Chapter 2: THE DYNAMIC OF WORLD TRADE  Examine the issues surrounding the

establishment of world trade organization (WTO)

1.0 INTRODUCTION
 Discuss the general agreement on tariff and
This unit looks at a comprehensive examination of
trade (GATT).
the world trade organization. Forces like
technological breakthroughs, economic growth,  Explain the machinery or mechanism of world
market evolution, shifts in customer tastes, social trade organization.
changes and political events can expand or shrink
 Dila on the dynamism on the nature of GATT
business space and world trade. Vast amounts of
members to WTO environments.
new track space created today change
perspectives. This unoccupied territory represent a  Elucidate succinctly the major features of WTO
land of opportunity for the technological and agreements.
strategic innovators who can see or create it faster
than their competitors do. The opportunities are  Explain the control on WTO by government of
great, but so are the competition and the chance of importing countries.
failure. To days growth era produces huge  Identify the general agreement on tariff and trade
discontinuities, creates new industries and in services (GATT) and
destroys old ones, and accelerates global
economic growth in the process. Expectations  Examine the world trade organization
are rising everywhere; human creativity is flowing in membership from year 2000 to date.
every field. Emerging economics are industrializing
3.0 MAIN CONTENT
and everyone is joining the digital revolution of
boundless information and seamless electronic 3.1 WTO AND THE ESTABLISHMENT OF
commerce. The world trade organization (WTO) is GENERAL AGREEMENT ON TARIFF AND
an international body dealing with rules relating to TRADE
international business operations. The organization
is responsible for global agreements, negotiations The World Trade Organization provides a forum for
and ensures regulations and rule made by all is continuing negotiation to liberalize the trade in
obeyed by all. And to keep various trade goods and services through the removal of barriers
policies/rules within agreed limits and bounds. It and the development of rules in new trade-related
came into existence on 1st January 1995 as a subject areas. The World Trade Organization
result of the Uruguay round of trade negotiations agreements have a common dispute settlement
URTN. It aims at; mechanism through which members enforce
their right and settle the differences that arise
 Facilitating trade among countries by creating between them in the course of implementation.
conditions for competition that are fair and The World Trade Organization (WTO) allows
equitable. countries to implement anti subsidy legislation. The
law allows a country to place a countervailing duty
 It encouraging to enter into negotiations for the
(CVD) on imports when a foreign government
reduction of tariffs and the removal of other barriers
subsidizes exports of the product, which in turn
to trade
causes injury to the import-competing firms. The
 Requires them to apply a common set of rules countervailing duty is a tariff designed to “counter”
to trade in goods and services. the effects of the foreign export subsidy. The
multilateral trading system of WTO can broadly be
 This body is responsible for overseeing the defined as the body of international rules by which
multilateral trading system which has gradually countries are required to abide in their trade
evolved over the last 60 years (Otokity, 2006). relations with one another. The basic aim of these
2.0 LEARNING OBJECTIVES rules is to encourage countries to pursue open and
liberal policies. These rules are continually
At the end of this unit, it is expected that you do the evolving. The existing rules are being clarified and
following: elaborated to meet the changing conditions of world
trade. At the same time rules covering new subjects
are being added to deal with problems and issues agreement (NAFTA), and the European Union
that are being encountered. (EU).
A tariff is an indirect taxes imposed upon imports. Similarly, the WTO system as it has emerged from
They can either be specific (Fixed amount per the Uruguay round consisting of the following
good) or ad valorem (a % of the value). Tariff substantive agreements:
imposition arises due to reasons such as;
(i) General agreement on trade in services (GATS)
 To reduce imports and protect domestic firms (ii) Multilateral agreement on tariffs and trade
from foreign competition. (GATT 1995) and all its associate agreements.
(iii) Agreement on trade –related aspects of
 To reduce imports in order to reduce balance of
intellectual property rights (TRIPS).
payment deficits.
3.2.1 LEGAL INSTRUMENT AT URUGUAY
The virtual developing country is a case study of
ROUND
Zambia. There are a series of field trips available
looking at different issues connected with economic The legal instrument embodying the results of the
development. This tour is the trade tour, and this Uruguay round of multilateral trade negotiations
unit shall also look at the imposition of tariffs as a were adopted in Marrakech on 15th April, 1994.
form of protection and the welfare loss that result. The complete set covers the legal texts, the
ministerial decisions and the Marrakech
If the government of a country imposes a tariff on
declaration, the signatory countries, as well as the
the imports from another country they raise the
individual agreements, the schedule of specific
world price by the amount of the tariff they impose.
commitments on services, the tariff schedule for
The WTO concept is the outcome of the first major
trade in goods, and the plurilateral agreements.
effort to adopt rules to govern international trade
Schedule in the original language only. The World
relations which was made by countries in the years
Trade Organization (WTO) deals with the global
immediately after the Second World War. These
rules of trade between nations. Its main function is
efforts resulted in the adoption in 1948 of the
to ensure that trade flows as smoothly, predictably
General known as, consequently the GATT rules
and freely as possible. The trade in goods involve
which was basically applicable to international trade
agreement on implementation of article VII of GATT
in goods for years was modified to include new
1994 (Customs valuation), agreement on
provisions particularly to deal with the trade
Reshipment Inspection (RSI) and others.
problems of developing countries.
3.3 THE BENEFITS AND USEFULNESS OF
3.2 THE MECHANISM OF WORLD TRADE
WORLD TRADE ORGANIZATION
ORGANIZATION
a. Member countries are obliged to ensure that
Trade is increasingly global in scope today. There
their (User) national registration; regulations and
are several reasons for this. One significant reason
procedures are in full conformity with the provisions
is technological -because of improved
of these agreements.
transportation and communication opportunities
b. The system helps promote peace.
today, trade is now more political. Thus, consumers
c. Dispute are handled constructively
and businesses now have access to the very best
d. Rules make life easier for all
products from many different countries.
e. Freer trade cuts the costs of living.
Increasingly rapid technology life cycles also f. It provides more choice of products and qualities.
increases the competition among countries as to g. Trade raises incomes
who can produce the newest in technology. In part h. Trade stimulate economic growth
to accumulate these realities, counties in the last i. The basic principles makes life more efficient
several decades have taken increasing steps to j. Government are shielded
promote global trade through agreements such as
the general treaty on trade and tariff GATT, and The World Trade Organization (WTO) deals with
organizations such as the World Trade the global rules of trade between nations. Its main
Organization (WTO), North American Free Trade function is to ensure that trade flows as smoothly,
predictable and freely as possible.
  Another important feature is that WTO is an
international that effectively creates a ceiling-but no
3.4 THE DYNAMIC NATURE OF GATT
floor for environmental regulation.
MEMBERS TO WORLD TRADE ORGANIZATION
 Made up of detailed procedural code for
It is of greater important to examine any change in
environmental law making and regulatory initiatives
attitude of GATT membership and how GATT rules
that would be difficult for even the wealthiest
applied to issues. Such issues do not posit whether
nations meet.
a certain policy is environmentally correct or not.
They suggest that the US policy could be made Other features of WTO include:
compatible with GATT rules if members agreed on
 The objectives and principles of multilateral
amendments or reached a decision to waive the
agreements on trade goods.  Biding of tariffs
rules especially for any issue that could spring up.
 Most favored nation treatment (MFN)  National
Many developing countries discarded import
treatment rule: prohibits countries from
substitution, policies and are now pursuing export-
discriminating among goods originating in different
oriented policies, under which they seek to promote
countries. The national treatment rule prohibits
economic growth by exporting more and more of
them from discriminating between imported
their products. Another issue is related to the pace
products and domestically produced like goods,
at which the world economy is globalizing through
both in the matter of the levy of internal taxes and
international trade and the flow of foreign direct
in the application of internal taxes.
investment. Similarly, this process of globalizing
which has increases the dependence of countries 3.6 SETTLEMENT OF WORLD TRADE
on international trade is further accelerated by the ORGANIZATION DISPUTE
shift in economic and trade policies noticeable in
most countries. The collapse of communism has Suppose a trade dispute arises because a country
led to the gradual adoption of market-oriented has taken action on trade (for example imposed a
policies in most countries where production and tax or restricted imports) under an environment
international trade had been state controlled. These agreement outside the WTO and another country
countries, which in the past traded primarily among objects. Should the dispute be handled under the
themselves are increasingly trading on a worldwide WTO or under the GATT agreement? The trade
basis (Otokity S. 2006). and environmental committee says that if a dispute
arises over a trade action taken under an
In addition, the framework of rights and obligations environmental agreement, and if both sides to the
which the WTO system has created therefore plays dispute have signed that agreement, then they
a crucial role in the development of trade in the fast should try to use the environmental agreement to
globalizing world’s economy. The ability of settle the dispute. But if one side in the dispute has
governments and business enterprises to benefit not signed the environment agreement, then the
from the system depends greatly on their WTO would provide the only possible forum for
knowledge and understanding of the rules of the settling the dispute. Preferences for handling
system. dispute under the environmental agreements does
not mean environmental issues would be ignored in
3.5 MAJOR FEATURES OF WORLD TRADE
WTO disputes. The WTO agreements allow panels
ORGANIZATION AGREEMENT
examining a dispute to seek expert advice on
The World Trade Organization (WTO), was environmental issues.
established in 1st January, 1995 and represents
Disputes are handled by the Dispute Settlement
the culmination of an eight-year process of trade
Body (DSB). The DSB works like a committee that
organization known as the Uruguay Round 135
meets regularly to discuss any issues countries
countries now belonging to the WTO and more,
may have with respect to each other’s trade
continue to join. The WTO is based in Geneva and
policies. The DSB is comprised of one
is administered by a secretariat which also facilitate
representative from each member country. When
ongoing trade negotiations, and oversees trade
they meet, countries have the right to object to the
dispute resolutions.
trade policies of another country. However, they
cannot object to anything or everything; instead, a with the original panel reports, appellate decisions
country can only object to an unfulfilled promise are almost automatically adopted by the DSB.
with respect to one or more of the WTO
4. Resolution. If the appellate board concurs with a
agreements.
panel decision that a defendant country has
When the Uruguay Round was finalized, each violated some of its WTO agreement commitments,
member country went back to its own legislature there are two paths to resolution:
and changed its trade policies and rules to conform
1. Compliance. In the preferred outcome,
to its new commitments. Sometimes inadvertently
the defendant country complies with the ruling
and sometimes purposely, some countries do not
against it and changes its laws as needed to
implement their commitments fully. Or sometimes a
conform. Sometimes compliance may take time
country believes that it has fulfilled its commitment,
because of delays in a legislative process, so
but its trading partner believes otherwise. Or new
normally the defendant will be given time to rectify
legislation may violate one of the country’s previous
the situation. In the process, the country will be
commitments. In these cases, a member country
expected to report its progress regularly to the
(the complainant) is allowed to register a dispute
DSB.
with the DSB against another member country (the
defendant). Resolution of a dispute follows these 2. Toward the defendant country. To be
steps: fair, the rescission must have an effect on the
defendant that is approximately equal in value to
1. Consultations. The DSB first demands that the
the cost imposed by the defendant’s violations.
appropriate government representatives from the
toward the defendant country. To be fair, the
complainant country and the defendant country
rescission must have an effect on the defendant
meet to discuss the dispute. They must do this
that is approximately equal in value to the cost
within a strict timetable (less than sixty days) and
imposed by the defendant’s violations.
hopefully will be able to resolve the dispute without
external intervention. 3.7 THE CONTROL ON WORLD TRADE
ORGANIZATION BY GOVERNMENT OF
2. Panel formation. If the countries return to the
IMPORTING COUNTRIES
DSB at a later session and report that the
consultations failed, then the complainant may ask The governments seek to limit the level of imports
the DSB to form a panel. A panel consists of three through a quota. Examples of quotas were found in
to five independent trade law experts who are hired the textile industry under the terms of the multi-fibre
expressly to make a judgment about the particular agreement which expired in January 2005 and
dispute. The DSB chooses the panelists in which led, in 2005 to a trade dispute between the
consultation with the disputing countries, or the European and China over the issue textile imports.
panelists are chosen by the director-general if the
countries cannot agree. The panel is generally Quotas introduce a physical limit of the volume
given about six months to decide whether the (number of units imported) or value (value of
defendant violated some of its promises, imports) permitted.
whereupon it reports its decision to the DSB. Since Countries can make it difficult for firms to import by
a panel report can only be rejected by consensus, imposing restrictions and being deliberately
no country has veto power over DSB adoption of a bureaucratic. These trade barriers range from
report. Thus all panel reports become official stringent safety and specification checks to
decisions. But the process doesn’t yet end. extensive holdups in the customs arrangements. A
3. Appeals. Either country can appeal the decision good example is the quality standards imposed by
given in the panel report. A request or appeal the European on imports of dairy products.
sends the issue to an appellate board comprised of Preferential government procurement policies and
three judges drawn from a set of seven, each of state aid. Free, trade can be limited by preferential
whom has a four-year term. As in the U.S. court behaviour by the government when allocating major
system, appellate arguments must be based on spending projects that favours domestic rather than
points of law relating to legal interpretations but overseas suppliers. These procurement policies run
cannot consider new evidence or retry the case. As
against the principle of free trade within the EU attended by the main allied countries in New
single market. Hampshire in 1944 and was seen as
complementary to two other organizations also
The use of financial aid from the state can also
conceived there: the International Monetary Fund
distort the free trade of goods and services of
(IMF) and the World Bank. The IMF would monitor
WTO nations, for example use of subsidies to a
and regulate the international fixed exchange rate
domestic cola or steel industry, or the widely
system, the World Bank would assist with loans for
criticized use of export refunds;
reconstruction and development, and the ITO
 Control against dumping and anti-dumping: anti- would regulate international trade. The ITO never
dumping is designed to allow countries to take came into existence, however. Although a charter
action against dumped imports that cause or was drawn, the U.S. Congress never approved it.
threaten to cause material injury to the domestic The main concern was that the agreement would
industry. Goods are said to be dumped when they force unwelcome domestic policy changes,
are sold for export at less than their normal value. especially with respect to wage and employment
policies. Because the United States would not
 The agreement on safeguards permits importing participate, other countries had little incentive to
countries to restrict imports of a product for a participate. Nonetheless, the United States, Britain,
temporary period by either increasing tariffs or and other allied countries maintained a strong
imposing quantitative restrictions. Such safeguard commitment to the reduction of tariffs on
actions can be resorted to only when it has been manufactured goods. Tariffs still remained high in
established through properly conducted the aftermath of the Depression-era increases.
investments that a sudden increase in imports. Thus, as discussions over the ITO charter
(Both absolute and relative to domestic production). proceeded, the GATT component was finalized
3.8 THE GENERAL AGREEMENT ON TARIFF early and signed by twenty-three countries in 1948
AND TRADE (GATT). as a way of jump-starting the trade liberalization
process. GATT’s main objective was to reduce the
A treaty created following the conclusion of World barriers of international trade through the reduction
War II. The general agreement on tariffs and trade of tariffs, quotas and subsidies. GATT was formed
(GATT) was implemented to further regulate world in 1947 and signed into international law on
trade to aide in the economic recovery following the January 1, 1948, GATT remained one of the focal
War. The growth of international trade and features of international trade agreements until it
investment has been stimulated partly by the was replaced by the creation of the World Trade
steady decline of trade barriers since the Great
Depression of the 1930s. In the post–World War II Organization on January 1, 1995. The foundation of
era, the General Agreement on Tariffs and Trade, GATT was laid by the proposal of the international
or GATT, prompted regular negotiations among a trade Organization in 1945, however the ITO was
growing body of members to reciprocally reduce never completed.
tariffs (import taxes) on imported goods. During The GATT consists of a set of promises, or
each of these regular negotiations (eight of these commitments, that countries make to each other
rounds were completed between 1948 and 1994), regarding their own trade policies. The goal of the
countries promised to reduce their tariffs on imports GATT is to make trade freer (i.e., to promote trade
in exchange for concessions—that means tariff liberalization), and thus the promises countries
reductions—by other GATT members. The make must involve reductions in trade barriers.
General Agreement on Tariffs and Trade (GATT) Countries that make these commitments and sign
was never designed to be a stand-alone on to the agreement are called signatory countries
agreement. Instead, it was meant to be just one
part of a much broader agreement to establish an The discussions held before the commitments are
International Trade Organization (ITO). The ITO decided are called negotiating rounds. Each round
was intended to promote trade liberalization by is generally given a name tied either to the location
establishing guidelines or rules that member of the meetings or to a prominent figure. There
countries would agree to adopt. The ITO was were eight rounds of negotiation under the GATT:
conceived during the Bretton Woods conference the Geneva Round (1948), the Annecy Round
(1950), the Torquay Round (1951), the Geneva II
Round (1956), the Dillon Round (1962), the
Kennedy Round (1967), the Tokyo Round (1979),
and the Uruguay Round (1994). Most importantly,
the agreements are reached by consensus. A
round finishes only when every negotiating country
is satisfied with the promises it and all of its
negotiating partners are making. The slogan
sometimes used is “Nothing Is Agreed Until
Everything Is Agreed.”
The promises, or commitments, countries make
under the GATT take two forms. First, there are
country specific and product-specific promises. For
example, a country (say, the United States) may
agree to reduce the maximum tariff charged on a
particular item (say, refrigerator imports) to a
particular percentage (say, 10 percent). This
maximum rate is called a tariff binding, or a bound
tariff rate.
One of the key principles of the GATT, one that
signatory countries agree to adhere to, is the
nondiscriminatory treatment of traded goods. This
means countries assure that their own domestic
regulations will not affect one country’s goods more
or less favorably than another country’s and will not
treat their own goods more favorably than imported
goods. There are two applications of
nondiscrimination: most-favored nation and national
treatment.
National Treatment is a concept of international law
that declares if a state provides certain right and
privileges to its own citizens, it also should provide
equivalent rights and privileges to foreigners.
WTO is an international 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.
3.9 WORLD TRADE ORGANIZATION
MEMBERSHIP FROM YEAR 2000 TO DATE
The WTO general agreement on trade in services
(GATS) commits member’s governments to
undertake negotiations on specific issues and to
enter into successive rounds of negotiations to
progressively liberalize trade among member
nations. The member nations of WTO are:
Argentina, Bulgaria, Czech Republic, Hungary,
India, Kenya, Mauritius, Nigeria, Pakistan,
Slovenia, Lanka, Turkey, Thailand etc.