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The Culture of the WTO: Why it Needs to Change

  • Debra P. Steger

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  • Debra P. Steger
    University of Ottawa

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1 Introduction

Like the countries which form its membership, the World Trade Organization (WTO) has a culture. Its culture or theology is not derived from the Uruguay Round agreements, but rather from the culture and practice of the General Agreement on Tariffs and Trade (GATT). Moreover, the culture of the WTO does not reflect the present geo-political realities and power relationships among its Members. It was developed in a very different time by a small group of countries – the original contracting parties of the GATT 1947 – for a very different purpose.

A major institutional negotiation took place in the Uruguay Round that attempted to set out a new “constitution” for the multilateral trading system (Steger 2004: 25-46). The results of this negotiation are reflected in the Marrakesh Agreement Establishing the WTO (the Marrakesh Agreement) and the Understanding on Rules and Procedures Governing the Settlement of Disputes (the DSU). The dispute settlement system of the WTO has been used very actively by Members, and is viewed as being strong and effective by its Members and commentators. In contrast, the political institutions of the WTO do not function much differently than they did in the previous GATT system – which is not very effectively. Despite the fact that the institutional rules have been changed, allowing WTO Members more flexibility in how they take decisions and amend agreements, the experience of Members since 1995 has been to follow the old GATT procedures and practice rather than using the flexibilities provided in the Marrakesh Agreement.

Thus, even though the rules in the Marrakesh Agreement provide Members with flexibilities and options for taking decisions and making new rules, such as amending existing provisions or adding new agreements, it is the culture of the WTO (which is a carryover of the culture of the old GATT) that inhibits progress. The rules are there, but the Members do not use them, rather, they rely on the old GATT practice with which they are familiar.

The problem is that the WTO is not the old GATT. Its Membership has changed from the original 23 contracting parties in 1948, to 128 contracting parties of the GATT in 1994 (BISD 42S/95, ix), to 150 Members of the WTO today. The overwhelming majority of WTO Members are developing countries, including the major emerging economic powers of China, India, and Brazil. Although the developing countries are not a homogeneous group, they hold the balance of power in the WTO. The major developed powers, United States and European Union, cannot drive the system as they could in the old days. Sylvia Ostry has characterized the old GATT system as a “bicycle built for two” with the United States in the front seat and the European Communities in the back (2002: 299-300). The current WTO is more like a bus careening down a hill with many drivers, none of whom are certain about where they want to go. In the past, the United States always drove the negotiations in previous Rounds - from the original negotiation in 1947 through the Tokyo Round in the 1970s and the Uruguay Round in the 1980s and 90s. Today, even if the United States and European Union did try to demonstrate some leadership in the Doha Round, the developing countries would not let them set the agenda and drive the negotiations. Those days are over.

Some of the major new economic powers in the WTO, in particular China, are not market economies. This poses enormous challenges for the multilateral trading system which is based on market principles and principles of non-discrimination and transparency. Vietnam has recently become a Member of the WTO, and Russia remains in the process of accession. The accession of these new Members raises obvious difficulties for the implementation and administration of WTO obligations.

The culture of the WTO needs to change in order to reflect the new political realities in the international economic system. President Vladimir Putin of Russia recently emphasized:

The new architecture of economic relations implies a principally new approach to the work of international organizations. It has become increasingly apparent of late that the existing organizations are not always up to the measure in regulating global international relations and the global market. Organizations originally designed with only a small number of active players in mind sometimes look archaic, undemocratic and unwieldy in today’s conditions. They are far from taking into consideration the balance of force that has emerged in the world today. This means that the old decision-making methods do not always work. The World Trade Organization and the Doha round of trade negotiations, which are proceeding with great difficulty, to put it mildly, provide a clear example in this respect.

Putin 2007

He also highlighted that the rapid growth in regionalism has emerged for a reason:

It is not coincidence that a parallel system of regional alliances and agreements is taking shape, essentially giving the global market a new structure. And the trade liberalization process is now taking place more and more through these new agreements. It is worth thinking about creating regional Eurasian free trade institutions in order to encourage trade and investment. These institutions could of course draw on and use the positive experience of the World Trade Organization.

Ibid

The mandate and purpose of the WTO is no longer clear. The mandate of the GATT system was continuing the process of trade liberalization – reducing barriers to trade in order to encourage economic growth that would bring greater wealth and prosperity. The preamble to the GATT 1947 reflected these goals. The preamble of the WTO Agreement is broader – it includes the goals of environmental sustainability and development. These new goals have been recognized by the Appellate Body and the dispute settlement bodies, but they have not become part of the accepted theology or culture of the WTO as perceived by its Members. So, there is a disconnect between what the preamble of the WTO says the purpose of the organization is and what its Members perceive it to be. There is also a disconnect between the actual procedures of the WTO for decision making and rule making, and the practice of the Members in taking decisions. Why is there the current paralysis in the Doha Round? The short answer is that the world has changed, and the WTO, because of the cultural attitudes of its Members, is mired in the old GATT theology of the past. Until the Members of the WTO wake up and face the new realities, and develop decision making and rule making procedures that reflect the new geo-political power relationships, there will continue to be paralysis in the system.

Unlike other international organizations which have Secretaries-General and/or Executive Boards and Secretariats with real power, the WTO is driven solely by its Members acting collectively (like the old GATT contracting parties). The Members will not allow the Director-General to have any real power, nor will they delegate any significant policy setting or even administrative or budgetary responsibilities to the Director-General or the Secretariat. There is no Executive Committee or Management Board that sets overall administrative or substantive policy or direction for the WTO.

Who and what is the WTO? It is the governments who are its Members, nothing more, nothing less. That is why their perceptions of what the WTO is, and how it should function, are critical. There is no institutional counterbalance to the collectivity of the Members, except for the dispute settlement system. Rather than weakening the dispute settlement system, the political institutions – including the decision making and rulemaking procedures – of the WTO need to be strengthened.

The current impasse in the Doha Round has occurred because of the rapid transformation in the global economy, in particular, as a result of the recent tremendous growth of the emerging economies – China and India. The geopolitical power relationships have changed – China is recognized by the United States as a major economic power – but the new “clubs” in international relations have not yet been formed. The Doha Round, while important, is fundamentally about market access – in agriculture, on manufactured goods, and on services. In many ways, this is an old agenda from a different era. The international trading system has moved from a bi-polar system driven by the United States and Europe to a multi-polar one, but most Members have not yet figured out what is in their interest given this new situation. The dispute settlement system continues to work effectively, but the WTO decision making and rule making machinery needs a major overhaul in order to equip the organization for the challenges of the new economic order. One of the real challenges for the WTO, as well as for other international organizations such as World Intellectual Property Organization, the World Bank, and the International Monetary Fund, is to develop new institutional structures and models that will allow these organizations to collectively determine their new mandates, set priorities, and develop plans for the future.

2 The “Mantras”

Professor John Jackson, the “father of international trade law”, has identified seven “mantras” that WTO Members faithfully chant, mostly he says, to avoid having to think issues through (2001: 71). The “mantras” provide a theology or an explanation for the way things are done and decisions are taken in the WTO which prevents Members from dealing with the really difficult and challenging issues, such as the proper mandate of the WTO, its relationship to the outside world, the role of development in the organization, and how the proliferation of regional trade and investment agreements affect the multilateral system. As a result, developing countries feel disenfranchised in the system and representatives of civil society believe that the WTO is a closed, unaccountable organization run by faceless bureaucrats. That is not how the WTO works in practice, but it is clear that the perceptions do not accord with the realities. Professor Jackson’s list of “mantras” includes:

The WTO is a Government to Government Organization

Increasingly, the stakeholders in international trade – companies and interest groups - are global. The issues and problems are global. Understandably, the stakeholders would like to influence the international institutions in order to resolve global problems.

The WTO is a Member-driven Organization

WTO Members are opposed to the Director-General and Secretariat having any real power or authority. There is a lack of formal management or governance structures in the WTO. All Members of the WTO can participate in every Council and Committee meeting.

Decisions are Taken in the WTO by Consensus

The GATT 1947, Article XXV provided that decisions of the CONTRACTING PARTIES were to be taken by majority vote. Consensus decision making is a practice that developed in 1960s. Decision making rules became more complex as a result of the institutional negotiations in the Uruguay Round. The United States, supported by Japan, insisted upon the practice of consensus decision making being enshrined as a rule. And so, in Article IX of the Marrakesh Agreement, the practice of consensus decision making became recognized as the rule. However, for every type of decision contemplated by Article IX (decision making) and Article X (amendments), there is a fallback to different types of majority voting if consensus cannot be reached after a specified time. Although the rules provide for flexibility in methods of decision making, WTO Members have only resorted to voting once in the history of the WTO (Steger 2004: Supra note 1). Why? The culture of the WTO forbids even thinking about voting.

Nation State Sovereignty must be Preserved at all Costs

By engaging in international cooperation and entering into treaty obligations, governments necessarily cede some sovereignty. Europeans have a wonderful concept, rather than worrying incessantly about losing sovereignty, they speak about the benefits that come from “pooling” sovereignty. The WTO is often criticized because its rules reach behind the border and affect the regulatory autonomy of states in a range of areas. Article III of the GATT, the national treatment principle, has in fact limited domestic regulatory autonomy since 1948. This is not new. However, it is true that the scope of the Agreement on Technical Barriers to Trade, the Agreement on Sanitary and Phytosanitary Measures and the General Agreement on Trade in Services (GATS) go far beyond traditional GATT rules. The GATS Article VI negotiations on “domestic regulation” could extend that reach even deeper into national autonomy. And, of course, the dispute settlement cases continue to clarify exactly how deep and how far those intrusions are.

Single Undertaking

The Uruguay Round agreements were negotiated, agreed and accepted as part of a “single undertaking” – an “all or nothing” package. The idea of the “single undertaking” was developed in order to repair the serious fragmentation in the GATT 1947 system that resulted from the Tokyo Round of multilateral trade negotiations. In the old GATT system, there were different levels of obligations because of the Tokyo Round “Codes” each of which had different memberships. Some commentators, including Professor Jackson, have queried whether the “single undertaking” is too strict a rule and have suggested that there should be some flexibility in adding new plurilateral agreements. Both the Report of the Consultative Board to Director-General Supachai Panitchpakdi on “The Future of the WTO: Addressing Institutional Challenges in the New Millenium” (the Sutherland Report), published in 2004, and the recent Report of the Atlantic Council, “Transatlantic Leadership for a New Global Economy” recommended that the idea of “variable geometry” be explored (WTO 2004; Eizenstat & Aldonas 2007). Article X of the Marrakesh Agreement makes it difficult to incorporate new plurilateral agreements into the WTO Agreement. To add new agreements, a consensus decision of the General Council is required.

The argument could be made, however, that the WTO has moved away from the single undertaking in several key decisions that have been taken since 1995. Indeed, the obligations and commitments of recently acceded countries, such as China and Vietnam, with their lengthy protocols of accession, are in many significant aspects greater than those of the original Members of the WTO. The information technology understanding and commitments agreed in 1998 and the telecommunications reference paper agreed in 1997 were, in effect, plurilateral understandings that were implemented by means of commitments in certain WTO Members’ Schedules. The principle of the “single undertaking” has already been deviated from, especially in the protocols of accession of many Members that have been approved since 1995 as well as in some of the understandings and agreements concluded since that time.

MFN is a Sacrosanct Principle, no Reservations

This is a myth; the WTO Agreement is replete with exceptions, including Article XXIV which allows regional trade agreements to be established and the Enabling Clause which came into effect in 1979 allows developed countries to provide preferences for developing countries. The recent protocols of accession for Members, such as China, that have acceded to the WTO in the past few years also have many provisions which derogate from the Most-Favoured-Nation (MFN) Principle.

Regionalism is on the rise, and with it, comes a whittling away of respect for and adherence to the principle of MFN. The Sutherland Report sounded a clarion call about the potential dangers of the rapid increase in the number of regional trade agreements (RTAs) (The Sutherland Report, see supra, note 8, Ch II.). They bring with them the potential for restrictive rules of origin which can create trade diversion and raise barriers to trade. There will be an increasing focus on regionalism, especially in Asia and Africa where, until recently, there were not many RTAs. That is the political reality. The real question is whether the WTO can develop appropriate surveillance mechanisms to review and supervise the administration of these agreements to reduce their potential negative impacts on the multilateral system.

The sheer number of regional agreements with restrictive rules of origin is indeed hampering the Doha Round negotiations on market access both with respect to agricultural products as well as non-agricultural products. Because of the complicated rules of origin in the over 300 RTAs around the world, it has become overwhelmingly difficult for negotiators to agree on formulae for reduction of tariffs. This is one of many reasons why the Doha Round negotiations have been so challenging and complex.

In any Round or Multilateral Negotiation, there must be Early Deliverables

Given the length of time that Rounds usually take, government negotiators sometimes set unrealistic goals to conclude certain aspects of the Round early so as to appear to be making progress. The problem with this strategy is that deadlines are established that cannot be met, and then they are repeatedly amended. This gives the general public the perception that the Round and/or the WTO is continually failing to meet its objectives. In the Tokyo Round, there was an “early harvest” on some improvements to the GATT dispute settlement system at the 1988 Montreal Ministerial Meeting to assuage the impression that the Round had failed. Often it is the dispute settlement system that is tinkered with to create an illusion of progress. In the Doha Round, the negotiators took the opposite approach, and agreed that the changes to the DSU would not be agreed until all of the other negotiations were complete.

The real problem is the conviction of WTO Members that changes to the agreements can only be made through major multilateral, multi-issue Rounds. The Marrakesh Agreement explicitly allows for modifications to be made to the existing agreements and new agreements to be negotiated whenever and however the Membership wishes. In fact, the Uruguay Round legal texts of the WTO Agreement specifically contemplate and mandate “built-in” negotiations in many agreements, including the General Agreement on Trade in Services, the Agreement on Agriculture, the Agreement on Rules of Origin, among others.

3 Myths and Misunderstandings

I would add the following four myths and misunderstandings to Professor Jackson’s list:

The WTO is a “Contract” that Countries can Withdraw from at any Time

While it is true that countries acceded to the GATT 1947 through a legal instrument called the Protocol of Provisional Application, and the original GATT allowed contracting parties to withdraw on sixty days notice (Protocol of provisional applications, Article 5) no country has formally withdrawn from the GATT 1947 or from the more recent WTO Agreement[1] The WTO now has 150 Members, with another 29 in the process of accession clamoring to join. [2] The Marrakesh Agreement provides that a Member can withdraw from the WTO Agreement six months after it has provided notice of withdrawal to the WTO (Art. XV). Withdrawal, however, is subject to the “single undertaking” requirement, which means that a country cannot withdraw from only one part of the WTO treaty, it must withdraw from the WTO Agreement as a whole. [3]

The WTO Agreement is a treaty, an international agreement, with rules and obligations that are binding in international law. It is not a commercial contract that countries can cancel whenever it suits them, nor is it “soft law” that is not binding on Members. The myth that it is simply a “contract” is related to the common perception that it is nothing more than a collection of reciprocal exchanges of concessions (Pauwelyn 2003: 907-951; Bagwell et al 2002: 56-76).

The WTO, Like the GATT, is About Reciprocal Exchanges of Concessions – the Goal is to Balance Concessions – it is not About Rules

Another carry-over from the old GATT is the belief that the WTO Agreement is comprised of a collection of bilateral, reciprocal exchanges of concessions (Pauwelyn 2003: 925-945). To the contrary, the Uruguay Round legal texts comprising the WTO Agreement contain hundreds of pages of treaty rules, many of which are not under negotiation in the Doha Round. Many of these agreements do not have Schedules of access commitments attached to them, and consist only of substantive rules. In fact, only the GATT 1994, the GATS, and the Agreement on Agriculture have market access schedules that relate to them. Other major agreements, such as the Agreement on Technical Barriers to Trade, the Agreement on Trade-Related Intellectual Property Rights, and the Agreement on Sanitary and Phytosanitary Measures, do not have schedules attached to them and are not fundamentally about market access. Rather, they establish international rules that limit countries from regulating in ways that unduly restrict or burden commerce.

The Purpose of the WTO is Exclusively Trade Liberalization

The mandate of the WTO is no longer clear. This is a major problem in the Doha Round that is contributing to its current impasse. The old analogy used by trade policy “insiders” was that trade liberalization within the GATT was like a bicycle – you had to keep pedaling or you would fall off. Sylvia Ostry observed some years ago that it would be more appropriate to describe the post-Uruguay Round WTO as a bus with many drivers, and no one knows where it is going (Ostry supra, note 3, 299-300).

While especially developed country negotiators would describe the purpose of the WTO as solely dedicated to trade liberalization, it is clear that the developing country Members of the WTO (which now form the vast majority of its membership) also view development as a key goal of the organization. There is presently, it is fair to say, no common understanding on what the mandate of the WTO is. However, if one takes into account the views of two-thirds of its membership, it is clear that the WTO serves the development agenda, and is no longer solely concerned with the goal of accelerating trade liberalization.

The preamble to the Marrakesh Agreement differs in some respects from the preamble to the GATT 1947. It includes the goals of “optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment” and recognizes that WTO Members are at “different levels of economic development”. Taking into consideration the broad scope of many of the WTO agreements, and the topics being discussed in WTO committees and councils as well as in the Doha Round negotiations, the rules clearly affect regulation of the environment, public health, services, investment, and intellectual property as well as trade.

Rule Change can Only Take Place Through Negotiating Rounds

The Marrakesh Agreement provides that the WTO is a forum for negotiations among its Members about any matters relating to the agreements and also for negotiations about other matters related to the multilateral trading system. Indeed, Article II of that Agreement does not expressly contemplate major negotiating Rounds, it allows the Members to negotiate, for example, an entirely new agreement outside of the context of a Round. Also, the amendment procedures for the WTO agreements set out in Article X of the Marrakesh Agreement explicitly provide for changes to be made to specific agreements without the necessity of a Round. The preference of WTO Members for negotiating Rounds is a long standing practice, but it is not required by the rules.

These mantras and myths are interlinked. The perception that trade negotiations should be conducted in mercantilist fashion, based on reciprocal exchanges of concessions, also contributes to the belief that the only way to make changes to the existing agreements is through reciprocal exchanges of concessions which can only be negotiated in a major Round in which everything is up for negotiation.

4 A Look Toward the Future

We live in an interdependent, globalized world. Problems, like companies, do not know borders. Issues cannot be resolved by nation states acting alone. Strong, effective institutions are needed to manage global interdependence. Unlike the situation in the 1980s when the Uruguay Round was launched, the multilateral trading system is not in disarray today. The Doha Round deals with only some of the agreements administered by the WTO. The WTO is a strong, effective, rules-based organization. Nation states cannot, by themselves, regulate effectively to deal with global problems – they need a strong multilateral institution to do this.

However, new regional “clubs” and arrangements are being formed. The developed countries must take President Putin’s warnings seriously. The rise of the new emerging economies, such as China, India, and Brazil, as major economic powers has transformed the geopolitical alignments. There is no longer one hegemon, the world is rapidly becoming multi-polar. The new economic powerhouses may decide that the best course of action is to work within and reform the existing international economic architecture, or they could opt to create their own regional organizations and alliances.

The Doha Round is in its current state in large part because the geopolitical power relationships have changed and the WTO has not as yet responded to these new realities. If this Round does indeed fail, it will not be the end of the WTO, nor of the multilateral trading system. The first failure of a major negotiating round in GATT/WTO history may provide a useful “time out” for the multilateral system to find its new stride, with the new relationships that are currently being forged. A “time out” can be put to good use if we seize the opportunity to search for a new culture and mandate for the WTO – a culture and a mandate that meets the needs of all the global players in this multi-polar, interdependent world. New models for global economic governance need to be forged, with the active participation of researchers and negotiators from the emerging economies and the developing world. These models cannot be based on Western values and traditions alone, but must be developed by a new consensus among the emerging economic powers, the industrialized world, and the developing countries. A “time out” could also be useful as a period of much-needed reflection about how to improve the institutional mechanisms of the WTO to make them more accountable, more effective, and more responsive to the needs of the developing country Members but also to civil society and the outside world.

What will the new mandate of the WTO be? The WTO should be recognized for what it is – an international organization that regulates trade as well as international economic relations generally. What does this mean? It means that all aspects of economic regulation come within the ambit of the WTO. If the WTO is to become truly representative of all of its Members, the developed world will have to accept that development is a major part of its purpose and mandate. Protection of the environment and sustainable human development are also important, but harmonization of labor standards is not likely to become a common concern in the foreseeable future. Movement of persons and the role and responsibilities of multinational corporations in the trading system are issues that clearly must become part of the new negotiating agenda. While it is not part of the Doha Round negotiations, reform of international intellectual property rules will have to be contemplated within the very near future. Not only are there real problems with patent protection and public health, but technology is moving at such a remarkable pace that traditional concepts of copyright and intellectual property are being seriously challenged by needs to expand access to knowledge to aid development. Protection of indigenous knowledge also will have to be taken seriously by the developed world. Moreover, investment and competition policy cannot remain forever outside of the multilateral rule-based system. They are simply too important to the way in which firms operate in the global economy.

What are the major issues for institutional reform of the WTO? The Sutherland Report highlighted a number of key topics and made some modest recommendations that would not require amendment of existing agreements. However, that Report has yet to be taken seriously by the WTO Membership. The following areas of institutional reform should be explored: decision making in the WTO, the internal management structure, external relations, transparency, and the role of RTAs within the multilateral system. WTO Members have discussed many of these issues in the past. However, they have not demonstrated an appetite for significant reform of the WTO institutional machinery.

The current impasse in the Doha Round should signify to all WTO Members that there is a problem with the architecture of the multilateral trading system. It is almost impossible to take decisions in the WTO, largely because of the practice of decision making by consensus. The current practices and procedures are not serving the WTO or its Members very well. There is a general paralysis in the system because of the cumbersome institutional machinery. As a consequence, governments are increasingly turning to regional agreements to manage their trade relations.

The WTO needs major surgery in order to respond effectively to the new political realities in the international economic system. The WTO is not the old GATT, and Members should abandon the mantras, myths and misunderstandings that are no longer relevant. They hinder rather than promote progress in the Doha Round and hamper the effective functioning of the WTO. Instead, Members should recognize that the mandate of the WTO is not exclusively confined to the liberalization of trade; it includes development as well as a host of other topics that relate to international economic regulation generally. Institutional reform of the WTO is needed to provide it with the architecture and decision making machinery to make it a vibrant, responsive and accountable international organization, relevant to governments, companies and people in the 21st century.

We are at a turning point in history. We have a unique opportunity to reform the WTO so that it reflects present day realities. However, that window of opportunity will close if the industrialized world does not take the needs and demands of the large emerging economies and the developing countries seriously.

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