What is the World Trade Organization?

The World Trade Organization (WTO) is receiving more attention than it has in decades, but there's a lot of confusion about what it is, and what it does. I provide some info below. 

Throughout this article are links to entries in my still nascent trade terms glossary. Check it out if there are terms you want to understand better and drop me a line if you want to see more words added or think I got something wrong. 

What you need to know:

  • The World Trade Organization is an international body which helps administer a series of trade commitments countries have signed with one another;
    • These commitments create a baseline set of rules for world trade which other trade agreements expand on. If international trade is salsa, the WTO is the basic step and a request not to step on your partner's feet. 
  • The WTO's employees are a secretariat with almost no independent decision making authority;
    • All decisions are made by the representatives sent by WTO Member countries and require full consensus. Even a single objection blocks a decision from moving forward;
  • With a few notable exceptions, negotiations on new rules at the WTO have been largely stalled for most of its history due to disagreements between the major players; 
  • The WTO has a dispute settlement body which looks like a court, but is more of an adjudicator and interpreter of the rules; 
    • The WTO itself can't force a country to comply with its rules. All it can do is rule that what the country is doing is a breach and, if the country continues doing it, authorize limited retaliation by impacted WTO Members. 

Why do we need a World Trade Organization?

The overwhelming majority of countries on earth have signed up to a set of agreements establishing the baseline rules of trade. The WTO puts these under one roof and provides a space where governments can negotiate to change or expand them, monitor one another's compliance with them, and settle any disputes arising from them. 

What kind of agreements? 

WTO Agreements cover trade in goods, services, intellectual property and more. As a general rule they attempt to create predictability and a level playing field so buyers can choose the best value offerings from abroad, instead of those favored by government policy. 

Some notable elements include (non exhaustive list):

  • A 'Goods Schedule' for each WTO Member, listing the maximum tariffs it agrees it can apply in any product type. 
  • A 'Services Schedule' for each WTO Member, listing where it agrees not to interfere with other countries selling services to its citizens, and how it will treat foreign services providers. 
  • A set of commitments on the types of agricultural subsidies it can provide, with upper limits on certain kinds. 
  • General rules on how WTO Members will approach establishing technical regulations for products and sanitary regulations for food to prevent these being used as stealthy forms of protectionism. 
  • Minimum levels of intellectual property protection WTO Members commit to maintaining. 
  • Obligations on transparency - the information WTO Members agree to provide to the WTO about their trade regime, especially in areas where it might be distorting to trade. 

Why did everyone sign these agreements? 

Markets work most efficiently with limited government intervention. Mutually agreeing to somewhat limit how much governments interfere in markets created stability and predictability, but still left plenty of options for governments to achieve those objectives while staying within the rules.

A good analogy is disarmament. Like flamethrowers, trade weapons like tariffs might be effective in the very short term, but a free-for-all with them benefits no one. Through trade agreements governments agreed to limit their use in exchange for everyone else limiting theirs. Taking flamethrowers off the battlefield is ultimately good for everyone, but not them leaves governments with plenty of other less horrific military tools. 

The WTO Agreements also create some predictability in the system. Knowing, for example, what a country's maximum tariff rates can be, allows investors to plan with confidence for the future. Otherwise, their investment may become worthless if what it produces suddenly faces a high duty in its target market, or if the imported materials it relies on do. 

Who runs it? 

The head of the WTO is a Director-General, who is nominated by a Member State and appointed with the consensus of all Member States. 

However, his role is administrative and advisory. All decisions in the WTO are made by the Members and require full consensus. While voting is theoretically possible in the WTO, it is never used and likely never will be. 

The peak decision making body of the WTO is the 'Ministerial Conference' which occurs every two years and is generally chaired by a Minister of very senior official from the host country. Between Ministerial Conferences decisions can be made at the WTO General Council, which is chaired by a different Member's ambassador on a rotating basis. 

Why does everything require consensus?

WTO rules are considered binding, and governments aren't willing to be part of a body which creates or changes rules in a binding way without their consent. 

So, what are the WTO's main functions?

Three main types of activities go on at the WTO:
1. Negotiations
2. Monitoring
3. Dispute Resolution. 

Negotiations are all about trying to build consensus to create new trade rules or change existing ones. It's very hard to get 164 different Members from all over the world to agree on anything, so negotiations take years and rarely lead to big changes. 

Monitoring is about transparency. Members are supposed to be open with one another about where their trade policy might be disrupting or altering trade. Through the monitoring function of the WTO, Members are able to raise concerns about one another's policies, ask questions about how policies work in practice and name-and-shame Members into obeying the rules. 

When naming and shaming doesn't work, or when Members disagree on what the rules actually mean, they can take a dispute against one another in the WTO's internal legal system. A WTO panel will then evaluate the matter and decide on a legal basis if a Member is in fact in breach of the rules. 

So a panel could order my country to change a law?

Not quite. 

While it's called 'binding' and 'law,' WTO rules aren't at all like a criminal or civil law in your own country. Their authority extends only to determining when a rule is being broken and, when nothing is done, allowing the Member who has been hurt to retaliate proportionately.

What does retaliate proportionately mean? 

The WTO's experts try to calculate how much a Member's trade has been damaged by the rule-breaking of the Member who lost the case. They might then authorize the Member hurt to raise tariffs against the rule-breaker up to the same value. 

This doesn't happen very often. Generally speaking, governments have a good record of changing their policies when a WTO panel rules them to be a breach of their obligations. However, they do this because they want to be seen as good global citizens and because they believe in the rules based trading system as a whole, not because the WTO has the authority to force them to. 

I heard the US is annoyed with the WTO, why?

The US has a number of long standing concerns with the World Trade Organization, many of which predate the Trump Administration. These extend across all three pillars of the WTO's work. Some of their concerns: 

  • The US is concerned that the negotiated WTO rules do not sufficiently address what it considers to be Chinese state-capitalism and what the US believes is inappropriate subsidization by China of its domestic industries. It also feels the existing rules do not provide sufficient restraints on Chinese intellectual property policies. 
  • The US is also concerned that the WTO is not adequately monitoring abuses by several major players. It argues Members are not living up to their transparency commitments and that the information they submit to the WTO is not always accurate or complete. 
  • Finally, the US has a range of concerns with the WTO Dispute Settlement Body. It argues WTO panels are practicing judicial activism and creating trade rules beyond what Members signed up to in the WTO Agreements. It also believes cases take too long and that Appellate Body judges are staying on beyond their fixed terms to finish cases, in violation of the WTO establishing agreements.  
    • While the US has a strong record of winning cases generally, it has found itself repeatedly on the losing end of disputes over its 'anti-dumping' regime. 

Can the US pull out of the WTO?

While theoretically it can, doing so would require the support of the US Congress which appears to be opposed to such a drastic move. 

No one can predict what would happen if it actually did so. The WTO is both the foundation and the linchpin of the international trading system, and the US is the world's largest economy. It would be like if all of Europe pulled out of FIFA. 

It's fair to be wary of any predictions. While the US not being a WTO Member would mean that legally speaking, those without an trade agreement with the US could raise their tariffs on it, it's far from clear many would do so given the near inevitable US retaliation. Those warning of a Post-WTO US immediately cut off from world trade by 4,000% tariffs are perhaps getting a little ahead of themselves. 

With that said, the WTO is an absolutely critical force for stability and predictability in world trade, and the US while not having a perfect record by any means has been a consistent and vocal supporter of its core mission.

A US withdrawal would be a potentially fatal blow to the organization which means greater instability, less predictability and a less transparent and even global trade playing field. That's not good for anyone.  

Read More:

The ICTSD Bridges Weekly Article on WTO Tensions

The WTO's Official 'About Us' Page

Trade β Blog by Peter Ungphakorn, a former WTO Secretariat Official