In defence of the WTO

Hard rules are better than no rules at all?

The creation of the World Trade Organisation (WTO) in 1994 took earlier international rules and agreements on free trade a lot further and added the disciplining bite of a binding Dispute Settlement Body (DSB). About two thirds of the WTO's 146 members are "developing" countries, and they were vocal in Cancun, but are the rules biased against them?

The new WTO rules impinge much more heavily on the freedom countries have to set domestic regulations which potentially affect trade. The WTO rules on food safety regulations are especially strict: they must be based on "scientific assessments". Although these may be costly for LDCs to apply at home, they have consistently favoured rules that curb the ability of the European Union (EU) and the US to use phoney health and safety regulations as sneaky barriers to imports. Peru, for example, recently won a case against the EU which tried to prevent it labelling its sardines as "sardines".

But other WTO rules and agreements have definitely not favoured LDCs. As May explains, the Trade and Related Aspects of Intellectual Property Rights Agreement (TRIPs) has not brought the promised improved innovation and investment in LDCs, but rather the transfer of rents from the developing world to the US and the EU.

If there is little dispute that the TRIPs agreement was a bad deal for LDCs, the General Agreement in Trade in Services (GATS) is harder to call. The basic principle is that countries only have to open their services markets to outside investment where they have specifically "scheduled" a sector. Of course countries can open their markets any time they like: the advantage of "scheduling" is that it creates a binding commitment that gives investors security.

Rules work both ways

GATS creates no obligations to privatise anything, and the agreement recognises the "right to regulate", but it does require that countries that do "schedule" a liberalisation, stick to it. Whilst the EU and the US try to persuade developing countries to open their markets to multinational service companies, LDCs are also demanding that developed countries let in their own computer programmers and accountants.

But the big problem of the WTO is the ambiguity, rather than draconian nature of many of its texts and procedures: what does "the right to regulate" services actually mean in the GATS? Suppose African countries want to export genetically modified (GM) maize: would the WTO strike down EU rules on GM foods if it thought there was not enough scientific evidence to support them?

In practice these issues would be decided upon by the DSB. Its rulings are not easy to predict, but there is little sign of bias against LDCs. Indeed, when they do bring cases against the big players, LDCs usually win.

Without legal rules, which WTO members have to agree unanimously, governments would theoretically be free to choose any regulations they like, even if they just blocked trade and investment without benefiting consumers or workers. In reality, that would mean the US and EU doing what they liked, whilst others would have to accept their choices. Smaller players prefer to have the rules made clearer so they can use the law to make big players stick to them. As Cancun showed, LDCs have a collective veto against any unreasonable extension of the free-trade agenda, but they should not see it as entirely negative. They should be ready to use the WTO's legal mechanisms to ensure that the developed countries are forced to stick to their commitments too.

Peter Holmes
Department of Economics
University of Sussex
Brighton
BN1 9SN
UK

P.Holmes@sussex.ac.uk

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