade rules' (WTO, Accessed Sep 2008).

How and where it operates

WTO has 153 members and 31 observer governments, representing 95% of the world trade (Fergusson, 2007). The organization has its headquarters in Genera, Swtzerland and its budget for 2006 was $136.4.

World trade decisions are made during the Ministerial Conference, which has to be organized at least every two years. The Ministerial Conference is a meeting of trade ministers from member countries. The day-to-day operations are supervized by the General Council, which is a body of national representatives. This council meets on a monthly basis to discuss/review trade policies and trade disputes and it is composed of many commitees, working groups and numerous other entities.

The Ministerial Conference analyzes the current programs and sets the agenda for future meetings. In these meeting, the decisions are made based on consensus rather than vote.

The first ministerial conference was held in Singapore in Dec 1996, reviewed WTO's short activity up to that moment and a number of member had an aggreement to remove tariffs on information technology products until 2000.

The second ministerial conference was held in Geneva, Switzerland in May 1998. WTO's activity was reviewed again and issues concerning electronic commerce have been discussed.

The third ministerial conference was held in Seattle, U.S. In Nov-Dec 1999. This meeting is also known as the 'Battle at Seattle' being remembered in connection to the street violence and anti-globalization prostests that took place during that time. This meeting was intended to review the agenda for future meetings, but no consensus was reached and the ministers suspended their work.

The fourth ministerial conference was held in Doha, Qatar in Nov 2001. The current negotiations were launched during this meeting, also known as the Doha Round. The negotiations concern the globalization process and how to make it more inclusive and helping the world's poor, generally via removing barriers and farming subsidies. The negotiations continue today as a consensus hasn't been reached, especially in the agriculture subsidies area.

The fifth ministerial conference was held in Cancun, Mexico in Sep 2003. This meeting continues the negotiations open during Doha round. The ministers couldn't reach a consensus and major differences remained unreconciled.

The sixth ministerial conference was held in Hong Kong in Dec, 2005. The members continued the negotiations open during Doha round and agreed upon 'modest advancement in agriculture, industrial tariffs, and duty and quota-free access for least developed countries' (Fergusson, 2007).

The General Council meets once a month to provide a forum for members to discuss trade issues. Additionally, the council meets in two other capacities: as Trade Policy Review Mechanism (TPRM) and as Dispute Settlement Body (DSB). The first capacity was established during the Uruguay Round and it refers to the body's supervision of national trade policies in member countries. The public examination of members constitutes mild pressure on countries to avoid practices that discourage trade. The second capacity was strengthened by the Uruguay Round. The process of dispute settlement has several phases. The first phase consists in the consulation of governments involved. The second phase exists only when the first one wasn't successful. In this phase, the complaint may ask the DSB to establish a dispute panel, which will report back to DSB after hearing the case. If the complaint gets DSB's support, the respondent has to either change its practices or negotiate a solution agreed upon by both sides. If the respondent doesn't comply, the complaint can ask DSB for suspension of obligations, thus allowing the latter to retaliate.

Its governing policies

WTO is a trade regulating organization, setting the rules that define the framework for trade policies. Five principles have a particular significance for both pre-WTO (GATT) and WTO:

Non-discrimination. The most favoured nation principle states that any advantage given to a product from another country by a contracting party should be extended to similar products of all other contracting parties. Moreover, national and domestic products have to be treated equally. Exceptions are allowed in rare cases. For example, special treatment for developing countries and free-trade areas are allowed.

Reciprocity - comes to support better access to foreing markets

Binding and enforceable commitments - a country can change its commitment only after negotiations with trade partners. If negotiations are not successful, they can refer to DSB

Transparency - the members are obliged to make their trade regulations public

Safety valves - in certain situations, governments have the possibility to restrict trade

Enforcement mechanisms

WTO through its regulatory body (DSB) can settle disputes between various governments and indirectly enforce non-compliant members to respect its principles. The mechanisms used in this case refer to retaliation and compensation. Both of these are options that are given to the complaint country whenever compliance to WTO rules is broken.

The complaint's retaliation hit list should be dependent on its retaliation capacity. Generally, retaliation targets either the defendant's export sectors, which has the greatest political clout if compliance is foreseeable with the theat of the hit list mentioned or the complaint's import sectors, which maximize the latter's domestic political power relative to the status quo (Chang, 2004).

Retaliation can be avoided by identifying mutually agreeable compensation solutions for both governments involved in dispute. Again, the compensation agreements depend on each party's relative political strength. Thus, each party should take under consideration the benefits of compensation and losses incurred by avoiding retaliation, when agreeing to a compensation scheme.

Case Studies - trade disputes

In 2006, the European Union (EU) claimed that Mexico charged illegal duties to EU olive oil and asked WTO to investigate this matter after talks between parties failed to solve the issue. The EU claimed that Mexico imposed definitive countervailing tariffs on olive oil imports from EU to help subsidizing the olive oil domestic production. The accusations were made against the lack of trasparency of the tariff decision process and the investigation behind it. Mexico replied that the measures were taken to protect national industry. WTO ruled in favor of Mexico as it failed to establish that the latter acted inconsistent with its obligations. Mexico's vast experience in WTO trade disputes consists in many actions against U.S. And like many Latin American countries has been using the dispute system to many trade remedies (Davey, 2005).