From GATT to WTO

The WTO came into existence on 1st January 1995. But there is a long history attached to the establishment of this organisation dating back to 1945. The original intention was to create a third institution to handle the trade side of the international economic cooperation, joining the two Bretton woods institutions, the International Monetary Fund and the World Bank. Over 50 countries participated in the negotiations to create an International Trade Organisation (ITO) as a specialised agency of the UN. The aim was to create the ITO at a UN Conference on Trade and Employment in Havana, Cuba in 1947.

Meanwhile 15 countries had begun talks in December 1945 to reduce and bind custom tariffs. With the Second World War just recently ended, the main aim was to give a boost to international trade and rectify the harm caused by the protectionist measures. The first round of negotiation was a success and by the time the General Agreement on Trade and Tariff or GATT 1947 came into effect on 30th October 1947 through a protocol of provisional application, the group had expanded to 23(contracting parties). The 23 were also a part of the larger group negotiating the ITO Charter. The Havana conference began on 21 November 1947, less than a month after GATT was signed. The ITO Charter was finally agreed in Havana in March 1948, but it never came into existence as it was never passed by the US Congress even though the US was one of its major driving forces. Not looking into the various political and other reasons behind such a decision of the United States, the conclusion was that GATT was the only international instrument governing international trade until 1995 when WTO was established.

The main purpose of GATT 1947 was to reduce tariffs internationally in order to facilitate free trade, the outcome of which is the various tariff concessions schedules created under GATT. GATT evolved as a result of a series of multilateral trade negotiations known as trade rounds. 8 trade rounds took place under GATT's auspices. The earlier trade rounds concentrated on further reducing tariffs. Later on the Kennedy round brought about an agreement on anti-dumping. The Tokyo rounds concentrated on reducing non-tariff trade barriers.

This was the first ever attempt made to look into trade barriers other than tariffs. In the Tokyo round various issues were brought to the forefront, some successful, some not so successful. In most cases, a relatively small number of GATT members subscribed to such arrangements. Since they were not accepted by all members, they were informally called codes. These agreements and arrangement were not multilateral, but a good start. Later in the Uruguay round, many of these agreements became multilateral, accepted by all members. Only four remained plurilateral, later in 1997, the number reducing to two which included Government procurements and civil aircrafts. These plurilateral agreements became a part of WTO as we will see when we proceed further on the discussion of coming into force of the agreement that finally established the WTO.

The final chapter of the trade negotiations under GATT was the Uruguay round. All was not going well under the GATT and with the world trade becoming more and more complex, GATT was not able to deal with it. For instance, in agriculture, loopholes in the multilateral system were heavily exploited, and efforts at liberalizing agricultural trade met with little success. In the textiles and clothing sector, an exception to GATT's normal disciplines was negotiated in the 1960s and early 1970s, leading to the Multifibre Arrangement. Even GATT's dispute settlement systems were causing concern as will be discussed later. The Uruguay round negotiations lasted for about seven and a half years, twice the time originally planned for.

But it was worth the trouble, basically all issues related to trade were discussed in these negotiations, previous GATT articles were reviewed and most importantly the Final Act concluding the Uruguay Round and officially establishing the WTO regime was signed during the April 1994 ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.

The Marrakesh agreement was the document that gave the legal sanction to the establishment of the World Trade Organisation on January 1, 2005. This agreement consisted of a preamble which laid down the basic objectives of this organisation, 16 articles which basically put forward the structure, functions, decision making process, accession and various other key aspects of the World trade organisation. Now the main function of the WTO as mentioned in Article 3:1 of the agreement is to administer the implementation of the multilateral trade agreements which are a part of the Marrakesh agreement in the form of annexes. Annex 1 consists of agreements on trade in goods, agreements on trade in services and agreements on trade related aspects of intellectual property rights. There are other annexes relating to dispute settlement undertaking, Trade policy review mechanism and plurilateral agreements.

Now an important question that arises is what happened to GATT after the establishment of the WTO. Well the answer to that is that GATT 1947 is a part of the Marrakesh agreement as Annex 1A in the form of GATT 1994 which is mainly GATT 1947 plus the various developments decided on during the various trade negotiations. The contracting parties of GATT 1947 automatically became the members of WTO (Article IX: Original membership) and then the agreement was opened to be accession by other countries (Article X: Accession). The WTO framework ensures a single undertaking approach to the results of the Uruguay Round — thus, membership in the WTO entails accepting all the results of the Round without exception.

Review of GATT and WTO
Now my focus here is to understand the functioning of WTO by a kind of review of both WTO AND GATT for better analysis. The key aspects picked up by me are as follows:
Coming into force: The WTO Agreement and the annexed agreements, including GATT 1994, were to come into force on a date determined by the Ministers of the WTO, which was to be as early as possible as and not later than July 1, 1995;Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, para. 3. The date, ultimately, was January 1, 1995. No minimum membership requirements were set, because the WTO Agreement adopted the pre-existing GATT 1947 membership as its own. WTO Agreement, Article XI: 1. Adherence to the WTO Agreement includes adherence to each of the annexed agreements, including GATT 1994, except for the plurilateral agreements in Annex 4 (re: civil aircraft, government procurement, dairy products, and bovine meat), which are optional agreements.

The Scope and Function of the GATT: The function of GATT is to constrain member States from imposing measures that restrain international trade, according to the theory that liberalized trade promotes efficient allocation of production and consumption among States. The scope of GATT is quite wide reaching. Not only does it cover tariffs, quotas, custom procedures, and state trading, it also extends to domestic activities, such as internal taxes, subsidies, and domestic regulation which tends to discriminate against imported products. The WTO agreement annexed in itself GATT 1994 which also includes GATT 1947 as well as GATS, intellectual property rights, trade review mechanism and plurilateral trade agreements.

Environmental Scope of GATT: does not address environmental issues per se. but it severely limits the ability of members to address environmental problems through trade barriers. In so far as a member State's activities concerning the environment have discriminatory impacts upon international trade, either by favouring domestic products or by favouring products from one nation over those of a GATT member State, GATT disallows them. Exceptions: Art. XX(b) and (g). Only in cases where the State has been or will be damaged within its territory would discriminatory trade action be appropriate under GATT. If enough scientific evidence of domestic damage existed, a member State could invoke the Article XX exceptions to justify trade barriers addressing a global environmental problem, as well. In the Tuna/Dolphin dispute, the GATT panel found the extraterritorial extension of the Article XX justifications wrongful when the United States attempted to justify trade restrictions upon the life and conservation of dolphins in the Pacific Ocean. Unilateral action has been disallowed but multilateral action hasn't been. Eg. CITES, Montreal Protocol. The optional structure of the Annex 4 agreements may provide the flexibility needed for the WTO to be able to support environmental-trade action within the GATT structure.

Decision making under WTO: The WTO makes decisions by consensus. But where a decision cannot be reached by consensus, the matter is decided a majority of votes cast, in an election in which each member of the WTO has one vote. WTO Agreement, Article IX: 1. Under the previous GATT consensus system, decisions were made rarely and one country could hold up the entire system. Article IX:2 of the WTO Agreement, the WTO Ministerial Conference and General Council exclusively interpret the WTO Agreement and the GATT 1994. Interpretations are based on the recommendation of the Council overseeing the functioning of the Agreement in question. The decision to adopt an interpretation is subject to a 3/4s vote by the members. Upon request by a member, the WTO's Ministerial Conference has the authority to make decisions on all matters under any of the Multilateral Trade Agreements, including GATT 1994. WTO Agreement, Article IV: 1. Decisions of the WTO are backed by sanctions: if a member does not follow the WTO's recommendation to cease a wrongful trade practice within a reasonable time, compensation and the suspension of concessions or other obligations may be imposed. However, compensation is voluntary. Understanding on Rules and Procedures Governing the Settlement of Disputes, 22.1.

*Law making process:

1. Processes of Amendment, Withdrawal, and Termination:

Any member may initiate a proposal to amend the WTO Agreement or the GATT 1994 by submitting a proposal to the Ministerial Conference. WTO Agreement, Article X:1. A Council which oversees GATT 1994 may also submit a proposal to amend GATT 1994 to the Ministerial Conference. If consensus within the Ministerial Conference cannot be reached, the Ministerial Conference decides by a 2/3s vote of members whether to submit the proposed amendment to the members for acceptance. Generally, amendments become effective upon acceptance by 2/3s of the members. However, amendments to certain articles are only effective upon unanimous acceptance. Such articles include Articles IX and X (amendments and decision-making) of the WTO Agreement, and Articles I and II (MFN and tariff schedules) of the GATT 1994. Amendments which affect members' rights and obligations become effective for the members that have accepted them upon the 2/3s vote, and become effective thereafter for each other member upon acceptance by it. Under WTO Agreement Article XV:1, members have the right to withdraw from the Agreement, and thus also from the GATT 1994, after six months from the date the Director-General of the WTO received written notice of withdrawal. There is no provision concerning the termination of the WTO Agreement or GATT 1994.

2. Adjustments, Waiver and opt-outs:

In exceptional circumstances and subject to a 3/4s vote of the members, a member's obligation may be temporarily waived by the Ministerial Conference. WTO Agreement, Article IX. Another type of adjustment is the opt-out provision of Article XIII. If at the time either of two or more States becomes a member, if either member does not consent to be bound with respect to the other member, the treaties shall not apply as between those members.

3. Comparison of Adjustments to Amendments:

Under the old GATT system the waiver was often criticized as an "easy track" amendment process, the WTO Agreement has stiffened the waiver rules while easing the amendment rules. The waiver is temporary, may be terminated by the WTO, and is subject to a 3/4s vote (stricter than some amendment votes). The opt-out is not like an amendment, because it only avoids the treaty obligations to that specific member against whom one has opted out. The treaty obligations vis-a-vis the other members still apply. A party could avoid an amendment if it were one altering the rights and obligations of members and if the Ministerial Conference decided that members not accepting the amendment may nonetheless remain members. If the waiver applicant met the criteria for a waiver, within the judgment of the Ministerial Conference, there would be no way for a member to avoid the implications of that waiver. Similarly, there is no way to avoid an opt-out vis-a-vis a specific member.

Dispute settlement mechanism under WTO

In the end of this attempt to study the basic framework of WTO, I will also provide an insight into another important aspect of WTO that is the dispute settlement mechanism. Now the negotiations for a dispute settlement mechanism started in the Uruguay round negotiations itself and in the Marrakesh agreement, Understanding on Rules and Procedures Governing the Settlement of Disputes was added as Annex 2, which gives the framework on the basis of which the dispute settlement mechanism would work. But the question that arises here is, does that mean that there was no dispute settlement mechanism under GATT 1947? The answer to that is that there was a dispute settlement mechanism under GATT but it had various loopholes that made it extremely inefficient.

The dispute settlement mechanism tried to cover these loopholes in the following ways:
1. Procedure existed even under GATT but it had no fixed timetables, hence many cases dragged on for years. There are strict time frames under each step under the WTO.
2. Under GATT ruling could be adopted only by consensus, meaning that a single objection could block the ruling. Under WTO, rulings are automatically accepted, rejection only on the basis of consensus.
3. Under GATT, most people would never bring their case to GATT because the other party could use its veto power and block the establishment of the panel. Under GATT, establishment of panel can only be blocked once but if the DSB sits for the second time, it cannot be blocked.
4. Under GATT, even if the panel reports were adopted, the decision of the judges would never be fair and objective, it would be highly influenced by the power of the other party to block the decision. No such problem under the WTO.
5. Tokyo round codes-code specific dispute settlement mechanism. These specific dispute settlement procedures were only applicable to the signatories of the code and only with regard to specific subject matter. In cases where rules relating to the subject under dispute were under both under GATT and the code, the complainant could chose the forum or file a case under both forums. Forum shopping and Forum duplication.
6. Appellate review of panel reports not available under GATT.
7. Countermeasures could also be blocked under the GATT rules.

Hence the new dispute settlement mechanism tried to cover the loopholes present under The GATT agreement and it has been quite successful in doing so, keeping in mind the number of cases that go to WTO for settlement. Now briefly stating the procedure followed under the dispute settlement mechanism of the WTO.

1) Parties must attempt through consultation to resolve the dispute
2) If that fails, parties avail themselves of GATT's conciliation or mediation services
3) If that fails, a panel hears the dispute and issues its report
4) The report is adopted by the DSB unless there is a consensus against adoption
5) Parties may appeal the decision to the Appellate Body, whose report is adopted unless there is a consensus against adoption
6) Implementation of the DSB recommendations is monitored
7) if not implemented, the DSB may consider withdrawal of concessions

Conclusion
Long live the GATT. GATT 1947 provided for the groundwork for the establishment of the WTO and remains a very integral part of it. It is said by many that the reason why WTO has been successful in achieving its objectives is because almost 50 years were spent laying down the foundation of what finally case before us in the form of an organisation called WTO.

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