WTO Agreements: Aims, Limits and the Problem of Rising Protectionism

By Annika Schulz, Transatlantic Economy Analyst

The WTO’s goal to promote “a more prosperous, peaceful and accountable economic world”   has lost some ground during the last couple of years. Signed in 1994, the General Agreement on Tariffs and Trade (GATT) 1994 was geared toward securing fair competition and investment promotion in international trade. Today, member states are having difficulty complying with the rules agreed on in WTO agreements. Increasing trade barriers and violations of world trade agreements through domestic business subsidies and import restrictions contribute to macroeconomic imbalances worldwide; recently, for example, complaints were filed against the United States and Argentina. The global economic crisis makes international cooperation even more difficult as national governments face “weaker economic growth, high unemployment and fiscal austerity.” Consequently, protectionism is rising; it is already recognized as an issue to be resolved by WTO (and G20).

To date, 60 agreements and decisions have been implemented by the WTO. The obligations that accompany these agreements are expected to be met by WTO members. Violations of international trade obligations are generally seen as violations of international law. If a state acts contrary to the law, all parties can be considered “injured” as subjective rights have been disregarded. These erga omnes obligations, which are the rule within the legal framework of the WTO agreements, have so far not negatively affected a non-compliant state, neither materially nor morally. Members of the organization do not directly have to fear any fees or limitations.

Complaints, however, can be filed by one WTO member state against another. The WTO Dispute Settlement Process is currently divided into two stages after a country files a complaint about another WTO member. First, within a period of 60 days, the alleged violator may find a solution by consulting the other country concerned. In the second stage, a panel is opened if a solution has not been found. This can take over eight months during which time the established panel, together with the Dispute Settlement Body, moderates the countries’ negotiations and provides recommendations. Once the final report is filed, the concerned parties cannot ignore it as only the Dispute Settlement Body can reject panel reports.

While a country that has violated an agreement has to go through the WTO’s Dispute Settlement Process, it also achieves some economic gain for a certain amount of time. Since there are no major consequences for non-compliance, member states of the WTO continue to violate the agreements. Argentina, for example, is accused of using numerous restrictive trade measures lately, including non-automatic import licensing, in order to industrialize its economy. In regard to its renewable energy industries, the U.S. is alleged to be violating the WTO Subsidies and Countervailing Measures and the GATT; a total of six programs in five U.S. states are believed to be limiting fair competition according to the law. Both examples show how countries are currently focusing on their own economies instead of promoting open and fair trade on the international stage.

Although the 2011 WTO Report on G20 Trade Measures presents data indicating that the removal of trade restricting measures has slowed down as a result of the global economic crisis, it highlights rising protectionism as the bigger problem. Protectionism itself is mainly a policy strategy which includes a restriction of foreign imports through policies such as subsidies or taxation. Numerous governments are reacting with protectionist policies to current economic fluctuations, hoping to lead their economies out of the crisis through domestic business promotion and trade barriers. As the WTO states in its report, however, crisis resolution relies on the opening of markets.

Together with the UN Conference on Trade and Development and the OECD, the WTO has been tasked by the G20 to monitor trade restrictions and investment protectionism. As discussed at the G20 Meeting in Seoul (2010), protectionist measures did not only increase in 2009; within the November 2010 to July 2011 time period almost 200 more measures have been implemented. At the moment, these restrictions have a 1% impact on global trade. CEPR data shows that G20 members accounted for 60% of worldwide protectionist measures in 2009. Three more years into the crisis, the share has risen to almost 80%, according to Global Trade Alert data.

The formulation of the WTO’s aims in the agreements of 1994 can be considered idealistic in light of today’s global economic outlook and accompanied challenges. While the agreements are crucial, the process of ensuring compliance seems barely influential. A rising number of subsidies to domestic businesses as well as other protectionist measures are not only common but also understandable as they evolve out of the motivation of national economic stimulation. Nevertheless, the violations should not be tolerated as they give rise to suspicion and an unwillingness to cooperate. While violations in regard to subsidies are expected to occur under any economic conditions, other protectionist measures are certainly a reaction to the fragility of global markets. In the future, measures restricting trade need to be resolved through more efforts to tie national governments to international agreements, and the prospect of serious consequences.

Although these protectionist measures seem to have had little impact on global trade as a whole, on the way to recovery every opportunity for positive economic contribution needs to be seized. Emerging economies like the Philippines ought to be encouraged to further open their markets and to establish bilateral trade deals; closer multilateral cooperation is also crucial. It is unclear if WTO reports on G20 trade measures will have an impact, but improving compliance with WTO agreements and ensuring a global economic recovery will be far more likely when policy makers resist calls to hinder open and free trade.