The World Trade Organization and Implications for Developing Countries

On April 15, 1994, the Uruguay Round, the eighth in a series of trade negotiations under the auspices of the General Agreement on Tariffs and Trade (GATT) came to a close. The Covered Agreements of the Uruguay Round were codified under a new institutional framework, the World Trade Organization (WTO), which formally entered into force on January 1, 1995 and became fully operational on January 1, 1997. Unlike the institutionally nebulous GATT, the WTO is endowed with greater powers and a broader mandate, including binding procedures for settling disputes. The WTO is the premier legal and institutional foundation of the global multilateral trading system.

This paper provides an overview of the institutional and legal structures of the WTO, the key provisions of the various multilateral trade agreements, and an analysis of the possible ramifications of WTO policies for developing countries.

Background: From GATT to WTO

During the 1930s, the world’s major economies were engaged in disastrous “beggar thy neighbor” protectionism. With the Depression still fresh in their minds, the western allied powers were anxious to construct a durable and stable system of multilateral trade and monetary arrangements after World War II. The Bretton Woods Conference in 1944 created the World Bank to finance post-war reconstruction and development, and the International Monetary Fund to stabilize exchange rates and official balance of payments. The architects of Bretton Woods also agreed on an institutional structure to reduce obstacles to international trade and commerce. Building on this commitment, the United States proposed the creation of an International Trade Organization (ITO), which would extend the United States’ Reciprocal Trade Agreements program on a multilateral basis and oversee international trade. However, the United States, bowing to domestic protectionist pressures and reluctance to create an international body with the potential ability to override domestic law in critical areas of economic activity, failed to ratify the Havana Charter and the ITO was never created. In its place, the GATT, possessing no enforcement mechanism, no codified rules, and no administrative structure, was created on January 1, 1948, to provide a temporary framework for global trade liberalization. ¹

However, despite its inauspicious beginnings and provisional status, the GATT evolved into the central instrument for regulating and maintaining a fairly open international trade regime for nearly a half century, reducing many of the most egregious trade barriers around the world. For example, it has served as a conduit for multilateral negotiations on a variety of contentious international trade issues—often balancing the opposing interests of unregulated capitalism and nationalistic mercantilism. The GATT’s core principle of non-discrimination is embodied in the most-favored nation (MFN) provision which requires each signatory to treat imported products from any other contracting party no less favorably than “like” products imported from another GATT member country. The consultation provision, which requires parties to settle any trade disputes through consultation and negotiations, made protection more costly and helped maintain the relatively liberal post-war global trade regime. The eight rounds of multilateral trade negotiations under GATT have significantly reduced tariffs—from an average of 40 percent among industrial countries in 1948 to an average of just 6.4 percent by the early 1990s. ²

Despite these accomplishments, the GATT was ill-equipped to deal with the extraordinary task of regulating the rapidly expanding global economy without some fundamental changes. The GATT’s limited mandate and ambiguous injunctions, its provisional application and grandfather rights exceptions, ambiguity about the powers of the Contracting Parties to make certain decisions and waiver authority, the murky legal status of the GATT as an international institution, and the overall lack of constitutional provision meant that it could not effectively resolve the contradictory pressures of deeper integration, interdependence, economic regionalism, and narrow domestic policy regimes. An institution was needed that could more effectively enforce rules for fair and open trade in an increasingly complex and interdependent world.

The WTO: Legal-Institutional Structure

The WTO goes significantly beyond the GATT in limiting the potential for governments to implement trade policies that impose negative externalities upon other countries. ³ The WTO’s Dispute Settlement...