Introduction
Background to the study
The World Trade Organization (WTO) has been successful for the past decades of its operation. According to Jeffrey (n.d, p.3), during its formation, WTO was much more similar to the existing trading body referred to as the General Agreement on Tariffs and Trade (GATT). As a trading body, GATT was in control of the world trade since 1940’s. GATT was formed in 1947 with the objective of reducing trading tariffs amongst the existing members. According to Meredith (2003, p. 43), there was an increase in GATT membership over the years. Meredith asserts that this was due to its success in reducing the existing barriers to international trade. GATT members continuously met in what emerged to be known as ‘negotiation rounds’. The objective of the negotiations was to strategize on how to further reduce the maximum tariffs which a particular member country could impose to other members in relation to imports. Reduction in tariffs culminated into an increase in the volume of trade. However, there were problems which existed amongst the member of GATT which culminated into formation of WTO. Currently WTO has facilitated a 50 year period of international trade negotiations in GATT which had formulated comprehensive trading rules and liberalized trade.
Upon its formation in 1995, WTO’s objective was to ensure that trade f lows as smoothly, predictably and freely as possible. This would be achieved through incorporation of free trade policy. Free trade policy entails a trading system that enables traders to operate without government interference. This would greatly promote trade through a liberalized trading system which would culminate into global economic growth. In addition, the operation of WTO is aimed at fulfilling a number of roles which include improving the citizen’s welfare of its member sates, formulation of goods and services treaties, dispute settlement, policy reviews and their periodic scrutiny, trade and development, technical assistance and training. The institution is also aimed at fulfilling a number of functions. These include administration of trade agreements, settling trade disputes, attaining international cooperation with various international organizations, review of national trade policies. The trade institution is based on three main pillars. These include stimulating trade in goods (GATT), services (GATS), and intellectual property rights (TRIPS).
According to WTO organization chart (Anon., 2005); the trade institution has a comprehensive structure with a membership of 150 countries. These countries account for approximately 97% of the total world trade. Decisions in WTO are made through a consensus process amongst the entire membership and approved by the individual national governments. The top level of decision making consists of the Ministerial Conference which meets bi-annually. Next are the General Council, Goods Council, Services Council and the Intellectual Property Council which reports to the General Council. Despite the increment in world trade through WTO, there are a number of factors that hinder WTO in attaining its objective. This paper is a research report on the operation of WTO.
Aim
The report aimed at analyzing the factors that impede WTO in facilitating effective, smooth, predictable and free flow of trade.
Scope
The paper involves an analysis of the factor that hampers WTO in attaining its mission of ensuring smooth, predictable and free flow of trade. The factors cited include existence of trade barriers, such as technical trade barriers, tariffs and local content requirement. Increased growth in Preferential Trade Agreements (PTAs) and Regional Trade Agreements (RTAs) is affecting commitment of WTO’s member states. This is due to the fact that member countries perceive these agreements as alternatives to WTO. WTO’s decision making process in relation to ensuring effective flow of goods is complex making WTO to be ineffective in facilitating smooth and free flow of trade. There is also increase in conflict of interest between various members’ states and civil society. Some member states partially adopt the trading system principles. In addition, the dispute settlement scheme is also inefficient. Finally the conclusion and a number of recommendations are proposed. The recommendations involve the various ways through which WTO should consider in its effort to attain its mission.
However, the report does not consider an action plan through which the recommended strategies will be implemented. In addition, the duration to be taken in ensuring that all the recommendations are implemented is not also considered.
Factors impeding achievement of WTO‘s objectives
Existence of trade barriers
The objective of instituting WTO was to eliminate trade barriers between various countries thus ensuring smooth and free flow of goods. However, WTO’s effort to ensure free and smooth flow of trade is impeded by existence of trade barriers which have not been eliminated by some countries. This makes trading with these countries to be more stringent. Trade barriers refer to the different actions undertaken by the government in its effort to limit free flow of goods into and out of a respective country. Various governments have the capacity to control international trade either directly or indirectly. This is achieved by encouragement of exports or a reduction in the volume of imports. The government can encourage exports through extension of credit or issue of price subsidies. Trade barriers are categorized into two classes. These include non-tariff and tariff barriers. Non-tariff barriers may either have an influence on quantity or price. On the other hand, tariff barriers have a direct influence on the price of goods.
Other barriers which impede WTO’s free trade mission relate to local content requirement. The requirement dictates that a certain percentage of the products must be produced domestically. Despite the fact that local content requirement is aimed at benefiting the local producers, these restrictions can result into a decrease in import trade. This is due to the fact that there would be an increment in the price of goods. According to world trade report (Anon,. 2007), flow of goods between countries is affected by adoption of administrative policies. These policies are designed by a country to increase exports or restrict exports. For instance, Netherlands withdrew exporting tulips to Japan due to implementation of an administration policy which required cutting the tulips in the middle as a checking strategy (Meredith, 2003, p.7).According to USTR issues report on China’s WTO compliance (Anon., 2007),increased local content requirement is also witnessed in China. Imposition of import quotas limits the volume of goods to be imported in a particular country. Alternatively, a country can also impose export restriction restraining the quantity of goods to be exported to a particular country.
Smooth and free flow of trade is also limited by the existence of technical trade barriers. These involve regulations and standards that are set in relation to a particular product. Technical barriers vary from one country to another. By the virtue of different countries adopting different regulation, many regulations come into existence in the WTO multilateral trading system. This impedes smooth flow of trade between producers and exporters. In addition, the regulations are set arbitrarily by the individual countries making these countries to increase their protectionism. For instance US have a trade policy that limits free trade and smooth flow of goods. According to Jeffery (2003, p. 3), trade policy makers increasingly emphasize on commercial interests and favor incorporation of priorities such as protecting the American workers, the environment, and preservation of international labor standards. This means that trade will be hampered by these priorities and hence the growth of the country.
Increased growth of Preferential Free Trade Agreements
According to Andrew (2005, p.1), WTO is witnessing an increasing level of activity in negotiations of regional and bilateral Preferential Trade Agreements (PTAs). There is an increase in the number of countries forming trading groups in various continents such as Asian Pacific region, Latin America and Africa. Examples of such Regional Trading Agreement include the South Asian Free Trade Area (SAFTA) which was formed in July 2006. The member countries include Bangladesh, India, Maldives, Pakistan and Sri Lanka (Nilijan, 2006, p.143). Other regional groupings include European Union, MERCOSUR, North American Free Trade Agreement (NAFTA) and Andean. According to a survey by Andrew, New Zealand and Australian governments are actively being involved in negotiations of how they can facilitate formation of a number of PTA’s.
Over the past few decades, there has been an increase in prominence of PTA’s due to failures of various multilateral negotiations. This has been witnessed in WTO in which a number of Ministerial meetings failed. According to Nilijan (2006, p. 144), increase in formation of Regional Trading Agreements (RTAs) has resulted into a number of countries joining these agreements in an effort to secure their international trade. In addition, increase in the number of countries joining the PTA’s has resulted from the fact that governments are perceiving PTA’s as an appropriate avenue for pursuing objectives that are not related to trade. The regional trading blocs are continuously being viewed as building blocks through which a country can attain global free trade. This is due to the fact that RTAs increasingly acting as tools for enabling better access to the market and harmonizing custom procedures thus facilitating trade. This has resulted into a reduction in the number of countries which are committed to WTO. Increased growth of PTA’s has resulted into a violation of non-discriminatory principle of WTO. This is due to the fact that the PTA’s have resulted into emergence of MFN. Through MFNs, some countries are favored in the trading process through policies adopted. According to Minter, increased growth of preferential trade agreements is culminating into a diversion of flow of trade.
In addition, WTO is being threatened by the existence of other trading groups. These include custom unions, common markets, and economic unions. These agreements are threatening WTOs achievement of free trade since they are adopting common trading policies among the member states and hence their increased preference by countries.
Complex decision making process
In its operation, WTO has adopted a very complex decision making process. This has culminated into increased inefficiency in the operation of WTO. Currently, the institutions decision making process entails consensus building. Considering the fact that WTO membership has increased over the years through incorporation of emerging economies as members, the decision making process has become very inefficient. By January 2000, WTO had a membership of 135 countries. However, WTO decision making process is not inclusive of all its members. According to Jeffry and Jayashree (2000, Para, 8), this has made the decision making process to be unrepresentative and inequitable. However, due to domestic economic reforms such as trade liberalization, the developing countries are currently seeking a greater stake in the decision making process in trading system.
In addition, a number of restrictions to curb free riding amongst WTO members in decision making process have been imposed. They also have to participate in the entire negotiated agreements so as to be a part of the single undertaking. In addition, the emerging economies are the ones which are increasingly being forced to implement economic liberalization so as to be members of WTO. This means that member states have to become increasingly committed in the process of reforming their individual trade practices and barriers. According to Jeffry and Jayashree (2000, Para. 7),the individual county reformation to its economic practices takes a substantial amount of time which results into inefficiency in free trade amongst the member states. This is due to the fact that the member states have to be aware of all the issues involved in the negotiation. For instance, Jeffry and Jayashree (2000, Para. 8) asserts that a number of countries were forced to accept various obligations which were formulated during Uruguay Round in their absence. These obligations required effective enforcement and implementation of various regulatory policies. As a result, a number of countries were not able to fulfill these obligations which culminated into an increment inefficient flow of goods and free trade.
According to Jeffry and Jayashree (2000, Para. 9), increase in the number of active participants in WTO decision making process has culminated into its complexity. This is due to the fact that individual countries present diverse objectives and interests. It is forecasted that accession of China in WTO will result into an increment in complexity of the decision making process. This is due to the fact that China is a politically powerful country and hence will demand more say in WTO. Gaining consensus amongst 153 countries has proved to be an uphill task for WTO.
The decision-making process is also complicated by some industrial governments which act as representatives for various civil societies. In addition, the decision-making process is frustrated by the increasing stubbornness of the developing countries which oppose discussions and new measures on various standards. Some of these standards include those related to labor and environmental standards. These standards are not directly aimed at promoting trade but are related to non-trade objectives. According to Jeffry (n.d, p82), there is an increment in the level of dissatisfaction amongst the businesses community due to WTO’s slow pace of decision-making process.
Increased conflict of interest
There is an increment in the degree of conflict resulting from civil society. There are divisions among the various civil societies. Some of the civil societies are lobbying for an increment in the powers and mandate of WTO. According to Jeffrey (n.d, p, 82), these civil societies are increasingly pressurizing WTO to use trade sanctions in the enforcement of agreements in relation to environmental, labor, and other standards. On the other hand, some of the societies are pressurizing WTO in opposite direction. This is due to the fact that these parties want WTO’S authority to be decreased in such a way that will contribute towards strengthening the existing environmental and social standards or protections (Jeffrey, n.d, p. 82).
In addition, conflict of interest has also resulted in the poor leadership of WTO. This is evident from the fact that most of the largest members are not actively being involved in its leadership. For instance, Jeffrey (n.d, p.82) asserts that the industrial countries which have been traditionally been essential for the progress of the institution’s progress in relation to substantial issues and its reforms are increasingly becoming divided. These countries have also not been efficient in WTO’s leadership process. This has resulted in poor decisions in relation to increased economic liberalization and open trade. Some of the decisions made are just aimed at benefiting these economies.
Lack of commitment by some national governments to the trading system
In its effort to ensure smooth and free flow of trade, WTO established safeguards. According to Meredith (2003, p. 39), safeguards refer to temporary quotas or tariffs. In addition, the safeguard provision gives the member countries the right to freely raise the tariff above the set maximum level or otherwise introduce a quantitative restriction under the provisions of Article XIX ( Meredith, 2003, p. 9). The objective of these tariffs is to protect domestic industries from unfair international competition. In instituting the safeguards in the trading system, the principle of non-discrimination was supposed to be considered. According to this principle, there should be equal treatment for locally produced and imported goods between member states. Through this national treatment of trade, there is no hindrance to liberalization commitments through the imposition of taxes and other measures. However, some country members continuously use discriminatory safeguards.
According to the article looking behind the curtain (Anon., 2003), the objective of using discriminatory safeguards by these countries is to increase their competitive advantage. In addition, Minter (2005, Para. 5), asserts that increment in trade discriminatory preferences can culminate into confusion between the trading partners. This has the effect of negatively impacting trade and increasing the transaction cost. For instance, the US Global Steel Safeguard increased the import tariff in relation to steel for a number of countries. However, the tariffs were not imposed on some members such as Mexico and Canada (Meredith, 2003, p. 5).
The discriminatory application of WTO’s regulations by some countries culminates into an impediment to WTO’s efficiency of operation. In addition, the discriminatory application of safeguard regulation by some member countries hurts trade relationships between member countries. This is due to the fact that if a particular country imposes a safeguard in relation to a particular product, the member trading partners could be hurt by the decision. As a result, these countries could retaliate by increasing their own tariffs in relation to other products. This means that trade between the member countries will be negatively affected (Meredith, 2003, p.50). According to a world trade report (Anon., 2007), discriminatory application of the trading system’s principles also results in opportunistic gains which deteriorate the terms of trade between countries.
WTO introduced the use of safeguards with the objective that it will result in increased trade liberalization during the process of trade negotiations. Trade liberalization would result in an increment in the volume of trade. This is due to the fact that the safeguard provided an option to mitigate the effects of the safeguard through an increment in their trade tariffs. However, some countries are not committed to safeguarding as a WTO trading system. This is due to the fact that they are not certain of the repercussions of trade negotiation. Meredith (2003, p. 50) asserts that by reducing trade negotiations, countries are not sure about their country’s economic rate of growth. This shows that the inclusion of safeguards has resulted in a reduction in the credibility of the trade agreement which culminates in the weakening of the entire agreement.
Apart from the discriminatory application of the safeguard provision, a number of countries bleach the WTO principles and rules. For instance, despite its increased integration of the transparency principle in its operation, China still pursues industrial policies that are problematic which distorts smooth and free flow of trade. Despite its membership in WTO, China has imposed export and import restrictions, prohibited subsidies, and discriminatory regulations. In addition, China has not formulated effective Intellectual Property Rights (IPR) policies as required by WTO. This has resulted in an increment in the degree of conflict between China and other member states especially the US (‘USTR issues report on China’s WTO compliance’, 2007, para.2).
The inefficiency of WTO’s dispute settlement system in the developed countries and increasing complexity of the legal trade regime
One of the ways through which developing countries can improve their rate of economic growth is by accessing foreign markets. This can be achieved through an increment in the country’s rate of globalization. Marc and Eric (2004, p. 5) assert that WTO plays a critical role in the process of facilitating trade and access to markets. However, increased pressure for protectionism can result in a rollback of the gains. To avert this risk, WTO has formulated a Dispute Settlement Mechanism through which trade quarrels are resolved. The role of the Dispute Settlement Mechanism is to enforce rules thus ensuring that there is a smooth flow of trade.
In relation to the developing countries, the Dispute Settlement Mechanism faces a number of obstacles that hinders smooth flow of trade in these countries. For instance, through trade liberalization, a country expects to obtain considerable returns. These returns can be hindered by foreign governments. This is due to the fact that the government may offer protection to these producers. The effect is that the developing countries are undermined of their capacity to reallocate resources to the export sector affected. This is due to the fact that the developing countries have a limited alternative export markets and goods. Such protectionism by the developed countries results into deterrence of the trade reforms required to stimulate effective, predictive and smooth flow of goods in the developing countries (Marc & Eric, 2004, p. 4).
The developing countries do not have a substantial market size to successfully threaten the retaliation for non-compliance by the developed countries.
Lack of effective dispute settlement system may discourage the developing countries to file complaints. In addition, the developing countries may also become reluctant in initiating a dispute due to fear of reprisals. For instance, by initiating a dispute, the developed countries may react by suspending foreign aid to these countries or the unilateral trade preferences. According to Marc and Eric(2004, p. 5),this shows that WTOs dispute settlement system is inefficient and does not result into effective and free trade between the developed and the developing economies.
According to Marc and Eric (2004, p. 5), there has been an increment in the degree of complexity of the legal trade regime over the years. This has resulted into the WTO’s dispute settlement mechanism being skewed towards the developed countries. According to Marc and Eric (2004, p. 5), this is due to the fact that the developing countries do not have the sufficient legal capacity to take full benefits of the WTO’s laws. For a country to obtain total legal benefits of the WTOs dispute settlement mechanism, there are certain facilities that must be in place. For instance, a well experienced trade lawyer is required to ensure effective litigation of the case, effectively seasoned bureaucrats and politicians to aid in the determination of whether it is effective in litigating the case. In addition, a staff is required to ensure effective monitoring of trade practices in the foreign market. A number of domestic institutions are required to participate in international negotiations in relation to complex standards such as those related to health and safety (Mack & Eric, 2004, p. 5). Marc and Eric assert that the developing countries lack such legal mechanisms that can represent them in the WTO trade negotiations. This shows that the developing countries are not effectively represented in the WTO’s dispute settlement mechanism. This also shows that WTO’s dispute settlement system is inefficient in enforcing disputes amongst its members. Enforcement of disputes is based on economic asymmetry between the poor and rich countries.
Conclusion
WTO has been successful in promoting and facilitating global trade over the past decades. This has resulted into an increase in the global volume of trade. In addition, there has been an increase in the number of member states. Despite the commitment of WTO in ensuring smooth and free flow of trade, the trading system has not been able to fully achieve its mission due to a number of factors. Some countries have not fully committed themselves to the multilateral trading system through effective reduction of trade barrier, poor formulation of the intellectual property rights and lack of transparency in their trading activities. Lack of commitment arises from the fact that governments of these countries want to protect their economy through various policies. This is due to the fact that they are not sure whether reduction of the trading barriers would culminate into an increment in the country’s economic growth. Some of the trade barriers include trade and non trade tariffs, government requirements such as local content requirement, excessive testing, rules of origin and technical trade barriers. This limits WTO’s effort in creating free trade amongst the member states. Increased growth in preferential and regional trade agreements is also culminating into a reduction in the number of WTOs member states who are committed to WTO’s effort to ensure smooth and free trade. This is due to fact that these agreements are acting as tools to facilitate market access and hence their economic growth.
The decision making process is also complex due to the fact that all the members has to participate in the negotiations. Considering the fact that there has been an increase in WTO’s member, its decision making process becomes complex. This is due to the fact that have to be involved in the decision making process. The result is that efficiency of smooth, predictable and free flow of trade is limited. The degree of complexity is heightened by an increase in member states with divergent objectives and interests. This makes it difficult to reach a consensus between member states. Lack of participation by some members in the decision making process results into their being forced to commit to obligations that they are not able to fulfill. This means that these countries do not commit themselves to facilitating smooth trade between member states. WTO is also experiencing increased diverse pressure from external parties especially the civil societies. The civil societies increasingly misrepresent WTO resulting into increased criticism of WTO and its role. In addition, WTO’s leadership is poor due to conflict of interest between the powerful member states such as China and US. This has resulted into poor decision making in relation to economic liberalization and open trade. Leadership in WTO discriminates the Less Developed Countries (LDCs). This is due to the fact that the decision making process is skewed to the developed countries.
Lack of commitment is also witnessed by discriminatory application of the trading system’s principles such as use of safeguards. This impedes flow of trade between some member states. In addition, discriminatory application of the trading system principles results into an increment in the cost of transaction.
Recommendations
In an effort to attain its smooth flow and free trade, the WTO policy makers should consider the following in an effort to reduce the above impediments.
- WTO should undertake institutional reforms. One of the reformations should relate to its Dispute Settlement Mechanism. This can be achieved through a reduction of the legal formalities and procedures involved in dispute settlement. This will ensure efficiency in the process of enforcing trade rules and regulation between member states. This will culminate into increased efficiency of trade. Reformations to the DSM will also reduce the level of economic asymmetry between the rich and the poor countries.
- WTO’s Dispute Settlement Body should from time to time select its findings and conduct in-depth analysis. The findings should be analyzed by an expert group who will ensure that all the loopholes which impede its attainment of the mission are addressed.
- To counter lack of commitment by member states through joining emerging regional and preferential trade agreement, WTO should expand its operation scope by incorporating new agendas in relation to competition policy, investment, labor standards and creation of a good trade related environment.
- WTO should also reform its decision making process to reduce its complexity. In addition, reformation of the decision making process should also be aimed at eliminating conflict of interest between member state. Political power by member states should not form the basis through which decision making is based. Even the developing counties should be involved in the process of decision making.
- To eliminate the problem posed by consensus decision making process, WTO should adopt the voting system in its decision making procedure. This will eliminate the degree with which decision making process is skewed towards the developed countries such as US, European Union, Canada and Japan. Decision making process through the voting system will ensure that the democracy is incorporated. This is due to the fact all the member states will be involved despite their economic development disparity.
- WTO should also ensure that it there is transparency amongst member states in applying the trading system principles. This would ensure creation of equal rights to all the parties in their trading activities.
- WTO should continuously negotiate with governments of the member states to commit themselves towards reducing their tariffs and other trade restrictions.
- To mitigate increased pressure from civil societies, WTO should ensure the relevant civil societies understand its role. This will reduce possible criticism by these societies. In addition WTO should also cooperate with various intergovernmental agencies. This will culminate into value addition in the operation of WTO and hence its efficiency. Partnering with these agencies will also legitimize WTO’s activities thus reducing the negative criticism.
- WTO should ensure that the various preferential trade agreements are subject to review and discipline by WTO. This should be implemented using its Trade Policy Review Mechanism thus providing a vehicle for effective analysis of the impacts of PTAs.
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