GATT and WTO – UPSC Economy Notes

Introduction: The General Agreement on Tariffs and Trade (GATT) emerged in 1947 with the goal of establishing a fair and open international trading system by eliminating trade barriers among member countries. GATT was officially adopted in 1948 with 23 founding members, including India. Over time, GATT evolved through a series of negotiations known as trade rounds, addressing various issues and expanding its scope.

GATT Trade Rounds: The GATT trade rounds were a series of negotiations that focused on specific issues and led to agreements among member countries. The eight GATT rounds were:

1. Havana Round (1947):
2. Annecy Round (1949):
3. Torquay Round (1950):
4. Geneva Fourth Round (1956):
5. Dillon Round (1960-1961):
6. Kennedy Round (1962-1967):
7. Tokyo Round (1973-1979):
8. Uruguay Round (1986-1994):
   • The Uruguay Round was particularly significant and marked a transformative period in global economic dynamics. It spanned the longest duration under GATT and witnessed crucial changes:
     • Industrial democracies gained acceptance among developing countries.
     • China adopted significant economic reforms (LPG policies).
     • The communist economic model lost prominence.
     • Developing countries reconsidered protectionist policies.
     • The disintegration of the Soviet Union weakened the bargaining position of the third world.

Uruguay Round and the Creation of WTO: The Uruguay Round introduced new dimensions to GATT negotiations, addressing areas such as intellectual property rights, agriculture, services, and foreign direct investment. Initially met with resistance from developing countries, the expansion of the agenda was influenced by Western powers, ultimately leading to their reluctant agreement.

Under the guidance of the Director-General Arthur Dunkel, the negotiations produced the Dunkel Draft. Upon achieving consensus, this draft transformed into the Marrakesh Treaty, which was signed in Marrakesh, Morocco, in 1994. This landmark agreement paved the way for the establishment of the World Trade Organization (WTO) at the beginning of 1995.

The creation of the WTO represented a significant shift in global trade governance, replacing GATT and introducing a more comprehensive and rules-based framework for international trade relations.

GATT vs. WTO:

1. Nature:
   • GATT is a treaty, whereas WTO is an organization.
2. Dispute Settlement:
   • GATT lacked dispute settlement processes, unlike WTO which has established mechanisms for resolving disputes between member countries.
3. Scope:
   • GATT primarily focused on traditional trade issues like tariffs and quotas, while WTO covers a broader range of areas related to international trade.
4. Secretariat and Institutional Foundation:
   • GATT had a relatively small secretariat and lacked an institutional foundation for implementing rules, unlike WTO, which has a more structured organization.

World Trade Organization (WTO):

• The WTO, established in 1995, replaced GATT and is headquartered in Geneva, Switzerland, with 164 member countries. Afghanistan became the 164th member, Liberia the 163rd, and Kazakhstan the 162nd. In addition to states, the European Union is also a member.
• WTO members don’t need to be full sovereign nations; they must be customs territories with full autonomy in external commercial relations. Hong Kong and Taiwan are WTO members, but Iran is not.
• The Director-General heads the WTO, serving a four-year term. Unlike the UN, WTO is autonomous and not part of the United Nations. There is a global arrangement between the two entities, involving information exchange, representation at meetings, and cooperation between secretariats.
• Unlike organizations with weighted voting, WTO follows a ‘one country, one vote’ system, making it relatively democratic. Decisions are generally made by consensus.
• WTO consensus is often reached through informal negotiations between small groups of countries, known as ‘Green room’ or ‘mini-ministerials.’ India hosted two mini-ministerial meetings in 2018 and 2019, promoting multilateralism and addressing new challenges faced by the WTO.

WTO Ministerial Conferences:

1. 1995: WTO came into existence.
2. 1996: First ministerial conference in Singapore.
3. 1998: Second ministerial conference in Geneva, Switzerland.
4. 1999: Third ministerial conference in Seattle, Washington, USA.
5. 2001: Fourth ministerial conference in Doha, Qatar, initiating the Doha Development Round.
6. 2001: China joined WTO after 15 years of negotiations.
7. 2003: Fifth ministerial conference in Cancún, Mexico, forming the G20.
8. 2005: Sixth Ministerial in Hong Kong.
9. 2009: Seventh Ministerial in Geneva.
10. 2011: Eighth Ministerial in Geneva.
11. 2013: Ninth Ministerial in Bali.
12. 2015: Tenth Ministerial in Nairobi.
13. 2017: Eleventh Ministerial Conference in Buenos Aires, Argentina.
14. 2020: Twelfth Ministerial in Astana, Kazakhstan (postponed due to the pandemic).

Decision-Making Hierarchy:

1. Ministerial Conference: Highest-level decision-making body, meets every two years, each member represented by its commerce minister.
2. General Council: Carries out decisions of Ministerial Conferences, composed of representatives from all member governments.
3. Bodies under General Council:
   • Dispute Settlement Body: Composed of all members, deals with dispute resolution.
   • Trade Policy Review Body (TPRB): Conducts trade policy reviews of members, where the WTO General Council serves as the trade policy review body.
4. Councils for Trade (Third Level):
   • Council for Trade in Goods
   • Council for Trade in Services
   • Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS)
5. Other Bodies Reporting to General Council:
   • Six bodies covering issues such as trade and development, environment, regional trading arrangements, and administrative matters.

The WTO’s decision-making structure involves multiple levels of governance, with Ministerial Conferences setting the overall direction, the General Council overseeing implementation, and specialized bodies addressing specific aspects of trade.

Dispute Settlement in WTO:

Disputes in the World Trade Organization (WTO) are addressed through a structured process:

1. Request for Consultations:
   • Disputes arise from trade policies violating WTO rules.
   • The complainant initiates the dispute by requesting consultations with the involved party.
   • Bilateral consultations provide an opportunity to find a solution without litigation.
2. Adjudication by Panel:
   • If consultations fail within 60 days, the complainant can request adjudication by a panel.
   • The General Council serves as the Dispute Settlement Body (DSB), overseeing dispute resolution.
3. Appellate Body:
   • DSB conclusions can be challenged in the Appellate Body, a standing body of seven persons.
   • The Appellate Body hears appeals from panel reports and can uphold, modify, or reverse legal findings.
4. Implementation of Rulings:
   • After a ruling, the erring nation is directed to make changes in its laws to comply with WTO rules.
   • Failure to comply may lead to the complainant country taking cross-retaliatory measures.

Challenges and Concerns:

• While the process is multilateral, there is no direct punishment for the erring country.
• Poor countries may face challenges in retaliating against richer nations.

Crisis in the Appellate Body:

• The Appellate Body is responsible for hearing appeals and ensuring the consistency of decisions.
• As of the information cutoff in January 2022, the Appellate Body faces a crisis, affecting its functioning.
• The crisis has implications for the timely resolution of disputes and the overall effectiveness of the WTO dispute settlement mechanism.

WTO, Cross-Retaliation, and Airbus Dispute:

1. Background:
   • In 2005, the U.S. filed a case against the EU for allegedly providing illegal subsidies to Airbus.
   • The EU counter-complained against the U.S., citing support for Boeing.
   • In October 2019, the WTO approved U.S. tariffs on $7.5 billion worth of European goods in retaliation for the EU’s support to Airbus.
2. Cross-Retaliation and Appellate Body Crisis:
   • WTO Appellate Body orders are binding, and non-compliance allows the aggrieved country to cross-retaliate.
   • The Appellate Body, the highest court of the WTO, faced a crisis in 2019 with only three judges serving out of the sanctioned seven.
   • Minimum three judges are needed to form a bench for dispute resolution.
3. Appointment Issues:
   • Appellate Body judges’ appointments occur by consensus, allowing any member to delay the process.
   • The U.S. repeatedly vetoed the initiation of the nomination and appointment process, aggravating the crisis.
4. Implications:
   • The Appellate Body’s potential paralysis may lead to countries abandoning the multilateral system.
   • Unilateral retaliatory measures could replace the formal appeals process.
5. Significance of Arbitration Process:
   • The arbitration process is crucial for the WTO and underpins its ability to issue binding rulings.
   • The future of the WTO is intertwined with the future of its formal appeals process.

The crisis in the Appellate Body raises concerns about the effectiveness of the WTO in resolving trade disputes and maintaining a rules-based international trading system.

Foundational Principles of WTO:

The World Trade Organization (WTO) operates based on three foundational principles:

1. National Treatment:
   • Definition: National treatment prohibits discrimination between imported and domestically produced goods concerning taxation or government regulation.
   • Application: It ensures that domestically produced and imported goods are treated equally in terms of purchase by anyone in the country.
2. Most Favored Nation (MFN):
   • Definition: MFN treatment denotes normal trading relations between two countries, requiring WTO members to grant each other MFN status.
   • Non-Discrimination: Members must treat all trading partners equally, adhering to the principle of non-discrimination.
   • Importance: It is a fundamental principle across various WTO agreements, promoting equal treatment, trade liberalization, transparency, and preventing protectionist measures.
3. Special and Differential Treatment (S and D):
   • Definition: Special and differential treatment is a principle recognizing the differing capacities and needs of developing countries, allowing them more lenient terms.
   • Aim: It aims to address the economic and developmental disparities among WTO members.
   • Flexibility: S and D provisions offer developing countries flexibility in implementing agreements and transitioning into the global trading system.

Significance of MFN:

• Trade Expansion: Encourages increased trade by fostering normal relations without trade barriers.
• Global Trade Liberalization: Serves as the basis for global trade liberalization, ensuring fair competition based on cost and quality.
• Benefits for Small Countries: Provides benefits to small countries, protecting them from bilateral pressures.
• Simplification of Rules: Simplifies trade rules with a single set of tariffs for all countries.
• Prevention of Protectionism: Prevents special interests from obtaining protectionist measures at the domestic level.

These principles form the core framework of the WTO, promoting fair and non-discriminatory trade practices among its member countries.

Solar Panels and WTO Dispute:

National Solar Mission:

• Objective: Part of the National Action Plan on Climate Change, aiming for a solar power capacity of 100 GW by 2022.
• Guidelines for Solar Thermal: Mandated 30% domestic content to incentivize the growth of the local solar industry.

Controversy and WTO Challenge:

• Developer vs. Equipment Manufacturers: Power project developers favored sourcing globally for flexibility, quality, and technology, while solar PV equipment manufacturers wanted a controlled environment to boost domestic sales.
• WTO Challenge: The U.S. Trade Representative challenged India’s domestic content requirements in the WTO, alleging discrimination against U.S. exports.

WTO Ruling:

• Violation of WTO Rules: The WTO ruled in favor of the U.S., stating that India’s domestic content requirements violated WTO rules of national treatment.
• Discrimination: The requirements were considered discriminatory against U.S. exports.

Exceptions to Most Favored Nation (MFN) Principle:

1. Regional Trade Blocs: Entities like the European Union and the former North American Free Trade Agreement (NAFTA or US-MCA) allow for exceptions, maintaining tariff walls with non-member nations.
2. Generalized System of Preferences (GSP): Allows imports from poor countries at lower or zero tariffs.
3. India-Pakistan Exception: Recognizing historical economic ties, the WTO allows India and Pakistan to enter special arrangements, considering the exceptional circumstances of their establishment as independent states.

India’s Response:

• Withdrawal of MFN Status: In 2019, India withdrew the MFN status for Pakistan following a terror attack in Pulwama, hiked customs duty by 200% on Pakistani goods.
• National Security Exception: This action was justified as it related to national security, an allowed exception under WTO rules.

This case highlights the balance between promoting domestic industries and adhering to international trade rules, with exceptions made for regional cooperation and national security concerns.

Special and Differential (S and D) Treatment in WTO for Developing Countries:

WTO Agreements and S and D Provisions:

• WTO Agreements include Special and Differential (S and D) treatment provisions for developing countries.
• Developing countries, the majority of WTO members, are further categorized into developing countries and least developed countries (LDCs).

Developing Country Status:

• WTO lacks specific definitions for developed and developing countries.
• Members can self-declare their status as developed or developing countries. Challenges can be raised by other members on these declarations.

Privileges and Benefits for Developing Countries:

1. Extended Transition Periods: Developing countries are granted longer transition periods before full implementation of certain agreements. For example, developing countries had ten years to implement specific provisions of the intellectual property rights regime.
2. Agricultural Subsidies: Developing countries can provide agricultural subsidies up to 10% of the value of produce, compared to 5% for developed countries.
3. Generalized System of Preferences (GSP): GSP, a preference scheme, is available to developing countries. However, the decision to extend GSP benefits is at the discretion of the developed country, determining the list of eligible developing countries.

Least Developed Countries (LDCs):

• Designated by the United Nations (UN), there are currently 47 LDCs, with 36 being WTO members.
• LDCs are entitled to GSP benefits.

Challenges and Considerations:

• Self-declaration of developing country status can be challenged by other WTO members.
• GSP benefits are subject to the discretion of developed countries.

Summary: S and D provisions aim to address the developmental needs and challenges of developing countries within the WTO framework, offering specific benefits and preferences. The flexibility provided recognizes the diverse economic conditions and capacities of member nations.

Key WTO Agreements:

1. Agreement on Agriculture (AoA):
   • Addresses trade in agricultural products.
   • Covers areas such as market access, domestic support, and export subsidies.
2. General Agreement on Trade in Services (GATS):
   • Focuses on international trade in services.
   • Defines rules and commitments for the liberalization of trade in various service sectors.
3. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS):
   • Deals with the protection of intellectual property rights on a global scale.
   • Establishes minimum standards for various forms of intellectual property.
4. Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement):
   • Sets constraints on members’ policies related to food safety, animal health, and plant health.
   • Addresses issues such as contaminants, pesticides, inspection, and labeling.
5. Agreement on Technical Barriers to Trade:
   • Ensures that technical regulations and standards, as well as testing and certification procedures, do not create unnecessary trade barriers.
6. Bali Package:
   • Resulted from the Ninth Ministerial Conference of the WTO in Bali, Indonesia, in 2013.
   • Aims at lowering global trade barriers.
   • Part of the Doha Development Round, initiated in 2001.
   • Represents the first agreement reached through the WTO approved by all its members.

Principles of WTO Negotiations:

• Single Undertaking: Negotiations occur on the principle of the single undertaking, where every item is part of an indivisible package. Nothing is agreed upon separately, and agreements are reached only when all aspects are settled.

Summary: The WTO oversees a comprehensive set of agreements covering various aspects of international trade, including agriculture, services, intellectual property, and sanitary measures. The Bali Package, resulting from the Ninth Ministerial Conference, reflects a commitment to reducing global trade barriers and is part of the broader Doha Development Round. The principles of negotiations, including the single undertaking, emphasize the interconnected nature of agreements within the WTO framework.

Agreement on Agriculture (AoA):

The Agreement on Agriculture (AoA) within the framework of the World Trade Organization (WTO) addresses key aspects related to international trade in agricultural products. It consists of three pillars:

1. Domestic Support:
   • Green Box: Subsidies that are not considered trade-distorting and have no limits. To qualify, these subsidies must not cause significant distortion of trade and must be government-funded. Examples include environmental and conservation programs, direct income support decoupled from production levels, research funding, and disaster relief.
   • Amber Box: Subsidies that are considered trade-distorting and subject to limitations. Governments are required to limit such support within 5 to 10 percent of the value of production, with developed countries limited to 5 percent and developing countries, like India, limited to 10 percent.
   • Blue Box: Direct payments under a production-limiting program. There is no limit on these subsidies. For example, farmers may be paid to limit production to allow the farm to be left fallow for soil fertility regeneration.
2. Export Subsidies:
   • Prohibits the use of export subsidies.
3. Market Access:
   • Addresses issues related to market access for agricultural products.

The classification of subsidies into the Green Box, Amber Box, and Blue Box is based on whether the subsidies distort trade and to what extent such distortion is allowed. Green Box subsidies have no limits, Amber Box subsidies are subject to limitations, and Blue Box subsidies have no limits but involve direct payments under production-limiting programs.

Examples:

• The Rythu Bandhu Scheme of Telangana and Pradhan Mantri Kisan Samman Nidhi 2019 are examples of schemes involving direct income support to farmers, falling under the Green Box.

The AoA plays a crucial role in regulating agricultural trade by addressing the impact of domestic support, export subsidies, and market access on global trade dynamics in the agricultural sector.

India and the Amber Box:

India’s engagement with the WTO, particularly concerning the Amber Box subsidies, has been a topic of contention. The Amber Box includes subsidies considered trade-distorting, and WTO imposes limits on such support.

Key Points:

1. Minimum Support Price (MSP) Program:
   • India operates a Minimum Support Price (MSP) program, where the government pays farmers for the grains they sell, supporting agriculture investment, ensuring food security, and stabilizing prices.
2. WTO Cap on Subsidy:
   • WTO imposes a cap on the subsidy, limiting the amount a country can provide. India argues against the limitation and questions the calculation methodology.
   • The calculation is based on a 1986-88 base year, with restricted allowances for inflation since then. India contends that the base year does not accurately reflect the changes in input prices, leading to a discrepancy in subsidy calculations.
3. Peace Clause:
   • A temporary ‘Peace Clause’ was introduced at the WTO Bali conference in 2013. This clause temporarily shields countries from legal challenges if their subsidies breach WTO obligations.
   • The Peace Clause was meant to be an interim arrangement, and a permanent solution was to be negotiated by 2017. However, the clause has been extended indefinitely until a satisfactory permanent solution is in place.
   • The Peace Clause ensures that countries, including India, can continue their food security programs without legal challenges, even if the subsidies exceed WTO limits.

India advocates for a fair and accurate calculation of subsidies, considering the actual economic conditions and inflation rates. The issue reflects the complexities in aligning global trade rules with the diverse economic and agricultural conditions of individual nations. The quest for a permanent solution continues within the WTO framework.

FAQs

1. What is GATT and how is it related to WTO?

• Answer: GATT stands for the General Agreement on Tariffs and Trade, a multilateral agreement aiming to promote international trade by reducing or eliminating trade barriers such as tariffs and quotas. In 1995, GATT transformed into the World Trade Organization (WTO), which inherited and expanded upon GATT’s principles and functions, becoming the global institution overseeing international trade rules and dispute resolution.

2. What are the objectives of GATT/WTO?

• Answer: The primary objectives of GATT/WTO are to promote free and fair trade among nations, foster economic development, raise living standards, and ensure the predictability and stability of the international trading system. It seeks to achieve these goals through negotiations, agreements, and dispute settlement mechanisms.

3. How does GATT/WTO facilitate international trade?

• Answer: GATT/WTO facilitates international trade by providing a framework for negotiations among member countries to reduce trade barriers, negotiate trade agreements, and resolve disputes. It establishes rules governing trade in goods, services, and intellectual property, thereby promoting transparency, predictability, and non-discrimination in global commerce.

4. What are the principles governing GATT/WTO?

• Answer: GATT/WTO operates based on principles such as non-discrimination (most favored nation and national treatment), transparency, reciprocity, and binding commitments. These principles ensure that member countries are treated equally in trade matters and that trade policies are transparent and predictable, fostering trust and cooperation among nations.

5. How does GATT/WTO resolve trade disputes?

• Answer: GATT/WTO provides a dispute settlement mechanism to resolve trade disputes among member countries. This mechanism involves consultation, mediation, and adjudication by independent panels or the Appellate Body. The rulings issued are binding, aiming to enforce compliance with trade agreements and maintain the stability and integrity of the global trading system.

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