World Trade Organization 101

1. What is WTO?

The World Trade Organization (“WTO”) is an international global organization which deals with the rules of trades between countries. This organization was established through the Agreement Establishing the WTO (“Marrakesh Agreement”) as it was signed on 15 April 1994 in Marrakesh, at the conclusion of the Uruguay Round of Multilateral Trade Negotiations. The aim of WTO is to make certain that trades all over the world run as smoothly, as predictable, and as freely as possible with its main objective to help all of the members in using trading as a means to raise living standards, establish jobs, and improve the international community’s lives. Here, the presence of WTO comes with many roles, namely:

(1) operating a global system of trading rules;

(2) acting as a forum for negotiating trade agreements;

(3) settling trade disputes between its members; and

(4) supporting the needs of developing countries.

2. The Functions of WTO

The WTO as international organization plays an important role in regulating world trade issues and was established with the intention of creating national welfare, through a series of fair and transparent multilateral trade agreements, also maintain the interests of all countries both developed and developing countries, including the Least Developing Countries (LDCs). According to Article III of Marrakesh Agreement, it functions to:

1. Facilitate the implementation, administration and operation, and further the objectives, of the Marrakesh Agreement and of the regarding Multilateral Trade Agreements, as well as provide the framework needed for the implementation, administration, and operation of the regarding Plurilateral Trade Agreements.
2. Provide the forum for negotiations among the Members regarding their multilateral trade relations in matters concerning the agreements in the Marrakesh Agreement Annexes. WTO itself may also furnish a forum for further negotiations among the Members regarding their multilateral trade relations and a framework for the implementation of the negotiation results as decided by the Ministerial Conference.
3. Administer the Understanding on Rules and Procedures Governing the Settlement of Disputes in Annex 2 of Marrakesh Agreement.
4. Administer the Trade Policy Review Mechanism which is provided for in Annex 3 of Marrakesh Agreement.
5. Cooperate with the International Monetary Fund and with the International Bank for Reconstruction and Development and its affiliated agencies.

To simplify the functions of WTO in this era, WTO is obliged to:

1. Administer WTO trade agreements.
2. Furnish the forum for trade negotiations.
3. Handling international trade disputes.
4. Monitoring each Member’s national trade policies.
5. Provide with technical assistance and training for the developing countries
6. Cooperate with many other international organizations.

3. The Principles of the Trading System by WTO

1)Most Favoured Nation (MFN): Treating Other People Equally (Article 1 GATT 1947; Article 2 GATS; Article 4 TRIPs)

According to this principle, any nation is prohibited to normally discriminate between their trading partners. If one nation grants a special favour to someone (for instance: a lower customs duty rate for one of the related products), the nation has to apply the same act of granting to all other WTO Members.

2) National Treatment: Treating Foreigners and Locals Equally (Article 3 GATT 1947; Article 17 GATS; Article 3 TRIPs)

According to this principle, the imported and locally-produced goods have to be treated equally, at the very least after the foreign goods have already entered the market. This shall also apply to foreign and domestic services as well as the foreign and local trademarks, copyrights, and patents.

As a note, the “National Treatment” principle will apply once a product, service, or items of intellectual property has entered the market. Hence, custom duties on imports are not considered as a violation of the principle, regardless the locally-produced products are not charged an equivalent tax.

3) Freer Trade: Gradually, through Negotiation

One of the most obvious means of encouraging trade is lowering trade barriers, including custom duties (or tariffs), and measures, including import bans and quotas, that restrict quantities selectively. From time to time, such matters have been negotiated under the General Agreement on Tariffs and Trade (“GATT”). By the 1980s, the negotiations had expanded to cover non-tariff barriers on goods as well as to the new areas (such as services and intellectual property). By all means, opening markets can be beneficial. However, it surely requires adjustments. Here, the WTO agreements allow nations to introduce changes gradually through “progressive liberalization”.

4) Predictability: Through Binding and Transparency

At times, promising not to lower a trade barrier can be as important as lowering the trade barrier itself. This promise provides businesses a pellucid view of their future opportunities while trading. With stability and predictability, investment can be more encouraged, jobs can be effectively established, and consumers can fully enjoy the benefits of competition — choice and lower prices. The multilateral trading system is one thing which the governments make an effort of in order to make the business environment stable and predictable.

Here, in WTO, when nations agree to open their markets for goods or services, they will “bind” their commitments. Furthermore, a nation is able to change its bindings only after negotiating with its trading partners, regardless of the fact that this could mean compensating them for loss of trade.

5) Promoting Fair Competition

Despite the fact that WTO is usually described as a “free trade” institution, the system still does allow tariffs and other forms of protection in limited circumstances. This is eventually aimed to create an open, fair, and undistorted competition. In fact, many WTO agreements are present to support fair competition, for instance in agriculture, intellectual property, and services.

6) Encouraging Development and Economic Reform

In accordance with its function, the WTO system contributes to the development of nations. However, the developing countries, which are over three quarters of WTO members, need flexibility in taking their time to implement the system’s agreements. Here, the agreements inherit the earlier provisions of GATT which allows the developing countries to receive special assistance and trade concessions from WTO. Therefore, the developing countries are able to have their transition periods to adjust to the more unfamiliar, and perhaps, difficult WTO provisions.

4. WTO Agreements

The WTO agreements cover goods, services, and intellectual property matters. These agreements are available to be WTO’s trade rules, which are also based on what the governments have negotiated. The following is the list of the WTO agreements:

1. Marrakesh Agreement
2. Agreement on Government Procurement
3. Agreement on Trade-Related Aspects of Intellectual Property Rights
4. Agreement on Trade Facilitation
5. Agreement on Trade in Civil Aircraft
6. Basic Telecommunications Services Agreement
7. General Agreement on Trade in Services
8. Information Technology Agreement
9. Multilateral Agreements on Trade in Goods — Agriculture
10. Multilateral Agreements on Trade in Goods — Antidumping
11. Multilateral Agreements on Trade in Goods — Customs Valuation
12. Multilateral Agreements on Trade in Goods — GATT 1947 & 1994
13. Multilateral Agreements on Trade in Goods — Import Licensing Procedures
14. Multilateral Agreements on Trade in Goods — Pre-shipment Inspection
15. Multilateral Agreements on Trade in Goods — Rules of Origin
16. Multilateral Agreements on Trade in Goods — Safeguards
17. Multilateral Agreements on Trade in Goods — Sanitary/Phytosanitary Measures
18. Multilateral Agreements on Trade in Goods — Subsidies/Countervailing Measures
19. Multilateral Agreements on Trade in Goods — Technical Barriers
20. Multilateral Agreements on Trade in Goods — Trade-Related Investment Measures (TRIMs)
21. Trade Policy Review Mechanism
22. Understanding on Commitments in Financial Services
23. Understanding on Dispute Settlement
24. etc.

5. WTO Dispute Settlement (Article 3.7 and Article 11 DSU)

Dispute settlement is the central pillar of the multilateral trading system. It is also one way to show WTO’s unique contribution to the stability of the global economy as well as to conduct WTO’s main function. The operation of WTO dispute settlement process involves the parties and third parties to a case, the Dispute Settlement Body panels, the Appellate Body, the WTO Secretariat, arbitrators, independent experts, as well as specialized institutions.

There are 2 main ways to settle a trade dispute after a complaint is filled to WTO:

1. The parties discover a mutually agreed solution, especially during the phase bilateral consultations;
2. Through Adjudication (including the subsequent implementation of the panel and the Appellate Body reports, which are eventually binding upon the parties once adopted by the Dispute Settlement Body).

Furthermore, there are also 3 main stages of the dispute settlement process conducted in WTO:

1. Consultations between the regarding parties;
2. Adjudication by the panels and by the Appellate Body (if applicable);
3. The implementation of the ruling, which includes the possibility of countermeasures in the event of failure by the losing party to implement the ruling.

As a matter of fact, by January 2008, only approximately 136 out of 369 cases had reached the full panel process. The majority of the rest have either been notified as settled “out of court”, or rather in a prolonged consultation phase.

6. The Pros and Cons of WTO

Pros:

1. Simplifying business with guidelines by WTO that makes business easier, can be guarantee by all countries with their trade regulations;
2. WTO’s primary objective is to promote trade among member countries and to ensure that every nation abides by the provisions of its trade treaty to preserve harmony and peace in trade among the members;
3. WTO encourages countries to diversify their products as trade between nations between nations becomes free and uncomplicated;
4. WTO facilitates the settlement of dispute in trade area and responsible to settling the disputes between nations while conducting trade among themselves; and
5. Allows countries to do business with each other and facilitates the flow economy, leading to an increase of the nation’s net income.

Cons:

1. The unfairness of developing countries where powerful governments and large corporations dictate policy;
2. WTO unconcerned about unfair behavior towards workers and laborers involved in trade resulting there is no protection against them;
3. The rules of WTO primarily designed to favor powerful multinationals, reduces the trade balance and makes it difficult for small business to succeed; and
4. WTO inspires its members to greater trade to make more profit, encouraging them to create more industries and technical enterprises which leads the country to use more resources and degrade the environment.

7. The Impact of WTO in Indonesia

As the largest organization in the trade field, WTO has the aim to equalize trade conditions and create a more equitable trading environment for goods and services and free trade flows. WTO is also responsible for implementing multilateral provisions on international trade and dispute resolution mechanisms, including: GATT that applies to trade in goods, General Agreement on Trade In Services that apply to trade in services, Agreement on trade-related aspects of intellectual property rights (TRIPs), and dispute settlement understanding.

For developing countries such as Indonesia, WTO opens up opportunities for export products with trade liberalization promoted by WTO, the existence of clear rules of the game in the practice of international trade, the existence of regulatory transparency, and different special treatment for developing countries.

The benefits of WTO can be seen in the exporter and importer perspective. Such as:

1. For the exporters, almost all tariffs in trade of goods will certainly not increase above their bound rates because importing countries cannot suddenly apply such restrictions. However, the exporters are also required to guarantee rules regarding customs because of the existence of uniformity to reduce the differences requirements by each country.
2. For the importers, they will have the early notice of how much it would cost to import an item regarding the rules of binding tariffs. And for those who import raw or semi-finished materials, they will receive goods on time and at competitive prices.

Indonesia, to join WTO, has to fulfil the requirements that consist of import tariff reductions, agreement of foreign firms to trade openly at Indonesia’s domestic markets, the telecommunication and finance sector commencing to more foreign competition and driving economic growth. There are two sides to the impact of Indonesia being a WTO member. Indonesia had to standardise its products and this hindered Indonesia in international trade, making it difficult for Indonesian products to enter the international market. Rather, this setting causes the foreign products to overflow Indonesia’s national market. As a result, Indonesia’s economic growth faces significant challenges. The gap between the developed and developing countries was also perceived by Indonesia where the developed countries protect themselves against products from the developing countries. As an example, the violation done by the US due to the termination of clove cigarette import. WTO with its restrictions in international trade makes Indonesia unready to face such free trade, and be inevitably involved in it.

Regardless, Indonesia still undoubtedly obtains the advantage of joining WTO. Indonesia has specific and unique products which become known globally, making Indonesia own a special place in the heart of the international community. However, to keep in mind, Indonesia has to continuously improve its national industry to produce international standardized products to compete at an international level. Hence, Indonesian citizens should escalate their interest and use of their own products, therefore it can gradually control the national market.

Sources:

World Trade Organization, www.wto.org.

Makmum Syadullah and Adwiena Dwiyanti, “Position of Indonesia in WTO Reform”, International Journal of Economics and Financial Issues, Vol. 10, №1, 2020.

Mykola Yermonshenko etc, “Actual Problems of Economics”, Scientific Economic Journal, Vol. 2, №176.

The Ministry of Economy, Trade and Industry, “Overview of the WTO Agreements”, 2011, https://www.meti.go.jp/english/report/downloadfiles/2011WTO/2-0Overview.pdf.