World Trade Organisation – Challenges and Way Ahead

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Last year, the world saw the 25th anniversary of WTO’s establishment amid the turmoil caused by the COVID-19 outbreak. Indeed the global trade body played a critical role in ensuring a stable multilateral trading regime over the past decades. Yet its credibility is currently challenged due to the lack of consensus and crippled dispute resolution system. The pandemic has exacerbated this situation to a whole new level, with protectionism prevailing over the need for liberalisation. The WTO members must cast aside their differences and work towards a mutually beneficial and sustainable future.

WTO

What is WTO?

  • The World Trade Organisation is an international organisation involved in the supervision and liberalisation of world trade.
  • It is the only international organisation that deals with rules of international trade.
  • It became operational on January 1, 1995.
  • Unlike its predecessor, GATT (only focuses on goods), it encompasses goods, services, intellectual property and several investment policies.
  • There are more than 160 WTO members currently
  • Their total international trade share is more than 90%.
  • The Ministerial Conference is the WTO’s decision-making body. The agreements reached in these conferences are made based on consensus (all members must agree) and these decisions are binding.
  • The WTO Director-General is the organisation’s administrative head, who traditionally wield little power over the global trade regime since decisions are consensus-based.
  • Recently, Nigeria’s Ngozi Okonjo-Iweala became the first women and first African to take up this position.

What are the objectives of WTO?

The main objectives of WTO are:

  • Set and enforce international trade rules
  • Provide a forum for trade negotiations and enable further trade liberalisation
  • Resolve trade disputes
  • Increase transparency in the decision-making processes
  • Cooperate with other major international economic institutions involved in global economic management
  • Help developing countries to benefit from the global trading regime
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How did WTO come to be?

  • The idea of a global trade regime was conceived at the 1944 Bretton Woods Conference, which initiated the post-World War financial system and established the IMF and the World Bank.
  • The delegates of the Bretton Woods Conference called for the establishment of the International Trade Organisation (ITO), which was envisaged as an international trade regulating body.
  • This negotiation ended with the signing of the Havana Charter in 1948. This charter was never enforced because of the US’ failure to ratify it, countries’ concerns about sovereignty breach and Cold War politics.
  • Therefore, the ITO was never established.
  • This compelled those involved in the establishment of ITO to pursue more modest goals of enforcing the General Agreement on Tariffs and Trade (GATT) in 1947, which was intended to serve as a temporary arrangement before the new trade institution is established.
  • The GATT lasted for over half a century, with its contracting parties expanding and their tariff commitments deepening.
  • Some of the key defects of GATT are:
  1. GATT is not a bona fide international organisation
  2. GATT is a contract to which countries are parties and their commitment to this contract is temporary and not definitive
  • Despite its institutional deficiencies, the GATT was able to function as a de facto international organisation, conducting 8 rounds of multilateral trade negotiations.
  • The eighth round of negotiation – the Uruguay Round (1987-1994) – concluded with the signing of the Marrakesh Agreement, which led to the establishment of the WTO as a true international organisation with enforceable laws and dispute settlement mechanism.
  • The establishment of the WTO coincided with the end of the Cold War. It has the same legal and organisational standing as that of other international organisations like IMF and World Bank.
  • The original GATT and all changes introduced before the Uruguay Round were renamed as GATT 1947.
  • GATT 1947 is different from GATT 1994, which consists of clarifications and modifications made during the Uruguay Round.
  • GATT 1994 became an integral part of the Marrakesh Agreement.
  • The Marrakesh Agreement’s other key components include the General Agreement on Trade in Service (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Understanding on Rules and Procedures Governing the Settlement of Disputes, Trade Policy Review Mechanism etc.
  • With the WTO covering more products and having more members than its predecessor, the open market access has increased significantly.
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What is WTO’s role during the pandemic?

  • Some of the key roles of WTO during the COVID-19 crisis are:
  1. Mitigating pandemic-led economic shock
  2. Helping coordination of nations’ trade policies
  3. Ensuring transparency to pandemic-related measures
  4. Monitoring member countries’ trade responses to the pandemic
  5. Reducing transaction cost of policy coordination among member countries
  • The advent of the COVID-19 outbreak saw supply chain disruption and trade restrictions on pharmaceutical products, food products etc.
  • Export restrictions were mainly to protect PPEs, pharmaceuticals, food, medical devices and COVID-19 test kits.
  • Such restrictions are not entirely against WTO norms.
  • WTO agreements supporting the public health response are:
  1. GATT, 1994 and GATS: Allows countries to impose trade restrictions for protecting public health and welfare
  2. TRIPS agreement: Allows members to have access to affordable life-saving drugs through various provisions like WTO-compliant compulsory licensing procedures (for costly, rare and patented drugs), voluntary licensing of patents and pooling of intellectual property for drugs and medical devices
  3. Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) gives members the right to impose trade restrictions for the protection of human, animal and plant life or health. Such restrictions should be backed by scientific evidence. If scientific evidence is insufficient, countries can adopt SPS measures based on available relevant information.
  4. Agreement on Technical Barriers to Trade (TBT Agreement) seeks to monitor technical regulations, standards and conformity assessment procedures so that they are non-discriminatory and hurdle-free.
  • Provisions under these agreements were used by countries to safeguard their citizens amid the COVID-19 crisis
  • Such legally valid measures led to severe shortages of food and pharmaceuticals in import-dependent countries.
  • In May 2020, WTO held a General Council meeting – the primary forum for international trade policy coordination. Discussions focused on COVID-19 responses and the long-term implications of the pandemic at the national and global levels.
  • WTO members emphasised the importance of keeping trade restrictions temporary, targeted, proportional and transparent.
  • The special meeting of the WTO’s Committee on Agriculture provided a forum for food import-dependent countries to voice their concerns about farm subsidies granted in response to the pandemic. This is of major concern for such countries since subsidies prevented their own producers to compete fairly in the global food market.
  • Members’ commitment towards the free flow of essential goods enabled the resilience of the global trade regime.
  • The WTO also provided a forum for enabling policy coordination with regards to intellectual property rights on COVID-19 vaccines.
  • Normally, WTO members must notify any quantitative trade restrictions for ensuring transparency.
  • This failed to take place amid the pandemic, with only a few members complying with the norm.
  • The WTO addressed this issue by
  1. Compiling a list of pandemic-related trade restrictions on goods, services and IPRs imposed by different countries for all stakeholders to access
  2. Maintaining informal situational report focusing on pandemic responses like state aids, government subsidies, the moratorium on default interest on late payments of customs duties etc.
  3. Informing about global supply chains of essential goods and services for reducing uncertainty caused by policy fluctuations
  • The Trade Policy Review (TPR) Mechanism (evaluates the adherence of members’ trade policies to trade norms) is used by the WTO to monitor the members’ pandemic response. This allows countries to question a specific member’s trade policies and assess whether the pandemic is used as an excuse to deviate from the WTO norms.
  • India’s TPR focused on government policies over the past 4 years, Atmanirbhar Bharat, tariff measures, deferred payments to the electricity sector and delays in the payment of various port charges.
  • Such measures taken amid the pandemic shows that WTO remains at the forefront despite various challenges faced by it.

What are the challenges faced by WTO?

Paralysis of dispute settlement mechanism:

  • The Dispute Settlement Body, consisting of all WTO members, is responsible for resolving dispute cases.
  • This body has the sole authority to set up ‘panels’ of experts to consider the dispute case and to accept/reject the panels’ rulings or results of an appeal based on the consensus of the members.
  • The panel’s ruling is heard by the three members of a 7-member Appellate Body set up by the Dispute Settlement Body.
  1. The Appellate Body members broadly represent the range of WTO membership
  2. Each member have a four-year term
  3. They are not affiliated with any government
  4. They are experts in the fields of law and international trade
  • The Appellate Body can uphold, reverse or modify the panel’s ruling.
  • The panel’s ruling is binding if Appellate Body does not overturn it and the mandated country must comply with it through compensation or by ceasing offending practice.
  • In case of non-compliance, the plaintiff country can retaliate through trade restrictions.
  • Yet, this elaborate process came to a grinding halt in December 2019 due to the dispute over the appointment of new judges to the Appellate Body.
  • The US repeatedly vetoed all proposed new judges.
  • The main reasons for Washington’s rejections are its concern towards Appellate Body’s functioning, overarching verdicts and its breach of sovereignty.
  • Other criticisms faced by the Appellate body are its slow response and its focus on issues not necessary to resolve disputes
  • Thus, the Appellate Body currently does not have the minimum number of members (three) required for the hearing appeals.
  • The consequences of this blockade are:
  1. The dispute settlement mechanism is powerless
  2. Countries are free to veto by appealing the dispute ruling to a non-functioning Appellate Body
  3. Future trade disputes have the potential to become mini trade wars
  4. WTO’s credibility is lost

Most Favoured Nation (MFN) Status:

  • MFN status is an economic position in which a country enjoys the best trade terms given by its trading partner.
  • This means that the country receives the lowest tariff, the fewest trade barriers and the highest import quotas.
  • All WTO members receive MFN status, leading to all receiving the same trade benefits as all other members.
  • However, developing countries are exempted.
  • The WTO rules allow countries to self-designate as developing countries to avoid committing to opening up of markets and to protect the domestic firms.
  • The US accuses India and China (developing countries) of using this provision despite being ranked by the IMF as the second and fifth-largest economies respectively at the global level.

Lack of consensus:

  • In its more than 25 years of existence, the WTO brought in just one new agreement covering its entire members – the 2013 Trade Facilitation Agreement (TFA).
  • This feat was achieved only because the developing countries were provided leeway with regards to their commitments.
  • The TFA enables the speeding up of customs procedures and easing of trade to make it faster and cheaper.
  • It is estimated that this could increase global trade value by around $1 trillion.
  • Such pluralistic agreements require years of negotiations, making it a slow and tedious process.

Protectionism:

  • Global supply chain disruption caused by the Great Lockdown caused a massive dislocation of global trade.
  • This underscored several countries’ arguments in favour of protectionist policies like high tariffs and stricter customs procedures.
  • Such protectionist policies reduced the relevance of the global trade regime and adversely impacted employment, economic growth, purchasing power etc., across the globe.
  • The main reason behind the lack of sound decisions on global trade amid the lockdown is the absence of trust between developed and developing countries.
  • Protectionist policies followed by countries like the US and the UK have created mistrust across the global community. This situation is exacerbated by the trade tensions between the US and China.

China:

  • China is often cited as an example of WTO’s failure.
  • WTO was not able to put a stop to China’s state-driven capitalism as well as its intellectual property offences (companies forced to share sensitive technologies before investing)
  • China designated itself as a “developing country” despite having several advantages in global trade.

TRIPS waiver:

  • India and South Africa, along with 57 members (mostly developing and least developed countries) are calling for a temporary waiver from certain provisions of TRIPS for prevention, containment and treatment of COVID-19.
  • The developed countries like the US, the EU, Switzerland and Japan are opposing this proposal.
  • These countries cite an adverse impact on the commercial interests of existing IP holders.
  • However, critics point out that these countries are shielding the powerful pharmaceutical companies from facing potential loss despite the same countries’ financial support for the research and development.
  • The TRIPS waiver is an existential threat to the current practice of treating medicines as a commodity.
  • Failure of consensus in this issue is the consequence of the global trade body’s fundamental structural problem.
  • Consensus-based decisions failed at bridging the gap between the developed and developing countries, leading to the persistence of discords and stagnation.

Deregulation:

  • WTO rules overrule national sovereignty, leading to the erosion of environmental and labour protections.
  • It is criticised for its stand on genetically modified crops, US dolphin-safe labelling etc.
  • It is also criticised for protecting unfair labour practices, violation of labour rights (China), wages etc., for lowering the cost of exports.

Import competition:

  • WTO-led tariff reductions hurt domestic jobs and wages due to increased dependence on imports and foreign firms.
  • For instance, since China entered the WTO in 2001, the US has lost more than 3 million jobs.

Failure of Doha Round:

  • At the 2001 ministerial conference in Doha, Qatar, the WTO members agreed to initiate new rounds of negotiations focusing on developing countries.
  • This came to be known as the Doha Development Agenda or the Doha Round.
  • The core aspects of the agenda include liberalisation of agricultural trade, reduction of trade barriers in the service sector and non-agricultural goods.
  • The majority of economically weak countries rely on agriculture exports for their growth. Yet they struggle due to developed countries’ support to their farmers with subsidies.
  • These negotiations collapsed in 2008 due to disagreements over agriculture subsidies and the proposed “special safeguard mechanism”, which suggested allowing developing countries to temporarily increase tariffs to protect their farmers.

What can be the way ahead?

The WTO members can make use of the upcoming ministerial meeting, which is scheduled to take place on June 2021 in Kazakhstan, to forge an agreement to further liberalise international trade and prioritise cooperation in the areas of vital importance. Some of the focus areas can involve the following aspects:

Reforming WTO:

  • Many countries like Japan, the US and the EU are pushing towards the WTO’s reform.
  • Such reforms aim at strengthening the global trade body’s negotiating function, which has withered after the collapse of the Doha Round.
  • They also seek to further regulate the Appellate Body to safeguard sovereign rights.
  • It should be noted that developing countries are not involved in these negotiations.
  • This is a concern because such reforms will have serious implications for developing countries.
  • India can lead the way to ensure that there is inclusivity in the overhauled WTO.

Free Trade of medical goods:

  • The SDG 3 (good health and well-being) involves combating communicable diseases and providing access to affordable healthcare
  • International trade plays a vital role in this aspect since world imports of medical products are worth around $1.01 trillion (2019).
  • Around half of this value accounts for COVID-19 related products like medical supplies, medical equipment and technology, medicines etc.
  • While it is justifiable for countries to restrict vital commodities during a crisis, it disrupts the overall global response to the pandemic, leading to further slowing down of the revival process.
  • Reciprocal harms are inflicted while slapping tariffs since medical goods will become costlier and more difficult to access even in those countries imposing trade restrictions.
  • This is because no country is self-reliant when it comes to the manufacturing of medicines and medical equipment.
  • Thus, countries must cooperate towards the removal of existing trade barriers on medicines and medical supplies and prevent the enactment of further restrictions.
  • In this regard, the following measures need to be made enforceable under a WTO medical goods agreement, which should cover all members:
  1. Lift tariffs, export restrictions and non-tariff barriers on medical goods
  2. Remove avoidable regulations and administrative barriers to medical products’ trade
  3. Ease the movements of frontline workers

Ease of trade of environmental goods:

  • Liberalising environmental goods is critical for addressing the climate crisis.
  • Past instances of negotiations on removing/reducing trade barriers on environmental goods and services have failed due to a lack of consensus.
  • Key challenges faced by negotiators on liberalising environmental goods and services are
  1. Uncertainty regarding the criteria of environmental goods and services. Past negotiations saw the inclusion of daily necessities like kitchen sinks and bicycles.
  2. Environment goods and services agreement must be dynamic for it to remain relevant for a long time. This requires the timely removal of trade barriers by signatories, which is challenging and nearly impossible.
  • Countries can consider the following solutions:
  1. Creating multiple lists – a core list (liberalised by all members within a specific deadline) and complimentary lists (countries allowed to choose goods and services for liberalisation)
  2. Set up a review mechanism representing all WTO members for periodically considering the steady stream of new products and criteria changes coming up in the market.

Fish subsidies:

  • Negotiations on fish subsidies initiated during the Doha Round.
  • The Doha Round sought to clarify and improve regulations on fish subsidies with due consideration to the importance of the sector for developing economies.
  • Fish subsidies regulation is pivotal for achieving SDG 14.6, which bans certain forms of fisheries subsidies that may contribute to overcapacity and overfishing, illegal, unreported and unregulated fishing.
  • The benefits of regulating fish subsidies are:
  1. Enables sustainability and higher returns
  2. Benefit artisanal fishing community in long term by providing stable jobs, increasing income and reducing poverty
  3. Improve global food security
  • The main hurdles during negotiations are:
  1. Developing countries calling for exemptions for small-scale fishermen.
  2. Eligibility criteria for special treatment
  • The global trade body can work towards enforcing an agreement that allows a transition period for the developing countries to implement sustainable fishing practices before prohibited subsidies are enforced.
  • This transition period can be used to enhance countries’ ability to monitor their fish stocks so that they can allow subsidised fishing in well-managed waters.

Investment regulation:

  • FDI inflow is critical for the growth of technology, trade, financial relationships and shaping supply chains.
  • The pandemic has reduced the global FDI by 42% last year.
  • It is estimated to further plunge by 5-10% in 2021.
  • While this is not because of the lack of multilateral investment rules, such regulations will ensure increased FDI inflow.
  • FDI rules are currently administered by thousands of bilateral investment treaties and other pacts consisting of investment provisions.
  • Such rules often cause conflicts and incoherence.
  • Currently, the WTO only has limited rules on investments under the Agreement on Trade-Related Investment Measures.
  • This agreement mandates treating of FDIs as national entities and bans quantitative restrictions on FDI.
  • Negotiations are currently underway for the implementation of the agreement on investment facilitation for development.
  • This agreement is in lines with the WTO Trade Facilitation Agreement.
  • Its objectives are
  1. Improvement of transparency and predictability in the global investment activities
  2. Streamline and hasten administrative procedures and requirements
  3. Boost international cooperation on exchanges of information, technology and experiences
  4. Prevent/address disputes
  • Measures to be taken to promote international investment facilitation agreement:
  1. Capacity-building of developing countries with technical assistance to enable them to participate in the negotiation process and implement the proposed agreement
  2. Inclusion of different categories of obligations within the agreement to enable equitable growth
    1. Easing market access for FDI without jeopardizing sovereignty of nations with regards to regulations on the environment, public health and safety.

Digital trade:

  • The WTO currently lacks digital trade-focused rules.
  • Many rules related to non-digital trade are automatically applicable to digital trade.
  • However, such rules are outdated and full of lacunae since they were enacted when the internet was at its nascent stage.
  • Current pressing issues pertaining to digital trade are:
  1. Data security is pushing countries towards data protectionism. Eg: data localisation laws, the Great Firewall of China etc.
  2. Companies forced to disclose software source codes by governments for privacy protection. Such policies force disclosure of trade secrets and go against the firms’ intellectual property rights
  • The lack of consensus led to around half of the WTO members becoming parties to non-WTO agreements on digital trade rules. Examples include:
  1. Comprehensive Progressive Agreement for Trans-Pacific Partnership (CPTPP)
  2. North American Free Trade Agreement or United States-Mexico-Canada Agreement (USMCA)
  3. Digital Economy Partnership Agreement (DEPA)
  • The future digital trade negotiations in WTO should focus on:
  1. Defining digital trade and related terms
  2. Authorising electronic signatures to validate online transactions
  3. Authorising cross-border paperless trade
  4. Enabling protection of e-consumers
  5. Mandating national-level rules and frameworks for e-commerce
  6. Regulating financial technology and Artiftificial intelligence
  7. Addressing the digital divide
  • The WTO can work towards modular arrangement as seen in the DEPA, which is signed between Chile, New Zealand and Singapore. This agreement is structured to contain a dozen separate subject-specific categories on different matters related to digital trade.
  • When other countries join this agreement, they can accept different levels of commitments to each of these categories.
  • This enables at least a minimum level of commitments among countries on different aspects of digital trade

IP rights:

  • The issue with the TRIPS waiver can be addressed through licensed manufacturing.
  • This enables economically weak countries to have adequate supplies while also safeguarding intellectual property rights.
  • Licensed manufacturing is already being promoted by the member countries:
  1. AstraZeneca vaccine licensed to the Serum Institute
  2. QUAD countries are working towards financing agreements to boost India’s production of US-developed Novavax and Johnson & Johnson vaccines.

Conclusion:

The World Trade Organisation is critical for ensuring a sustainable and inclusive post-pandemic world. The organisation can work towards this through mutual trust and cooperation. Challenges can be addressed through systematic transition and mutually beneficial agreements.

Practice question for mains:

Critically examine the need for WTO reforms for a sustainable and inclusive global economy. (250 words)

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