How the WTO works (Q&A)

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Q. On the issue of harmonious trading, the WTO has been tasked as the guardian of free trade and to promote and settle trade disputes in a fair manner. Yet there are many who oppose the WTO for being too powerful and it can compel sovereign states to change laws and regulations by declaring these to be in violation of free trade rules, it is run by the rich for the rich and does not give significant weight to the problems of developing countries among other complaints. What are your views on the WTO and how could it do better?

A. I suspect most who oppose the WTO don’t quite understand the way it works. The WTO is not an organization that can “compel sovereign states to change laws and regulations by declaring these to be in violation of free trade rules.” The free trade rules referred to here are really promises, or commitments, that countries have made to each other. After making these promises, last made at the conclusion of the Uruguay round in 1994, officials went home and had the commitments approved by their legislatures. Every democratic country had the privilege of saying no to these commitments – but no one did. Instead every country said we’ll promise to liberalize trade by this much, if you promise to liberalize by that much, or, we’ll open our markets a little to your products if you open your markets a little to our products.

What the WTO really is then is a place to complain about and investigate broken promises. If one country believes that another has broken a commitment, it can raise the issue at the WTO’s dispute settlement board (DSB). The DSB meets regularly and has one representative appointed by each WTO member country. The only kind of issue that can be dealt with here is one related to the WTO agreement.

Consider the 2nd dispute case brought to the DSB. Venezuela complained that US regulations to promote cleaner air violated the US national treatment promise because imported gasoline from Venezuela was required to be cleaner than domestic gasoline produced in the US. Any complaint sets in motion a well-defined legalistic procedure to settle the dispute. The first step is called consultations because countries are required to sit down with each other and try to work out the problem on their own. If that fails, and it did in this case, the DSB creates a panel of three to five people – drawn from a list of international legal experts – to assess whether the country violated its commitment. In this case, the panel determined that the US had violated its national treatment commitment. The next step allows the losing country to appeal the decision to another panel. The US did and lost again. Next, the DSB, which really means the group of WTO member countries look to the offender to change its laws so as to live up to its previous promise.

So when people say the WTO “compels a country to change its laws,” what it really means is that a country is “asked to change its laws to that which was previously promised.” That’s a little different. In the case of Venezuela and the US, the US did change its environmental regulations to comply with the ruling.

What if a country refuses to change its laws? That has happened occasionally. The first effect is that a country looks bad in front of the international community. It’s kind of like catching someone in a lie and the person refuses to come clean. Not good! Imagine if the US had done that with the 2nd DSB case. That would have looked especially bad given the US was one of the primary advocates of the WTO.

But if a country does refuse to change, the second recourse is for the other country to suspend its previous concessions. In other words, a country is allowed to rescind some of its promises of market access to the offending country. This is like saying, if you’ve only lived up to 95% of your promises to us, then we’ll only live up to 95% of our promises to you. This is the only “punishment” the WTO can sanction. But it’s really a quid pro quo.

The other part of the above question suggests the WTO agreement does not give “significant weight to the problems of developing countries.” This may well be true especially given that the current Doha round of trade liberalizing talks was designated to be a “development round.” That designation was made largely because the majority of WTO members are developing countries and they have felt that insufficient special treatment was given to the issue of development. However, in many instances developing countries have been given differential treatment. One example I’ll mention is that developing countries have not been expected to lower their trade barriers to the same degree as developed countries. See the info on Tariff Bindings [dead link].

Much more can be said on this issue, but it will have to wait. Suffice it to say, overall I think the WTO is a pretty fair system. One way to fix it is to teach more people why it is an effective institution, even the way it is. I also think the WTO agreement does not take advantage of developing countries as much as is often claimed. However, the evidence here is surely mixed. Also, as with anything, improvements are always possible.