The Power of the WTO

In 1776, Adam Smith earned the moniker, “the father of economics”, upon the publication of his book, The Wealth of Nations.  This was the first comprehensive work on economics ever created. Smith had done his best to not only analyze economics, but to devise a theory to grow a nation’s economy continuously.  Smith understood that a prosperous economy allows for a stronger global community, a more powerful nation, and a happier population.  This school of thought evolved into economic liberalism and soon after, capitalism arose from it. Leaders and thinkers around the world subscribed to Smith’s writings and teachings and began implementing policies that followed his principles of seeking a comparative advantage. Initially, this meant countries were only specializing in what their nation had the most of with regards to resources like land, labor, or capital. For instance, with regards to today’s modern economy, a nation with a large population would specialize in labor intensive goods, whereas a nation with much in the way of capital would specialize in capital intensive goods.  A nation specializing in labor intensive goods means that this nation would focus on markets involving their agricultural industry or their mining industry.  Nations that are wealthy or have advanced technology may focus on building capital intensive areas of their economy.  These micro-markets include computer production, telecommunications, or financial investments.  As more advanced communication and transportation technologies emerged, however, it became easier to trade globally and invest in other nations.  With enhanced methods of trade, more and more states began to adhere to Smith’s school of thought.

One of the central ideas of economic liberalism is that free trade is a necessity to have continuous economic growth not just domestically, but internationally as well. Free trade means that there are no barriers of any kind to hinder transactions between individuals, corporations, or governments. This concept sounds incredible in theory as sustainable economic growth would appear to be the goal that all nations should strive for, but how could it be achieved? Following World War II, many nations were destroyed both physically and economically and yet a new age of multilateralism was ushered in. In 1945, the United Nations was created for the sole purpose of promoting diplomacy and peace to ensure that no other world war would come about. The establishment of the United Nations forged a system that could foster economic growth while simultaneously regulating the new global economy. This international discussion resulted in the UN Conference on Trade and Employment, and established the General Agreement on Tariffs and Trade (GATT) in 1947.  This new organization was charged with seeking out ways that trade would go unfettered and nations could continue to rebuild and grow their economies.¹

The GATT would do its best to promote free trade until 1995 when it was transformed into the World Trade Organization (WTO) that we have today.  The purpose of the WTO is fundamentally the same as GATT, although it possesses one notable exception from its predecessor, under the purview of the WTO, there is the new Dispute Settlement Body or DSB.²  This is a court comprised of leading economists from around the world who are directed to act as judges and juries in trade disputes.  They try cases brought before their courts and pass down rulings.  The WTO is the only international institution with the full power to impose consequences on nations they find to have violated free trade. This punishment is typically in the form of tariffs levied against the nation in question until reparations for their offenses against free trade are considered paid.  This is an incredibly powerful tool to have in one’s arsenal, but grave concerns over how it can impede sovereignty arise.  The purpose of this article is to examine whether in fact the WTO is detrimental to states’ sovereignty, or whether it is a unique institution that brings unprecedented levels of prosperity to the world. We now turn to how it was created, and whether benefits outweigh how states are forced to relinquish a portion of their sovereignty in the area of trade. Ultimately, the WTO serves as a guardian over all international policies to ensure that free trade is protected.  The power vested within the Dispute Settlement Body does require states to sacrifice a modicum of their sovereignty, but it is this power to hold nations accountable for their actions that truly strengthens the global economy and binds together the global community.³

The World Trade Organization (WTO) has a rich history.  It was born in 1995 as the product of the General Agreement on Trade and Tariff’s ministerial meeting that year, dubbed the Uruguay Round.⁴ The GATT was an agreement that undeniably made great advances in reducing the number of tariff barriers nations were levying against one another, but it was unable to contain and end some of the non-tariff barriers to trade being created by nations in attempts to outperform each other’s economies. The GATT, despite its flaws, was needed. The governments of the world recognized the importance of increasing global cooperation in a united economy. World War II had just come to a close, and world leaders knew two things.  They wanted to avoid another world war, and they knew they needed strong economic coordination to rebuild and to prevent another conflict.  The restraints and punishments given to Germany in the Treaty of Versailles at the end of World War I had crippled its economy and plunged its citizenry into a hellish economic landscape of hyperinflation and high unemployment.⁵

The damages imposed upon the defeated nation were the consequence for their actions in the war.  Germany was dealt a severe blow by the other nations, but these stipulations found in the Treaty of Versailles had the opposite of their intended effect.⁶  It did not stop the rise of Germany as a powerful country again, rather it ensured that all of Germans’ hostility could be galvanized for war again.  German fascists and radical political fundamentalists falsely attributed blame to minority groups (Jews, Romas, etc.), and voiced their own aggressive and belligerent concerns loudly in this interwar period.  Angry at their plight, the German people listened.  This rancor and fury felt towards the world was led by Adolf Hitler and the Nazi Party.  Germany is proof that economic instability is like stagnant water, it is a breeding ground for the most deadly of political diseases: anger, and consequentially, ultra-nationalist views.  A powerful economy is crucial to maintain world peace and establishing a sense of multilateralism, hence why the newly formed United Nations created the GATT in 1947.

The foundation for the GATT was built by the United Nations Conference on Trade and Development in 1947, although it was not adopted by the entirety of the United Nations until 1948.⁷ States were committed to building a global environment of peace and prosperity, and they believed they needed the ability to trade freely with one another and have economic protections that would safeguard the well-being of their populations.⁸

The Bretton Woods system was a separate agreement developed a few years prior to the GATT.  According to John Ravenhill’s book, Global Political Economy, this was the case because the United States never chose to ratify one of the agreements that sprang forth from this system called the International Trade Organization.  The GATT was created and accepted rapidly to foster the burgeoning global trade.⁹  The United Nations succeeded in its intention to promote a sense of international community causing a sharp increase in the amount of trade taking place between states.  The GATT included several key principles of free trade to be followed by the member nations of the UN.¹⁰  Much emphasis was placed on non-discrimination policies for other nation’s exports.  These policies were known as the Most Favored Nation (MFN) policy and the National Treatment Rule (NTR).  The MFN stipulates that anything given to one nation must also be given to all signatories of the GATT.  For example, if the United States decided to lower tariffs on produce coming from Costa Rica, they must in turn lower tariffs on produce imported from every member nation of GATT. The NTR states that GATT signatories are required to treat imports the same exact way that they regard domestic products.  No tariffs may be levied against imports from GATT nations, while domestic products go unfettered by any new taxes. A second major principle incorporated into the body of GATT is reciprocity.  Reciprocity requires that trading partners extend the courtesy of reducing tariffs a nation had to pay on a certain good, the nation receiving the reduction must also grant a tariff reduction to the other nation on a separate good.  The third key component of the GATT was the establishment of new safeguards.  Free trade is needed to have a robust and healthy economy, but it also has certain negative aspects to it.  It does produce long lasting strong economies, but it can also mean that labor suffers from lower wages so that the owners of capital can remain competitive in the face of new global competition.  Since free trade may on occasion prove itself to be harmful to a nation, the government such a nation can implement certain policies that would allow their state to move back towards a healthier economy.  One such policy may be found in Article XIX of the GATT.  This article allows for the government of a nation to increase tariffs in industries that are being impacted negatively by free trade and liberal economic policies.¹¹  The GATT served its purpose for many years, and with more and more nations joining the UN, free trade went from being a movement pioneered by a few great thinkers to a widely accepted and successful economic practice throughout the world.

The GATT was successful for a number years in carrying out its intended purpose, but some nations figured out ways to exploit the system and make more profit off of international trade than others.  The GATT performed exceptionally well at driving out tariff barriers imposed by nations against one another, but was less successful at fending off other forms of attacks on free trade.¹² Tariffs are the most common barrier to trade, but there exist a myriad of alternative forms of barriers that can be just as effective at granting one’s nation the upper hand in the international market and inhibiting free trade. Three common types of these forms could be quotas, subsidies, and regulations.¹³ Quotas mean exactly what they sound like, upper limits on specific goods. Subsidies are applied domestically rather than to a foreign product, but can inflict harm upon trade internationally but artificially lowering price on the domestically produced goods.  A prime example of this is the U.S. steel industry. Domestic subsidies to our steel industry have seen to it that the United States is the top steel exporter in the world, making it a very lucrative industry of trade for us, but this has also been criticized by other nations as giving U.S. steel an unfair advantage in the global trade arena.¹⁴ A third non-tariff barrier can be in the form of regulations.  Health and environmental regulations are powerful weapons in the battle to slow down free trade because at times imposing these regulations is necessary for the benefit of one’s citizens.  For instance, the U.S. does not import any beef from Argentina because of health regulations and the precautions Argentinians take in preparing the beef, or lack thereof.  The GATT did not have measures in place to prevent these actions from inhibiting free trade.  Signatories of the GATT understood that something needed to happen to slow the non-tariff barriers and have free trade continue as unencumbered as possible. Member nations would meet several times to discover a way to update GATT to enable it to target non-tariff barriers.  In the end, an entirely new system was created in the Uruguay Round of negotiation in 1995.¹⁵  The Uruguay Round engaged in discussion on numerous topics including how to create free trade in the sectors of trade like services, investments, and intellectual property rights. The nations present at this meeting discussed the shortcomings of GATT and they developed an entirely new trade organization: the World Trade Organization (WTO).¹⁶

The World Trade Organization is an international trade organization like no other.  It possessed all of the same safeguards for free trade as its predecessor, but it also ensured that it could protect free trade from non-tariff barriers which makes it unique. Unlike the GATT which had enumerated ways in which it would directly support free trade and do its best to mitigate or entirely prevent any tariff barriers to trade, the WTO devoted an entire wing of its organization to reviewing and stopping any attack on free trade. The Dispute Settlement Board was created with only one intention in mind.  It needed to be an area where nations could send a trade representative to file a formal complaint against another nation should they perceive policies inhibiting their free trade.  The Dispute Settlement Board (DSB) is a continued, yet enhanced version of a similar notion that was also in the GATT, however, the DSB of the World Trade Organization is much more effective.  The GATT body for trade disputes was not used much because according to author Craig VanGrasstek, the GATT’s board frequently sided with the defendant in trade dispute cases. Within its first two decades of the World Trade Organization’s trade dispute board’s existence, it averaged 25 cases per year.¹⁷ The increased level of fairness demonstrated by the WTO may be attributed to the fact that more and more nations have been signing on as affiliate countries devoted to the ongoing process of fostering free trade and higher levels of cooperation between nations.  As of July 2016, there are now 164 full members of the World Trade Organizations and twenty-three observer nations.¹⁸. Cases are deliberated by an appointed board of economists who examine the charges against a nation and hear from both the plaintiff’s and defendant’s trade ministers to decipher the issue at hand.  When a decision is made, what happens next is what makes the Dispute Settlement Board truly special.

The World Trade Organization has both the DSB and also has an appellate body that allows for defendants to appeal to overturn rulings giving each side the opportunity to be heard thoroughly.  The appellate board is comprised of seven individuals appointed by member countries who serve four year terms.  They hear again the trade representatives’ arguments and are given ninety days to pass down a ruling.  The appellate body of the Dispute Settlement Board was initially proposed in the Uruguay Round of negotiations on reforming the GATT, but faced opposition as many believed that it would not see widespread use.¹⁹  This lack of support for an appellate body has changed since every case adjudicated by the Dispute Settlement Board was appealed. The appellate court of economists has allowed for the WTO to become incredibly effective not only in stopping anti-free trade practices, but also in encouraging and maintaining member nations’ trust in the organization. The fact that the appellate body exists is further evidence that the organization does not favor one side over the other, but rather aspires to providing a fair and just tribunal.  This is important because, when the Dispute Settlement Board passes down a ruling, it is not only saying that the defendant is in violation of the tenets of free trade, it also imposes tariffs upon the defendant to correct any wrong doing.  The rulings are intended to show the defendant and the world that free trade is necessary for long term economic stability and promotes global peace through economic interaction. Overtime, WTO trade disputes have slowly decreased in frequency and I contend that this is because more nations are realizing the benefits of free trade.²⁰  Nations that trade together are allies and have intertwined economies.  As a result, no rational state would want to cut ties or attack an ally with whom its economy’s growth is tied to.  Free trade may not be perfect, but it does have the ability to bring the nations of the Earth closer to each other and increase prosperity.

The World Trade Organization has an incredible history. The GATT, its direct predecessor, was the first organization of its kind.  It was devoted to creating an environment where free trade flourished and countries could band together so that no further global conflict could spring forth from the rivalry that hails from exacerbated economic competition.   It failed to be able to regulate global trade after non-tariff barriers grew in popularity, but it was replaced by the WTO and soon these policies began to be targeted and eliminated.  For this, the World Trade Organization relies on its Dispute Settlement Board.  These officials are able to preside over trade cases and resolve any issues that arise. The appellate body, too, is a method in which countries may rest assured that the WTO is fair and carefully reviews all cases brought before the board. I believe that it is important to understand how the WTO was developed and the ideas behind it, because it is its commitment to defending free trade to foster peace that makes it such an important institution.  It also creates enforceable rulings that penalizes nations for breaking the principles of free trade. If more international organizations had punishing powers like the WTO, this could make them much more efficient.  The obvious counter argument is that by imposing rulings, and punitive tariffs upon guilty member nations, the WTO has the power and authority to trample upon the sovereignty of individual nations. There is merit to this argument, but by defending free trade and blocking any egregious attempts by states to gain too much dominance over other states, it is preventing the creation of conditions that have led to world wars in the past.  Its purpose was to make sure that no widespread warfare could occur again, and thus far it has had moderate success.  Proxy wars have been waged in time since World War II that may be used as an argument against the success of the WTO, however, I would argue that these wars had significant causes other than ones originating from crippling economic sanctions.  These nations were poor already and had political leaders and political events that guided them past the edge of instability and ultimately into wars. The World Trade Organization, like the United Nations, is not perfect, and is by no means a cure all for global issues, but it can solve numerous problems with regards to economic growth and stability.  The United Nations, if made into a stronger institution, could become even more instrumental in preventing wars with cultural or political causes just as the WTO has been helpful in preventing wars created by unfair trade practices. World leaders need to draw inspiration from the success of the World Trade Organization and see that when the world works together, and nations hold one another accountable, we all prosper.