In the first chapter of my Trade text book I describe the WTO; how and why it was set up and how it works today. The section is meant to clear up some of the misunderstandings and misrepresentations that are common about the WTO. This week I came across a prime example on an internet blog post titled “Globalism Destroys America: 10 Reasons why the World Trade Organization is Bad for America.

So let me respond to several of the points raised by the author.

Point 1 – “The WTO is not accountable to the American people or to any other voters around the globe. It is a sprawling bureaucracy that wields an almost unbelievable amount of power that is completely unchecked by democratic processes.”

In one sense this is true in that the WTO leadership is not elected by anyone. The Director General (DG) of the WTO, Pascal Lamy is chosen by the member governments and actually does not have very much power. His primary is to maintain the momentum of the Doha round trade liberalization talks, that have floundered badly, and to appoint panel members in disputes when the disputing countries cannot agree.

Most of the important decisions made at the WTO are made by the Dispute Settlement Body (DSB), which is comprised of one person appointed by every member government. The DSB in turn cedes judgments about disputes over to an independent panel of experts, either agreed to by the disputing parties or chosen by the DG. It is true these panels are unelected, but they are chosen in a process meant to make them about as impartial to the wishes of the disputing parties as is possible.

The WTO bureaucracy is hardly sprawling, consisting of just a small staff in Geneva and the extent of its power is extremely limited as well. More on that next.

Point 2 – “The WTO acts as the legislature, the executive and the judiciary in matters of world trade. The WTO has the authority to impose punishments on member nations, and it has not been shy about exercising this authority.”

If at all, the DSB is the powerful arm of the WTO, not the DG. When a panel rules against a defending country in a dispute what it is saying is that its independent judgment is such that the defendant has not lived up to one of its promises in the Uruguay round agreement. The Uruguay round, completed in 1994, consists of a set of commitments that countries have made to each other regarding a wide range of trade policies. It is important to recognize that all of these promises resulted in legislative actions that were considered by elected representatives in all of the participating countries (where elections are held). In the case of the US, the House and Senate approved these changes and the President signed off on them. Thus, everything we promised in the Uruguay round was approved by the voters via our representative democratic system.

Next, when a panel rules against a country it cannot “impose punishments.” The first thing it will do is ask the country to come into compliance. It is like saying the following: “The defendant country said it would do X, but now it is discovered by an independent panel not to have done X, so the DSB turns to the country and says, please do X.”

Often the country that loses does change it policies eventually and fulfills its original promise. That’s the way the system is supposed to work.

But what if the country refuses to do so. That too has sometimes happened. The US, Europe and others have in some instances refused to comply with a DSB panel decision. What then can the powerful WTO do?

Before answering let me point out that non-compliance is like saying: “We promised we would do X, but now were taking it back. Too bad!” Noncompliance means a country has decided not to abide by its previous promises.

In this case the DSB can impose a kind of punishment or penalty, but it works like this. The complaining country, that is being injured because the defendant has not fulfilled its promises, is now allowed to “suspend concessions.” This means that the complaining country is allowed to renege on some of its promises made to the defendant country. This is like the complaining country saying, “Since we thought we were getting X from you in return for Y (where Y is the complaining country’s promises), and since the panel has shown you haven’t given X, then we are taking back Y.

That is the extent of the “power” of the WTO.

There is more I can say about this blog post .. and maybe I will tomorrow. In the meantime if readers would like to add to this story please respond with answers to the following questions.

Reader Input:

  1. What are some examples of countries not fulfilling their WTO promises after losing a WTO dispute?
  2. What are some examples of suspended concessions by countries?