Context: The World Trade Organization’s (WTO’s) dispute settlement mechanism is going through a “crisis”: the body is struggling to appoint new members to its understaffed Appellate Body that hears appeals in trade.
Prelims: Current events of national and international importance.
Mains: GS III And GSII-
- Important International institutions, agencies, and fora- their structure, mandate.
- Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment.
- Inclusive growth and issues arising from it.
World Trade Organization (WTO):
- Officially commenced on 1 January 1995 under the Marrakesh Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.
- An organization that intends to supervise and liberalize international trade
- HQ – Geneva, Switzerland.
- Official language – English, French, Spanish.
Goals of WTO:
- The WTO’s global system lowers trade barriers through negotiation and operates under the principle of non-discrimination.
- The result is reduced costs of production (because imports used in production are cheaper), reduced prices of finished goods and services, more choice and ultimately a lower cost of living.
- The WTO’s system deals with these in two ways.
- One is by talking: countries negotiate rules that are acceptable to all.
- The other is by settling disputes about whether countries are playing by those agreed rules.
- The WTO can stimulate economic growth and employment.
- The WTO can cut the cost of doing business internationally.
- The WTO can encourage good governance. Transparency — shared information and knowledge — levels the playing field.
- The WTO can give the weak a stronger voice:
- Small countries would be weaker without the WTO. Differences in bargaining power are narrowed by agreed rules, consensus decision-making and coalition building.
History And Evolution of WTO:
- From the early days of the Silk Road to the creation of the General Agreement on Tariffs and Trade (GATT) and the birth of the WTO, trade has played an important role in supporting economic development and promoting peaceful relations among nations.
- The General Agreement on Tariffs and Trade (GATT)
- It traces its origins to the 1944 Bretton Woods Conference, which laid the foundations for the post-World War II financial system and established two key institutions, the International Monetary Fund (IMF) and the World Bank.
- The conference delegates also recommended the establishment of a complementary institution to be known as the International Trade Organization (ITO), which they envisioned as the third leg of the system.
- In Havana in 1948, the UN Conference on Trade and Employment concluded a draft charter for the ITO, known as the Havana Charter, which would have created extensive rules governing trade, investment, services, and business and employment practices.
- The Havana Charter never entered into force, primarily because the U.S. Senate failed to ratify it. As a result, the ITO was stillborn.
- Meanwhile, an agreement as the GATT signed by 23 countries in Geneva in 1947 came into force on Jan 1, 1948, with the following purposes:
- to phase out the use of import quotas
- and to reduce tariffs on merchandise trade,
- The GATT became the only multilateral instrument (not an institution) governing international trade from 1948 until the WTO was established in 1995.
- Despite its institutional deficiencies, the GATT managed to function as a de facto international organization, sponsoring eight rounds (A round is a series of multilateral negotiations) of multilateral trade negotiations.
- The Uruguay Round, conducted from 1987 to 1994, culminated in the Marrakesh Agreement, which established the World Trade Organization (WTO).
- The WTO incorporates the principles of the GATT and provides a more enduring institutional framework for implementing and extending them.
- The GATT was concluded in 1947 and is now referred to as the GATT 1947. The GATT 1947 was terminated in 1996 and WTO integrated its provisions into GATT 1994.
- The GATT 1994 is an international treaty binding upon all WTO Members. It is only concerned with trade in goods.
|1944||Bretton Woods conference wanted to make ITO (International Trade Org.) but the USA did not ratify. Thus, GATT was born as a stopgap arrangement|
|1947||GATT (General Agreement on Trade & Tariffs) established aimed to reduce barriers to international trade|
Dispute Settlement Body (DSU)
The Council for Trade in Goods (Goods Council)
The Council for Trade in Services (Services Council)
The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS Council)
Important Terms Before Understanding Functions of WTO:
- All countries want to protect domestic industries and prevent the entry of foreign players. So, they create two types of barriers to International trade viz.
- Tariff Barriers :
- When Govt. puts heavy import duty/custom duty on Foreign Products which protects domestic players from competition from foreign players
- Non Tariff barriers :
- When Domestic players are given subsidies/preference over the foreign players by Govt. for Ex.
- When Govt. is buying some Phones/ Xerox Machines, in the tender it’ll mention that only Domestic companies are allowed.
- Making policies in a way that it’s hard for foreign players to start factory / introduce his product in India.
WTO Ministerial Conferences (MC):
The first Ministerial Conference (i.e. MC1) was held in Singapore in 1996 and the last one (MC11) was organised in Buenos Aires in 2017. All these MCs have evolved the prevailing current global trading system.
- Singapore, 9-13 December 1996 (MC1)
- Trade, foreign, finance and agriculture Ministers from more than 120 World Trade Organization Member governments and from those in the process of acceding to the WTO participated.
- The following four issues termed as the Singapore issues were first brought upon which the multilateral body could initiate negotiations:
- trade and investment
- trade facilitation
- transparency in government procurement
- trade and competition
- Geneva, Switzerland 18-20 May 1998 (MC2)
- The Ministerial Declaration included the following work programmes:
- the issues, including those brought forward by Members, relating to implementation of existing agreements and decisions;
- Priority areas for the next round of comprehensive negotiations on agriculture include Market access, Export subsidies, etc.
- Seattle, USA November 30 – December 3, 1999 (MC3)
- There were two major issues,
- whether to start a new comprehensive round of negotiations such as the Uruguay Round or confine negotiations to the so-called “built-in agenda” of agriculture and services mandated at the last Ministerial.
- what should the negotiations encompass, more specifically what should be included in the agenda of the meeting.
- The meeting was unable to resolve both issues and ended in stalemate.
- The deliberations were suspended without agreement on a new round of negotiations and without agreement on a ministerial declaration.
- There were two major issues,
- Doha, Qatar 9-13 November 2001 (MC4)
- The special and differential treatment for developing countries shall be an integral part of all elements of the negotiations to enable developing countries to effectively take account of their development needs, including food security and rural development.
- The negotiations on trade in services shall be conducted with a view to promoting the economic growth of all trading partners and the development of developing and least-developed countries.
- It recognizes the work already undertaken in the negotiations, initiated in January 2000 under Article XIX of the General Agreement on Trade in Services (GATS).
- Market access for non-agricultural products:
- The negotiations shall take fully into account the special needs and interests of developing and least-developed country participants, including through less than full reciprocity in reduction commitments, in accordance with the relevant provisions of Article XXVIII bis of GATT 1994.
- Transparency in government procurement:
- Recognizing the case for a multilateral agreement on transparency in government procurement and the need for enhanced technical assistance and capacity building in this area, it agreed that negotiations would take place on the basis of a decision to be taken, by explicit consensus.
- Cancún, Mexico 10-14 September 2003 (MC5)
- The main task was to take stock of progress in negotiations and other work under the Doha Development Agenda.
- Hong Kong, 13-18 December 2005 (MC6)
- The WTO member economies aimed to reach a preliminary agreement on liberalization of farm trade by reducing subsidies, and address other issues at meeting, aiming for a successful conclusion of the Doha Round in 2006.
- After an intense talk, WTO Members have produced an interim package for the Doha Round negotiation:
- the deadlines for the elimination of agricultural export subsidies (2013) and cotton export subsidies (2006),
- and also mandates that duty and quota-free access for at least 97% of products originating from the least developed countries (LDCs) be provided by 2008.
- Regarding non-agricultural market access (NAMA), Members adopted the “Swiss formula” mandating greater cuts in higher tariffs and decided that modalities for tariff reduction be established by April 30, 2006.
- The Swiss Formula (by the Swiss Delegation to the WTO) is a suggested method for reducing tariff on non-agricultural goods (NAMA) by both developed and developing countries.
- It makes different coefficients for developed and developing countries.
- Here, tariff-cuts are supposed to be undertaken such that it cuts higher tariffs more steeply than it cuts lower tariffs.
- This meeting could have been the final step of the Doha trade talks launched in 2001.
- Geneva, Switzerland 30 November – 2 December 2009 (MC7)
- The theme of the Conference is “The WTO, the Multilateral Trading System and the Current Global Economic Environment”.
- Unlike previous conferences, this meeting was not a Doha Round negotiating session, but rather a chance for Ministers to reflect on all elements of WTO's work, exchange ideas and extensive guidance on the best way forward in the years to come.
- Geneva, Switzerland 15-17 December 2011 (MC8)
- The Conference approved the accessions of the Russian Federation, Samoa and Montenegro.
- It adopted a number of decisions on intellectual property, electronic commerce, small economies, least developed countries’ accession, a services waiver for least developed countries, and trade policy reviews.
- It reaffirmed the integrality of special and differential treatment provisions to the WTO agreements and their determination to fulfill the Doha mandate to review them with a view to strengthening them and making them more precise, effective and operational.
- Bali, Indonesia 3-6 December 2013 (MC9)
- The Conference adopted the “Bali Package”, a series of decisions aimed at:
- streamlining trade,
- allowing developing countries more options for providing food security,
- boosting least-developed countries’ trade and helping development more generally.
- The Bali Package is a selection of issues from the broader Doha Round negotiations.
- The Conference also approved the accession of Yemen as a new member of the WTO.
- Nairobi, Kenya 15-19 December 2015 (MC10)
- It culminated in the adoption of the “Nairobi Package”, a series of decisions on agriculture, cotton and issues related to least-developed countries (LDCs).
- Special Safeguard Mechanism for Developing Country Members;
- Public Stockholding for Food Security Purposes;
- Export Competition;
- Stressing the vital importance of cotton to a number of developing economies and particularly the least-developed amongst them,
- Developed country Members, and developing country Members declaring themselves in a position to do so, shall grant preferential trade arrangements in favor of LDCs, as from 1 January 2016, duty-free and quota-free market access for cotton produced and exported by LDCs.
- LDC issues:
- Preferential Rules of Origin for Least Developed Countries;
- Implementation of Preferential Treatment in Favour of Services and Service Suppliers of Least Developed Countries;
- and Increasing LDC Participation in Services Trade;
- The decision in Nairobi builds on the 2013 Bali Ministerial Decision on preferential rules of origin for LDCs.
- The “Nairobi Package” pays fitting tribute to the Conference host, Kenya, by delivering commitments that will benefit in particular the organization’s poorest members.
- Buenos Aires, Argentina 10-13 December 2017 (MC11)
- The Conference ended with a number of ministerial decisions, including on fisheries subsidies and e-commerce duties, and a commitment to continue negotiations in all areas.
- Nur-Sultan, Kazakhstan, 8-11 June 2020 (MC12)
- The WTO members have agreed that the organization’s Twelfth Ministerial Conference (MC12) will take place in June 2020 in Kazakhstan, which joined the WTO in 2015.
Some Important agreements in WTO Ministerial Conferences (MC):
The Doha Round:
- The Doha Round is the latest round of trade negotiations among the WTO membership. Its aim is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules.
- The Round is also known semi-officially as the Doha Development Agenda as a fundamental objective is to improve the trading prospects of developing countries.
- The Doha Ministerial Declaration provided the mandate for the negotiations, including on following subjects:
- More market access, eliminating export subsidies, reducing distorting domestic support, sorting out a range of developing country issues, and dealing with non-trade concerns such as food security and rural development.
- Non-agricultural market access (NAMA):
- To reduce or as appropriate eliminate tariffs, including the reduction or elimination of high tariffs, tariff peaks and tariff escalation (higher tariffs protecting processing, lower tariffs on raw materials) as well as non-tariff barriers, in particular on products of export interest to developing countries.
- To improve market access and to strengthen the rules.
- Each government has the right to decide which sectors it wants to open to foreign companies and to what extent, including any restrictions on foreign ownership.
- Unlike in agriculture and NAMA, the services negotiations are not based on a “modalities” text. They are being conducted essentially on two tracks:
- (a) bilateral and/or plurilateral (involving only some WTO members) negotiations
- (b) multilateral negotiations among all WTO members to establish any necessary rules and disciplines
- Trade facilitation:
- To ease customs procedures and to facilitate the movement, release and clearance of goods.
- This is an important addition to the overall negotiation since it would cut bureaucracy and corruption in customs procedures and would speed up trade and make it cheaper.
- These cover anti-dumping, subsidies and countervailing measures, fisheries subsidies, and regional trade agreements.
- “Clarifying and improving disciplines” under the Anti-Dumping and Subsidies agreements;
- and to “clarify and improve WTO disciplines on ﬁsheries subsidies, taking into account the importance of this sector to developing countries.
- The environment:
- These are the first signiﬁcant negotiations on trade and the environment in the GATT/ WTO. They have two key components:
- Freer trade in environmental goods – Products that WTO members have proposed include wind turbines, carbon capture and storage technologies, solar panels.
- Environmental agreements – Improving collaboration with the secretariats of multilateral environmental agreements and establishing more coherence between trade and environmental rules.
- Geographical indications (GI):
- Multilateral register for wines and spirits
- Geographical indications are place names (in some countries also words associated with a place) used to identify products that come from these places and have specific characteristics (for example, “Champagne”, “Tequila” or “Roquefort”). Under the TRIPS Agreement, all geographical indications have to be protected at least to avoid misleading the public and to prevent unfair competition (Article 22).
- Dispute settlement:
- To improve and clarify the Dispute Settlement Understanding, the WTO agreement dealing with legal disputes.
Agreement on Agriculture:
- WTO wants to
- Reduce import duty
- Reduce export subsidies
- Reduce Amber box subsidies (Domestic subsidies)
Amber Box: De Minimus limits
- The minimal amounts of Amber box subsidies permitted by WTO, even though they distort trade
- Calculated on the agriculture production of the given member state in 1986-88
- Limits – Developed ( 5%), Developing (10%), Least Developed (Exempted)
- In 1986: USA agriculture production was far ahead of India. So, their 5% De-minimus quota will be far bigger than our 10% quota (in absolute figures).
- Input costs have skyrocketed in these decades. But, De-minimus doesn’t consider inflation factor.
- So, if India has to limit its (Amber box) agro. subsidies to a non-inflation adjusted 86’s production; we cannot continue the MSP to farmers or food security to the poor.
- These subsidized foodgrain are meant for feeding the poor only, they do not distort international trade.
Bali summit and Peace clause (Indonesia):
|Trade Facilitation Agreement||
To cut down the red tape in customs clearance
Exporters from Least developing countries will get Duty free, quota-free (DFQF) access to markets in foreign countries.
|Food stockholding||Led to Peace clause|
Trade facilitation agreement (TFA)
- Member nations to publish a detailed list of procedures for import-export, fees, inspection rules, penalties, etc.
- Minimize the proof documents and clearance required for customs clearance
- Provide electronic payment of fees, duties, taxes → Reduce red tapes and bureaucratic hassles in customs clearance
- Setup a single-window mechanism to help the trader submits all documents at a single point- preferably online.
- Provide faster customs clearance to perishable goods (fruits, veggies, flowers).
- Give Advance ruling, as and where applicable.
- Traders should be notified immediately if goods are detained at customs.
- LDC will get financial and technical help to comply with the above rules.
- Benefits :
- Increase global GDP by $1 trillion (~Rs 60 lakh crore) + more jobs approx. 21 million
- 2014, July, 31st But India refused + Agreement becomes effective from – 2015
- Benefits :
India refused to sign the Trade Facilitation agreement because :
- TFA maintains that it doesn’t diminish the rights & obligations of members under other agreements of WTO
- For example, under the Agreement on Agriculture (AoA) if a developing country is giving Amber box subsidies beyond 10% of its national agriculture production (base year 1986), then other members will be justified in putting trade sanction or WTO-complaint against the said country.
- Once India has signed TFA, the developed countries may stonewall their demands for a rational change in base year and ceiling limits on agro. Subsidies.
- Then India will have to cut down agro. Subsidies in MSP and food security programs, else they’ll put sanctions on us, soon as Peace-clause “temporary” deadline is over in 2017!
- And yet, we’ll have to keep giving them easy customs clearance because we signed the TFA!
- Therefore, the Government has decided to use the TFA signature as a “Bargaining Chip” for a permanent solution of food subsidies issue.
India-US agreed to resolve differences over public stockholding for food security under WTO
- As per the deal agreed between India and the US, the Peace Clause under Bali package will be allowed to continue in perpetuity and India’s food security programme will not be challenged under the WTO rules until a permanent solution to it is found.
- However, bilateral agreement between India and the US need an endorsement by 160 WTO members.
- The agreement will help pave the way for reaching a consensus on the Bali Package of WTO and help implement far-reaching reforms of custom rules under TFA.
- Further, it will help India continue its food security programme and food subsidy.
2015 Ministerial Conference Nairobi, Kenya (MC10):
- Stopping the use of subsidies and other schemes unfairly supporting agricultural exports.
- Ensuring that food aid for developing countries is given in a way which does not distort local markets.
- Seeking to simplify the conditions that exporters from the poorest countries have to meet so that their products benefit from trade agreements (so-called rules of origin).
- Giving more opportunities for businesses from the poorest countries to provide services in the WTO's 164 member countries.
- However, for many observers, Nairobi signaled the end of the Doha talks, a sentiment that intensified after the 2016 election of Trump.
In 2017 Ministerial Conference Buenos Aires (MC11),
- USA reflected the skepticism toward multilateralism when it blocked agreement on a draft ministerial declaration that would have “reaffirmed the centrality of the multilateral trading system and the development dimension of the organization’s work.”
- Meanwhile, India, which has repeatedly threatened to block WTO agreements (including the Trade Facilitation Agreement) unless WTO members conceded to its demands on public stockholding for food security. India also toughened its stand on new issues including e-commerce and investment facilitation.
- In the end, it was a relief to many that the United States did not actively seek to dismantle the WTO—as some had feared. But giving up its traditional leadership role could lead to a similar result, only more slowly.
What is the problem in the WTO Appellate Body?
- Over the last two years, the membership of the body has dwindled to just three persons instead of the required seven.
- This is because the United States, which believes the WTO is biased against it, has been blocking appointments of new members and reappointments of some members who have completed their four-year tenures.
- Two members will complete their tenures in December this year, leaving the body with just one member.
- At least three people are required to preside over an appeal, and if new members are not appointed to replace the two retiring ones, the body will cease to be relevant.
- The understaffed appeals body has been unable to stick to its 2-3 month deadline for appeals filed in the last few years, and the backlog of cases has prevented it from initiating proceedings in appeals that have been filed in the last year.
- The three members have been proceeding on all appeals filed since October 1, 2018.
- In February 2019, the body said it would be unable to staff an appeal in a dispute between Japan and India over certain safeguard measures that India had imposed on imports of iron and steel products.
- The panel had found that India had acted “inconsistently” with some WTO agreements, and India had notified the Dispute Settlement Body of its decision to appeal certain issues of law and legal interpretations in December 2018.
WTO and India:
- India is a founder member of the General Agreement on Tariffs and Trade (GATT) 1947 and its successor, the WTO.
- India's participation in an increasingly rule-based system in the governance of international trade is to ensure more stability and predictability, which ultimately would lead to more trade and prosperity.
- Services exports account for 40% of India's total exports of goods and services.
- The contribution of Services to India's GDP is more than 55%.
- The sector (domestic and exports) provides employment to around 142 million people, comprising 28% of the work-force of the country.
- India's exports are mainly in the IT and IT-enabled sectors, Travel and Transport, and Financial sectors.
- The main destinations are the US (33%), the EU (15%) and other developed countries.
- India has an obvious interest in the liberalization of services trade and wants commercially meaningful access to be provided by the developed countries.
- Since the Uruguay Round, India has autonomously liberalized its Services trade regime across the board.
- Ensuring food and livelihood security is critical, particularly for a large agrarian economy like India.
- India is persistently demanding a permanent solution on public stockholding subsidies at WTO.
- At the 2013 Ministerial Conference (MC9) in Bali,
- An interim agreement (a peace clause) was made on “public stockholding” continuing exceptions that allow developing countries to stockpile agricultural products to protect against food shortages.
- India strongly favors extension of higher levels of protection to geographical indications for products like Basmati rice, Darjeeling tea, and Alphonso mangoes at par with that provided to wines and spirits under the Trade-related Aspects of Intellectual Property Rights (TRIPS) agreement.
- Developed countries have been putting pressure on the inclusion of non-trade issues such as labour standards, environmental protection, human rights, rules on investment, competition policy in the WTO agreements.
- India is against any inclusion of non-trade issues that are directed in the long run at enforcing protectionist measures (based on non-trade issues, the developed countries like the USA and European Union are trying to ban the imports of some goods like textile, processed food, etc.), particularly against developing countries.
- The 2017 WTO Ministerial Conference (MC11) Buenos Aires ended without any substantial outcome as consensus failed the 164-member body.
- The USA blocked a permanent solution on government stockholding for food security purposes, resulting in India’s toughened stand on new issues including e-commerce and investment facilitation.
- Developed countries led by the US and the European Union sought to find a way out of the deadlock at the WTO talks by forming large pressure groups on e-commerce, investment facilitation and MSMEs within the WTO with more than 70 members in each formulation.
- Though WTO is driven by consensus and even a plurilateral agreement needs the approval of all members, the formation of these groups as an attempt to steer WTO away from its focus on multilateralism.
- It’s fierce defense of ‘Trade-Related Intellectual Property’ rights (TRIPs)—patents, copyrights and trademarks—comes at the expense of health and human lives.
- WTO has protected for pharmaceutical companies’ ‘right to profit’ against governments seeking to protect their people’s health by providing life-saving medicines in countries in areas like sub-Saharan Africa, where thousands die every day from HIV/AIDS.
- The U.S.A. has consciously (or not) destroyed the Doha round of trade negotiations process in formulating excessive demands that no country was prepared to meet.
- The priority of the Obama administration was not to revive a dying WTO negotiation but to concentrate on its newly created alternative, the TPP (Trans-Pacific Partnership), to contain its competitors: Europe and China.
- For years now, the multilateral system for the settlement of trade dispute has been under intense scrutiny and constant criticism.
- The U.S. has systematically blocked the appointment of new Appellate Body members (“judges”) and de facto impeded the work of the WTO appeal mechanism.
- Chinese mercantilism (try to influence trade and business, especially by encouraging exports and putting limits on imports), the USA’s aggressive use of unilateral tariff measures, and the inability of WTO members to reach consensus on expanding its disciplines to important new sectors in the modern economy reinforce the critique of the WTO.
- Since the WTO is consensus-based, reaching an agreement on reforms among all 164 members is extremely difficult.
- One possibility moving forward could be a plurilateral agreement with a group of like-minded countries on a new set of rules that serve as an addendum (supplement) to the broader WTO.
- Today, the world is going through protectionism, trade war (like USA & China), and Brexit making global economy squeezed.
- The role of WTO in the future is very crucial to preserve global liberalized economic system evolved since the end of the 2nd World War.
- It is the right time when countries like the USA giving the threat to withdraw from WTO making it dysfunctional, India and other emerging economies like Brazil, South Africa, etc can provide a strong base for strong WTO with saving interests of developing countries.