November 22, 2019

How Are Agreements Reached at the WTO?

EPA/Scanpix
Disagreements in the WTO: a French wine store in Los Angeles. The US has decided to raise tariffs on European products and received permission to do so from the WTO.
Disagreements in the WTO: a French wine store in Los Angeles. The US has decided to raise tariffs on European products and received permission to do so from the WTO.

An agreement at the World Trade Organization can lead to hard feelings back home.

A widespread belief has recently emerged that the WTO has not managed to conclude any agreements for years and the latest success story in trade agreements dates back to 30 years ago. Fortunately, the reality is a bit more positive. As we look at the various multilateral trade agreements that WTO member states have managed to conclude unanimously, we should refresh our memory and go back in history to the organisation’s early days.

It all began with the 1947 trade negotiations in which, as a cornerstone for subsequent agreements, a rule was established stipulating that countries could not discriminate against each other in trade, which meant that countries that joined the agreement had to treat each other equally in commerce. While early negotiations were mainly aimed at lowering tariffs, later the obligation to reduce non-tariff restrictions and rules on anti-dumping came into the discussion. The resulting agreement was named the General Agreement on Tariffs and Trade (or GATT) and a fair proportion of its rules still constitute an important part of the WTO’s current regulations.

The Uruguay Round of negotiations, held between 1986 and 1994, led to the establishment of the WTO. Remarkably, in 1997 sixty-nine countries agreed on the extensive liberalisation of telecommunications services. In 2000, an extremely difficult task was undertaken: negotiations to liberalise agriculture and the services market. Both topics became part of the Doha Round agenda (named after the 4th WTO Ministerial Conference, which took place in Qatar in 2001). In addition to agriculture, the highly ambitious plan for negotiations in Doha included non-agricultural tariffs, commerce and the environment, facilitating trade, rules on public procurement and intellectual property. The issue of special treatment for developing countries was addressed under all headings, which meant allowing distinctions and less strict rules for these countries, as it was clear that the world’s poorest or developing states need concessions to catch up with developed countries.

How far have these negotiations come? Again, the general belief is nowhere, and the reason for this lies in the fact that agriculture—the most politically sensitive and heated topic in the WTO—has not attained the long-awaited appropriate solution established in the Doha Round. At that time the goal was to liberalise agricultural tariffs and to implement fair (some even say equal) rules for the allocation of agricultural subsidies. The reason agriculture has been at the centre of the negotiations becomes clear when we look at the list of WTO members: almost three-quarters of the organisation’s 164 member states are developing countries, whose main economic sector (or one of them) is agriculture, including agricultural trade.

Nevertheless, the WTO has managed to establish very important rules for global commerce following the Doha Round. For example, in 2011 countries agreed to expand the rules on public procurement, which is estimated to be worth about 100 trillion US dollars a year globally. In 2013, after years of work, there was a breakthrough at the ministerial conference in Bali and WTO countries approved the Trade Facilitation Agreement (TFA) with the goal of harmonising administrative procedures related to trade and cutting down on bureaucracy. The agreement came into force in 2017 and is estimated to reduce trade-related costs by 14%; it should increase the volume of trade by one trillion US dollars a year. In 2015, 15-year-long arguments about eliminating agricultural export subsidies came to a successful conclusion; it was decided that all WTO countries must eliminate this form of support, and today most have done so. Also in 2015, the existing IT agreement was expanded, with tariffs on over 200 IT products (worth 1.3 trillion US dollars a year) being eliminated.

“How were those agreements achieved?” and “Why does it all take so long?” are probably the most common questions I have heard during my eight years of working with the WTO.

To try and answer these questions, we should first compare trade during the early years of the GATT with the position today. Commerce has grown immensely (thanks largely to the WTO’s regulations), global export volume alone has grown 250-fold compared to 1948, and each year trade grows an average of 1.5 times faster than the global economy as a whole. Moreover, those who stayed away from the GATT negotiations—some of them poor developing countries who were not members of the WTO—have today grown to become some of the biggest main product groups’ exporters and key players in WTO negotiations. Interests—and conflicts of interest—in multilateral trade negotiations are therefore many times greater than they were during the years following World War II.

Concluding agreements today is clearly more time-consuming, as the WTO now has 164 members and decisions must be made unanimously—the organisation doesn’t have qualified majority voting, which would not be possible due to the big difference in the development levels of the countries. As the WTO is the only international organisation that establishes legally binding global trade rules, countries and their political leaders weigh their choices carefully before compromising because, as with most major agreements, to accomplish something you need to give something up. The rules agreed in the WTO are not UN-resolution-type political documents—failing to comply is not followed by sanctions—but rather agreements, which lead to specific repercussions from the WTO’s Dispute Settlement Body (DSB, the so-called “WTO court”), if their obligations are not fulfilled.

A frequent problem is that processing complaints in the DSB takes longer than the appellant would like and sometimes the damage caused to a country’s commerce or businesses has already become irreversible. It all takes time due to the multifaceted nature of commerce and the technical and political complexity of the issues. If you look at any of the WTO’s agreements or decisions made by the DSB, you can see that they are complex, detailed texts, a mix of sector-specific nuances and legal detail. Thus, both negotiations on agreements and legal disputes require the contribution of experts on the relevant sector and international trade lawyers. It comes as no surprise that sectoral experts are often involved in negotiations in Geneva, which are mainly handled by diplomats. Sometimes the experts are even permanently engaged on-site or the parties appoint experts in a certain field as diplomats. The EU, with 28 countries, is often the only member of the WTO that has a mix of economists, sectoral experts and lawyers engaged in important negotiations. In addition, there are the representatives of the EU’s member states, whose backgrounds might vary from agriculture to law.

The WTO’s biggest decisions are made at the ministerial conferences that take place every two years. News of breakthroughs or failures usually reaches the world media and puts the WTO in the spotlight only at these times, and it seems as if nothing happens in between. In reality, all the big WTO decisions are crafted during the period between the ministerial conferences when technical and time-consuming diplomatic negotiations take place at the organisation’s headquarters in Geneva. In their work, diplomats take into account the instructions of their home government and, besides political will, the key to success often lies in the diplomats’ personal ability to explain and pass on their message about their country’s position (discussions are often so specific that extremely thorough knowledge in macro- and microeconomics and pure mathematics and a detailed knowledge of a country’s economic outlook are needed). However, the ability to listen to and understand the problems of other countries or groups of countries and the reasons behind their opposing positions is also necessary. The way diplomats can explain to their governments the complexity of WTO negotiations and the perspectives of possible compromises is also imperative.

The greater a country’s economic interests in a sector being negotiated, the more complicated it is for them to see the future benefit of compromise. In sectors in which political interests are strong and the competing interests of the world economy’s major players have a high impact, reaching an agreement is, even today, complicated—to put it mildly. Binding topics together is more of a rule than the exception in the WTO. For example, the EU, Australia, Canada and some other countries have done a lot to find a solution to one of the biggest problems in the WTO today: the crisis over the DSB due the US blocking the appointment of new members, demanding an extensive reform of the body’s principles. Efforts have now lasted for a year, but a solution has not so far been found. The word “solution” has been attributed wildly different meanings by major countries and the stakes are too high to compromise even slightly. Blocking the appointment of DSB members might have some other hidden agenda, so that the US can resolve some issues that have not been dealt with previously.

How was it possible to reach agreement on politically sensitive issues before? It has never been easy, and the heated political arguments at the ministerial conferences that have followed diplomats’ preparatory work have been anything but straightforward. To build up pressure to conclude the necessary agreements, an additional day and night have been added to the conference on the last three occasions.

It is no secret that China, the US, the EU, India, Brazil and Canada usually have an imperative role in making the key decision, and on more than one occasion a multilateral agreement is essentially secured when these parties have reached a compromise; Indonesia and South Africa are also very influential. In 2013, political leaders from the trade sectors of the US, India and the EU sat together for over 24 hours to reach a difficult compromise in the preliminary agreement on agricultural food security for developing countries. The need for this agreement was fundamental, as the prime minister of India had unambiguously stated that, without it, India would not sign the TFA, the content of which had been drafted over years of diplomatic argument and was ready for political approval. The difficult compromise was finally achieved in the early morning of an additional day at the ministerial conference, which also concluded the historic TFA. The great hall filled with top politicians and diplomats from 164 countries cheered the WTO’s Director-General and the host country’s minister of commerce, who was instrumental in reaching the compromise. The Indian minister was heavily criticised back home as he was considered to have sold out his country’s interests whilst Western Europe and the US thought that the compromise was more than generous towards India. Sometimes agreements are good even when both sides of the argument think that they lost!

Negotiations are complicated by the fact that the topics—be it agriculture, services, intellectual property or something else—are often intertwined, and often artificially connected by countries. This means, for one thing, that when one country decides to compromise and, for example, substantially cuts its agricultural subsidies or completely eliminates them, when choosing its negotiating tactics this country’s government will wonder what to do about tariffs, having put the country in a more disadvantageous position by supporting agriculture compared to other similar WTO states. Should it raise tariffs? Other countries would definitely not approve of such behaviour—even if it remains within the allowed tariff margins—but, as long as it complies with the WTO rules, it is allowed. In 2005, for example, the EU made a significant compromise at the ministerial conference by promising to eliminate export subsidies if other WTO members compromised on topics important to the EU. The other countries never followed through, so the EU remained in a defensive position on this issue for years. This compromise was also an important lesson for the EU not to conclude agreements when it is not clear what other parties may do. Nevertheless, we should give credit to the EU as the negotiating tactics were founded on values for reaching important agreements in the WTO—“I will compromise when you do”. It took another ten long years for the historic agreement to eliminate export subsidies to be agreed by all members during the Nairobi Ministerial Conference in 2015.

The historic Nairobi agreement characterises well why the WTO is not in a hopeless situation in concluding new trade agreements: while in 2005 the EU held on tightly to some protectionist measures, in 2015 it was among those that loudly demanded the elimination of export subsidies. Let’s not forget that this was the common position of 28 EU member states, including major agricultural economies such as France and Poland.

If a country’s economic policies change, so do its positions in the WTO. It is clear that no multilateral agreements can be signed in the WTO without the support of key states, which means that, before any potential compromise can be made at the multilateral level, the trade war between its two largest member states must first be satisfactorily concluded. However, since the world is continually changing while it waits for the greats to resolve their argument, we may see a WTO in which a significant number of new agreements are concluded between specific parties, i.e. only a few member states that have both the desire to enter into new deals and the willingness to compromise.