Is the World Trade Organization Attractive Enough for Emerging Economies?

The World Trade Organization (WTO) has been seen as one of the most important achievements of international economic cooperation in the post-war period. Membership of the WTO and of its predecessor, the General Agreement on Tariffs and Trade (GATT) has dramatically expanded over the years, and the organization now includes all of the larger countries with the exception of Russia, which is still negotiating its accession. The main attractions of the WTO are seen by their protagonists to be twofold — the WTO represents a platform for multilateral negotiations to improve access to markets for countries’ exports and to establish a set of legally binding trade rules and disciplines. The former expands the opportunities for countries’ exports and thus leads to improved conditions for economic growth. The latter provides for increased transparency and predictability of countries’ policy commitments — features that are of considerable importance for newcomers into world markets and for avoiding policy “backsliding.”

Since the establishment of the World Trade Organization (WTO) in 1995, 21 countries or customs territories have joined the organization and one more, Vietnam, has met the requirements for accession. Of these, all are allowed to classify themselves as developing economies in the WTO, although one — Chinese Taipei — is classified as high income by the World Bank. Relative to the situation prevailing under the General Agreement on Tariffs and Trade (GATT), it seems to be widely believed that most new members have had to make substantial commitments to reform their trade regimes and to reduce the level of their tariffs. This has generated considerable controversy, since some new members have ended up with much more open trade regimes than existing members — a situation widely regarded as unfair.

What kind of international regulations might help foreign direct investment (FDI) contribute most positively to the growth and welfare of host countries in the developing world? What kind of international regulations might limit FDI from doing damage?

Trade is one of the longest surviving human activities, becoming more far-flung, varied and valuable over time. The rules governing trade — even free trade — have grown more complex with millions of new players and products, giving rise to the multilateral trade organization to serve as King Solomon. In theory, governance of international trade organizations takes the form of “One Country, One Vote.” In practice, whatever the formal rules, a strong leader sits atop and sets the agenda in a hierarchy resembling the Empire State Building. Bill Clinton’s Trade Representative, Charlene Barshevsky, unabashedly used the word “push” rather than “persuade” to describe America’s leadership:

It is vital to the long-term prosperity and prestige of the United States … to take full advantage of our strong global position and continue to push our trading partners for even more open markets and economic liberalization. If we abdicate our strength, we risk missing a prime opportunity to advance those policies and values that have been so instrumental in making our economy the strongest and most efficient in the world. (emphasis added, Barshewsky 1998)

One of the most remarkable successes of the World Trade Organization (WTO) in recent years has been the expansion of its membership and the continued stream of applications by countries to accede to it. Of the 43 countries that have applied to accede the WTO under Article XII since January 1, 1995, approximately one half are countries in the process of transition from a planned to a market economy. Ten of the 14 countries that have already completed their accession process and between nine and 13 countries — depending on whether East Asian countries are included or not — of the 28 countries negotiating their accession are transition countries. Clearly, the WTO represents a powerful attraction for countries in transition (CITs), which treat WTO Membership as a “stamp of approval” of their policies and their admission into the international community — a feat quite important for CITs that have been isolated from world markets for more than 50 years.

The proliferation of bilateral and plurilateral free trade agreements (FTAs¹) in recent years has been widely noted. The World Trade Organization (WTO) received notifications of 167 FTAs which entered into force from the beginning of 1990 through July 1, 2005,² and there may be others. A wide variety of agreements also provide for some integration between members but do not achieve complete free trade in merchandise. Some of these FTAs pair a large developed-country partner with a developing-country partner. Beginning in 2000, the U.S. has initiated FTA negotiations with 23 different countries in 12 separate agreements, and concluded negotiations with 13 of those countries. Similarly, in 2004 ten countries acceded to the EU, expanding its membership to 25. At the time of writing (November 2005), another eight countries are in the queue for EU Membership,³ and the EU has a wide variety of additional agreements, including FTAs with Chile, Mexico, and South Africa and various sorts of arrangements with its regional neighbors under the umbrellas of the “European Neighbourhood Policy” and “Euro-Mediterranean Partnership.”

This chapter asks whether regional trading arrangements (RTAs) are substitutes for or complements to World Trade Organization (WTO) Membership. From the start of the current international trade regime there has been a tension between the nondiscrimination mandated in Article I of the General Agreement on Tariffs and Trade (GATT), requiring most favored nation (MFN) treatment, and the predilection of GATT signatories and WTO Members for discriminatory trading arrangements. The initial negotiations leading to GATT were characterized by an Anglo-U.S. conflict over Imperial Preferences, which were grandfathered despite strong U.S. antipathy and soon after signing the GATT the largest continental European economies established the European Coal and Steel Community setting off on the path to a customs union.¹

Around four years ago I began to work on the effects of the World Trade Organization (WTO) and its predecessor the General Agreement on Tariffs and Trade (GATT).¹ I was interested in quantifying the effects of membership in these multilateral trade organizations on international trade. I fully expected to find a large positive effect and was primarily interested in comparing this to the effects of other things that enhanced trade (particularly the effects of currency unions). However, I was astonished to find that a naïve look at the data yielded little evidence that membership of GATT/the WTO had an effect on trade that was either economically or statistically substantive. In this chapter, I review the small literature that has developed around this issue.

Becoming a member of the World Trade Organization (WTO) is not just a question of “raising one’s hand.” Accession is subject to a complex negotiation process, which is costly and which involves demands from existing member countries that applicant countries do not necessarily consider to be in their own immediate interest. Perhaps inevitably bilateral or regional arrangements may often seem more attractive than WTO Membership. Accession commitments relate to market access, as well as policy rules not directly related to trade. Both add up to something like a “price” for WTO Membership.¹ Although the price tag is negotiable, the negotiating process is somewhat biased in favor of existing members. Moreover, there is evidence that the price has risen through time; see Evenett and Primo Braga (2005). Yet, countries are willing to pay this “price.” so there must be a benefit. Arguably the most important and immediate benefit is an expected increase in exports to existing member countries, beyond the levels that would otherwise be reached.

The most striking features of the World Trade Organization (WTO) are, arguably, its membership list and the changes in the list over time. Despite widespread concerns about globalization and about the role of the WTO as a global institution, WTO Membership has been growing rapidly. When GATT the predecessor of the WTO — was established in 1947, the total number of countries signing the Agreement was 23. By 2007, the membership had increased to 150. Moreover, there were more than 30 countries negotiating accession to the WTO. Most of the increase in the membership has come from developing countries and from countries in transition since most developed countries had joined GATT years earlier. Developing countries now account for two-thirds of the total membership. What is evident from the rising numbers is that many countries join the WTO with great expectations and expecting something positive to come from their membership.

This chapter analyzes the experience of developing countries in the World Trade Organization’s (WTO) dispute settlement system and evaluates on a country-by-country basis how they have fared in (1) in the specific cases in which they were involved and (2) in advancing their major trade policy concerns. The chapter then briefly considers several possible reforms to the WTO system that would be of particular interest to developing countries. In order to place the chapter’s analysis in context, an introductory section briefly describes the system and overviews its operation during its first ten years — from 1995 to 2004.¹

Implementation of the results of the Uruguay Round has been a key issue in charting the course of the World Trade Organization (WTO) system over the years since 1997. There had been a substantial overhaul and expansion of the scope of the multilateral trading system in the round, which was concluded against a background of growing world trade, and several international institutions predicted global welfare gains of up to $500 billion, much of which was to benefit developing countries. However, the Asian, Russian, and Brazilian crises of 1997–98 changed the global economic environment; problems emerged with the implementation of the WTO Agreements; and efforts to build on the success by launching a “Millennium Round of Multilateral Trade Negotiations” foundered in Seattle in 1999. As a result, the WTO began the new millennium with a great deal of soul searching.