A Primer on the WTO and the Global Trading System

by Chris Wold, Clinical Professor, Northwestern School of Law of Lewis & Clark College

November 2, 2000

For many people, the November 1999 Ministerial Meeting of the World Trade Organization (WTO) in Seattle was there first exposure to the WTO. Yet, the WTO is a very influential institution that has the power to decide that nationally enacted environmental and labor laws are inconsistent with international trade rules. For example, a recent WTO dispute resolution panel found that U.S. efforts to protect endangered sea turtles violated WTO rules. Another panel ruled that the European Union's import ban on meat products containing bovine growth hormones violated WTO rules. Despite the public sentiment expressed in Seattle, governments of the world continue to press ahead with a free trade agenda that largely excludes citizens from the debates. This article describes the basic rules of the WTO and explains why citizens must educate themselves about the WTO.

The Rules of the GATT

The General Agreement on Tariffs and Trade (GATT) preceded the WTO and remains in force as part of the WTO. The GATT emerged from the ruins of World War II to reduce tariffs on goods and to create rules for trading in goods. By all accounts, the GATT has been successful at reducing tariffs. Tariffs (taxes imposed on a good as the price of entry into a country) have fallen from about 40% of the cost of the good to about 4% since the end of World War II.

The so-called nontariff rules of the global trading system, however, have generated most of the controversy. The GATT imposes three important rules to end discrimination against products. First, it requires countries that have signed the agreement to treat the products of foreign countries the same for tax and regulatory purposes. This principle is known as the Most-Favored-Nation (MFN) principle and prohibits countries from playing favorites. Thus, the United States must tax and regulate shrimp from Brazil the same as shrimp from Thailand or Bangladesh.

Second, a country must treat products from foreign countries the same as domestic products. Known as National Treatment, this principle is designed to ensure that countries do not protect their products from foreign competition. Thus, the United States must tax and regulate tuna from Mexico the same as tuna from the United States. Third, countries cannot impose other types of restrictions on products, such as quotas and licensing schemes, even if unenforced, because they may change the conditions of competition.

These non-discrimination rules have been interpreted in a way that prohibits a country from applying different taxes or regulations to products based on the way that the product was produced. Distinctions in tax and regulatory treatment must apply only to products with different physical characteristics. Thus, a panel ruled that the United States could not prohibit the importation of tuna from Mexico even though Mexico was catching tuna by encircling and killing dolphins in violation of the Marine Mammal Protection Act (MMPA). The United States argued that it was treating Mexican and U.S. fishermen the same, because all fishermen had to comply with the MMPA. The panel ruled that the United States was imposing a restriction on trade, because it was treating Mexican tuna differently from United States tuna. According to the panel, tuna is tuna and the capture method is irrelevant.

Similarly, a WTO panel ruled that the United States could not prohibit the importation of shrimp from several Asian countries because those countries did not use turtle excluder devices (TEDs) -- equipment which permits endangered sea turtles to escape from a shrimp net. The panel ruled that the prohibitions constituted quantitative restrictions on shrimp in violation of the GATT. The United States was also violating its MFN obligation, because it permitted the importation of shrimp from some countries and prohibited it from others, but the panel did not expressly rule on this issue. On September 18, 2000, a WTO panel ruled that carcinogenic asbestos products were the same as non-carcinogenic cellulose products and thus should be regulated the same. Fortunately in this case, the panel ruled that the measure, although inconsistent with the GATT's core rules, was "saved" by an exception for the protection of human, animal, or plant life or health.

A panel would rule similarly if a WTO member tried to prohibit imports of Adidas or Nike tennis shoes because of labor conditions in Indonesia or Vietnam, where the shoes are produced. These trade rules are a modern day version of "a rose is a rose is a rose." Under trade rules, tennis shoes are tennis shoes, regardless of whether the minimum wage is $1.00 a day or $10.00 an hour or whether a 12 year old child works 60 hours a week to produce the shoes. Members of the WTO can tax and regulate products differently only if the products have different physical characteristics or if their end uses are different. Thus, tuna and salmon can be taxed differently, and tuna in water can be taxed differently from tuna in oil. But, tuna caught using different capture methods cannot.

The GATT does not include any exceptions from these rules for labor conditions, unless the product is produced with prison labor. It does include environmental exceptions for measures necessary to protect human, animal, or plant life or health and for measures relating to the conservation of exhaustible natural resources. However, panels have interpreted these exceptions extremely narrowly. In fact, only the French ban on asbestos products has ever been saved by the environmental exceptions, because there was scientific certainty that asbestos was carcinogenic. In other cases, though, panels have ruled that the environmental measures were not, for example, "necessary to protect dolphins." The panel ruled that the prohibitions were not necessary, because the United States could have used other, less trade-restrictive options. The panel also said that the United States had not exhausted all options reasonably available to it, such as negotiating an international treaty. These interpretations obviously allow panels great discretion to determine when a Member has less trade restrictive options and when the Member has exhausted all reasonable options.

The Emergence of the WTO

Relatively early in the life of GATT, the Members realized that lower tariffs and non-discrimination rules were insufficient to open markets adequately. As a result, they initiated negotiations called "rounds", to develop rules for subsidies and other "non-tariff barriers" to trade. These early rules proved largely ineffective and Members finally agreed to a comprehensive set of negotiations to develop several new agreements and to create a more effective dispute resolution body. These negotiations, called the Uruguay Round, culminated in the creation of the World Trade Organization.

Because the WTO includes the GATT, the basic non-discrimination rules still apply. Whereas the GATT applied those rules to goods, the WTO also applies them to intellectual property rights, agriculture, food safety laws, and services, among other things.

Moreover, the WTO includes two agreements that require Members to use standards developed by international organizations rather than their own national standards. One of those agreements, called the Agreement on Sanitary and Phytosanitary Standards or the "SPS Agreement," relates to additives, contaminants, bacteria, invasive species and other things that affect human, animal, and plant life and health. This agreement is particularly important because it affects food safety laws and could expose citizens to significantly more pesticides in their food. This agreement requires Members to use standards established by an international organization called Codex Alimentarius, but its standards are often less restrictive than those imposed by the U.S. Environmental Protection Agency. According to this agreement, the a WTO Member can establish its own standards if the standards are scientifically justified and if they are based on "scientific principles" and a risk assessment. The agreement does not define these key terms, however, which gives trade panels much discretion to determine when a standard is scientifically justified or based on scientific principles.

The first test of this agreement suggests that measures in many countries to protect their food supply from dangerous pesticides are in jeopardy. A WTO panel ruled that the European Union's prohibition against the importation of meat products containing bovine growth hormones was invalid, because the prohibition was not rationally related to scientific reports concerning the health effects of growth hormones in meat products. Members of the panel rejected the findings of Europe's experts and the concerns of Europeans relating to the health consequences of growth hormones in meat products. WTO panels have also ruled that measures to protect domestic food products in Japan and Australia from diseases and pests also failed the scientific tests of the SPS Agreement.

The WTO Dispute Resolution Process

If a Member believes that another Member is violating any rules of the WTO Agreements, it may initiate the dispute resolution process. The disputing parties must first attempt to resolve their dispute through confidential consultations. If those consultations fail, then the complaining party may request the establishment of a dispute resolution panel. Panels are composed of three panelists, unless the parties mutually agree to a panel of five. Panel members are chosen from a list of candidates. The candidates may be individuals from any Member country and from any governmental or non-governmental organization so long as they possess some relevant expertise, although trade expertise is of most importance.

The dispute resolution rules expressly state that Panel deliberations "shall be confidential." Unlike the court systems of most countries, citizens cannot watch the hearings and they generally do not have the right to obtain information about the proceedings. Due to a lawsuit brought by the group Public Citizen, citizens can obtain documents submitted by the United States. Moreover, citizens cannot participate in developing the position of their government through notice and comment rulemaking, which federal agencies must do when they prepare new regulations. Citizens may submit their own briefs to a panel, but a panel is not required to read them.

Once the panel issues its decision, the panel's report is automatically adopted by the Dispute Resolution Body, which includes all Members of the WTO, unless one of the disputants appeals to the Appellate Body. The Dispute Resolution Body must decide by consensus not to adopt a panel decision. If the panel rules that a Member has a law that is inconsistent with WTO rules, then it has three options. Under trade rules, the most preferable option is for the Member to repeal or amend its offending law to conform to the panel's opinion. If the Member refuses to comply with the panel's decision, then the disputants can negotiate trade sanctions. If the disputing Members cannot agree on appropriate trade sanctions, then the complaining Member may impose economic sanctions -- tariffs -- on the non-complying Member in an amount equivalent to the value of the products embargoed. For example, a WTO panel found the European Union's prohibitions against the importation of meat products containing bovine growth hormones to be inconsistent with WTO rules. But, the EU refuses to repeal the ban. As a result, the United States imposed 100% tariffs on certain beef products, flowers, mineral water, and other products from the European Union.

Conclusion

The WTO is fast becoming the institution where national environmental and labor laws can be defeated because they limit free trade. Similar investment provisions in the NAFTA have already proven dangerous for environmental legislation. When Canada banned the import and interprovincial transport of the gasoline additive MMT, because its main ingredient, manganese, is a known human neurotoxin, Ethyl Corporation claimed under NAFTA that the law was an "expropriation" of its assets. Canada ultimately paid Ethyl $13 million in damages and legal fees to settle the claim. A panel recently ordered the Mexican government to pay a U.S. corporation, Metalclad, almost $16 million when the municipal government refused to give Metalclad a construction permit for a hazardous waste landfill. The United States is currently negotiating the Free Trade for the Americas Agreement which would extend similar investment provisions to all countries in Latin American. These decisions and negotiations show that citizens must become more educated about the WTO, because important decisions about our environmental and labor laws are being made without our knowledge and without our participation.