The Current Trading System: Instruments, Opportunities and Problems
The areas covered by the GATT/WTO system are: trade in goods, trade in services and protection of intellectual property rights. The WTO rules lay down disciplines for governments in the formulation of laws, procedures and practices in these areas, and in some cases, they also prescribe disciplines for firms.
The rules regarding trade in goods aim to promote competition among the goods of different countries, largely through reduction of tariffs and disciplines on non-tariff measures affecting their import and export. Import tariffs were very high before GATT came into operation. Negotiations at the time GATT was established and in successive rounds reduced the tariffs to their current comparatively low levels. The average trade-weighted tariff on industrial products in the developed countries fell to 15 per cent by the mid-1950s, to 10 per cent by the late 1960s, to 6 per cent by the late 1970s and finally to about 4 per cent in the Uruguay Round. Developing countries also very substantially reduced their industrial tariffs in the Uruguay Round. For example, India's trade-weighted average tariff on industrial products has been reduced from 71.4 per cent to 32.4 per cent, Brazil's from 40.6 per cent to 27 per cent, Chile's from 34.9 per cent to 24.9 per cent, Mexico's from 46.1 per cent to 33.7 per cent, Venezuela's from 50 per cent to 30.9 per cent, and so on (Das 2001b).
Even though the tariffs of developed countries have been substantially reduced, they remain comparatively high on the products of interest to developing countries. Also, in several product chains of interest to developing countries, developed countries have progressively higher tariffs on products with higher processing, a feature which has come to be known as tariff escalation. All this restricts opportunities for the export of industrial products from developing countries and discourages industrial upgrading.
The disciplines in the non-tariff areas are mainly on conditions and procedures for restricting imports under special circumstances, for counter-action against unfair trade practices, for enforcement of product standards and for certain procedural matters. Some of these were developed in the Tokyo Round (1973-79), and were applicable to the countries that adopted them. They were further elaborated and refined in the Uruguay Round and have been made applicable to all WTO member countries.
The rules in the area of services aim at progressive elimination of domestic regulations for the import and operation of services in order to promote competition among the services and service providers of different countries. There are both overall disciplines relating to the import of services and specific ones relating to particular service sectors. The General Agreement on Trade in Services (GATS) provides a framework for WTO member countries to choose the sectors on which they would undertake commitments and lay down conditions for entry and national treatment. The agreement provides for progressive liberalization of various service sectors with the stipulation that the developing countries may choose to liberalize only a limited number of sectors and transactions.
The rules for protection of intellectual property rights (IPRs) in the TRIPS Agreement prescribe certain minimum levels of protection of IPRs in the WTO member countries. While a country may provide higher levels of protection at its discretion, all countries must provide the prescribed minimum levels of protection for the various types of IPRs included in the agreement. The rules prescribe the rights of the IPR holder, the duration of the rights, the conditions and procedures for putting limitations and constraints on these rights and the relief against violation of the rights.
Enforcement of rights and obligations in WTO agreements is ensured through an integrated dispute settlement process, spelled out in the Dispute Settlement Understanding (DSU). When a country perceives that its right has been violated by another country or that another country has not adhered to its obligation, it can make a complaint. A panel of experts will examine the issues and give its recommendations. The DSU prescribes the operational mechanism by which the recommendations have to be accepted and acted upon. If a country fails to act, the complaining country is allowed to take retaliatory action against the erring one.
POSITIVE ELEMENTS OF THE SYSTEM
As pointed out by Das (2001b), the WTO system has several elements that have the potential to impact positively on international trade. Among these positive elements are:
1. It provides an opportunity for sharing benefits among members. The most-favoured-nation (MFN) principle contained in Article I of GATT 1994 prescribes that the benefits provided by a member to any country will be extended to all members. It is through the operation of this principle that developing countries obtained the benefit of tariff reductions in the past, most of which had been achieved as a mutual exchange of concessions among developed countries. Even though the MFN principle has been eroded by the emergence of regional trading arrangements, it continues to be an important pillar of the system.
2. It provides for burden-sharing in times of crisis for a member. This is attained through:
* the safeguards provision (Article XIX of GATT 1994 and the WTO Agreement on Safeguards), which is used by a member to restrict imports when its domestic industry suffers injury from imports or there is a threat of such injury;
* the balance-of-payments provision (Articles XII and XVIIIB of GATT 1994), which enables a member to take import-restrictive measures if it faces a balance-of-payments problem. (Article XVIIIB applies to developing countries, whereas Article XII applies to all members, though developed countries have now given up applying such measures.)
In both cases the burden is shared by the entire membership by accepting the limitations to the imports into that country.
3. It provides protection to a member against possible harassment by other members through unilateral trade-restrictive actions. The WTO dispute settlement process generally resolves disputes between members quite efficiently. (Details, including the problems in the process, are discussed below). The system of redress of grievances is particularly important for a weak party, which is often in need of protection.
As discussed, developed countries have found the GATT/WTO system very useful in expanding their trade opportunities. These particular features make it also relevant and potentially useful to the weaker trading partners, particularly developing countries. In fact, several developing countries that are not presently in the WTO have applied for membership largely because of these features. But unfortunately the system has not worked to the satisfaction of the majority of its members, especially developing countries, owing to a number of other problems, systemic, structural and operational. There are problems in the basic principles and structure, in the negotiating process, in the current agreements and finally in the operation of the agreements; and there are severe deficiencies, imbalances and inequities in the agreements as well.
SYSTEM EXPECTATIONS AND THE OPPORTUNITY GAP
The WTO framework has given rise to certain expectations by member countries. Reduction of tariffs and disciplines on non-tariff trade-restrictive measures have resulted in expansion of opportunities for trade in goods. Liberalization in the service sectors has enhanced the possibilities and potential for expansion of service transactions across borders. And protection of IPRs has given a boost to the creation of new IPRs. But these opportunities cannot be used equally by all countries, primarily because of the vastly differing levels of capacity for their utilization, especially between developed and developing countries (ibid).
Effective utilization of the opportunities provided by the system requires the following:
* the existence of domestic supply capacity in goods and services;
* the possibility of expansion of domestic supply capacity in the short/medium term;
* existence of linkages with major markets;
* existence of scientific and technological base for research and innovation;
* a favourable external environment, i.e., support from other countries to assist a country to make use of the opportunities.
Naturally the countries with high supply capacity will have higher utilization of the opportunities. With a few exceptions, developing countries have very low supply capacity in the goods sectors, and still less in the services sectors. They also have weak linkages with the major markets, as their trading firms are very weak compared to those of developed countries. The possibility of expansion of supply capacity and the development of linkages is also not bright, as this requires a high level of financial resources and access to technology, both of which are limited in developing countries. The rapid development of technology and its incorporation in production, transport and communication is likely to enhance the gap between the supply capacities of developed and developing countries, serving to widen the gap in the utilization of opportunities provided by the WTO system.
The situation is much worse in the area of IPRs. A very high proportion of current IPRs and much of the potential for new IPRs are in developed countries. Developing countries' share is meagre, leaving a big gap in utilization of the opportunity for creation of new IPRs offered by the trading system. Development of IPRs requires financial resources for education, training and research and also linkages with research institutions, which most developing countries do not have. The resource requirement may grow even higher in future, as research and technological innovation becomes more sophisticated; and this may further widen the gap in utilizing the opportunities for generating new IPRs.
In addition to all these factors, the external environment has not been favourable to developing countries, as their efforts at expansion of production and exports have been repeatedly stifled by policies and measures in the developed countries. As soon as they developed supply capacity and became competitive in some sectors, the developed countries imposed import restraint, initially through direct import control measures (including through special regimes in derogation of normal GATT rules such as in textiles) and later through so-called 'grey area' measures, a series of anti-dumping measures and more recently via considerations of environmental protection. The pressure for including a social clause in the WTO framework is seen by developing countries as yet another potential means of import control in the developed countries.
Industries in developed countries have generally chosen to pressure their governments for protection rather than adopt the longer term course of trying to adjust to the emerging competition. To the extent that they have succeeded, the burden has fallen mainly on developing countries.
OBJECTIVES, TECHNIQUES AND STRUCTURAL PROBLEMS OF THE TRADING SYSTEM
The WTO has some good objectives. The preamble of the Marrakesh Agreement Establishing the WTO states that relations between the parties in the field of trade and economic relationships should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production and exchange of goods and services, while allowing for optimal use of the world's resources in accordance with the objective of sustainable development. But the means chosen to achieve this objective is by entering into 'reciprocal and mutually advantageous arrangements' on trade between countries. Further, the ultimate means of enforcement of the rights and obligations in the system is through retaliation against the erring country. Both these techniques are inadequate and inappropriate for a system such as the WTO (Das 2001b).
Reciprocity is clearly inadequate as the guiding principle for a system with a membership whose levels of development are spread over such a wide range. By its very nature, the instrument of reciprocity will involve 'getting' by 'giving'. Those with higher capacity to 'give' will 'get' more, and those with small capacity will naturally not derive much benefit. In such circumstances, the principle of reciprocity has the inherent deficiency of enhancing disparity among members. Similarly, the principle of 'mutual advantage' is likely to yield unequal results for the strong and the weak in international economic arrangements, if the strength and power of nations is a factor influencing the results, as it is in the case of trade (ibid).
As the deficiency of reciprocity as the basis of exchanging concessions was recognized, differential and more favourable treatment to the developing countries was incorporated in Part IV of GATT. While developed countries undertook specific responsibilities in favour of developing countries, they were never seriously implemented. The instrument of differential and more favourable treatment to developing countries has been very much blunted in WTO agreements that emerged out of the Uruguay Round.
There is also the problem of enforcement of rights and obligations. Despite the potential benefit for all countries offered by the dispute settlement process, in practice, the weak countries are handicapped, since the ultimate means of enforcing rights and obligations is by taking retaliatory action against the erring country. Owing to the potential economic and political costs, a weak country, particularly a developing country, will hesitate to take such action against a strong country; thus retaliation is an effective enforcement mechanism only between two strong countries.
SPECIFIC PROBLEMS AND IMBALANCES IN THE AGREEMENTS
Considering the background in which the GATT/WTO system emerged, it should be no surprise that the agreements are full of inequities and imbalances. A detailed analysis of the features and imbalances of the WTO agreements has been carried out by Bhagirath Lal Das (1998a, 1999, 2001b); the following discussion draws substantially from this analysis.
The starting point is an examination of the agreements in textiles and agriculture, which have been a testing ground for the multilateral trading system for a long time. Throughout, the interests of powerful industry lobbies in the major developed countries have taken precedence over upholding the integrity of the multilateral trading system, and in so doing have revealed the hypocrisy of these countries' championing of open and free trade and of their professed reliance on market forces.
The WTO Agreement on Textiles and Clothing allows the major developed countries, namely, the United States, the EC and Canada, to maintain severe restrictions on imports from the developing countries in respect of over 1,000 textile products; whereas the developing countries do not have any such restrictions on their imports.
In the mid-1960s, as U.S. and Western European textile industries found themselves unable to compete with exports from developing countries, their governments, rather than follow a true market-oriented approach and allow these non-competitive industries to either become competitive or die, decided to ignore the rules. If they thought that the problem was of a short-term nature, another course for them would have been to take steps to restrain imports under the safeguards provision of GATT. But this would have meant restraining imports from all countries, including other developed countries. So instead they sponsored a special regime of international trade in textiles that would permit them to selectively restrict imports from developing countries. Although this special regime was technically abolished in 1995, when the WTO agreements came into force, the restrictions continue under the terms of the Agreement on Textiles and Clothing, which stipulates abolition of all such restrictions only on 1 January 2005.
By 1995, developing countries had already been subjected to this highly unequal regime for nearly 35 years, and it was expected that in the wave of liberalization in the new WTO system, the restrictions would be abolished altogether. Instead, however, the major developed countries insisted on, and obtained, concessions from developing countries in return for a promise to bring the textiles sector under normal trade rules in 2005.
The manner by which the WTO textiles agreement has been implemented by the major developed countries has, moreover, added to the inequity. Although the developed countries have technically fulfilled their commitment in progressive liberalization, in fact very little genuine liberalization has taken place, even after more than six years of the ten-year transition period (see Chapter 4). This has been possible because of a severe deficiency in the agreement. The base on which the percentages to be liberalized are calculated is a long list of products (itemized in an annex) that includes a large number of textile items that have not been under restraint. Since the developed importing countries had the option of choosing products from this list, the major developed country Members (US, EC and Canada) at each stage chose mostly those products that had not been under restraint. This allowed them to comply with the letter of the rules, but not with its spirit. Moreover, since the rules provide for 'progressive liberalization', rather than a sudden liberalization at the end of the 10-year implementation period, it can be seen as violating the letter of the agreement as well.
Another major deficiency in the agreement is that it does not put a specific obligation on the developed importing countries to take positive structural adjustment measures in this sector. In the absence of such measures, it is feared that the domestic industry, which has a strong influence, may put pressure on the governments, as it has in the past, to continue with restrictions. Such pressure was the reason for installing a special trade regime in this sector in GATT. 'Progressive liberalization' as envisaged in the agreement provided the opportunity for gradual adjustment of the industry to a free import regime over the span of 10 years. But, since the industry, as explained, has complied in such a way as to avoid liberalization to date, it is likely to cry for help again when it is faced with sudden liberalization in January 2005. The tardy process of liberalization and absence of any positive structural adjustment measures make it doubtful whether the major developed countries will abide by their obligation for full liberalization at that time.
The WTO Agreement on Agriculture has permitted the developed countries to increase their domestic subsidies (instead of reducing them), to substantially continue their export subsidies and to provide special protection to their farmers in times of increased imports and diminished domestic prices. Most developing countries, on the other hand, have previously provided little or no agriculture subsidies, and the agreement constrains them from having or increasing these subsidies. They now find themselves in a situation in which they cannot use domestic subsidies beyond a de minimis level (except for very limited purposes), cannot use export subsidies and cannot provide special protection measures for their farmers. In essence, developed countries are allowed to continue to distort agricultural trade to a substantial extent and even to enhance this distortion; whereas developing countries that had not been engaging in such distortion are not allowed the use of subsidies (except in a limited way) or special protection. All this needs some explanation and clarification.
Agriculture had eluded the normal discipline of the multilateral trading system right from the beginning. GATT contained only a soft discipline in agriculture, while the Tokyo Round (1973-79) could not finalize any discipline in this area. Finally, the Uruguay Round (1986-94) resulted in a comprehensive agreement, covering market access, domestic subsidies (called domestic support in the agreement) and export subsidies.
However, the Agreement on Agriculture is one of the most imbalanced and deficient agreements emerging out of the Uruguay Round. Countries were asked to reduce their domestic subsidies over a span of time: the developed countries by 20 per cent in six years and the developing countries by 13.3 per cent in 10 years. The de minimis level was defined as 5 per cent of production for developed countries and 10 per cent of production for developing countries. Countries having subsidies below these respective levels did not have to make any reduction. Since all but a few of the developing countries had no domestic subsidies beyond the de minimis level at that time, they did not have to make any reduction. Developed countries with high levels of domestic subsidies were allowed to continue these up to 80 per cent after the six-year period, while developing countries (with a very few exceptions) were prohibited from having subsidies beyond the de minimis level, except in a limited way.
In addition, many types of domestic subsidy have been exempted from reduction, most of which are used by the developed countries. While these countries reduced their reducible subsidies to 80 per cent, they at the same time raised the exempted subsidies substantially. The result is that total domestic subsidies in developed countries are now much higher compared to their level in 1986-88, which is taken as the base level for the reduction of reducible subsidies. In the 24 OECD countries combined, the value of domestic support in agriculture (as measured by the Total Support Estimate) rose from US$276 billion (the annual average for base period 1986-88) to US$326 billion in 1999 (OECD 2000). (See Chapter 4 for further discussion). The professed reason for exempting these subsidies in developed countries from reduction is that they do not distort trade. However, such subsidies clearly enable farmers to sell their products at lower prices than would have been possible without them.
The reduction exemptions applicable to developing countries are limited to four items: input subsidy given to poor farmers; land improvement subsidy; diversion of land from production of illicit narcotic crops; and provision of food subsidy to the poor. The scope is very limited and hardly a half-dozen developing countries use these subsidies (Das 2001b). Moreover, subsidies exempt from reduction and used mostly by developed countries (Annex 2 subsidies) are immune from counter-action in the WTO; they cannot be subject to the countervailing duty process or the normal dispute settlement process. Those exempt from reduction and used by developing countries (listed above) do not have such immunity, however.
As for export subsidies, developed countries were to reduce their budget outlays by 36 per cent and the quantity of exports covered by the subsidies by 21 per cent over six years. The reductions for developing countries were 24 per cent and 14 per cent respectively over ten years. This has enabled the developed countries to retain 64 per cent of their budget allocations and 79 per cent of their subsidy coverage after six years. The developing countries, on the other hand, had generally not been using export subsidies, except in a very few cases. They are now prohibited from doing so.
The inequity relating to the special protection of farmers arises from what is called the process of tariffication. Countries that had been using non-tariff measures for import restraint, that is, quantitative limits on imports, were obliged to remove them and convert them into equivalent tariffs. Countries that undertook such tariffication for a product got the benefit of the 'special safeguard' provision, which enables them to protect their farmers when imports rise above some specified limits or prices fall below some specified levels. Countries that did not undertake tariffication did not get this special facility. This has been clearly unfair to developing countries, which, with few exceptions, did not have any non-tariff measures and thus did not have to tariffy them. The result is that developed countries, which were using trade-distorting methods, have been allowed to protect their farmers, whereas developing countries, which were not engaging in such practices, cannot provide special protection to their farmers (Das 2001b).
This inequity and imbalance appears aggravated when one considers the limitation to the use of the general safeguard provision in the agriculture sector. One necessary requirement for taking a general safeguard measure is that there be injury (or threat thereof) to domestic production, which will be extremely difficult to demonstrate in this sector because of the large dispersal of farmers across the country.
Apart from these specific problems in the areas of subsidy and protection, there is a basic problem with the agreement. The WTO Agreement on Agriculture is based on the assumption that production and trade in this sector should be conducted on a commercial basis. Agriculture in most developing countries is not a commercial operation, however, being instead carried out largely on small and household farms. Most farmers take to agriculture not because it is commercially viable, but because the land has been in the possession of the family for generations and there is no other source of livelihood. If such farmers are asked to face international competition, they will almost certainly lose out. This will result in large-scale unemployment and collapse of the rural economy, which is almost entirely based on agriculture in a large number of developing countries.
In the area of general subsidies too, there is an imbalance in the treatment of those generally used by developed and developing countries. The subsidies mostly used by developed countries, such as those for research and development, for the development of undeveloped regions and for environmental adaptation, have been made totally non-actionable. This means that they are immune from counter-action through the imposition of countervailing duty or through the normal WTO dispute settlement process. But the subsidies normally used by developing countries, such as those for industrial upgrading, diversification, technological development, and so on, have not been given any such favoured treatment. It may be argued that developing countries can also use the immune subsidies; but the current reality is that these measures are mostly used by developed countries and have got full protection.
The WTO agreements with regard to standards are those on technical barriers to trade and on sanitary and phytosanitary measures. These agreements are intended to enable countries to set mandatory standards for industrial and agricultural products for the protection of human beings, animals and plants but there is a restriction that standards should not be framed or used as unnecessary obstacles to international trade. Though countries have the option of formulating domestic standards, in practice they are almost obliged to use international standards, owing to two stipulations in the agreements. One states that if a country uses an international standard, it will be presumed that there is no unnecessary obstruction to international trade. The other states that if a country formulates its own separate domestic standard, it has to prove that the international standard is not appropriate or practical for its specific situation.
Though developing countries are practically compelled therefore to use international standards, they are not able to participate in the setting of these standards. Two main bodies formulate these standards, viz., the International Standards Organization and the Codex Alimentarius. While developed countries are fully represented in these bodies, along with their major firms, developing countries lack adequate expertise and/or financial resources to participate in their meetings. As a result, standards are set without taking into account the special situation of developing countries, which will have a serious effect on the market access of their products.
One of the special provisions meant to benefit developing countries is the one contained in Article XVIIIB of GATT 1994, which allows these countries to take import-restrictive measures if they face balance-of-payments (BOP) problems. However, the method of operation and some new decisions have made this provision less effective and less useful, rendering an important instrument for reducing the system's imbalance almost non-operational. The provision itself does not define what constitutes a BOP problem. Further, it does not put any restriction on the type of import-restrictive measures the developing country invoking it will adopt. While this gives a developing country considerable flexibility, the current practice puts severe constraints both on the eligibility of a developing country and on its options for deciding on BOP measures.
Normally the IMF is expected to give a report on the BOP situation of the country concerned. Previously, it used to present a factual report on the country, and the BOP Committee of GATT used to determine whether there was a BOP problem. Now the IMF report also gives its views on whether a such a problem exists. Further, in coming to a conclusion, the IMF report takes into account the total foreign exchange reserves, inflows and outflows. Thus even highly volatile and uncertain reserves and flows (e.g., portfolio investments) get included. Uncertain reserves which can be taken out at any time do not give a sound basis for foreign exchange strength to the country inasmuch as hardly any commitment of foreign exchange outgo can be made on that basis. Thus, the current criterion of deciding on whether a BOP problem exists appears faulty.
There is also the problem of what type of action can be taken to address a BOP problem. A recent decision in a dispute case requires the developing country concerned to give priority to tariff-type action over direct import control measures. The latter can be taken only when the developing country provides sufficient reasons as to why the former will not be adequate to deal with the problem. It is well known that although price-based measures may have an import-restrictive effect, the results are more uncertain and delayed compared to those of direct import control measures. This provision has effectively reduced the capacity of developing countries to deal with the problem promptly and effectively.
In the operation of the WTO rules on services and IPRs, there is almost total negation of the principle of reciprocity and mutual benefit as the basis for concessions in the GATT/WTO system. In practice, the concessions in these two areas are overwhelmingly one-sided, given by the developing countries in favour of the developed countries; thus these two agreements are very imbalanced.
In the services areas covered by the liberalization commitments in the WTO General Agreement on Trade in Services, the supply capacity lies almost entirely in the developed countries. Hence, the commitments on liberalization of the entry of services are almost exclusively to the benefit of the developed countries. Of course, it can be argued that a country may benefit at times by the use of imported services, as it may improve the production and trading process. But such benefit can be realized by developing countries through the use of appropriate import policies for these services, without having to make a commitment on liberalization in the WTO. Once such a commitment is made, it cannot be modified without giving adequate compensation. Such commitments are clearly concessions by the developing countries to the developed countries, for which they get hardly anything in return, since they lack the supply capacity to take advantage of the liberalization of such services sectors in the developed countries.
Developing countries might have derived some benefit if developed countries had liberalized services and modes of supply of services where movement of labour is involved, allowing them the opportunity to supply some such services to the developed countries. But the latter are not prepared to do this on the ground that immigration issues are involved. Thus, the sectors and modes where the developed countries have the supply capacity have been taken up for liberalization, while the few areas from which the developing countries would have derived some benefit have not been given attention.
GATS itself also has some grave deficiencies. Some principles and objectives have been enunciated which would appear to be for the benefit of the developing countries; but these have not been integrated into the commitment process. The manner in which they will be brought into operation has not been laid down. Thus they continue to be mere expressions of good intentions, without being transformed into enforceable obligations.
Similarly, regarding obligations, there is a specific obligation that developing countries will be called upon to liberalize fewer sectors and fewer transactions. But how this provision will be operationalized has not been specified. In fact, the experience of negotiations on the liberalization of financial services has shown that major developed countries were insisting on higher levels of commitments from developing countries. Since the manner in which the provision should be implemented was not specified in the agreement, it has provided no protection to developing countries.
Intellectual Property Rights
The TRIPS Agreement in the WTO concerns the protection of IPRs. Its very inclusion has brought about an imbalance in the WTO system, since almost all intellectual property is in the hands of the developed countries. The developing countries do not have much of the intellectual property covered by the agreement; and as such they do not enjoy any reciprocal benefit from its protection. In fact, they have lost a lot of flexibility in this matter, as they cannot be selective in the protection of intellectual property, nor can they discriminate in favour of their domestic intellectual property if they have any.
The experience of the few years of implementation of the agreement thus far shows that developing countries have been unable to protect some of the major sources of their intellectual property from being appropriated by foreign corporations and institutions. The biological wealth of the developing countries represents the source materials for many new items of intellectual property of the firms of the developed countries. These firms get protection of exclusive rights over the intellectual property, without any compensation to the country or community from which the source material for its creation came. The agreement does not at present prevent this. Similarly, there is a vast body of indigenous knowledge in the developing countries that has not been formally put on record in the modern sense. Yet such indigenous materials and their use have been in existence for generations in several developing countries. Often, however, it is the firms of the developed countries that obtain protection of such materials and use it in their names. The agreement has not provided any protection against such exploitation. (See Chapter 4 for further discussion of implementation problems in TRIPS).
Dispute Settlement Process
The mechanism for enforcement of rights and obligations in the WTO, the dispute settlement process, is a powerful arm of the system. However, the ultimate instrument for enforcement through this process is retaliation against the erring country, which is not practical or useful for developing countries. Even in several other ways, the process is less useful in actual practice to developing countries than to developed countries.
When a country has a grievance against another country, it can formally raise a dispute in the WTO and ask for its resolution. A panel of experts hears the complaint, gives its findings and recommendations. If any party is not satisfied, it can appeal to the standing Appellate Body (AB). The process has been made effective by the arrangement that the findings and recommendations of the panel/AB are bound to be approved. If the respondent country has been found to have done something wrong, it has to take corrective action within a fixed time frame. Thus, the recommendations cannot be ignored or blocked, nor can there be undue delay in implementation. Generally, the respondent country, if found to have done something wrong, takes corrective action promptly and willingly. And yet the system, in practice, is deficient and imbalanced for the developing countries in several ways.
Consider the question of retaliation as the last resort for enforcement of rights and obligations. Even though in normal cases a situation may not arise when retaliation will be necessary, it does become relevant and necessary in really sensitive and difficult cases. And it is these types of cases which the developing countries fear most. Also the efficacy of a system is judged mainly by its functioning in really difficult cases. In such cases, a complaining country may well have to resort to retaliation against the respondent erring country. Retaliation should thus not be seen as an extremely remote possibility. In fact, the problem of adequate implementation of a panel/AB recommendation has generated controversy in a large number of cases in the WTO at present.
Retaliation would mean that the complaining country would be imposing high tariffs on some products from the erring country, making those products available to the consumers of the complaining country at higher prices, or obliging them to purchase them from some other countries. There is an economic cost involved in either case; and a developing country may find it difficult to shoulder that burden. A developing country will also naturally hesitate to take retaliatory measures against powerful developed countries. It will have to weigh the political cost before taking such action. Further, a retaliatory action by a developing country may not have any significant impact on the erring country if it is a major developed country, because the level of its exports to the developing country may be very low in proportion to its total exports.
The weak trading partners, particularly the developing countries, are disadvantaged in this regard for other reasons too, including the high cost involved in the dispute settlement process, the delay in relief and inadequate relief in the best of situations.
Raising a dispute and pursuing it in a panel and the AB is very costly. So is defending a case as respondent. Generally the legal expertise for such matters is located in the major developed countries; and a developing country may have to seek their help either to raise a dispute or to defend itself against the complaints of others. Thus a developing country will seriously weigh the financial burden before deciding to launch a complaint. By contrast, a major developed country will not have such hesitation, because it can easily afford the cost. The result is highly inequitable, given the vast difference in the capacity of developed and developing countries in this regard.
Even if a dispute is raised, full relief may take nearly 30 months; and by then the weak economy of a weak trading partner could have suffered irreparable damage. There is much less resilience in the production and trade in developing countries compared to that in the developed countries; hence, the damage due to the delay may be much higher in the former than in the latter.
Moreover, the relief is prospective, namely, from the time the implementation of the recommendations starts after the adoption of the report of the panel/AB. There is no provision for retrospective compensation with effect from the time the error was committed. For a developed country this may not mean much of a loss, but for a developing country the loss may be heavy because of its weak economy.
There are also several problems that have emerged in the operations of the dispute settlement system since the establishment of the WTO (see Raghavan 2000c). First, there is a controversy relating to a situation when there is a disagreement between parties to a dispute as to whether the losing party has properly complied with a ruling or recommendation of the panel. In such a disagreement, the issue is whether a Member has the right to unilaterally determine whether or not the other party has properly implemented the panel ruling, and if the determination is negative, to move to impose trade retaliation measures, or whether the determination of compliance has to be done by the original panel. The controversy relates to apparent conflicts arising from the wording of Articles 21, 22 and 23 of the DSU. It arose in the banana dispute between the United States and the EC when the United States claimed it can determine for itself whether the other party has complied, and that if it determines that it has not, it can seek authorization straight away under Article 22.6 to take retaliatory measures and suspend concessions (without going through the Article 21.5 process of referring to the original panel on whether or not the erring member has complied with the ruling). This unilateral U.S. action generated some uncertainty and disquiet among members (Raghavan 2000c:7-9).
Second, the panel/AB process itself is creating further burdens of obligations on the developing countries by engaging in very substantial interpretations of the rules. The interpretations have in many cases significantly added to the obligations of the developing countries and eroded their rights. The DSU itself (in Article 3.2) makes clear that 'recommendations and rulings of the DSB (Dispute Settlement Body) cannot add to or diminish the rights and obligations provided in the covered agreements.' The right of authoritative interpretation is vested in the WTO Ministerial Conference and/or the General Council, whose role it is to clarify or clear up ambiguity or uncertainty in or conflicts over interpretations of the WTO agreements. However, in several cases (for example, the disputes over the Indonesian car, over India's balance-of-payments, and over Brazil's aircraft subsidies), the panel and appeal process engaged in substantial interpretations of the provisions of the agreements, which resulted in expanding the obligations or reducing the rights of developing countries. In some cases the panels and Appellate Body went to the extent of adjudicating between two conflicting provisions of the agreements, as exemplified in the Indonesian car dispute (ibid: preface, 10-13, 25). According to the Indian Ambassador to the WTO, major and smaller trading entities and nations were becoming equally concerned over the tendency of panel and Appellate Body decisions to encroach on the remit of the legislative organs of the WTO (Khor 2000e: 8).
Third, the extremely legalistic approach to trade disputes that has developed is having negative implications. In the earlier dispute settlement system under GATT, panel rulings and recommendations were required to be adopted by the Contracting Parties, and this was done in practice by positive consensus (i.e., agreement by all). However in the present WTO system, panel decisions are adopted by negative consensus (Article 16 of the DSU states a panel report shall be adopted at a meeting of the Dispute Settlement Body (DSB), unless the DSB decides by consensus not to adopt it). Thus consensus is required to reject a report, and since the winning party can withhold any potential consensus to reject a report, in effect panel or Appellate Body decisions are automatically accepted. With the exception that a party to the dispute can appeal to the Appellate Body against a panel ruling, it is almost impossible for the membership to challenge or set aside the reports of the panels and Appellate Body, even if they have clearly made errors or have gone beyond their jurisdiction. While on the one hand it may be useful to have the security of an automatic DSU process, on the other hand, the automatic adoption of panel reports has landed developing countries in a situation where their rights have been reduced and their obligations increased through panel and Appellate Body interpretations and rulings, even though these bodies are not supposed to add to or diminish these rights and obligations.
Fourth, the WTO secretariat has been playing too large a role, and an inappropriate role at that, in guiding the dispute settlement process. According to C. Raghavan:
From the time a dispute is sent to a panel process until the end of the proceedings, the system now works such that the secretariat has assumed a very important role -- from the choice of panellists (in view of the increasingly few cases where the disputants themselves agree on the composition of a panel, the naming of panellists by the WTO Director-General now threatens to become the general practice rather than an exception) through to the panel proceedings (quoted in Khor 2000e: 9).
Some panellists have privately indicated that the secretariat provides notes and briefs to panels, including on items that negotiators had intended in the texts, without the knowledge of the parties, including when the hearing is over; and the secretariat also guides the drawing up of conclusions and reports. Thus, the WTO secretariat not only services the negotiations and the administering/supervisory bodies, namely the Councils for Trade in Services, Trade in Goods and TRIPS; it also has a hand in the adversarial dispute process, in what is clearly a violation of the norms of judicial or quasi-judicial systems, either Anglo-Saxon or droit administrative, and brings into question the impartiality of the multilateral trading system (ibid.; Raghavan 2000c).