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Reforms at the WTO: Beyond Archaic Binaries

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    17th Jul, 2021
Reforms at the WTO: Beyond Archaic Binaries

Introduction

  • In February this year, the European Commission announceda new European trade strategy.
  • The announcement was expansive, covering everything from digital tradeto sustainability.
  • For those concerned about the health of the existing trade regime, however, the Commission’s most important comments were on the prospects for reforming the World Trade Organization (WTO).
  • The WTO has been in the clutches of a slow-moving crisis for years.
    • At its heart are a series of disputes about the role of the WTO’s Appellate Body, the final arbiter in the WTO’s Dispute Settlement System.
    • Today, the Appellate Body sits empty, severely undermining the capacity of the WTO to resolve trade disputes.

Understanding the Organization

About

  • The World Trade Organisation (WTO) is a global intergovernmental, international organization dealing with the rules of trade between nations.
  • It was established on 1 January 1995 as the successor to the GATT under the Marrakesh Agreement. 

Marrakesh treaty

  • Marrakesh treaty under Uruguay round of talks was signed at Marrakesh, Morocco.
  • All nations signed the agreement and WTO was established on January 1, 1995.
  • India was one of the founding members of WTO.
  • China joined WTO only in 2001 and Russia had to wait till 2012.

The Structure

  • Highest authority: the Ministerial Conference
  • Second level: General Council in three guises
    • The General Council
    • The Dispute Settlement Body
    • The Trade Policy Review Body
  • Third level: councils for each broad area of trade, and more
    • The Council for Trade in Goods (Goods Council)
    • The Council for Trade in Services (Services Council)
    • The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS Council)
  • Fourth level: down to the nitty-gritty

Major functions of WTO

Some of the functions of WTO are: 

  • To oversee the implementation, administration, and operation of the covered agreements. 
  • To provide a forum for negotiations and for settling disputes. It administers the Understanding on Rules and Procedures Governing the Settlement of Disputes.
  • To review and propagate the national trade policies and to ensure the coherence and transparency of trade policies through surveillance in global economic policy-making. 
  • To provide assistance to developing, least-developed and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training. 
  • To facilitate and provide the framework for the implementation, administration, and operation and further the objectives of its Agreement and of the Multilateral Trade Agreements.
  • To provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the trade agreements.
  • To administer the Trade Policy Review Mechanism.
  • With a view to achieving greater coherence in global economic policymaking, the WTO cooperates, as appropriate, with the International Monetary Fund (IMF) and with the International Bank for Reconstruction and Development (IBRD) and its affiliated agencies. 

India and WTO

  • India was one of the founding members of the World Trade Organisation (WTO) when it was formed on January 1, 1995.
  • China would enter the WTO six years later, in December 2001.
  • India was a member of the drafting committee of the Regional Comprehensive Partnership Agreement (RCEP) from 2011, but opted out of the mega regional free trade agreement at the last moment when it was announced in 2019.
  • The RCEP deal has given China an edge over India when it comes to trade in the Indian Ocean Region.
  • The refusal to join RCEP came at a time when the policy regime was willing to further liberalise capital flows. 

What are the challenges faced by the Organization?

Despite its initial successes, the World Trade Organization (WTO) currently faces an existential crisis. There are calls for substantial reform as the organization’s main functions are progressively becoming ineffective.

  • Ineffective forum for negotiations: Other than notable initiatives, it has not provided an effective forum for trade negotiations for more than a decade.
  • Inadequate adoption of rules: Its rules have not adequately adapted to global economic dynamics and its rulemaking procedures require revisions.
  • Paralyzed organs: The WTO’s most successful contribution, adjudicating trade disputes, has run into difficulty: the organization’s Appellate Body (AB) has been paralyzed by a disagreement regarding the appointment of new judges to fill vacancies. The trading system shows signs of stress on many fronts.
  • Pandemic:The COVID-19 pandemic has also created added uncertainties in trading environments as countries implemented new restrictive policies regarding essential supplies, making the WTO’s role pertinent in protecting global trade from the pandemic’s effects.

How US turned its back on WTO?

  • Since the start of the Trump administration, the United States has refused to appoint any new members to the body, effectively allowing countries to avoid compliance with WTO rulings.
  • The primary driver of this drastic action has been American frustration at perceived judicial overreach.
  • S. policymakers, starting with the George W. Bush administration, have repeatedly voiced their displeasure with Appellate Body decisions, contending that certain decisions have reached beyond the text of existing WTO agreements.
  • In particular, S. complaints have focusedon:
    • Concern over Anti-dumping duties: WTO rulings that criticize the United States’ use of antidumping and countervailing duties.
      • These tariffs are intended to protect American firms against subsidized or predatorily priced goods and have become an increasingly importantpart of the American trade arsenal.
    • Concerns over tariff: Another area of concern has been the narrow way in which the Appellate Body has defined “public bodies,” a ruling that makes it harder to apply tariffs against goods produced by state-owned enterprises in China and elsewhere.
    • Concern over functioning of Appellate Body: Finally, the slow speed of the Appellate Body decision-making—which allows violations to continue for years—has been a continual source of agitation.
    • Concern over self-declaration: The United States have questioned the WTO’s self-declaration policy for designation of ‘developing countries’.

Major Proposals for Reforming the WTO

The Development Debate and Special and Differential Treatment (SDT)

  • Developing country status is self-defined rather than through objective criteria.
  • The SDT became a controversial issue as many developing countries started to more firmly integrate into the world economy and receive larger shares of global trade.
  • The 2019 US Memorandum referring to this issue (White House 2019) suggests concrete measures, such as Gross Domestic Product (GDP) per capita and purchasing-power parity, membership in the G20 and OECD, and shares in global exports and Foreign Direct Investment (FDI).
  • However, the criteria should also consider social and human development indicators created by international organizations, which should receive a multilateral approach.

Who are ‘developed’ and ‘developing’ countries?

  • There are no WTO definitions of “developed” and “developing” countries.
  • Members announce for themselves whether they are “developed” or “developing” countries.
  • However, other members can challenge the decision of a member to make use of provisions available to developing countries.
    • India is one of the WTO’s Asian developing members. 
  • LDC: A “Least Developed Country” designation is contingent on a statistical methodology implemented competently by the United Nations Conference on Trade and Development (UNCTAD).
  • Developing: A “Developing Country” status is self-declared. A developing country is also known as a low and middle income country (LMIC). It is less developed than countries classified as “developed countries” but these nations are ranked higher than “less economically developed countries.” These countries are characterized by:
    • being less developed industrially
    • widespread poverty
    • low education and literacy levels
    • government corruption
    • a lower Human Development Index when compared to other countrieso   health risks such as having low access to safe water, as well as sanitation and hygiene problems

Is lack of clarity on the definition an issue?

  • Numerous meritless claims: The flexibility in the definition of developing country has allowed numerous meritless claims.
    • However, institutions like the World Bank do regularly publish income estimates that have been used by WTO members to object to certain demands for ‘developing country’ status by high-income countries.
      • For instance, in ongoing negotiations on non-agricultural market access, the US has used the WB’s income estimates and objected to demands for developing-country relaxations from India, China and Brazil.
    • No estimate: The WTO does not have an exact count of how many of its members are ‘developing countries’ and receive associated benefits; its estimate is two-thirds of total membership. However, not every claimant is a deserving candidate.
      • For instance, South Korea, the 7th richest nation in the world based on per-capita income, claimed – and benefitted from – developing country status at the WTO until February 2020.
      • South Korea’s per-capita income was US$31,847 in 2019; Bangladesh’s, for instance, was US$1,856 in the same year—and both are ‘developing countries’.

What are the advantages of “developing country” status? 

Developing country status in the WTO brings certain rights.

  • Longer transition period: There are for example provisions in some WTO Agreements which provide developing countries with longer transition periodsbefore they are required to fully implement the agreement.
  • Technical assistance: Developing countries can receive technical assistance.
  • S&DT regime: The ‘developing country’ status allows countries to avail of the WTO’s Special & Differential Treatment (S&DT) regime.  It allows countries claiming to be developing countries to:
  • receive relaxations in implementation timelines for proposed trade liberalisation
  • gain waivers from certain onerous WTO rules
  • receive non-reciprocal preferential treatment for trade in goods under the Enabling Clause (officially known as the Decision on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries, GATT 1979”).
  • Other benefits: Moreover, LDCs receive-
    • favourable terms on market access
    • further assistance to mainstream trade into their economies through programmes run by sister organisations like the International Monetary Fund (IMF), United Nations Conference on Trade and Development (UNCTAD), and World Bank.

Is self-announcement of being a ‘developing country’ enough for GSP?

  • When a WTO member announces itself as a developing country, it does not automatically mean that it will benefit from the unilateral preference schemes of some of the developed country members such as the Generalized System of Preferences (GSP).
  • In practice, it is the preference giving country which decides the list of developing countries that will benefit from the preferences.

Are negotiations over designation of ‘developing countries’ beneficial for India?

  • India has a particular interest in preserving its Developing Country status; this will be contested by the western bloc. 
  • Gaining concessions at WTO: Though negotiations over designation present a challenge to India, they also provide an opportunity for the country to gain important concessions at the WTO.
  • However, a comprehensive agreement that provides India with a reasonably good deal can only be achieved if New Delhi is willing to demonstrate foresight in prioritising its long-term ambitions over short-term interests.

Paradox of aggregates

  • India also suffers from the paradox of aggregates. On various metrics, its rankings on the global stage may appear remarkable because of its sheer population size; however, it faces deep-seated and herculean challenges.
    • India has the world’s 3rd largest GDP on a PPP basis, yet ranks 122nd when the same is calculated per capita.
    • It boasts the 2nd largest internet subscriber base in the world, just behind China, yet has only 29-percent internet penetration compared with, for example, China’s 54 percent.

What options India have?

  • There are positions that India can take in future negotiations.
  • First, to recall the mechanics of negotiations at the WTO: The conduct of negotiations since the Doha Round has involved, first, the creation of a broad, ambitious agenda– which is then broken down into piecemeal subjects over several annual summits. For each subject, negotiations around the scope of relaxations for developing countries and LDCs are treated as part of the same package.
  • Politically, this made sense, as concessions on implementation could be traded as chips for securing consent to the agreement itself.
  • Consider the Trade Facilitation Agreement: When negotiations were held in 2013, the principal questions for the agreement were threefold—defining a base year for calculation of subsidies; defining what qualified as a producer subsidy and therefore was to be eliminated; and providing for implementation timelines, including accommodations for developing countries and LDCs – a question led by India.

What issues should India raise?

India, too, will need to bring its own issues to the table. It should advocate assiduously on the following points.

  • Market Access and a path to rules parity between trade in services and merchandise trade
  • Finding mechanisms to treat commercial agriculture done at scale differently from small-scale and subsistence farming, when calculating amber box subsidies
  • Ensuring that any definition of a “developing country” status, if devised, is not prejudicial to India’s interests and is sufficiently protected from tinkering by individual countries

Concluding thoughts

The WTO, despite its problems, remains the best venue through which to resolve issues related to global trade. Given that the Developing Country self-declaration is open to challenge, this should have provided a proper resolution against misuse through discussions, debates and negotiations, but for the informal and undefined process around such challenges. 

It is expected that the US under Biden will work within the WTO to further its interests. Countries and trading blocs like Japan and the European Union are hoping that American participation will help resolve some of the key issues. The scenario presents India with a historic opportunity to leverage its economic prowess and geopolitical position to make progress on some of the key issues that affect not only India’s interests, but also those of other players in the WTO.