WTO Summary: What It Is And Why We Need It

What It Is

WTO stands for World Trade Organization. Ever since the second world war many countries have been a party to the GATT - the General Agreement on Trade and Tariffs. As time went by there would be negotiation “rounds” when the agreement would be updated. Then in a mammoth round that lasted from 1986-1994 (the so-called Uruguay round) it was decided to fundamentally overhaul the GATT and place the international trading system on a firmer institutional footing. To this end the WTO was created. Essentially it is a club with countries as members and it has three main roles:

  1. Facilitating the adminstration, implementation and operation of the multilateral trade agreements (MTAs) such as the GATT, GATS (General Agreement on Trade in Services) and TRIPS (Trade Related Aspects of Intellectual Property Rights). These agreements are considered part of what a country signs up to when they join the WTO (and so are often known simply as the WTO agreements.)
  2. Be a forum for trade negotiations and particularly those regarding existing or future multilateral agreements. A specific example of this aspect of the WTO are the biannual “ministerials” run by the WTO the last of which was held at Doha (the one previous being the infamous Seattle meeting).
  3. Handle trade disputes. The WTO provides a framework within which disputant countries can meet and negotiate. It also has a “court”: the Dispute Settlement Body that deals with formal complaints relating to WTO agreements (for example imposing tariffs prohibited by GATT). Importantly compared to some other international institutions the decisions of the DSB are binding on members.

Having defined what the WTO does it is important to make clear what it is and what it represents to people particularly when they discuss its merits or problems. To my mind there are four major aspects:

  1. The Institution. This refers to way the WTO is structured and the power balance between members. In its formal setup the WTO is very equitable with every country, no matter how big or how small having no more votes than anyone else. But just as in a democracy (where each individual has a single equal vote - pardon the simplication) this does not entail practical equality. Differences in power and wealth outside the WTO translate into disparities in negotiations that happen within the WTO (for example differences in the number of negotiators a delegation possesses or the simple fact that the U.S. market is several orders of magnitude larger than the Jamaican one so access to one is not the same as access to the other).
  2. The Philosophy. The WTO aim is open, fair and undistorted competition and the promotion of trade 2. Unfortunately fairness is a very normative concept and therein lies the rub. In real terms what this means is free trade in the widest sense (i.e. not simply no tariffs but the elimination of non-tariff barriers such as discriminatory regulation) with concessions and special assistance to poorer countries tacked on (of course this failure of assistance to be more extensive may not reflect the underlying philosophy but more the actions of individual members). It must also be remembered that in a sense there is no such thing as the ‘WTO’ independent of its member countries. The entire WTO staff at the time of the Seattle ministerial was approximately 600 people - about the same size as the EU delegation. Thus speaking of the WTO philosophy may be a little misleading as it may give the impression of the WTO as independent entity able to pursue its own ends over the will of its member countries. This is not the case and this fact explains why the WTO agreements contain such glaring exceptions to its principles (for example in relation to agriculture and textiles where the developed countries maintain protectionist barriers). Nevertheless the WTO philosophy does indicate the tenor of the agreements and the direction of progress over time (for example tariff rates dropped under GATT and continue to do so).
  3. The Members. The WTO is its membership. The WTO is more like a club than a state. All decisions are made by the members, it is members who sit on committees, it is members who draft agreements (with the assistance of WTO staff), it is members who negotiate them. This also means that power outside the WTO can mean power inside it. The WTO does not possess independent governors who can impose decisions on the members. In many ways this is a very good thing and is probably essential for the WTO to work; countries would not (and often constitutionally could not) sign up to an organization that required that degree of surrender of sovereignty. However the possession of a powerful executive or governors can also make for quicker reforms and more progressive outcomes than might otherwise be the case (consider the case of civil rights in the US). This is an important point to be borne in mind. For example one often hears complaints of the kind: “Why doesn’t the WTO impose eco-labelling, why doesn’t the WTO ban X, … ” as if the WTO could impose these rules ex cathedra. The simple fact is these rules must be put forward and accepted by the members (and this is exactly why there is so little progress on eco-labelling - there are many countries, especially the less developed, that oppose it).
  4. The Agreements. The Multilateral Trade Agreements contain the rules that govern trade among WTO members as such they (combined with the decisions of the DSB) are what determine rules of trade from the biggest issues to the smallest minutiae: whether, for example, US steel tariffs, the import of cattle treated with BST should be permitted, whether bananas may be preferentially sourced by the EU from former colonies and so on.

Why We Need It

There are two main arguments that I set out below.

1. The Benefits of Trade

Almost all complex societies throughout history have wanted to trade. Today with revolutions in communications and explosion in population this is even more true that in the past. Economics also provides good reason to believe that (free) trade is a good thing 1. Tariffs hinder trade and are often expressly designed to do so (the only other possibility is to raise revenue). So, the argument is simple: free trade good, tariffs bad. But why, one might ask, has there been so much protectionism then? In fact if we have seen trade throughout history we have also seen its counterpart: attempts to restrict or control a particular aspect of it (normally for the greater profit of those who obtain the monopoly). The answer depends on your perspective but there are a variety of good reasons why there would still be pro-protectionists even if free trade really were a good thing. 1. Many people tend to go in for Absolute Advantage arguments. These tend to view trade between two countries as a strictly zero-sum game and thus to induce the, unfortunately typical, human response: grab as much for ourselves and give them as little as possible. In the context of trade this translates to: import none of their goods and export lots of ours. Apart of the obvious flaws in this approach that the ‘other side’ will be doing the same (see game theory discussion below) the absolute advantage argument was demolished (at least in the straightforward form it is usually encountered) about two hundred years ago by the economist David Ricardo. Nevertheless it remains popular and gains allegiance from such illustrious forbears as Lincoln and Chamberlain. 2. Political economy considerations. Often a particular group in a country has much to gain from protectionism while the country overall has a welfare loss. Classic examples are the corn laws in Britain in the early nineteenth century or US automobile manufacturers facing Japanese competition in the 1970s and 1980s [4]. 3. Specialist economic arguments such as: strategic trade policy or, from the development literature, the infant industry argument. These arguments are dubiously regarded at present, the infant industry, in particular, has been much criticized over the last thirty years. 4. The miscellaneous rag bag: basic nationalism to more measured concerns for self-sufficiency e.g. in agriculture.Conclusion: There are good reasons to support free trade and few decent reasons to oppose it.

2. Institutions, cooperation and game-theoretic considerations.

Consider the following situation: two countries A and B who can trade. Let us suppose for a moment that each country could gain by excluding the other country’s goods by imposing tariffs or restricting trade in some other manner (for example if we accepted absolute advantage had something to be said for it (see 1.1 above) or one of the countries was very large relative to the other). Say country A can impose a tariff on B and vice versa.

Consider the following further assumptions (for sake of this discussion these are assumptions but they are likely to be reasonably accurate)

  1. The gain to a country (A say) from imposing the tariff would be at the cost of some to the other country (B). For example B would now have less exports
  2. The gain to A would be less than the loss to B (Why? At least one plausible reason is that though A’s terms of trade may have improved offset against this is the reduced choice and higher prices that A’s citizens pay).

But if these assumptions then have a classic prisoner’s dilemma situation (If you are unfamiliar with the Prisoner’s Dilemma some preliminary game theory can be found in [3] including a discussion of that particular issue):

| | B Has No Tariff | B Has Tariff | | —————– | —————- |—————-| | A Has No Tariff | (9,10) | (5,13) | | A Has Tariff | (11,6) | (7,8) |

The numbers in brackets indicating welfare outcomes for A and B respectively. The danger is that both countries think they gain from tariffs but crucially this is in the absence of the other country doing the same thing. If they both impose tariffs they restrict trade (and the choice open to their citizens) while gaining no more of the share of the trade themselves1. Thus they both end up worse off than they were to start with. Moreover once a trade war has begun they often tend to escalate and/or entrench themselves in a way familiar from normal wars with each side indulging in tit for tat behaviour. What is the solution? The obvious one is to create an institution that will help maintain the cooperative equilibrium that maximises joint welfare. This institution will also facilitate returning to this equilibrium should problems arise. The institution would have the further advantage of reducing the ability of special interest groups in a country manipulating trade policy to their advantage (see 1.2 above). This is the institutional argument for multilateral trade agreements and an organization such as the WTO.

#### 3. Informational and resource issues

It is possible for each of pair of countries to negotiate their own bilateral agreement as opposed to have one single organization like the WTO. However there are several reasons to prefer the WTO:

  1. If each pair of countries negotiate and there are N countries then N x N-1 agreements have to be negotiated as opposed to the single one for the WTO.
  2. If countries negotiate one on one this can lead to very serious imbalances of negotiating power. Consider Jamaica with 0.057% of world trade trying to negotiate with the EU or the United States. Within a multilateral context weaker countries are more likely to get a better deal.
  3. Negotiating in one organization, multilaterally promotes transparency. Rules are made for all and are not made on a case by case basis.
  4. One big organization makes it easier, especially for smaller, weaker, countries to group together to represent common interests.

### Conclusion

The WTO has a crucial role in promoting free, fair and stable trade. This is to the benefit not just of developed countries but the developing even more so: “… if the poor are to have any hope of better lives their countries must be given greater opportunities to participate in the global trading system. Of course trade liberalisation must be planned, phased in, and based on clear rules. Of course it must be accompanied by increased trade capacity and domestic pro-poor policies. But the WTO is the only place where global trade development can take place in a way shaped by the developing world. Without the WTO we are left with the economics of the bully.”2

References

  1. WTO pages
  2. What is the WTO? - WTO website.
  3. See Game Theory: An Introductory Sketch for information on the Prisoner’s Dilemma and other game-theoretic ideas.
  4. Corporate Power, American Democracy, and the Automobile Industry; Luger, Stan; [CUP, 2000].
  5. Select Committee on International Development 10th Report: “AFTER SEATTLE — THE WORLD TRADE ORGANISATION AND DEVELOPING COUNTRIES” [2000-Nov-08].

Last Updated: 2003-05-06
Created: 2003-05-06


  1. It is worth remarking that even if one of the countries, say B, had little to gain from imposing tariffs it might still do so as a retaliatory measure. This threat of retaliation would be perfectly rational since it could help prevent the welfare loss B suffered from A imposing tariffs. [return]
  2. [5], Conclusion. [return]