An introduction to the World Trade Organisation

27 April 2017

In a nutshell, the World Trade Organisation (WTO) is an international organisation aiming to reduce all barriers to trade.

It achieves this by acting as a forum for countries to constantly re-negotiate to remove blocks they have on trade. These re-negotiations are called Rounds.

Barriers to trade include tariffs (taxes) on products or services coming into a country, as well as added tariffs/taxes that a foreign product or service might pay within a country.

Barriers also include other blocks on trade like licencing or packaging requirements or subsidies that a government might give to an industry like agriculture or the arts.

Set up in 1995, the WTO is a young organisation. Before this the GATT (General Agreement on Tariffs and Trade) co-ordinated international trade but did so without a permanent organisation to support it.

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How the WTO runs

Unlike other international economic organisations like the International Monetary Fund or the World Bank Group, each country has one vote  though decisions are generally made by consensus. (The exception is the EU which has a block vote of 28, soon to be 27.)

The WTO has 164 members. The EU is the only organisation to be a member of the WTO. All EU member states are also individual members but they always vote as the EU bloc. All other members are states or, like Hong Kong, have separate membership of the WTO to their status within a country.

Trading on WTO terms

The WTO does not have a set of minimum tariffs or rules with which each country must comply. Instead, it has two main elements.

First, it requires each country to set out a list of its tariff rates for each product and service. Each tariff set for a product and service is subject to negotiation with each other member of the WTO. Whether another member seeks to negotiate these tariffs depends upon whether they have an interest in that product.

For large trading states like the USA, China or Brazil these lists or schedules can be extremely long. The EU has a single schedule for all its members and it is quite extensive. All of these are available on the WTO website.

Second, the WTO requires states to apply their individual schedules, and non-tariff rules on packaging or licencing etc., in a non-discriminatory way.

Most-Favoured Nation and National Treatment rules

This non-discrimination breaks down into two basic rules. The first, Most-Favoured Nation, means you must give whatever your best treatment is for foreign products coming into your country to all members of the WTO. For example, if a country cut the tariff on imports of copper from 10% to 5% for exporters from one country, it would have to charge 5% to every other country as well.

The second basic rule, National Treatment, means that you must give your best internal conditions to foreign products or services. For example, if you do not require domestic products to have a warning as to sugar content in food you cannot require it of foreign products. These requirements are set out in detail in the WTO’s core treaties: GATT (General Agreement on Tariffs and Trade), GATS (General Agreement on Trade in Services) and TRIPs (Trade Related Intellectual Property Rights).

But there is a big exception. If you are in a customs union or free trade area, for instance you can treat products and services from the customs union better than you treat other WTO members. The EU is an example of a customs union.

What happens if a country breaks WTO rules?

The WTO also has a busy Dispute Settlement Body (DSB). Here countries can take cases against other countries they think violate WTO rules.

Some DSB hearings are public but they are generally held in private. The findings of the DSB are publicly available. The EU and the United States followed by China, India, Brazil and Argentina are the most common participants in disputes. When a country is found in violation of WTO rules it is required to change its laws to comply with them.

If countries choose not to do so, the winning state can take retaliatory action in the form of trade sanctions such as introducing higher tariffs.

The main purpose of the WTO is to be a forum for negotiation. However, negotiation Rounds can take a very long time. The latest Round called Doha, which started in 2001, recently ended with minimal success.

While the WTO is seen by its members to work well, it is worth bearing in mind that its negotiations are long and arduous. As an organisation, it facilitates world trade but it does not set the tariff or tax rates that make trading expensive. Its members and their willingness to negotiate with each other dictates how successful or not the organisation will be in the future.

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