Services and Intellectual Property

In the long run, the extension of GATT rules to cover services and intellectual property may be particularly significant. Until 1995, GATT rules applied only to industrial goods (i.e., manufactured goods and commodities). In 2010, world trade in services amounted to $3,690 billion (compared to world trade in goods of $15,237 billion).22 Ultimately, extension of GATT rules to this important trading arena could significantly increase both the total share of world trade accounted for by services and the overall volume of world trade. The extension of GATT rules to cover intellectual property will make it much easier for high-technology companies to do business in developing nations where intellectual property rules historically have been poorly enforced (see Chapter 2 for details).

The World Trade Organization

The clarification and strengthening of GATT rules and the creation of the World Trade Organization also hold out the promise of more effective policing and enforcement of GATT rules. The WTO acts as an umbrella organization that encompasses the GATT along with two new sister bodies, one on services and the other on intellectual property. The WTO’s General Agreement on Trade in Services (GATS) has taken the lead to extending free trade agreements to services. The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an attempt to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rules. WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. While the WTO operates on the basis of consensus as the GATT did, in the area of dispute settlement, member-countries are no longer able to block adoption of arbitration reports. Arbitration panel reports on trade disputes between member-countries are automatically adopted by the WTO unless there is a consensus to reject them. Countries that have been found by the arbitration panel to violate GATT rules may appeal to a permanent appellate body, but its verdict is binding. If offenders fail to comply with the recommendations of the arbitration panel, trading partners have the right to compensation or, in the last resort, to impose (commensurate) trade sanctions. Every stage of the procedure is subject to strict time limits. Thus, the WTO has something that the GATT never had—teeth.23

WTO: Experience to Date

By 2012, the WTO had 153 members, including China, which joined at the end of 2001, and those countries collectively account for 97 percent of world trade. Another 25 countries, including the Russian Federation, were negotiating for membership into the organization. Since its formation, the WTO has remained at the forefront of efforts to promote global free trade. Its creators expressed the hope that the enforcement mechanisms granted to the WTO would make it more effective at policing global trade rules than the GATT had been. The great hope was that the WTO might emerge as an effective advocate and facilitator of future trade deals, particularly in areas such as services. The experience so far has been encouraging, although the collapse of WTO talks in Seattle in late 1999, slow progress with the next round of trade talks (the Doha Round), and a shift back toward some limited protectionism following the global financial crisis of 2008–2009 have raised a number of questions about the future direction of the WTO.

WTO as Global Police

The first 15 years in the life of the WTO suggests that its policing and enforcement mechanisms are having a positive effect.24 Between 1995 and 2011, more than 400 trade disputes between member-countries were brought to the WTO.25 This record compares with a total of 196 cases handled by the GATT over almost half a century. Of the cases brought to the WTO, three-fourths had been resolved by informal consultations between the disputing countries. Resolving the remainder has involved more formal procedures, but these have been largely successful. In general, countries involved have adopted the WTO’s recommendations. The fact that countries are using the WTO represents an important vote of confidence in the organization’s dispute resolution procedures.

Expanding Trade Agreements

As explained earlier, the Uruguay Round of GATT negotiations extended global trading rules to cover trade in services. The WTO was given the role of brokering future agreements to open up global trade in services. The WTO was also encouraged to extend its reach to encompass regulations governing foreign direct investment, something the GATT had never done. Two of the first industries targeted for reform were the global telecommunication and financial services industries.

In February 1997, the WTO brokered a deal to get countries to agree to open their telecommunication markets to competition, allowing foreign operators to purchase ownership stakes in domestic telecommunication providers and establishing a set of common rules for fair competition. Under the pact, 68 countries accounting for more than 90 percent of world telecommunication revenues pledged to start opening their markets to foreign competition and to abide by common rules for fair competition in telecommunications. Most of the world’s biggest markets—including the United States, European Union, and Japan—were fully liberalized by January 1, 1998, when the pact went into effect. All forms of basic telecommunication service are covered, including voice telephony, data and fax transmissions, and satellite and radio communications. Many telecommunication companies responded positively to the deal, pointing out that it would give them a much greater ability to offer their business customers one-stop shopping—a global, seamless service for all their corporate needs and a single bill.26

This was followed in December 1997 with an agreement to liberalize cross-border trade in financial services.27 The deal covers more than 95 percent of the world’s financial services market. Under the agreement, which took effect at the beginning of March 1999, 102 countries pledged to open (to varying degrees) their banking, securities, and insurance sectors to foreign competition. In common with the telecommunication deal, the accord covers not just cross-border trade but also foreign direct investment. Seventy countries agreed to dramatically lower or eradicate barriers to foreign direct investment in their financial services sector. The United States and the European Union (with minor exceptions) are fully open to inward investment by foreign banks, insurance, and securities companies. As part of the deal, many Asian countries made important concessions that allow significant foreign participation in their financial services sectors for the first time.

THE FUTURE OF THE WTO: UNRESOLVED ISSUES AND THE DOHA ROUND

Since the successes of the 1990s, the World Trade Organization has struggled to make progress on the international trade front. Confronted by a slower growing world economy after 2001, many national governments have been reluctant to agree to a fresh round of policies designed to reduce trade barriers. Political opposition to the WTO has been growing in many nations. As the public face globalization, some politicians and nongovernmental organizations blame the WTO for a variety of ills, including high unemployment, environmental degradation, poor working conditions in developing nations, falling real wage rates among the lower paid in developed nations, and rising income inequality. The rapid rise of China as a dominant trading nation has also played a role here. Like sentiments regarding Japan 20 years ago, many perceive China as failing to play by the international trading rules, even as it embraces the WTO.

Against this difficult political backdrop, much remains to be done on the international trade front. Four issues at the forefront of the current agenda of the WTO are antidumping policies, the high level of protectionism in agriculture, the lack of strong protection for intellectual property rights in many nations, and continued high-tariff rates on nonagricultural goods and services in many nations. We shall look at each in turn before discussing the latest round of talks between WTO members aimed at reducing trade barriers, the Doha Round, which began in 2001 and is still ongoing as of 2012.

Antidumping Actions

Antidumping actions proliferated during the 1990s. WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home, or below their cost of production, when domestic producers can show that they are being harmed. Unfortunately, the rather vague definition of what constitutes “dumping” has proved to be a loophole that many countries are exploiting to pursue protectionism.

Between 1995 and mid-2011, WTO members had reported implementation of some 3,922 antidumping actions to the WTO. India initiated the largest number of antidumping actions, some 647; the EU initiated 428 over the same period, and the United States 452 (see Figure 7.2). Antidumping actions seem to be concentrated in certain sectors of the economy, such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment.28 These sectors account for approximately 70 percent of all antidumping actions reported to the WTO. Since 1995, these four sectors have been characterized by periods of intense competition and excess productive capacity, which have led to low prices and profits (or losses) for firms in those industries. It is not unreasonable, therefore, to hypothesize that the high level of antidumping actions in these industries represents an attempt by beleaguered manufacturers to use the political process in their nations to seek protection from foreign competitors, who they claim are engaging in unfair competition. While some of these claims may have merit, the process can become very politicized as representatives of businesses and their employees lobby government officials to “protect domestic jobs from unfair foreign competition,” and government officials, mindful of the need to get votes in future elections, oblige by pushing for antidumping actions. The WTO is clearly worried by the use of antidumping policies, suggesting that it reflects persistent protectionist tendencies and pushing members to strengthen the regulations governing the imposition of antidumping duties. To some extent, the WTO has been successful; as shown in Figure 7.2, antidumping actions peaked in the 1999–2001 time period and declined thereafter.

FIGURE 7.2 Antidumping Actions

ANOTHER PERSPECTIVE Members Continue to Criticize Argentina’s Import Licensing

Import licenses are permits granted before a product is imported. The administrative procedures for obtaining the licenses should be simple, neutral, equitable, and transparent. Where possible they should be given automatically and quickly, and even if they are non-automatic they should not obstruct trade unnecessarily. Australia, Turkey, the EU, Norway, Thailand, the U.S., New Zealand, Costa Rica, Colombia, Peru, Chinese Taipei, Japan, Rep. Korea, Switzerland, and Canada said their producers and traders reported that their exports to Argentina have declined or been delayed by Argentina’s licensing processes and requirements, which some described as “protectionist.” Among the complaints, almost 600 products are now covered either explicitly or in practice by such licensing requirements, each requiring individual approval in order to be imported, non-automatic licenses are issued as part of a “trade-balancing” policy, on condition that the importer also exports or invests in local production, processing an application can take considerably longer than the 30–60 days maximums for non-automatic licensing, the licensing is more burdensome than necessary, and lastly that Argentina as a member of the G-20 group of leading economies is not living up to the group’s declarations against increasing protectionism.