CHAPTER 3.

(W5&6)
The multilateral trading system of WTO can broadly be
THE DYNAMICS OF WORLD TRADE defined as the body of international rules by which
ORGANIZATIONS (WTO) countries are required to abide in their trade relations
with one another. The basic aim of these rules is to
INTRODUCTION encourage countries to pursue open and liberal
This unit looks at a comprehensive examination of the policies. These rules are continually evolving. The
world trade organization. Forces like technological existing rules are being clarified and elaborated to
breakthroughs, economic growth, market evolution, meet the changing conditions of world trade. At the
shifts in customer tastes, social changes and political same time rules covering new subjects are being added
events can expand or shrink business space and world to deal with problems and issues that are being
trade. Vast amounts of new track space created today encountered.
change perspectives. This unoccupied territory
represents a land of opportunity for the technological A tariff is an indirect tax imposed upon imports. They
and strategic innovators who can see or create it faster can either be specific (Fixed amount per good) or ad
than their competitors do. The opportunities are great, valorem (a % of the value). Tariff imposition arises due
but so are the competition and the chance of failure. to reasons such as;
Today's growth era produces huge discontinuities, ●​ To reduce imports and protect domestic firms
creates new industries and destroys old ones, and from foreign competition.
accelerates global economic growth in the process. ●​ To reduce imports in order to reduce the
Expectations are rising everywhere; human creativity balance of payment deficits.
is flowing in every field. Emerging economies are
industrializing and everyone is joining the digital The virtual developing country is a case study of
revolution of boundless information and seamless Zambia. There are a series of field trips available
electronic commerce. The world trade organization looking at different issues connected with economic
(WTO) is an international body dealing with rules development. This tour is the trade tour, and this unit
relating to international business operations. The shall also look at the imposition of tariffs as a form of
organization is responsible for global agreements, protection and the welfare loss that result.
negotiations and ensures regulations and rules made
by all are obeyed by all. And to keep various trade If the government of a country imposes a tariff on the
policies/rules within agreed limits and bounds. It came imports from another country they raise the world
into existence on 1st January 1995 as a result of the price by the amount of the tariff they impose. The
Uruguay round of trade negotiations URTN. It aims at; WTO concept is the outcome of the first major effort to
●​ Facilitating trade among countries by creating adopt rules to govern international trade relations
conditions for competition that are fair and which was made by countries in the years immediately
equitable. after the second world war. These efforts resulted in
●​ It encouraging to enter into negotiations for the adoption in 1948 of the General known as,
the reduction of tariffs and the removal of consequently the GATT rules which was basically
other barriers to trade applicable to international trade in goods for years was
●​ Requires them to apply a common set of rules modified to include new provisions particularly to deal
to trade in goods and services. with the trade problems of developing countries.
●​ This body is responsible for overseeing the
multilateral trading system which has THE MECHANISM OF WORLD TRADE
gradually evolved over the last 60 years ORGANIZATION
(Otokity, 2006).
Trade is increasingly global in scope today. There are
WTO AND THE ESTABLISHMENT OF several reasons for this. One significant reason is
GENERAL AGREEMENT ON TARIFF AND technological -because of improved transportation and
TRADE communication opportunities today, trade is now more
The World Trade Organization provides a forum for political. Thus, consumers and businesses now have
continuing negotiation to liberalize the trade in goods access to the very best products from many different
and services through the removal of barriers and the countries.
development of rules in new trade-related subject
areas. Increasingly rapid technology life cycles also increases
the competition among countries as to who can
The World Trade Organization agreements have a produce the newest in technology. In part to
common dispute settlement mechanism through which accumulate these realities, counties in the last several
members enforce their rights and settle the differences decades have taken increasing steps to promote global
that arise between them in the course of trade through agreements such as the general treaty on
implementation. The World Trade Organization trade and tariff GATT, and organizations such as the
(WTO) allows countries to implement anti subsidy World Trade Organization (WTO), north American
legislation. The law allows a country to place a Free Trade agreement (NAFTA), and the European
countervailing duty (CVD) on imports when a foreign Union (EU).
government subsidizes exports of the product, which in
turn causes injury to the import-competing firms. The Similarly, the WTO system as it has emerged from the
countervailing duty is a tariff designed to “counter” the Uruguay round consisting of the following substantive
effects of the foreign export subsidy. agreements:
 ★​ General agreement on trade in services (GATS) pace at which the world economy is globalizing
★​ Multilateral agreement on tariffs and trade through international trade and the flow of foreign
(GATT 1995) and all its associate agreements. direct investment. Similarly, this process of globalizing
★​ Agreement on trade –related aspects of which has increased the dependence of countries on
intellectual property rights (TRIPS). international trade is further accelerated by the shift in
economic and trade policies noticeable in most
LEGAL INSTRUMENT AT URUGUAY ROUND countries. The collapse of communism has led to the
gradual adoption of market-oriented policies in most
The legal instrument embodying the results of the countries where production and international trade
Uruguay round of multilateral trade negotiations was had been state controlled. These countries, which in
adopted in Marrakech on 15th April, 1994. The the past traded primarily among themselves are
complete set covers the legal texts, the ministerial increasingly trading on a worldwide basis (Otokity S.
decisions and the Marrakech declaration, the signatory 2006).
countries, as well as the individual agreements, the
schedule of specific commitments on services, the tariff In addition, the framework of rights and obligations
schedule for trade in goods, and the plurilateral which the WTO system has created therefore plays a
agreements. Schedule in the original language only. crucial role in the development of trade in the fast
The World Trade Organization (WTO) deals with the globalizing world's economy. The ability of
global rules of trade between nations. Its main function governments and business enterprises to benefit from
is to ensure that trade flows as smoothly, predictably the system depends greatly on their knowledge and
and freely as possible. understanding of the rules of the system.

The trade in goods involves agreement on MAJOR FEATURES OF WORLD TRADE

implementation of article VII of GATT 1994 (Customs ORGANIZATION AGREEMENT
valuation), agreement on Preshipment Inspection
(RSI) and others. The World Trade Organization (WTO), was established
on 1st January, 1995 and represents the culmination of
THE BENEFITS AND USEFULNESS OF an eight-year process of trade organization known as
WORLD TRADE ORGANIZATION the Uruguay Round 135 countries now belonging to the
WTO and more, continue to join. The WTO is based in
A.​ Member countries are obliged to ensure that Geneva and is administered by a secretariat which also
their (User) national registration; regulations facilitates ongoing trade negotiations, and oversees
and procedures are in full conformity with the trade dispute resolutions.
provisions of these agreements. ●​ Another important feature is that WTO is an
B.​ The system helps promote peace. international that effectively creates a
C.​ Dispute are handled constructively ceiling-but no floor for environmental
D.​ Rules make life easier for all regulation.
E.​ Freer trade cuts the costs of living. ●​ Made up of detailed procedural code for
F.​ It provides more choice of products and environmental law making and regulatory
qualities. initiatives that would be difficult for even the
G.​ Trade raises incomes wealthiest nations to meet.
H.​ Trade stimulate economic growth
I.​ The basic principles makes life more efficient Other features of WTO include:
J.​ Government are shielded ●​ The objectives and principles of multilateral
agreements on trade goods.
The World Trade Organization (WTO) deals with the ●​ Binding of tariffs
global rules of trade between nations. Its main function ●​ Most favoured nation treatment (MFN)
is to ensure that trade flows as smoothly, predictable ●​ National treatment rule: prohibits countries
and freely as possible. from discriminating among goods originating
in different countries. The national treatment
THE DYNAMIC NATURE OF GATT MEMBERS rule prohibits them from discriminating
TO WORLD TRADE ORGANIZATION between imported products and domestically
produced goods, both in the matter of the levy
It is of greater importance to examine any change in of internal taxes and in the application of
attitude of GATT membership and how GATT rules internal taxes.
applied to issues. Such issues do not posit whether a
certain policy is environmentally correct or not. They SETTLEMENT OF WORLD TRADE
suggest that the US policy could be made compatible ORGANIZATION DISPUTE
with GATT rules if members agreed on amendments or
reached a decision to waive the rules especially for any Suppose a trade dispute arises because a country has
issue that could spring up. taken action on trade (for example imposed a tax or
restricted imports) under an environment agreement
Many developing countries discarded import outside the WTO and another country objects. Should
substitution policies and are now pursuing the dispute be handled under the WTO or under the
export-oriented policies, under which they seek to GATT agreement? The trade and environmental
promote economic growth by exporting more and committee says that if a dispute arises over a trade
more of their products. Another issue is related to the action taken under an environmental agreement, and if
both sides to the dispute have signed that agreement, composed of three judges drawn from a set of
then they should try to use the environmental seven, each of whom has a four-year term. As
agreement to settle the dispute. But if one side in the in the U.S. court system, appellate arguments
dispute has not signed the environment agreement, must be based on points of law relating to legal
then the WTO would provide the only possible forum interpretations but cannot consider new
for settling the dispute. Preferences for handling evidence or retry the case. As with the original
disputes under the environmental agreements does not panel reports, appellate decisions are almost
mean environmental issues would be ignored in WTO automatically adopted by the DSB.
disputes. The WTO agreements allow panels 4.​ Resolution. If the appellate board concurs
examining a dispute to seek expert advice on with a panel decision that a defendant country
environmental issues. has violated some of its WTO agreement
commitments, there are two paths to
Disputes are handled by the Dispute Settlement Body resolution:
(DSB). The DSB works like a committee that meets a.​ Compliance. In the preferred
regularly to discuss any issues countries may have with outcome, the defendant country
respect to each other’s trade policies. The DSB is complies with the ruling against it and
composed of one representative from each member changes its laws as needed to conform.
country. When they meet, countries have the right to Sometimes compliance may take time
object to the trade policies of another country. because of delays in a legislative
However, they cannot object to anything or everything; process, so normally the defendant
instead, a country can only object to an unfulfilled will be given time to rectify the
promise with respect to one or more of the WTO situation. In the process, the country
agreements. will be expected to report its progress
regularly to the DSB.
When the Uruguay Round was finalized, each member b.​ Toward the defendant country.
country went back to its own legislature and changed To be fair, the rescission must have an
its trade policies and rules to conform to its new effect on the defendant that is
commitments. Sometimes inadvertently and approximately equal in value to the
sometimes purposely, some countries do not cost imposed by the defendant’s
implement their commitments fully. Or sometimes a violations. toward the defendant
country believes that it has fulfilled its commitment, country. To be fair, the rescission must
but its trading partner believes otherwise. Or new have an effect on the defendant that is
legislation may violate one of the country’s previous approximately equal in value to the
commitments. In these cases, a member country (the cost imposed by the defendant’s
complainant) is allowed to register a dispute with the violations.
DSB against another member country (the defendant).
Resolution of a dispute follows these steps: THE CONTROL ON WORLD TRADE
ORGANIZATION BY GOVERNMENT OF
1.​ Consultations. The DSB first demands that IMPORTING COUNTRIES
the appropriate government representatives
from the complainant country and the The governments seek to limit the level of imports
defendant country meet to discuss the dispute. through a quota. Examples of quotas were found in the
They must do this within a strict timetable textile industry under the terms of the multi-fibre
(less than sixty days) and hopefully will be able agreement which expired in January 2005 and which
to resolve the dispute without external led, in 2005 to a trade dispute between the European
intervention. and China over the issue of textile imports.
2.​ Panel formation. If the countries return to
the DSB at a later session and report that the Quotas introduce a physical limit of the volume
consultations failed, then the complainant may (number of units imported) or value (value of imports)
ask the DSB to form a panel. A panel consists permitted.
of three to five independent trade law experts
who are hired expressly to make a judgment Countries can make it difficult for firms to import by
about the particular dispute. The DSB chooses imposing restrictions and being deliberately
the panelists in consultation with the disputing bureaucratic. These trade barriers range from stringent
countries, or the panelists are chosen by the safety and specification checks to extensive holdups in
director-general if the countries cannot agree. the customs arrangements. A good example is the
The panel is generally given about six months quality standards imposed by the European on imports
to decide whether the defendant violated some of dairy products.
of its promises, whereupon it reports its
decision to the DSB. Since a panel report can Preferential government procurement policies and
only be rejected by consensus, no country has state aid. Free trade can be limited by preferential
veto power over DSB adoption of a report. behaviour by the government when allocating major
Thus all panel reports become official spending projects that favours domestic rather than
decisions. But the process doesn’t yet end. overseas suppliers. These procurement policies run
3.​ Appeals. Either country can appeal the against the principle of free trade within the EU single
decision given in the panel report. A request or market.
appeal sends the issue to an appellate board
The use of financial aid from the state can also distort the United States would not participate, other
the free trade of goods and services of WTO nations, countries had little incentive to participate.
for example use of subsidies to a domestic cola or steel Nonetheless, the United States, Britain, and other
industry, or the widely criticized use of export refunds; allied countries maintained a strong commitment to
the reduction of tariffs on manufactured goods. Tariffs
●​ Control against dumping and anti-dumping: still remained high in the aftermath of the
anti dumping is designed to allow countries to Depression-era increases. Thus, as discussions over the
take action against dumped imports that cause ITO charter proceeded, the GATT component was
or threaten to cause material injury to the finalized early and signed by twenty-three countries in
domestic industry. Goods are said to be 1948 as a way of jump-starting the trade liberalization
dumped when they are sold for export at less process.
than their normal value.
●​ The agreement on safeguards permits GATT’s main objective was to reduce the barriers of
importing countries to restrict imports of a international trade through the reduction of tariffs,
product for a temporary period by either quotas and subsidies. GATT was formed in 1947 and
increasing tariffs or imposing quantitative signed into international law on January 1, 1948, GATT
restrictions. Such safeguard actions can be remained one of the focal features of international
resorted to only when it has been established trade agreements until it was replaced by the creation
through properly conducted investments that a of the World Trade Organization on January 1, 1995.
sudden increase in imports. (Both absolute The foundation of GATT was laid by the proposal of
and relative to domestic production). the international trade Organization in 1945, however
the ITO was never completed.
THE GENERAL AGREEMENT ON TARIFF AND
TRADE (GATT). The GATT consists of a set of promises, or
commitments, that countries make to each other
A treaty created following the conclusion of World War regarding their own trade policies. The goal of the
II. The general agreement on tariffs and trade (GATT) GATT is to make trade freer (i.e., to promote trade
was implemented to further regulate world trade to aid liberalization), and thus the promises countries make
in the economic recovery following the War. must involve reductions in trade barriers. Countries
that make these commitments and sign on to the
The growth of international trade and investment has agreement are called signatory countries.
been stimulated partly by the steady decline of trade
barriers since the Great Depression of the 1930s. In the The discussions held before the commitments are
post–World War II era, the General Agreement on decided are called negotiating rounds. Each round is
Tariffs and Trade, or GATT, prompted regular generally given a name tied either to the location of the
negotiations among a growing body of members to meetings or to a prominent figure. There were eight
reciprocally reduce tariffs (import taxes) on imported rounds of negotiation under the GATT: the Geneva
goods. During each of these regular negotiations (eight Round (1948), the Annecy Round (1950), the Torquay
of these rounds were completed between 1948 and Round (1951), the Geneva II Round (1956), the Dillon
1994), countries promised to reduce their tariffs on Round (1962), the Kennedy Round (1967), the Tokyo
imports in exchange for concessions—that means tariff Round (1979), and the Uruguay Round (1994). Most
reductions—by other GATT members. importantly, the agreements are reached by consensus.
A round finishes only when every negotiating country
The General Agreement on Tariffs and Trade (GATT) is satisfied with the promises it and all of its
was never designed to be a stand-alone agreement. negotiating partners are making. The slogan
Instead, it was meant to be just one part of a much sometimes used is “Nothing Is Agreed Until Everything
broader agreement to establish an International Trade Is Agreed.”
Organization (ITO). The ITO was intended to promote
trade liberalization by establishing guidelines or rules The promises, or commitments, countries make under
that member countries would agree to adopt. the GATT take two forms. First, there are country
specific and product-specific promises. For example, a
The ITO was conceived during the Bretton Woods country (say, the United States) may agree to reduce
conference attended by the main allied countries in the maximum tariff charged on a particular item (say,
New Hampshire in 1944 and was seen as refrigerator imports) to a particular percentage (say, 10
complementary to two other organizations also percent). This maximum rate is called a tariff binding,
conceived there: the International Monetary Fund or a bound tariff rate.
(IMF) and the World Bank. The IMF would monitor
and regulate the international fixed exchange rate One of the key principles of the GATT, one that
system, the World Bank would assist with loans for signatory countries agree to adhere to, is the
reconstruction and development, and the ITO would nondiscriminatory treatment of traded goods. This
regulate international trade. means countries assure that their own domestic
regulations will not affect one country’s goods more or
The ITO never came into existence, however. Although less favorably than another country’s and will not treat
a charter was drawn, the U.S. Congress never approved their own goods more favorably than imported goods.
it. The main concern was that the agreement would There are two applications of nondiscrimination:
force unwelcome domestic policy changes, especially most-favored nation and national treatment.
with respect to wage and employment policies. Because
National Treatment is a concept of international law
that declares if a state provides certain rights 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.

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.