Saving the WTO from the risk of irrelevance

– Prabhash Ranjan & Rachit Ranjan

As we approach the tenth ministerial meeting of the World Trade Organisation (WTO) in Nairobi, a major question that confronts the global trading community is the very future of the WTO. WTO, the multilateral arbiter of international trade rules between 160-odd counties, faces a serious existential crisis. This is primarily because, since its inception in 1995, it has failed to deliver on significant trade liberalisation. The only consolation is the Agreement on Trade Facilitation, concluded during the 2013 Bali ministerial conference. But why is WTO important? WTO, notwithstanding its limitations, is the only multilateral platform that allows smaller and developing countries to make concerted efforts at integrating trade and development. WTO allows these countries to negotiate international trade issues in blocks and together withstand the relentless demand of developed countries to open their markets without reciprocal benefits. It also allows for effective and non-partisan settlement of trade disputes and for the review of each country’s trade policy.

This existential crisis of the WTO has deepened due to the conclusion of a plethora of free trade agreements (FTAs), including mega FTAs like the recently executed Trans Pacific Trade agreement (TPP). TPP has countries like the US, Canada, Australia, Japan and New Zealand as its members with a collective GDP of $27.5 trillion, approximately 40 per cent of the global economy and covering nearly a third of global trade. All these FTAs operate on the basis of non-most favoured nation (MFN) principle, which is a fundamental cornerstone of the WTO. Economically, FTAs may act as building blocks for the multilateral trading regime if they liberalise ‘substantially all trade’ between its constituent members and do not impose a higher burden on non-constituent members than what existed before the formation of the free trade area. These conditions are given in Article XXIV of the General Agreement on Tariffs and Trade (GATT), an integral part of the WTO, and constitute an exception to the MFN rule. Thus, all FTAs that WTO member countries sign have to satisfy these legal requirements. However, whether all FTAs actually satisfy these requirements is a question that has hardly been tested.

We argue that one way to keep the WTO relevant is by strengthening its existing mechanisms that exercise supervisory control over FTAs. We discuss two options in this regard:

Strengthening the role of CRTA
First, as per WTO law, all WTO member countries are bound to notify the WTO of their intention to enter into a FTA. The WTO’s Committee for Regional Trade Agreements (CRTA) examines the compatibility of the notified FTA with WTO rules. In other words, the CRTA could come to the conclusion that the notified FTA is inconsistent with WTO rules. This would, in turn, compel countries to make their FTA compatible with WTO rules. However, WTO’s CRTA, which must decide by consensus, has never been able to finalise any report examining the compatibility of FTAs with WTO rules. As a result, one does not know whether the humongous number of existing FTAs act as ‘building blocks’ or ‘stumbling blocks’ for the multilateral trading regime. There is an urgent need to strengthen the CRTA to ensure that the exercise of checking the compatibility of notified FTAs is carried out swiftly.

Role of WTO’s DSU
Second, countries could ensure greater control of the WTO over FTAs by using WTO’s dispute settlement understanding (DSU). WTO member countries have frequently used the DSU to settle a variety of trade disputes with other members. From 1995 till the end of 2014, more than 500 complaints were filed by different countries, resulting in close to 100 decisions of the Appellate Body (AB) – the highest court of the WTO. Thus, a WTO member country can use the DSU to challenge deviation from MFN, which is permissible only if the requirements of Article XXIV are satisfied.

The use of the DSU is particularly important in the context of the TPP. It is widely believed that the TPP purports to create a set of standards that would lead to significant market access barriers for many developing countries. For example, in the case of Vietnam, the US has offered a zero per cent import duty on apparel imports subject to the Rules of Origin (ROO) practised by the US. The US ROO in apparel follows a “yarn-forward rule”, which stipulates that yarn used to make textiles or apparel must be sourced from another TPP country. Currently, the largest providers of cotton yarn to Vietnam are China, South Korea and India, who are incidentally not members of the TPP. This will create a higher and more restrictive regulation of commerce to non-constituent countries like India and thus violate Article XXIV. To provide another example of the trade restrictiveness on third parties of the TPP, it is believed that certain market access conditionalities have been included in the form of higher environmental and labour standards. These standards will necessarily make a significant dent on the global competitiveness of products originating from countries like India, which will not be able to meet such standards, again leading to a potential violation of Article XXIV.

Protectionist and exclusionary FTAs weaken multilateralism. Thus, India and other developing countries should consider exercising their rights under the WTO, which would not only challenge these protectionist FTAs but also revitalise an almost moribund international organisation.

Dr. Prabhash Ranjan, Faculty of Legal Studies, South Asian University co-authored this article with Rachit Ranjan, Oval Observer Foundation. The original article appeared in The Business Standard. The same can be accessed by clicking HERE.

Disclaimer: The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the Faculty of Legal Studies or South Asian University.