WTO: An Introduction

WTO was established on 1 January 1995 as a successor of the General Agreement on Tariffs and Trade (GATT) 1947. The members of the GATT became original members of the WTO. However, for the acceding countries, Article XII of the agreement requires that they  undergo a process of accession by finalizing agreements separately with the existing WTO members. Practically, the negotiations need not be held with each WTO member - they should be held with the major trading partners. As Nepal was not the member of GATT, she had to follow the accession procedure in accordance with the Article XII of the Marrakesh Agreement. She negotiated with her major trading partners Australia, Canada, EU, India, Japan, Malaysia, NZ, USA and China. After the negotiations with them were over, Nepal's protocol of accession was adopted by 5th WTO meeting at Cancun on 11th September 2003. After WTO came into being in 1995, 22 members have completed this process. Among LDCs, only Cambodia and Nepal completed the accession procedures. Though there are other LDCs as well which have become the WTO members, they acquired the membership in WTO by virtue of being the members of GATT. While Cambodia was to be the 147th member of WTO, Nepal the 148th, Nepal ratified the WTO membership protocol earlier than Cambodia and submitted the same to the WTO Secretariat in March 2004. Though the WTO rules require the protocol to be ratified by the member country's parliament, and Nepal was constrained in it as it had no parliament, it fulfilled the requirement by an amendment in the Treaty Act through an Ordinance which provided that the ratification of multilateral agreements such as WTO could be made through a royal assent.

Chronology of WTO ministerial conferences

# First held in Singapore from 9 to 13 December 1995

#  Second held in Geneva, Switzerland from 18 to 20 May 1998

#  Third held in Seattle, US from 30 November to 3 December 1999

#  Fourth held in Doha, Qatar from 9 to 14 November 2001

#  Fifth held in Cancun, Mexico from 10 to 14 September 2003

#   Sixth scheduled in Hong Kong but the timing depends on progress forward reviving the latest round of global trade liberalization talks

Some Major Points of the Zgreement on Nepal’s WTO Membership

1.   Commitment to 25 mandatory provisions only, not on WTO-Plus provisions

2.   Tariff binding allowed at 42% on average against the present level of about 13% applied rate in average (In agriculture, the tariff binding at 51% for transition period (initial 3-10 years) and at 42% then after. In non-agriculture, 39% for the transition period and 24% then after.)

3.   No rate bound at lower than the presently applied rate. 400 tariff lines bound at the applied rate.

4.   Tariff on ICT products to reduce to zero in between 5-7 years from the present 5%

5.   Removal of the additional import duties (e.g. special duty, local development tax etc.) within 10 years

6.   Banking, telecommunication, health, accounting, legal services are among the major 37 sectors and subsectors opened now for direct foreign investment (e.g. professional services, communication, construction and engineering, distribution, education, environment, banking and financial services, health and tourism).

7.   Foreign direct investment to be allowed up to 80% 

8.   Full implementation of Trade Related Intellectual Property Rights (TRIPS) provision by January 1, 2007.

9.   Law on anti-dumping, countervailing and safeguard within one year of accession.

10. Right to provide upto 10% subsidy on agriculture.

11.       Commitment of the developed countries to make available technical assistance to Nepal to fulfil the Nepali commitments for the accession. 

10 Common Misunderstandings about the WTO

1. The WTO dictates policy.

Reality: The WTO does not tell governments how to conduct their trade policies. The rules of the WTO system are agreements resulting from negotiations among member governments. The rules are ratified by members’ parliaments, and decisions taken in the WTO are virtually all made by consensus among all members.

In other words, decisions taken in the WTO are negotiated, accountable and democratic. The only occasion when a WTO body can have a direct impact on a government’s policies is when a dispute is brought to the WTO and if that leads to a ruling by the Dispute Settlement Body (which consists of all members). Normally the Dispute Settlement Body makes a ruling by adopting the findings of a panel of experts or an appeal report.

Even then, the scope of the ruling is narrow: it is simply a judgement or interpretation of whether a government has broken one of the WTO’s agreements—agreements that the infringing government had itself accepted. If a government has broken a commitment it has to conform.

2. The WTO is for free trade at any cost

Reality: It’s really a question of what countries are willing to bargain with each other, of give and take, request and offer.

Yes, one of the principles of the WTO system is for countries to lower their trade barriers and to allow trade to flow more freely. But just how low those barriers should go is something member countries bargain with each other.

The rules written into the agreements allow barriers to be lowered gradually so that domestic producers can adjust. They have special provisions that take into account the situations that developing countries face. They also spell out when and how governments can protect their domestic producers, for example from imports that are considered to have unfairly low prices because of subsidies or “dumping”.

Here, the objective is fair trade. Just as important as freer trade— perhaps more important—are other principles of the WTO system. For example: non-discrimination, and making sure the conditions for trade are stable, predictable and transparent.

3. Commercial interests take priority over development …

Reality: The WTO agreements are full of provisions taking the interests of development into account.

Underlying the WTO’s trading system is the fact that freer trade boosts economic growth and supports development. In that sense, commerce and development are good for each other. At the same time, whether or not developing countries gain enough from the system is a subject of provisions of the WTO agreements.

Least developed countries receive special treatment, including exemption from many provisions. The needs of development can also be used to justify actions that might not normally be allowed under the agreements, for example governments giving certain subsidies. And the negotiations and other work launched at the Doha Ministerial Conference in November 2001 include numerous issues that developing countries want to pursue.

4. … and over the environment

Reality: Many provisions take environmental concerns specifically into account.

The preamble of the Marrakesh Agreement establishing the World Trade Organization includes among its objectives, optimal use of the world’s resources, sustainable development and environmental protection. This is backed up in concrete terms by a range of provisions in the WTO’s rules. Among the most important are umbrella clauses (such as Article 20 of the General Agreement on Tariffs and Trade) which allow countries to take actions to protect human, animal or plant life or health, and to conserve exhaustible natural resources. Beyond the broad principles, specific agreements on specific subjects also take environmental concerns into account. Subsidies are permitted for environmental protection. Environmental objectives are recognized specifically in the WTO agreements dealing with product standards, food safety, intellectual property protection, etc.

What’s important in the WTO’s rules is that measures taken to protect the environment must not be unfair. For example, they must not discriminate. You cannot be lenient with your own producers and at the same time be strict with foreign goods and services. Nor can you discriminate between different trading partners. Also important is the fact that it’s not the WTO’s job to set the international rules for environmental protection. That’s the task of the environmental agencies and conventions.

5. … and over health and safety

Reality: The agreements were negotiated by WTO member governments, and therefore the agreements reflect their concerns.

Key clauses in the agreements (such as GATT Art. 20) specifically allow governments to take actions to protect human, animal or plant life or health. But these actions are disciplined, for example to prevent them being used as an excuse for protecting domestic producers— protectionism in disguise.

6. The WTO destroys jobs, worsens poverty

Reality: Trade can be a powerful  force for creating jobs and reducing poverty. Often it does just that. Sometimes adjustments are necessary to deal with job losses, and here the picture is complicated. In any case, the alternative of protectionism is not the solution.

7. Small countries are powerless in the WTO

Reality: Small countries would be weaker without the WTO. The WTO increases their bargaining power.

In the WTO trading system, everyone has to follow the same rules. As a result, in the WTO’s dispute settlement procedure, developing countries have successfully challenged some actions taken by developed countries. Without the WTO, these smaller countries would have been powerless to act against their more powerful trading partners.

8. The WTO is the tool of powerful lobbies

The WTO system offers governments a means to reduce the influence of narrow vested interests.

This is a natural result of the “rounds” type of negotiation (i.e. negotiations that encompass a broad range of sectors). The outcome of a trade round has to be a balance of interests. The private sector, non-governmental organizations and other lobbying groups do not participate in WTO activities except in special events such as seminars and symposiums. They can only exert their influence on WTO decisions through their governments.  Governments can find it easier to reject pressure from particular lobbying groups by arguing that it had to accept the overall package in the interests of the country as a whole.

A related misunderstanding is about the WTO’s membership. The WTO is an organization of governments, not of business firms or other organizations.

9. Weaker countries are forced to join the WTO

Most countries do feel that it’s better to be in the WTO system than to be outside it. That’s why the list of countries negotiating membership includes both large and small trading nations.

The reasons are positive rather than negative. They lie in the WTO’s key principles, such as non-discrimination and transparency. By joining the WTO, even a small country automatically enjoys the benefits that all WTO members grant to each other. And small countries have won dispute cases against rich countries – they would not have been able to do so outside the WTO. The alternative would be to negotiate bilateral trade agreements with each trading partner. That could even include regularly negotiating the regular renewal of commitments. For this, governments would need more resources, a serious problem for small countries. And in bilateral negotiations smaller countries are weaker. By joining the WTO, small countries can also increase their bargaining power by forming alliances with other countries that have common interests.

10. The WTO is undemocratic

Decisions in the WTO are generally by consensus. In principle, that’s even more democratic than majority rule because no decision is taken until everyone agrees.

It would be wrong to suggest that every country has the same bargaining power. Nevertheless, the consensus rule means every country has a voice, and every country has to be convinced before it joins a consensus. (However, there are also voices being raised, from developed countries, against this system, particularly after the Cancun debacle. Eds.) Quite often reluctant countries are persuaded by being offered something in return. Consensus also means every country accepts the decisions. There are no dissenters.

(Excerpted and adapted from WTO website)

Opportunities/Benefits of Joining WTO

#  Import consistency for industrial inputs

#  Supply stability for the benefit of the consumers

#  Possible assistance from WTO Secretariat and major trading partners for domestic capability enhancement as promised by the major trading partners and as provided in the rules and principles of WTO

#  Well defined trade/transit rights as defined in WTO mechanism will be institutionalized and there will be no frequent transit related tussles with India as used to be experiences in the past

#  Safeguard from unilateral decision of trading partners (such as by imposing quota restrictions and higher tariffs)

#  Benefit from the provision of positive discriminations in favour of least developed countries (For example, the Generalized System of Preferences (GSP) facility is continued under WTO)

#  Backward linkage with transnationals will be improved and it will increase production and employment

#  Nepal can protect domestic industry through tariff/domestic regulations

#  Creates a predictable trading environment and lessen uncertainty in trade regime

#  Only the member countries can exercise the right embodied in the WTO agreements

#  Creates transparency in trade regime

#  Helps members to defend their trade rights through the Dispute Settlement Body (DSB)

#  Helps to increase foreign direct investment (FDI)

#  Creates more awareness in the society

#  Helps in creating environment of a good governance

Challenges/Concerns from Joining WTO

#  WTO benefits the rich while the poor will be left out

#  WTO extend the ends of the Western developed countries to the domestic economies of the LDCs

#  WTO increases poverty, inequality

#l  WTO stirs social, political cultural unrest

#  Privileges granted to farmers and SMEs will be disputed and eroded (how to protect them from closing down?)

#  Likelihood of food security problem being worsened as Nepali agriculture may lose the competitive strength

#  Enhancing competitive capability is difficult

#  Threats to domestic producers from import surge

#  Balance of Payments (BOP) problems are likely

#  Patenting and documenting bio-resources is difficult

#  Costs and risks of non-compliance to WTO rules and accession commitments are very high

#  Revenue implication (government revenue will be reduced due to the tariff cuts as Nepal’s major source of revenue is foreign trade, especially the imports duty. The revenue loss was 1% in USA, 46% in Sierra Leone, and it is estimated to be 20% in Nepal)

#  Loss of autonomy in policy making as the policies will be dictated by the WTO rules and accession commitments

#  The economy will be more vulnerable to external shocks

#  The negotiating skills of the Nepali government and private sector leaders is very weak

#   Displacement possibility for non-competitive goods and services

Recommendations to Nepal for Success under WTO Regime

#  Address human resource and infrastructural constraints

#  Identify sectors of comparative advantage (seek technical assistance)

#  Develop business advocacy mechanism (seek technical assistance)

#  Develop mechanism for the protection of SMEs and the farmers remaining within the WTO limits (seek technical assistance)

#  Place a competent representative in Geneva

#  Develop institutional capability both in private and public sectors (seek technical assistance)

#  Replace duty drawback facilities with duty exemption system

#  Expand the limited export base by identifying and developing new products (seek technical assistance)

#  Have a simple two-tier structure of import tariffs

#  Develop the negotiating skills in the Nepali negotiating authorities (seek technical assistance)

#  Enact new legislations and amend the existing ones to make them WTO compatible (seek technical assistance)

#  Develop strong alliance among the government, the private sector and the civil society.

What are Nepal’s Commitments in WTO?

#  To abide by the Trade Related Intellectual Property Rights Safeguard (TRIPS) Agreement by 1st January 2007 ensuring in the legal system of the country not to increase existing rate of infringement, providing national treatment to imported products, providing Most Favoured Nation (MFN) treatment to all the WTO members.

#  To fulfil the transparency requirements as per GATT/GATS by publishing laws before enforcement.

#  To retain De-minimis (10% of value of agriculture production) for domestic support.

#  To retain the right to provide export subsidies in industrial products.

Commitments on service trade

#  Sub-sectors opened subject to conditions:

#   Professional services: Legal, account auditing,  book keeping, architectural, engineering and veterinary services

#   Business services: Computer related, research development, leasing, rental, video tapes, advertising, market research, management consulting, technical testing, services related to mining, scientific consulting, packaging, printing, publishing, and convention services

#   Multi-modal courier (international), construction, telecommunication, commission agent, franchising, wholesale/retail of radio/TV equipment, records, music tapes, higher, adult and other education, sewage, refuge disposal, sanitation, insurance, banking, hospital, hotel, restaurant, travel tour operation, cinema, theatre services, aircraft maintenance, computer reservation system, pipeline transport, storage and warehouse services

Systemic commitments

#  Price control, regulating export-import and free zones to be as per WTO rules

#  Phasing out of Other Duties and Charges (ODCs) within 2 to 10 years depending upon the product

#  Right to appeal and implement custom valuation as per action plan by 1st Jan 2007

#  Non-discriminatory domestic tax system as per GATT provision

#  Rules of origin, pre-shipment inspection, safeguard, anti-dumping, countervailing measures as per WTO agreements

#  Fees/charges commensurate to cost of service

#  Non-application of Trade Related Investment Measures (TRIMs) upon accession

#  Implement Technical Barriers on Trade (TBT) and Sanitary and Phytosanitary (SPS) agreement as per action plan by 1st Jan 2007

Commitments in goods trade

#  Tariff lines bound except on arms/cement/petroleum oil and lubricants

#  Tariff ceiling on agriculture products (simple average on accession 51% and final 42%

#  Parity tariff on edible oil products

#  Tariff on non-agriculture products (simple average on accession 39% and final 24%)

#  Transition period of 3 years allowed except on IT and vehicles

#  About 148 IT products with final tariff bound at 0% to be achieved by 5 years

#  About 480 products with final tariff bound at the applied level

#  About 56 products with tariff bound below the applied level

#  Initial Negotiation Right (INR) granted to members as per request