THE WORLD TRADE
ORGANIZATION (WTO)

BACKGROUND:

The World Trade Organization (WTO) was established on 1 January 1995 as the legal and institutional foundation of the multilateral trading system. It provides the principal contractual obligations determining how governments frame and implement domestic trade legislation and regulations. And it is the platform on which trade relations among countries evolve through collective debate, negotiation and adjudication. The WTO is the embodiment of the results of the Uruguay Round trade negotiations and the successor to the General Agreement on Tariffs and Trade (GATT).

CREATION

The origin of the WTO can be traced back to the creation of the International Trade Organization at the 1944 Bretton Woods' Conference. While the terms of the ITO charter were being drafted and debated (a process which began in February of 1946 and lasted until their a final draft was produced in March 1948) and countries pondered whether they would join the organization, representatives from a group of 17 nations assembled in Geneva and concluded an interim agreement (GATT) to lower trade barriers and tariffs among themselves. The agreement, which was to take effect on 1 January 1948, was not meant to be a permanent trade body but rather a stopgap agreement to serve until the time that the ITO would be put in place.

However, when the Truman Administration decided not to submit the charter creating the ITO to the US Senate for ratification (since there were not enough votes in the Senate in favor of ratification) the plan to create the ITO was abandoned leaving the GATT Treaty in its place.

While the GATT functioned well enough, the leading members wished to replace it with a world-wide trade-regulating body like the WTO for a number of reasons. First, the GATT rules applied to trade only in merchandise goods. In addition to goods, the WTO covers trade in services and trade-related aspects of intellectual property (through the agreement on Trade-related Aspects of Intellectual Property Rights—TRIPs). Second, while GATT was a multilateral instrument, by the 1980s many new agreements of a plurilateral, and therefore selective nature had been added. The agreements which constitute the WTO are almost all multilateral and, thus, involve commitments for the entire membership. Third, The WTO dispute settlement system is faster, more automatic, and thus much less susceptible to blockages, than the old GATT system.

But beyond these practical and functional reasons for establishing the WTO, there were also more philosophical and symbolic reasons. The GATT was a set of rules, a multilateral agreement, with no institutional foundation, only a small associated secretariat which had its origins in the attempt to establish an International Trade Organization in the 1940s. By contrast, the WTO is a permanent institution with its own secretariat. Moreover, the GATT was applied on a "provisional basis" even if, after more than forty years, governments chose to treat it as a permanent commitment while the WTO commitments are fully and functionally permanent.

For the above reasons, the creation of a new, permanent trade body became one of the principal objectives about half-way through the GATT's Uruguay round, which ran from 1986 to 1994. A draft for the new international trade body, the WTO, was draft ed and formally approved at the Ministerial Conference held in the ancient trade center of Marrakesh in July of 1994. Under the terms of the so-called "Final Act" signed there, the GATT was replaced by the WTO on 1 January 1995.

The Preamble of the Agreement Establishing the WTO states that members should conduct their trade and economic relations with a view to "raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of development."

Furthermore, members recognize the "need for positive efforts designed to ensure that developing countries, and especially the least-developed among them, secure a share in international trade commensurate with the needs of their economic development."

To contribute to the achievement of these objectives, WTO Members have agreed to enter into "reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations."

As the successor to GATT, WHO celebrated the golden jubilee of the multilateral trading system in May 1998.

PURPOSES

The fundamental principles of the WTO are:

• Trade without discrimination. Under the "most-favored nation" (MFN) clause, members are bound to grant to the products of other members no less favorable treatment than that accorded to the products of any other country. The provision on "national treatment" requires that once goods have entered a market, they must be treated no less favorably than the equivalent domestically-produced good.
• Predictable and growing access to markets. While quotas are generally outlawed, tariffs or customs duties are legal in the WTO. Tariffreductions made by over 120 countries in the Uruguay Round are contained in some 22,500 pages of national tariffschedules which are considered an integral part of the WTO. Tariffreductions, for the most part phased in over five years, will result in a 40% cut in industrial countries' tariffs in industrial products from an average of 6.3% to 3.8%. The Round also increased the percentage of bound product lines to nearly 100% for developed nations and countries in transition and to 73% for developing countries. Members have also undertaken an initial set of commitments covering national regulations affecting various services activities. These commitments are, like those for tariffs, contained in binding national schedules.
• Promoting fair competition. The WTO extends and clarifies previous GATT rules that laid down the basis on which governments could impose compensating duties on two forms of "unfair" competition: dumping and subsidies. The WTO Agreement on agriculture is designed to provide increased fairness in farm trade. An agreement on intellectual property will improve conditions of competition where ideas and inventions are involved, and another will do the same thing for trade in services.
• Encouraging development and economic reform. GATT provisions intended to favor developing countries are maintained in the WTO, in particular those encouraging industrial countries to assist trade of developing nations. Developing countries are given transition periods to adjust to the more difficult WTO provisions. Least-developed countries are given even more flexibility and benefit from accelerated implementation of market access concessions for their goods.

MEMBERSHIP

As of 11 December 2005, there were 149 member nations of the WTO. There were over 30 applicants negotiating membership at that time. All GATT signatory nations who signed the Final Act of the Uruguay Round in Marrakesh in July of 1994 automatically became original members of the WTO. In addition, several other countries who joined the GATT later in 1994 and signed the Final Act of the Uruguay Round and became original WTO members. When the WTO became effective on 1 January 1995, there were 76 original WTO members and another 50 nations at various stages in the membership process.

Aside from the original WTO members, any nation or "customs territory" having full autonomy in the conduct of its trade policies may accede to the WTO on terms agreed with WTO members. The process of a nonmember nation joining the WTO takes place in several stages. In the first stage of the accession procedures the applicant government is required to provide the WTO with a memorandum covering all aspects of its trade and economic policies having a bearing on WTO agreements. This memorandum becomes the basis for a detailed examination of the accession request in a working party.

Alongside the working party's efforts, the applicant government engages in bilateral negotiations with interested member governments to establish its concessions and commitments on goods and its commitments on services. This bilateral process, among other things, determines the specific benefits for WTO members in permitting the applicant to accede. Once both the examination of the applicant's trade regime and market access negotiations are complete, the working party draws up basic terms of accession.

Finally, the results of the working party's deliberations contained in its report, a draft protocol of accession, and the agreed schedules resulting from the bilateral negotiations are presented to the General Council or the Ministerial Conference for adoption. If a two-thirds majority of WTO members vote in favor, the applicant is free to sign the protocol and to accede to the Organization; when necessary, after ratification in its national parliament or legislature.

After becoming a member, many countries are represented in the WTO by permanent diplomatic missions in Geneva usually headed by a special Ambassador.

As a result of regional economic integration—in the form of customs unions and free trade areas—and looser political and geographic arrangements, some groups of countries act together in the WTO with a single spokesperson in meetings and negotiations.

The largest and most comprehensive grouping is the European Union and its 25 member states. The EU is a customs union with a single external trade policy and tariff. While the member states coordinate their position in Brussels and Geneva, the European Commission alone speaks for the EU at almost all WTO meetings. The EU is a WTO member in its own right as are each of its member states.

It is important to note that any country can withdraw at any time from the WTO.

STRUCTURE

The highest WTO authority is the Ministerial Conference which meets at least once every two years and is composed of representatives from all WTO signatories. The day-to-day work of the WTO, however, falls to a number of subsidiary bodies, principally the General Council, which is required to report to the Ministerial Conference. The General Council meets several times a year in the Geneva headquarters. Like the Ministerial Conference, the General Council is composed of representatives from all member nations. As well as conducting its regular work on behalf of the Ministerial Conference, the members of the General Council also convene as the Dispute Settlement Body (DSB) and as the Trade Policy Review Body. At the next level are the Goods Council, Services Council and Intellectual Property (TRIPS) Council, which report to the General Council.

Five other bodies are established by the Ministerial Conference and report to the General Council: the Committee on Trade and Development, the Committee on Trade and Environment, the Committee on Regional Trade Agreements, the Committee on Balance of Payments, and the Committee on Budget, Finance and Administration. A Trade Negotiations Committee was also established in November 2001 as a result of the Doha Declaration (see below). At the second Ministerial Conference in Geneva in 1998, ministers decided that the WTO would also study the area of electronic commerce, a task to be shared by existing councils and committees.

Each of the plurilateral agreements of the WTO—those on civil aircraft, government procurement, dairy products and bovine meat—have their own management bodies which report to the General Council.

The DSB itself also establishes subsidiary bodies for the resolution of trade disputes. One such set of bodies are called "panels." These panels are set up on an ad-hoc basis and last only long enough to hear the merits of a particular trade dispute between WTO members and reach a decision as to whether unfair trade practices are involved. After the DSB approves the formation of a panel, the WTO Secretariat will suggest the names of three potential panelists to the parties to the dispute, drawing as necessary on a list of qualified persons. If there is real difficulty in the choice, the Director-General can appoint the panelists. The panelists serve in their individual capacities and are not subject to government instructions.

The DSB also has the responsibility of establishing an Appellate Body to review decisions made by individual panels. The Appellate Body is modeled after the structure of the U.S. Federal Appeals Courts: the Appellate Body is composed of seven persons, three of which are assigned to each appeal from a panel's judgment. The members of the Appellate Body must be broadly representative of WTO membership, and are required to be persons of recognized standing in the field of law and international trade, and not affiliated with any government. Each member serves a four-year term.

The procedural operation of panels and the Appellate Body are described below under the heading of "Activities."

SECRETARIAT

The WTO Secretariat is located in Geneva. It had 635 staffin 2006 and is headed by a Director-General, and four Deputy Directors-General. Its responsibilities include the servicing of WTO delegate bodies with respect to negotiations and the implementation of agreements. It has a particular responsibility to provide technical support to developing countries, and especially the least-developed countries. WTO economists and statisticians provide trade performance and trade policy analyses while its legal staffassist in the resolution of trade disputes involving the interpretation of WTO rules and precedents. Other Secretariat work is concerned with accession negotiations for new members and providing advice to governments considering membership. Despite the increased responsibilities of the WTO when compared with the GATT, there has been no significant increase in administrative or other staffing levels. Pascal Lamy of France, the fift h Director-General, began his four-year appointment on 1 September 2005.

BUDGET

The WTO's annual budget for 2006 was 175 million Swiss francs, with individual contributions calculated on the basis of shares in the total trade conducted by members. Part of the budget also goes to the International Trade Center.

ACTIVITIES

A. Reviewing Member Nations' Trade Policies

Surveillance of the national trade policies of WTO member nations is a fundamentally important activity running throughout the work of the WTO. At the center of this work is the Trade Policy Review Mechanism (TPRM).

Reviews are conducted on a regular, periodic basis. The four biggest traders—the European Union, the United States, Japan and Canada—are examined approximately once every two years. The next 16 countries in terms of their share of world trade are reviewed every four years; and the remaining countries every six years, with the possibility of a longer interim period for the least-developed countries.

The review examines the overall trading practices of a WTO member rather than focusing on the legal compatibility of any particular trade policy or practice.

Reviews are conducted in the Trade Policy Review Body (TPRB)—established at the same level as the General Council. The TPRB conducts its review through the use of two documents: a policy statement prepared by the government under review, and a detailed report prepared independently by the WTO Secretariat. These two reports, together with the proceedings of the TPRB are published after the review meeting.

In addition to the TPRM, many other WTO agreements contain obligations for member governments to notify the WTO Secretariat of new or modified trade measures. For example, details of any new anti-dumping or countervailing legislation, new technical standards affecting trade, changes to regulations affecting trade in services, and laws or regulations concerning the TRIPs agreement all have to be notified to the appropriate body of the WTO. Special groups are also established to examine new free-trade arrangements (e.g. regional trade associations like NAFTA—The North American Free Trade Agreement) and the trade policies of acceding countries.

In 2000, new talks began on agriculture and services. At the WHO's Fourth Ministerial Conference held during November 2001 in Doha, Qatar, these talks were extended, and a number of other issues were added to the WTO agenda. The Doha Declaration set 1 January 2005 as the date for completing all but two of the negotiations. That deadline was missed, but members unofficially aimed to finish the negotiations by the end of 2006. A Trade Negotiations Committee (TNC) was also set up by the Doha Declaration, operating under the authority of the General Council.

B. Settling Trade Disputes

The WTO also functions to settle trade disputes between member nations. Indeed, one of the goals of the WTO is to dissuade members from taking unilateral action against perceived violations of the trade rules and to instead seek recourse in the multilateral dispute settlement system and to abide by its rules and findings. Unlike the situation in a TPRM review, where a nation's

overall trade policy is examined, a trade dispute between member nations usually involves the legality of a particular trade policy or practice. Which one member nation, the complainant, has called into question.

When any such trade dispute arises, the nations party to the dispute first engage in bilateral meetings between themselves (usually conducted by the nations' respective representatives in Geneva). If this fails the WTO Director-General, who, acting in an ex officio capacity, will try conciliation or mediation to settle the dispute.

If consultations and mediation fail to arrive at a solution after 60 days, the complainant can ask the Dispute Settlement Body (DSB) to establish a panel to examine the case. Generally, the DSB cannot refuse to establish a panel and must constitute the panel within 30 days of its establishment.

Each party to the dispute submits to the panel a brief on the facts and arguments in the case, in advance of the first substantive meeting. At that first meeting, the complainant presents its case and the responding party its defense. Third parties which notified their interest in the dispute may also present views. Formal rebuttals are made at the second substantive meeting.

The panel then submits an interim report, including its findings and conclusions, to the parties, giving them one week to request a review. The period of review is not to exceed two weeks, during which the panel may hold additional meetings with the parties. A final report is submitted to the parties and three weeks later, it is circulated to all WTO members.

If the panel decides that the measure in question is inconsistent with the terms of the relevant WTO agreement, the panel recommends that the member concerned bring the measure into conformity with that agreement. It may also suggest ways in which the member could implement the recommendation. Panel reports are adopted by the DSB 60 days after being issued, unless one party notifies its decision to appeal or a consensus emerges against the adoption of the report.

The WTO dispute settlement mechanism gives the possibility of appeal to either party in a panel proceeding. However, any such appeal must be limited to issues of law covered in the panel report and the legal interpretation developed by the panel. Appeals are heard by the standing Appellate Body established by the DSB.

An Appellate Body can uphold, modify or reverse the legal findings and conclusions of the panel. As a general rule, the appeal proceedings are not to exceed 60 days but in no case shall they exceed 90 days.

Thirty days after it is issued, the DSB adopts the report of the Appellate Body which is unconditionally accepted by the parties to the dispute—unless there is a consensus against its adoption.

After the DSB adopts the report of the panel or the Appellate Body, the DSB has the responsibility of implementing the decision. At a DSB meeting held within 30 days of the adoption of the panel or appellate report, the party against whom the panel or the Appellate Body has ruled, must state its intentions in respect of the implementation of the recommendations. If it is impractical to comply immediately, the member will be given a grace period (set by the DSB) to come into compliance. If it fails to act within this period, it is obliged to enter into negotiations with the complainant in order to determine a mutually-acceptable compensation—for instance, tariffreductions in areas of particular interest to the complainant.

If after 20 days, no satisfactory compensation is agreed, the complainant may request authorization from the DSB to suspend concessions or obligations against the other party. The DSB should grant this authorization within 30 days of the expiration of the grace period established by the DSB.

There is a peculiar component of the WTO structure, the Dispute Settlement Review Commission, that applies solely to the United States. The commission is composed of five appellate judges and is activated whenever a panel decision is made against the United States. The commission analyzes the decision to determine whether it was unjustified, that is whether the panel exceeded its authority in making the decision or whether the panel went beyond the powers in the Uruguay round in making the decision. If the commission determines that three unjustified decisions occurred within any five year period a member of Congress can begin the process of removing the United States from the WTO. It should be noted that since any member can withdraw at any time from the WTO, the existence of this commission does not explicitly enhance US power in the WTO. It was created primarily as a mechanism to assure the US Congress that the WTO would monitor itself against any anti-US bias and in fact the commission was established within the WTO to secure the support of Senator Robert Dole for US entry into the WTO.

C. Training and Technical Instruction to Developing Countries

The WTO Secretariat has also continued GATT's program of training courses. These take place in Geneva twice a year for officials of developing countries. Since their inception in 1955 and up to the end of 1994, the courses have been attended by nearly 1400 trade officials from 125 countries and 10 regional organizations. Beginning in 1991, special courses have been held each year in Geneva for officials from the former centrally-planned economies in transition to market economies.

The WTO Secretariat, alone or in cooperation with other international organizations, conducts missions and seminars and provides specific, practical technical cooperation for governments and their officials dealing with accession negotiations, implementing WTO commitments or seeking to participate effectively in multilateral negotiations. Courses and individual assistance is given on particular WTO activities including dispute settlement and trade policy reviews. Moreover, developing countries, especially the least-developed among them, are helped with trade and tariffdata relating to their own export interests and to their participation in WTO bodies.

The WTO continues the GATT's participation in operating the International Trade Center (which it operates jointly with World Bank's Economic Development Institute). The Center responds to requests from developing countries for assistance in formulating and implementing export promotion programs as well as import operations and techniques. It provides information and advice on export markets and marketing techniques, and assists in establishing export promotion and marketing services and in training personnel required for these services. The Center's help is freely available to the least-developed countries. Since the beginning, GATT/WHO has trained more than 1,700 officials from developing countries.

D. Participation in Global Economic Policy-Making

An important aspect of the WTO's mandate is to cooperate with the International Monetary Fund, the World Bank and other multilateral institutions to achieve greater coherence in global economic policy-making.

Although the original agenda (established at a GATT meeting in Punta del Este, Uruguay in 1986) made no mention of a world trade body, a draft for such an organization was put forth in 1991 and quickly gained interest among many members for establishing such an organization.