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World Trade Organization &
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International Trade Policies
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Topics:
General Agreement on Trade and Tariff (GATT)
Establishment of WTO
Functions of WTO
The WTO Structure
Types of Regional Groupings
Advantages of Regional Groupings

Objectives:
After studying this chapter, you should:
Identify the idea behind introducing GATT

Describe the motive behind establishment of WTO

Be familiar with the types of the Regional Groupings

Recognize the advantages of regional groupings.

W orld Trade
Organization (WTO) is a
regulatory body that deals
with the rules of trade
between nations at a global
or near-global level.

There are a number of ways, in which you can look at the WTO. It’s an
organization for liberalizing trade. It’s a forum for governments to negotiate trade
agreements. It’s a place for them to settle trade disputes. It operates a system of
trade rules.
At its heart are the WTO agreements, negotiated and signed by the bulk of
the world’s trading nations. These documents provide the legal ground-rules for
international commerce. They are essentially contracts, binding governments to
keep their trade policies within agreed limits. Although negotiated and signed by
governments, the goal is to help producers of goods and services, exporters, and
importers conduct their business, while allowing governments to meet social and
environmental objectives.

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General Agreement on Trade and Tariff (GATT)
GATT is a multilateral treaty among the member countries that lays down
certain agreed rules for conducting international trade. The member countries
contribute together to four-fifth of the total world trade.
It is interesting to note that
underdeveloped countries form a
sizable majority in GATT.
The basic aim of GATT is to
liberalize world trade negotiations
among members’ countries and, for
the last forty seven years, it has
been concerned with negotiations on the reduction, even the elimination of trade
barriers — tariff and non-tariff — between countries and improving trade relations
so that the international trade flows freely and swiftly. It also provides a forum to
member countries to discuss their trade problems and negotiate to enlarge their
trading opportunities.
Twenty-three countries signed the Final Act of the General Agreement on
Tariffs and Trade (GATT) on 30 October 1947 after a period of intensive
negotiations. The lead negotiators had profoundly disagreed on the level of
ambition to be achieved by the negotiations but finally overcame their
differences.

GATT ROUND

Year Subjects Covered Participating

countries
1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960-61 Geneva (Dillon Tariffs 26
Round)
1964-67 Geneva (Kennedy Tariffs and Anti- 62
Round) dumping measures
1973-79 9 Geneva (Tokyo Tariffs, Non-tariff 102
Round) measures and
“Framework”
agreements
1986-93 Geneva (Uruguay Tariffs, Non-tariff 123
Round) measures, Rules,
Services, Intellectual
property rights,
Dispute settlement,
Textiles and Clothing,
Agriculture,
Establishment of the
WTO, etc.

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First Round
The first round of tariff negotiations, the Geneva Round, held in 1947 in
Geneva from 10th April to 30th October 1947, was a part of the establishment of
the GATT. Just before the end of the first session of the Preparatory Committee,
it was decided that the members of the Preparatory Committee should hold
negotiations, at the second session to be held at Geneva in 1947, aimed at
substantial reduction of tariffs and other barriers to trade on a mutually
advantageous basis. The concessions exchanged in the negotiations took the
form of:
The complete elimination of certain duties and preferences
I. The reduction of duty preference
II. The binding of duties at existing levels, and
III. The binding of duty free treatment.
The participating countries completed 133 sets of bilateral negotiations covering
two-thirds of import trade of the countries concerned.
Second Round
The second conference for the negotiations was held at Annecy in 1949
with the aim:
I. To facilitate the extension of GATT to countries which could not
participate in the Geneva conference,
II. To add nine more countries to increase the strength to 32.

Third Round
This Round was known as the Torquay Round, 1951, and the participants
who attended this Round were 38 in number. The main issues that were
discussed during this round are given below:
I. About 8700 concessions were negotiated in Torquay.
II. Tariff rates were considered and it was found that they had entered the
Torquay negotiations at disadvantage.
III. The conference was not successful as only 147 out of the accepted 400
agreements could be concluded.
IV. The success of this conference lay more in the widening of the
membership of GATT than in the reduction of tariff.
Fourth Round
The Fourth Round, known as the Geneva Round 1956, was attended by 26
countries. The following was the outcome of the talks:
Except the US which went almost by the limits of her negotiating power
and granted concessions on imports valued at about $ 900 million and
obtained concessions with exports valued at about $400 million, no other
country felt satisfied.
Several countries withdrew from the negotiations owing to inadequate
leeway
The representatives of European countries returned home with a sense of
frustration.

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Fifth Round
It was known as the Dillon Round, Geneva, 1960-61, and was attended by
26 countries. Three factors had a strong bearing on the decision to hold a tariff
negotiating conference in the 1960- 61 period.
It related to the step by step progress being made by the European
Economic Community towards the establishment of a full customs union
comprising the six member states of the community and more particularly t
hose favouring gradual alignment starting in 1961 of the national customs tariffs
of Benelux, France, the Federal Republic of Germany and Italy to the new
common tariff.
It was decided to hold a further general round of tariff negotiations
especially as these would give an opportunity to negotiate with EEC on its new
common tariff.
The US government had obtained authority in the Trade Agreement
Extension Act of 1958 to participate in multilateral tariff negotiations during the
four years ending 30 June 1962. If advantage was to be taken of this limited
authority, the tariff conference had to be held in the 1960-61 period.
A bilateral tariff agreement between UK and the EEC was announced on
17 May 1962. Agreement included reducing tariffs on a wide variety of industrial
goods by one tariff.

Sixth Round
This Round was known as the Kennedy Round, 1964-67, and was attended
by 62 participants. The following decisions were taken after three years of long
discussions:
I. The President got unprecedented powers to reduce, on a reciprocal basis,
almost the entire range of US tariff by 50%, spread over five years.
II. Negotiations permitted the broadcast of possible tariff reductions;
increased access to world markets for agricultural products; and the
granting of concessions to the developing countries on a non-reciprocal
basis, for products of special interest to the US.
III. The participants in the negotiations made tariff reductions together
account for almost 75% of total world trade and the concessions granted
by them represent a volume of trade valued at slightly more than $ 40,000
million.
IV. In the field of non-tariffs:

 The agreement relating principally to chemicals should, inter alia, result in

the abolition of the American selling price system of valuation applied to
imports of certain chemical products under which the US did not empower
the President to negotiate on this matter.

 On anti-dumping code, as per Article VI of the GATT, a Committee on Anti-

Dumping Practice was established on 1 July 1968, where the signatory
countries could consult on matters relating to the administration of anti-

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 dumping systems.

V. Agriculture Round: The negotiations on grains resulted in agreement on

basic minimum and maximum prices for varieties of wheat of major
importance in international trade and on the provisions to developing
countries of 4.5 million metric tons of grains annually, initially for a three-
year period.

VI. The tariff concessions negotiated in this round were to be implemented in

stages. The countries could either make the total reduction in tariffs in five
equal annual installments, first on 1st Jan 1968; or make 2/5th of the total
reduction by 1st July 1968, and subsequent reductions by 1st Jan. 1970,
1971 and 1972. There was nothing to prevent countries from Notes
making their tariff cuts earlier than the dates provided for if they so
wished.
Seventh Round
This Round was known as the Tokyo Round, 1973-79, and was attended by 102
participants. The following decisions were taken during this Round:
I. This round presented an opportunity to review and improve the working of
some of the fundamental provisions of GATT, notably Article I, the most
favoured nation (MFN) clause.
II. This agreement marks a turning point in international trade relations by
recognising tariff and non-tariff preferential treatment in favour of and
among developing countries as a permanent legal feature of the world-
trading feature.
III. It codifies practices and procedures regarding the use of trade measures
by governments to safeguard their external financial position and their
balance of payments (BoPs).
IV. Safeguard Action: The agreement concerns the de-recognition from other
GATT provisions which are accorded to developing countries under Article
XVIII of the GATT, giving them greater flexibility in applying trade
measures to meet their essential development needs.
V. Understanding on notification, consultation, dispute settlement and
surveillance in GATT.
VI. Tariffs: In the second half of 1979, two protocols embodying results of the
Tokyo Round tariff negotiations were opened for acceptance by
governments. By annexing to the Protocols, their schedules of
concessions and by accepting the Protocols, governments made their
tariff cutting commitments legally binding within the GATT.
VII. The nine industrialised markets MFN tariffs facing developing countries
exports of manufactured products will be reduced by 27% based on the
weighted average tariff, and by 38 per cent based on the simple average
tariff.

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Uruguay Round Package
The Eighth Round of GATT was known as Uruguay Round, 1986-93, and
123 countries participated in this Round. After seven years of protracted
negotiations of the eighth round of talks the decisions have been as under.
The Uruguay Round was the eighth of the rounds of negotiations to be
held under the auspices of the General Agreement on Tariffs and Trade (GATT).
The Round got its name from the Ministerial Conference launching the
negotiations in September 1986, which was held in Punta del Este, Uruguay. The
negotiations were to have been completed in four years, but because of the
crises and deadlocks that developed from time to time, they dragged on for over
seven years. They were formally concluded at the Ministerial Meeting held in
April 1994 in Marrakesh, Morocco. The Final Act embodying its results came into
force on 1st January 1995.
Factors Influencing the Launching
Broadly speaking, three developments made some GATT member
countries feel that there was a need to hold a new round of negotiations.
First, it had become evident that, although as a result of the adoption of
associate agreements the rules of GATT in a number of areas had been
strengthened, its rules were not being applied in two important trade sectors, viz.
agriculture and textiles. In the agricultural sector, most developed countries had
taken advantage of the loophole to establish policies that were not always
consistent with GATT principles. In the textile sector, a number of these
countries imposed restrictions on imports, particularly from developing countries.
They did this under the so-called Multi-Fibre Arrangement (the Arrangement
Regarding International Trade in Textiles or MFA), which provided a legal cover
for derogation from GATT rules against the use of quantitative restrictions.
Arrangements like the voluntary export restraints (VERs) proliferated, under
which some developed countries restricted competitive imports of certain
products. These measures had come to be called “grey area measures” as there
were doubts about their consistency with GATT principles and rules.
Second, by about the same time, it had become evident that trade in
services had grown into an important component of international trade. The rules
of GATT applied to trade in goods and there were no international rules on
measures taken by countries to protect their service industries. Opinion was
growing therefore, that both for the efficient development of the service
industries in different countries and to develop trade in services, it was necessary
to bring this trade under international discipline.
Third, industries and trading organizations were complaining that because
of differing national standards for the protection of intellectual property rights,
such as patents and trademarks, and ineffective enforcement by governments of
the national rules providing for such rights, trade in counterfeit goods was on the
increase. The absence of adequate protection was also considered a deterrent to
foreign investment in the production of patented goods and a reason for the
reluctance of industries in developed countries to sell or license technology to
industries in developing countries.
Positive Factors Influencing the Negotiations

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 The Uruguay Round negotiations lasted, as noted earlier, over seven years.
The reasons for the crisis that occurred from time to time are now of historical
interest. It would be sufficient to note for the purpose of this Guide that, in the
Round’s last phase and especially during its last two years, the deadlock among
the major players (particularly the United States of America and the European
Union) on certain crucial elements in the areas of agriculture and trade in
services delayed the successful conclusion of the Round.
In many ways, the launching of the negotiations coincided with the
decision of a number of developing countries to reoriented their trade and
economic policies away from import substitution to export-oriented growth. The
measures they were taking to reduce tariffs, to liberalize their import control
system and to open their doors to foreign investment were consistent with GATT
principles, its philosophy and approach. Though these measures were unilateral
and were not influenced by the launching of negotiations, they enabled
developing countries, including those that were initially skeptical, to take a more
constructive attitude to the issues being discussed and to agree to integrate
themselves more fully into the legal system that was being formulated. This shift
in trade policies and the adoption of market-oriented reforms also led a number
of developing countries to seek GATT membership. Simultaneously, with the
breakdown of communism, policies favoring privatization and market-oriented
reform in the countries that are now called transitional economies prompted
most of them to apply for GATT membership.
Establishment of WTO
The World Trade Organization (WTO) was established on 1st January
1995. Governments had concluded the Uruguay Round negotiations on 15th
December 1993 and ministers had given their political backing to the results by
signing the Final Act at a meeting in Marrakech, Morocco, in April 1994. The
‘Marrakech Declaration’ of 15th April 1994, affirmed that the results of the
Uruguay Round would strengthen the world economy and lead to more trade,
investment, employment and income growth throughout the world.
The WTO is the embodiment of the Uruguay Round results and the successor to
the General Agreement on Tariffs and Trade (GATT). The WTO has a larger
membership than GATT (155 by the end of March 2012). India is one of the
founder members of the WTO.
WTO Organizational Structure
Officially, each council, committee or working party elects its own
chairperson. However, to ensure a good distribution of appointments over all
these bodies, informal consultations are held to produce consensus on slates of
chairpersons in three groups: those directly involving the General Council
(including, the bodies reporting to the Trade Negotiations Committee); those
reporting to the Goods Council; and those reporting to the Services Council.

When the consultations are complete, the consensus slate is “noted” in

the General Council, Goods Council or Services Council, and then each
subsidiary council, committee or working party formally confirms the
selection by electing its own chairperson by consensus.

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 Almost all the chairs
have one-year terms. The
exceptions are: the Trade
Negotiations Committee,
chaired ex-officio by the
WTO Director-General; and
the chairs of negotiating
groups under the Trade
Negotiations Committee,
which have terms that are
set differently, so far from
one Ministerial Conference
to the next.

Trade without Discrimination

The main principle that guided the erstwhile GATT and directs the present
incumbent, WTO, is to promote trade without discrimination. For almost 50 years,
key provisions of GATT outlawed discrimination among members and between
imported and domestically produced merchandise. According to Article I, the
famous “most favoured nation” (MFN) clause, members are bound to grant to
the products of other members treatment no less favourable than that accorded
to the products of any other country. A second form of non-discrimination known
as “national treatment” requires that once goods have entered a market, they
must be treated no less favourably than the equivalent domestically produced
goods. This is Article III of the GATT. Apart from the revised GATT (known as
“GATT 1994”), several other WTO agreements contain important provisions
relating to MFN and the national treatment. Intellectual property protection by
WTO members provides for MFN and national treatment. The General Agreement
on Trade in Services (GATS) requires members to offer MFN treatment to
services and service suppliers of other members pre-shipment inspection; trade
related investment measures and the application of sanitary and phytosanitary
measures.
WTO, contrary to popular belief, is not a “free trade” institution. It permits
tariffs and other forms of protection but only in limited circumstances. It is a
system of rules dedicated to open, fair and undistorted competition.

Objectives of WTO
In its preamble, the agreement establishing the World Trade Organisation
reiterates the objectives of GATT. These are: raising standards of living and
incomes, ensuring full employment, expanding production and trade and optimal
use of the world’s resources. The preamble extends these objectives to services
and makes them more precise.

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 It introduces the idea of “sustainable
development” in relation to the optimal use of the
world’s resources, and the need to protect and
preserve the environment in a manner consistent
with various levels of national economic
development.
It recognizes that there is a need for positive
efforts to ensure that developing countries, and
especially the least developed among them, secure a

Functions of WTO
The agreement establishing WTO provides that it should perform the following
four functions:

It shall facilitate It shall provide a It shall be It shall be

the forum for further responsible for responsible for
implementation, negotiations the settlement carrying out
administration among member of differences periodic reviews
and operation of countries on and disputes of the trade
the Uruguay matters covered among its policies of its
Round legal by the member member
instruments and agreements as countries. countries.
of any new well as on new
agreements that issues falling
may be within its
negotiated in the mandate.

Most Favoured Nations Status

According to WTO, all the signatory countries are given the most favoured
nations (MFN) status so that these countries have market access to each others,
trading areas. India has already given a most favoured nation status to Pakistan;
however, Pakistan has not so far reciprocated. India, in any case, is not going to
suffer because of the acrimonious attitude of Pakistan.

TRADE BLOCKS
1. Preferential Trade Agreement: Here the member countries lower the
barrier for imports of identified products from one another, like the SAARC
Preferential Trading Arrangement (SAPTA)

2. Free Trade Area (FTA): In FTA, countries eliminate duties among

themselves while maintaining the same with the outsiders. The free trade
area is the least restrictive and most loose form of economic integration
among countries. Its goal is to abolish all tariffs between member
countries. This is usually done in a phased manner.

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 3. Custom Union: The objective of a custom union is to harmonise trade
regulations and to establish common barriers against outsiders. A custom
union is an extension of FTAs. In addition to the elimination of tariff
among themselves, they also agree to a common external tariff on goods
imported from non-members. This takes the form of a common external
tariff whereby imports from non-members are subject to the same tariff
when sold to any member country.

4. Common Market: A common market is a higher and more complex level

of economic integration than either a free trade area or a custom union. A
common market has all the elements of a custom union and in addition to
that, it allows free movement of all factors of production (such as labour,
capital, raw material, services etc.). A common market agreement
eliminates all tariffs and other restrictions on internal trade, adopts a set
of common external tariffs, and removes all restrictions on the free flow of
capital and labour among member nations.
5. Economic Union: When the members of a common market agree to have
common economic policies, then it becomes an economic union. A true
economic union has an integration of economic policies among member
countries. The members of an economic union harmonise their monetary,
taxation and fiscal policy and therefore, have to surrender their economic
sovereignty. Members of the economic union work as a single nation, as
far as economic policy is concerned.
Advantages of Regional Groupings
When two or more nations come together for the sake of business and reduce
the barrier of international trade amongst themselves, then a regional trading
block comes into existence. A trading block is a preferential economic
integration among a group of countries. Countries tend to ally for several reasons.
Some of them are as follows:
Countries prefer to go for regional agreements for finished goods market
and to take comparative advantage as allies may also be supplying goods
not available with the host countries.
Countries feel that RTAs such as GATT and WTO are more advantageous.
They feel that it is difficult to save national interest in the case of GATT.
But in RTAs they have preferential economic integration among a few
nations willingly selected after proper evaluation of all pros and cons.
In RTAs, countries can give much more leeway to each other than that in
GATT. They can go to the extent of a Common Market. Negotiation. With
only a few countries participating, it is also easier.
RTAs also increase the bargaining power of trading blocks in the WTO
because they cooperate with each other in the process of negotiation. It
also helps in decreasing the bargain power of other countries because
with the formation of RTAs among the developing nations like G-15 and
ASEAN, their bargain power has increased significantly
In international trade, most of the countries follow the principle of 80/20,
that is, about 80% of their business comes from 20% of the nations.

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 Therefore, they feel that it is better to have close ties with these 20%
nations and so they form RTAs, which are more logical and advantageous.

MAJOR TRADE BLOCKS

ASEAN
The Association of Southeast Asian
Nations (ASEAN) is a primary multinational
trade group of Asia. The goals of this group are
economic integration and cooperation through
complementary industry programmes;
preferential trading, including reduced tariff and
non-tariff barrier; guaranteed member access to
markets throughout the region; harmonized
investment incentives.
Today, ASEAN economic cooperation covers the following areas: trade,
investment, industry, services, finance, agriculture, forestry, energy,
transportation and communication, intellectual property, small and medium
enterprises, and tourism.

ASEAN was established on August 8, 1967 in Bangkok by the five original

member countries, namely, Indonesia, Malaysia, Philippines, Singapore, and
Thailand. Brunei Darussalam joined on January 8, 1984, Vietnam on July 28, 1995,
Laos and Myanmar on July 23, 1997, and Cambodia on April 30, 1999

The ASEAN region has a population of about 500 million, a total area of
4.5 million square kilometres, a combined gross domestic product of US$737
billion, and a total trade of US$ 720 billion.
The Treaty of Amity and Cooperation (TAC) in Southeast Asia was signed
at the First ASEAN Summit on February 24, 1976.
The TAC stated that ASEAN political and security dialogue and
cooperation should aim to promote regional peace and stability by enhancing
regional resilience. Regional resilience shall be achieved by cooperating in all
fields based on the principles of self-confidence, self-reliance, mutual respect,
cooperation, and solidarity, which shall constitute the foundation for a strong and
viable community of nations in Southeast Asia.

SAARC
The South Asian Association
for Regional Cooperation (SAARC)
was established on December 8,

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1985. It involves seven states of the Indian sub-continent—Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan and Sri Lanka. The objective of the Association is
to promote the welfare of the people of South Asia and to improve their quality of
life through accelerated economic growth, social progress and cultural
development in the region.
The Secretariat of the Association is at Kathmandu, Nepal. Summits,
which are the highest authority in SAARC, are to be held annually. The country
hosting the Summit holds the Chair of the Association. The Council of Ministers
comprising Foreign Ministers of member nations, meet at least twice a year. Its
functions include formulating policy, reviewing progress of regional cooperation,
identifying new areas of cooperation and establishing additional mechanisms
that may be necessary. The Governors of the Central Banks of Member States
under the auspices of SAARCFINANCE meet regularly to consider cooperation in
financial matters.

SAPTA
South Asian Preferential Arrangement (SAPTA) was signed by the SAARC
members on April 11, 1993 and came into force in December 1995. The objective
of the SAPTA is the creation of trade among the SAARC countries through the
reduction of tariffs and on preferential basis. It thus, seeks the economic
development of all the SAARC nations. The biggest argument in favour of SAPTA
is that there is geographical proximity (a big scope for cross border railway and
road link) among the member nations and nations are also culturally close to
each other.
Even after that, intra-regional trade among SAARC nations has remained
very low in South Asia compared to other similar regional trade blocs;
approximately 2.4 percent of total SAARC trade in 1990.
The trade between SAARC’s Big Two, India and Pakistan, through official
channels, is $200 million a year. But, the overall trade via third countries like
Singapore and Dubai is estimated at $1.5 billion a year.

SAFTA
The South Asian Free Trade Area (SAFTA) Agreement came into force in
January 2006, with a ten year period for full-fledged implementation. SAFTA is
supposed to open a new vista of regional economic cooperation and integration.
The SAFTA agreement replaces SAARC Preferential Trading Agreement (SAPTA).
SAFTA moves the region to higher levels of trade and economic cooperation by
“removing barriers to cross-border flow of goods. It provides Bhutan, Bangladesh,
Maldives, Nepal, and Sri Lanka - the Least Developed Countries (LDCs) - special
and differential treatment “commensurate with their development needs.” It bills
India and Pakistan as “NonLeast Developed Countries” (NLDCs).

Enrichment

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Activity 1
Write a short composition expressing your views about the statement below.

The late Senator Claro M. Recto, a noted Filipino nationalist who strongly
opposed the presence of U.S bases in the country, was against foreign
investment. Recto further stated:
“When we borrow money from abroad… to use to our economic
development, the Filipinos become the capitalists. They will pay interest to their
foreign creditors, but through the use of credit they would make profits well
above the interest they will have pay. Thus, our capitalists would retain the
profits.”

Essay Writing Rubric

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REFERENCES
Baida, Ziv (2019). International Trade: Frequenty Asked Questions. Retrieved July
4, 2020
from https://insightsunboxed.com/international-trade-questions-
answers-ziv- baida

Boundless Management (2020). Retrieved July 4, 2020 from https://courses

Lumenlearning.com/boundless- management/International-Trade-
agreements organizations

Globalization 101. Org (2016). Trade and Globalization. Retrieved July 3, 2020
from
http://www.globalization101.org/category/issues-in-
depth/trade/

Santander Trade. Com (2020). Philippines: Foreign Investment

santandertrade.com/en/portal/establish-
overseas/philippines/foreign-
investment
Sinha, P.K., Mittal, V. (2012) International Business. Retrieved July 4, 2020 from
http://ebooks.lpude.in/commerce/mcom/term_3/DCOM501_INTE
RNATIONAL_BUSINESS.pdf

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