Global Policy Forum

WTO: Is its Credibility in Peril?


By M. D. Nair

The Hindu, India
June 2, 1999

Just how long does it take for an international organisation set up under a general agreement to establish its credibility among member countries? The case in point is the World Trade Organisation (WTO) that completed four years and four months by April last. Ever since its creation, the WTO has been steeped in controversies, the latest one being its inability to nominate a new head after Mr. Renato Ruggiero of Italy stepped down on April 30.

Reaching a consensus on the new appointment has been made difficult by the intransigence of members with the leading trading partners U.S., Latin America and part of Western Europe supporting Mr. Mike Moore, a former Prime Minister of New Zealand, and most developing countries and Japan backing Mr. Supachai Panitchpakdi, Deputy Prime Minister of Thailand. It is generally agreed that a vote on the issue should be avoided, as countries that vote against the ultimate successful candidate may in future face negative reactions from a system that smacks of highly discriminatory powers under the dispute settlement process.

Developing countries' concerns

One of the reasons for the crisis at WTO is due to the fact that perceptions of equitable, fair and free trade vary from country to country. Through the WTO, most countries were hoping to strengthen their current trade through access to new markets. At the same time, they were not inclined to further open up their own markets to others. With over three fourths of WTO members being from developing countries whose combined share in world trade in 1998 was only 26 per cent as compared to 70 per cent for the developed countries, any attempt at harmonisation is bound to be in favour of the stronger nations. Paradoxically, the developing countries' share in world trade have been declining over the last two decades, from close to 30 per cent in 1980. In such a lopsided environment, in spite of the so-called concessions available under the provisions of WTO, they are unlikely to improve their market share unless this matter, which hinges heavily on allowable tariffs to protect domestic industries, is sorted out at the ministerial meeting later this year. For example, India suffers due to high tariffs imposed by importing countries of the European Union on some of its important export commodities such as textiles and leather - the tariff is 12.1 per cent on textiles and apparel compared to an average of 4.5 per cent on industrial products.

Another sensitive issue that affects the Indian pharmaceutical industry, which has attained a degree of maturity matching the developed world, is the allegation of dumping of Indian products - for example, ampicillin and amoxycillin - and the imposition of anti-dumping duties on them by the EU and South Africa. Along with many other issues affecting Indian industry, the number of disputes raised against India has risen to 20, ranging from prawn exports to lndia's automobile policies. For example, lndia's insistence that at least some parts for automobiles have to be made locally are considered violative of WTO norms.

Two way traffic

While disputes over India not amending its Patent Law to be consistent with Sec. 70.8 and 70.9 of Trade Related Intellectual Property Rights (TRIPS) have been largely settled with Parliament passing the Patent Amendment Bill, several others are still pending with the European Union and the U.S. In general, what needs to be emphasised is that if the WTO is to be credible, it needs to ensure that market access is a two-way traffic with equal opportunities for developing and developed countries. Apart from manufactured goods, the differential treatment provisions for developing countries embodied in the WTO should be extended to the services sector where developing countries like India have major advantages. The justifiable concern of the developing countries is that the international trade regime monitored and policed by the WTO will be effective and advantageous for them only to the extent of the developed countries' political and economic will to support their growth and development. Increased market access can lead to deceleration of investments in developing countries thereby widening the gap between them and the developed economies. Yet another obvious fact is that countries like U.S. have not revoked many of their provisions to penalise their trading partners when their domestic economy is affected. Special and Super 301 provisions under the U.S. Trade Act are two examples of unilateral action within a professed multilateral system.

Problems of the WTO also relate to those between two major trade partners - the U.S. and the European Union. With the trade between them exceeding $400 billion annually, acceptance of the WTO regime unconditionally by these powers is crucial for the effective functioning of the organisation. Ever since the inception of the world body, disputes have arisen on a number of basic issues between these two, the most notable and publicised disputes being the trade in bananas, hormone-treated beef, genetically modified foods in general, noisy airplanes, European subsidies for Airbus and geographical indication dispute on the labelling of Californian wines as Champagne.

The U.S. strategy has been to impose tariffs whenever it felt that unfair practices affect its domestic industries and then let the WTO rule under the dispute settlement provisions. Thus, while the U.S. threatened to impose levies on over $520 million of imports from Europe to retaliate against its banana import policies, the WTO fixed the sanctions at $191 million. Similarly, the U.S. is planning to impose sanctions worth $300 million if Europe does not lift its ban on import of hormone-treated beef. The battle cry on this issue is loud and clear with Europe in turn wanting to ban all American beef unless they are proved to be hormone-free. Japanese steel makers dispute the ruling by the U.S. Commerce Department that Japan was dumping hot-rolled steel in the U.S. market. To what extent the WTO will be able to settle these disputes between the trading giants in a manner acceptable to both parties and in the event, one of the parties is aggrieved, what course it will take, remains to be seen. The credibility of the system will depend on the ultimate outcome on these major disputes.

China's entry

It is paradoxical that even though 134 countries are members of the WTO, China, the eighth largest exporting country after the U.S., Germany, Japan, France, Britain, Italy and Canada, with exports worth $180 billion (together with Hong Kong $353 billion) has not been admitted to the WTO. According to the rules governing entry, major trading partners of the country in question have to approve its entry. In the case of China, the U.S. is its largest trading partner, and therefore, China needs U.S. approval for its entry. The U.S.-China relationship has always been complex with the corporate world ever so eager to set up base in China, as major supply points even for the U.S. markets. In the field of electronic and electrical goods and various commodity items, the U.S. market is flooded with Chinese products. Four plants in China are producing toys for Mattel, the world's largest toy manufacturer. Tens of thousands of Barbie and other branded dolls are made in China. As against this, the U.S. Government believes that, with balance in trade between the U.S. and China very much in favour of the latter, unless more concessions are available for U.S. companies to gain market access to China, the U.S. economy, through bilateral trade, will be seriously affected.

It is against this background that China's attempt for the last 13 years to join the WTO or its earlier version, the General Agreement on Tariffs and Trade (GATT), has been thwarted by the U.S. The Chinese Premier, Mr. Zhu Rongji, during his recent visit to the U.S., assured that several major concessions had already been granted to the U.S. that should make it possible for China to gain entry into the WTO. For example, China insists that it has cleared the way for export of U.S. wheat and citrus fruits, allows 25 to 30 per cent equity holding for foreign companies in the Chinese telecommunication industry and has opened up further the insurance sector for foreign companies. The U.S. still feels that these concessions have not gone far enough to justify early entry of China in the WTO. On the financial sector, the U.S. does not want China to devalue its currency to create new export opportunities for its industries and further upset the trade deficit.

NATO activities against Yugoslavia and the recent bombing of the Chinese Embassy in Belgrade have further complicated pending issues even though there is a general feeling that separating politics from trade matters will be advantageous to both parties. In the recent trade talks organised by Japan's Ministry of International Trade and Industry (MITI) between the U.S., Japan, European Union and Canada in Tokyo, China's admission was on the top of the agenda. The Pacific Economic Co-operation Council (PECC), consisting of business leaders, government officials and academics that report to the Asian Pacific Economic Co-operation Forum (APEC), declared that China's membership of the WTO is critical to sustain recovery and growth in the Asia-Pacific region.

What then are the credibility problems? Unlike in the case of the IMF, the World Bank and the International Court of Justice, world trade is far too close to the political systems and economic well being of countries. One of the cardinal objectives of setting up the new body was to ensure that protectionism, which is counter to free trade, will be minimised. However, when countries differ so widely not only in their economic status but also in their labour, service and environmental standards, attempts at harmonisation become perilous. The frame of reference and the rules for member countries thus will need to be re-evaluated taking all these aspects into consideration. Second, the WTO today is largely reactive rather than pro-active, which means that much of its time and energy are devoted to settlement of disputes rather than their avoidance. Third, rulings of WTO have not only to be fair but have also to be seen as fair by all members and once they are made, have to be implicitly complied with by all including the U.S. and the EU. Fourth, consensus, which is the preferred route for administrative changes, seems to be running into rough weather as in the case of nomination of the new head. Fifth, the timing of the coming into being of WTO in retrospect looks to have been jinxed. As many developing countries went through a financial crisis and serious unemployment problems, further liberalisation of domestic policies as required by the WTO is deemed to have disastrous consequences. Sixth, some of the world's leading countries like China are yet to be admitted to the WTO. Finally, the organisation has problems of managing its affairs due to lack of adequate and appropriate skilled manpower and even financial resources. It has been stated that the annual budget for WTO today is only $80 million, equivalent to the travel budget of the IMF.

What should be India's strategy'? Most countries are gearing themselves to present their cases at the ministerial conference to be held in Seattle in November. Members of regional trade blocs, set up partly as preferential trade areas, are getting together to define their approach and strategies. The recent quadrilateral meeting of Japan, the U.S., the EU and Canada, discussed in detail all issues impinging on trade between them and the rest of the World. This group which commands two thirds of the world trade wants to redefine the contours and nature of global trade. The 15-nation EU is meeting to discuss priority for a comprehensive round of trade talks. The Pacific Economic Cooperation Council (PECC), part of APEC, is planning to discuss the Pacific Rim's role in world trade. India, which is not a member of any of these powerful trading blocs, has a great obligation to restructure its policies and evolve common interest groups to pursue its own goals for increased trade and economic growth. The three segments identified as high priority areas for further negotiations at the proposed talks in Geneva in January 2000 are agriculture, services and import tariffs - all three of great importance to the Indian economy. Growth in Indian exports had shown a sharp decline in the last two years. In the last 12 months, exports were $34.1 billion compared to $180 billion from China, $119 billion from Singapore, $71.6 billion from Malaysia and $52.4 billion from Indonesia. It is imperative that all issues connected with trade in items, where India has inherent advantages to produce and market, should be studied in detail for ensuring meaningful pro-active negotiations at the summit in Seattle and at the next round of trade talks in Geneva.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.