How has the world trade organization contributed to the increasing globalization of the world?

WTO’s Virtues and Limitations

Despite the criticisms, WTO partnership earns clear advantages to its members. The MFN rule, together with the accepted retaliation principles and WTO core principles, creates strategic and economic gains for members. In addition to these individual gains, WTO countries gain collectively from a stronger and more authoritative international institution, empowered with more effective rule enforcement tools (DSS).

The WTO has achieved three important results: (1) the scope for multilateral trading negotiation has widened; (2) more countries have decided to join; (3) tariffs and direct nontariff barriers (NTBs) have been effectively reduced. These three merits do not necessarily imply the virtue of effectively boosting trade, and experts have different views on this issue.

From an empirical viewpoint, it is hard to quantify the WTO effects. According to some empirical studies conducted by Rose, GATT/WTO membership is not associated with more trade. By contrast, regional agreements and custom unions (CUs) boost trade. The conclusion of these studies is that WTO has not been effective in promoting trade. On the contrary, Subramanian and Wei in their empirical study found that WTO has strongly contributed to the increase in trade. They explain that Rose’s result is the statistical problem of aggregating all countries. If the group of developing countries – involved in many special treatments – is treated differently from the developed economies, then the underestimates of WTO effects on trade disappear. This result suggests that not all countries and sectors have equally benefited from WTO trade liberalization.

Another virtue of the new WTO is a more efficient law enforcement mechanism. In architecting WTO role, the signatory countries have been especially concerned of raising the cost to domestic politicians of ignoring WTO commitments. The new DSS encapsulates this intention as it increases the probability of catching and punishing offenders and of protecting offended parties.

Despite its accomplishments, WTO has also shown limitations that might have affected the occurrence of trade conflicts. It has been argued by Subramanian and Wei that WTO has contributed to, or not avoided, the reinforcement of various asymmetries:

Between developed versus developing countries allowing the latter to retain some trade privilege – tariffs and NTBs – under the principle of S&D treatment (GSP).

Between developing countries that entered before WTO and those entered after WTO, by imposing more stringent requirement and scrutiny for post-WTO accessions.

Between intra-members. Developed countries trade more among themselves than with developing economies.

Across sectors. Agriculture, textile, footwear, and clothing have traditionally been protected sectors.

International Agreements Affecting Patents: The WTO and TRIPS

New institutions and mechanisms have been developed to address the differences in patent protection among nations and resolve conflicts that occur. The most important institution is the World Trade Organization (WTO), which was established as the global governing body of the international trade regime in 1994 as a result of the Uruguay Round of the trade negotiations in the General Agreement on Tariffs and Trade (GATT). The WTO sets the legal ground rules for international trade and promotes the objectives of non-discrimination, liberalization of trade barriers, competition, and transparency. As of April 2003, the WTO had 146 member countries.

Intellectual property standards for WTO members are established through the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of 1995. This mechanism sets a floor of IPR protection for countries and connects IPR to several international trade agreements. Prior to the TRIPS Agreement, over 40 countries (primarily poorer countries) did not provide any comprehensive product and process patent protection for pharmaceuticals (WHO, 2001). Under TRIPS, member nations are required to adhere to basic minimum standards for universal patent protection for any technological invention, including pharmaceuticals. Failure to comply with these rules brings the threat of trade sanctions and other adverse consequences. The expansion of patent protection through TRIPS drew broad support from the research-based pharmaceutical industry, which expected to benefit from increased protection of its patents around the world.

Countries that previously had no patent protection are now introducing it so that they can become members of the WTO. TRIPS provides some leeway for countries to bring their national legislation in compliance with agreement standards. The length of the period varies for developed and developing countries. Developed nations were required to apply all TRIPS provisions by 1 January 1996, one year after TRIPS was established; developing countries and transitional economies were given five years, until 1 January 2000; and least developed countries were given 11 years, until 1 January 2006 (WHO, 2001).

The 4th WTO Ministerial Conference, held in Doha, Qatar, in November 2001, extended this deadline until 2016 for the world’s least developed countries. The meeting also produced the Doha Declaration on the TRIPS Agreement and Public Health, which asserted a priority to public health over intellectual property (WTO, 2001a). The Declaration stated, ‘The TRIPS agreement does not and should not prevent Members from taking measures to protect public health’, adding that TRIPS should be implemented in a manner ‘supportive of WTO Members’ right to protect public health and, in particular, to promote access to medicines for all’. The interpretation of the Doha Declaration in practical policy subsequently became a matter of vigorous debate. The Doha Declaration did not establish any new principles for TRIPS. Rather, it re-stated ideas contained in TRIPS and recognized that the poorest countries (without a well developed domestic pharmaceutical industry) ‘could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement’ to gain access to medicines. In short, could a poor country use compulsory licensing under a public health emergency to import generic drugs that were protected by product patents (in the importing country), and if so, for which diseases and from which countries?

In August 2003, the WTO resolved some of these questions raised by the Doha Declaration. Without changing the TRIPS Agreement, the WTO General Council approved a statement supporting the importation of generic medicines into those developing countries that lacked pharmaceutical manufacturing capabilities, under certain conditions (WTO, 2003b). This represented an interim decision, intended to last until TRIPS is amended in the ongoing round of negotiations. The WTO declared that the decision removed the final ‘patent obstacle’ to cheap drug imports for poor countries. The WTO Director-General announced:

The final piece of the jigsaw has fallen into place, allowing poorer countries to make full use of the flexibilities in the WTO’s intellectual property rules in order to deal with the diseases that ravage their people… . It proves once and for all that the organization can handle humanitarian as well as trade concerns (WTO, 2003a).

2.1.2 National Tariff Schedules

The WTO schedules differ from the applied tariffs under national law, which are reflected in domestic legal documents. Thus, for example, the Tariff Schedules of the United States (a Federal statute) contain three classes of tariffs. Column 1—General tariff rates are the rates that are applied to imports from WTO members that receive no special preference. These rates will be less than or equal to the negotiated bindings in the WTO schedules of the United States if the tariff at issue is bound. Column 1—Special rates are those applied under US RTAs such as NAFTA and various bilateral free trade agreements. Column 2 rates apply to imports from countries that are not entitled to the benefits of the WTO member rate, and typically represent the applied rate under the Smoot–Hawley Tariff of 1930.

To apply tariffs at the border, customs officials must undertake three tasks. First, they must “classify” the good in question. If the tariff on widgets is 10% and that on gadgets is 15%, one must know whether the import is a widget or a gadget. Many disputes arise over classification issues, a few of which find their way into the WTO, but most of which are adjudicated in domestic courts because they involve interpretations of domestic law. Disputes have been reduced, though not eliminated, by the creation of the Harmonized Commodity Description and Coding System, developed by the International Customs Cooperation Council, which classifies goods at the two-, four-, and six-digit levels. The goal is to ensure that goods are classified under the same heading in all countries, but customs officials can disagree over their interpretation. Furthermore, members are free to adopt a more fine-grained classification (eg, eight digit) for their own purposes, which will not be the same for all members, and such classification measures have become more and more common.

A second task for customs officials, in instances where tariffs are expressed in ad valorem terms, is to value the goods in question. Valuation is usually straightforward if importation occurs in connection with an arms length transaction (with the caveat that fraud can occur), but often imports come from related parties (foreign subsidiaries and so forth), and so the stated “price” may not be deemed trustworthy. Article VII of GATT, and a WTO “Valuation Agreement” elaborating Article VII, concern the use of various proxies for valuation that look to such things as the price in an arms length sale between the seller and an unrelated buyer for the same or sufficiently similar merchandise, and in the worst case scenario to a cost of production calculation [see WTO Valuation Agreement, Articles 1–6].

Finally, to the degree that different tariffs apply according to the origin of the good (recall the three columns in the US Tariff Schedules noted earlier), it is necessary for customs officials to identify the nation in which the import was “produced.” When all stages of production occur in one country, the process is easy, but many products today contain components manufactured in various countries, which are then assembled in still other countries. Trading nations thus require “rules of origin” to resolve the matter.

The WTO Agreement on Rules of Origin encourages transparency in the rules used by members and established an ongoing work program to establish harmonized rules of origin. The guiding principle of the program is the establishment of rules that focus on the locus of the last “substantial transformation” of the article in question (see Article 3). The concept of substantial transformation is itself ambiguous, however, and the work program hopes to produce some clarification. Factors that may bear on the occurrence of substantial transformation include a transformation that results in a change in tariff classification, and the amount of value added at each stage of production.

Further complicating the rules of origin issue is the fact that WTO rules apply only to the classification of goods for purposes of applying WTO law (eg, is this good from a WTO member or not? Is this good from a WTO member covered by a WTO legal antidumping order?) Many origination decisions, however, are taken pursuant to RTAs, which have their own body of law and potentially their own rules of origin. The decision whether to afford a certain good Mexican origin for NAFTA purposes, for example, is governed by NAFTA law, which has a number of rules of origin that focus on value-added criteria rather than the broader “substantial transformation” concept.

5.4.3 Is the WTO Constraining the Use of AD?

As mentioned earlier the WTO DSU is one of the major achievements of the Uruguay Round and AD has emerged as by far the most frequently disputed policies. Many of the AD disputes involve the methods for calculating AD margins. The single most common issue challenged to the WTO is the US practice of “zeroing” in the calculation of dumping. Zeroing is a somewhat obscure technical issue related to the calculation of AD margins where all negative dumping amounts are replaced with a zero prior to the calculation of the final dumping margin. As a result, this discretionary practice will lead the United States to find larger dumping margins by virtually any foreign firm it investigates.kk Bown and Prusa (2011) estimate that approximately 25% of current US antidumping cases would have resulted in a finding of “no dumping” if zeroing were not used.

According to Bown and Prusa (2011) through the first 15 years of the Uruguay Round zeroing had been the subject of more than 13% of WTO Panel investigations and almost 20% of WTO Appellate Body reports. They conclude that the WTO AB had likely devoted more time to zeroing than any other single issue in the WTO.ll If nothing else, the numerous disputes involving zeroing highlight a weaknesses of the WTO DSU. Since each dispute will require at least 18 months to adjudicate and since WTO “relief” is only prospective, WTO members have fairly weak incentives to change their rules. For instance, the US is still zeroing some 15 years after the WTO first ruled that zeroing was WTO inconsistent.

For US trading partners, the US's nonresponsiveness to the zeroing decisions sends a signal that compliance is voluntary, and this effectively erodes the legitimacy of the WTO. As evidence, in the last several years there have been five separate disputes involving a set of similar antidumping practices by China and in each case the WTO has ruled against China's procedures. As of the time of this writing, China has not revised any of its procedures in response to the WTO's dispute body determinations.

Production outside the quota

As the WTO ruled that exporting sugar produced in excess of the production quota (and therefore not eligible for export refunds) on top of that allowed under the agreed tonnages, was not permissible under the URAA, the EU has had to reduce production to a level that can be used internally. From July 2006 sugar produced in excess of the quota has to be:

used in the industrial sector in the EU

carried forward to the following marketing year

used for specific supply to the DOMs, Azores, Madeira and the Canary Islands

exported assuming that the WTO allowed export limit has not been filled by exported quota sugar.

Any surplus sugar produced in excess of that used as above is subject to a levy that is set at a ‘sufficiently high level in order to avoid the accumulation of quantities’. This levy has been set by the European Commission at €500 a tonne.

§10.5 Procurement Procedures

Procurement procedures may be considered no more than a technical matter of little general importance, but actually they are at the core of the PPP process. The major argument in favour of using PPPs is that they create savings in long-term costs compared to public-sector funded projects (cf. §28.6), but a badly-run procurement can all too easily destroy any potential for such a saving. An effective competition—i.e. an efficient procurement procedure—is probably the strongest contributor to generating VfM for the contracting authority.

In preparing for the Procurement Phase, the contracting authority may need to consider which procurement procedure to use where alternatives are available, as is the case in the EU for example. The global framework for public-procurement procedures is provided by the Agreement on Government Procurement (GPA), administered by the World Trade Organisation (WTO 2014), to which many countries are now party. This was first signed in 1979 and last amended in 2014 (at the time of writing). Detailed rules, based on these provisions, are contained, for example, in EU public-procurement regulations.

The WTO GPA allows for three types of public-sector procurement:

‘Open’ procedure: This procedure allows anyone to submit a bid.

‘Selective’ procedure: This procedure allows the contracting authority to reduce the number of prospective bidders through a pre-qualification procedure (cf. §10.6.1).

‘Limited’ procedure: Under this procedure, the contracting authority approaches prospective bidders directly rather than calling for bids (with or without pre-qualification).

The open and limited procedures are unlikely to be appropriate for a PPP, and are therefore not considered further in this context. Most countries with PPP programmes usually use some form of procedure that involves pre-qualifying bidders, for reasons that are explained below. The key differences then relate to whether procedures prohibit or allow for interaction or ‘dialogue’ between pre-qualified bidders and the contracting authority before asking for final bids, after which the requirements and bids cannot generally be altered further.

By way of an example, one of the most detailed procurement regulations based on the GPA principles is the EU Public Procurement Directive (EU 2014) that covers, inter alia, availability PPPs.1 Under the Public Procurement Directive, four types of bid procedure are prescribed:2

Open procedure

As under the GPA—not normally used for PPPs.

‘Restricted’ procedure

Under this procedure, which involves proposals from pre-qualified bidders, bidders can be asked to supplement, clarify or complete the relevant information before making bids, but once the bids are received, that is the end of the process. The decision is made on the basis of the bids, and there should be no further negotiation with bidders, who are expected to sign the PPP contract on the basis set out in their bids. This approach has mainly been used for concessions, e.g. in Italy and Spain, and provides a relatively quick and hence potentially lower-cost procedure for bidders. However, it does require the contracting authority to be confident about all the terms of the PPP contract and the market’s ability and willingness to understand and deliver them. Accordingly, it is less well-suited to more complex contracts where bidders may provide different solutions for the service concerned, and where the basis for bidding the overall pricing cannot be so easily specified in advance. Thus, the risk with this procedure is that the contracting authority does not get what it really wants and the bidders do not understand and deliver what is really needed. This may increase the risk of subsequent renegotiation of the PPP arrangements.

‘Competitive-dialogue’ procedure

In many cases the approach to delivering the service is not ready-made and may benefit from more innovative solutions, the legal and financial structures may be complex or the technical specifications cannot be established with sufficient precision. The competitive-dialogue procedure3 allows for greater interaction with bidders, which also pass through a pre-qualification process, while ensuring competition throughout the process. This helps to ensure that bids are better adapted to the specific needs of the contracting authority. It also prevents continuing negotiations on the final shape of the contract even after choosing a preferred bidder,4 and therefore in the absence of competition (cf. §10.6.8).

Under the competitive-dialogue procedure, the contracting authority invites increasingly-detailed proposals from pre-qualified bidders in a series of stages or bidding rounds (the number of which is up to the contracting authority). When launching the process, key documents, such as the draft PPP contract, must be available to bidders, so it is not a process that starts with a blank sheet of paper. The objective of the dialogue is to identify and define the means best suited to satisfying the pre-defined needs and outcomes (cf. §15.2). At any stage, the contracting authority can narrow down the number of different solutions (and bidders): practice on this varies. During this process, the contracting authority discusses issues such as the detailed terms of the PPP contract and the technical specifications of the project. When the contracting authority believes that solutions have been arrived at, as a result of the dialogue, that meet its needs and that are potentially deliverable by the bidders, it invites the bidders to present their final bids (sometimes referred to as ‘BAFOs’—best and final offers). These final bids may be ‘clarified, specified and optimised’, but ‘essential aspects’ of bids cannot subsequently change. The preferred bidder can be asked to confirm financial commitments or other terms contained in their bid.

A form of dialogue procedure is also used in other countries outside the EU such as Australia (there referred to as an ‘interactive tender’), Egypt and South Africa.

However, many countries still use the restricted procedure, reflecting concerns about the perceived complexity and governance challenges of the competitive-dialogue process. In these cases, there may be a second round of bids, if the first round of bids is inconclusive. It is important, however, to avoid a situation where a bidder is selected and further negotiations proceed in the absence of competition, as discussed further in §10.6.8.

Given the long-term nature of the PPP contract or to put it another way, the limited opportunity to use competition to negotiate better terms after selection of the bidder, the choice of PPP-procurement procedure is very important. This was one reason why the ‘negotiated procedure’ was replaced in the EU procurement directives by other forms of procedure that prevent, or at least severely restrict, such post-selection negotiation.

2.1.1 MFN Applied Rates, Tariff Bindings/Caps, and Binding Commitments

Are today's tariffs liberalized under the WTO? Furthermore, do some countries seem to have lower tariffs than others under the WTO? We examine these questions not only for applied tariffs, but also by describing the maximum tariffs that countries can legally apply under WTO rules. We begin by briefly introducing the basic WTO legal requirements associated with membership and defining some terminology.

Membership in the WTO requires that countries take on three main commitments with respect to their tariffs. First is the commitment that they apply the tariff at the same rate against imports from all other WTO members through the most-favored-nation (MFN) principle of nondiscrimination. Second, a WTO member chooses the set of products—up to 100% of products defined under the Harmonized System—over which it agrees to take on some legally binding commitment—a cap above which it promises not to raise its applied tariff. Third, for each of those products with some legally binding commitment, the member chooses an exact value for this upper limit. This upper limit is referred to as the “tariff binding” or “tariff cap.” A country's MFN applied rate must therefore be less than or equal to the tariff binding in order to be legal under the WTO.h Finally, the difference between the tariff binding rate and the MFN applied rate is frequently referred to as the tariff binding “overhang” or alternatively, the “water” in the tariff binding.

The first column of Table 1 presents the simple average of the MFN applied ad valorem import tariff rate for our sample of major economies in 2013, only two of which were not members of the WTO.i The United States, for example, applied an MFN tariff to imports from other WTO members at a simple average rate across the roughly 5200 6-digit Harmonized System (HS06) products of 3.4% in 2013. Among the high-income G20 members, Australia had the lowest average MFN applied tariff (2.7%) and Korea had the highest (13.3%). The emerging economy members of the G20 tend to have slightly higher MFN applied import tariffs, ranging from Indonesia (6.9%) to India (13.5%). The other developing countries in the sample that were WTO members by 2013 had applied MFN tariffs that were even slightly higher than the typical G20 rates, ranging from an average of 5.6% (Burma) to 16.8% (Egypt). Finally, the WTO nonmember countries, such as Ethiopia and Iran, had average MFN applied rates that were substantially higher.j

Overall, applied ad valorem import tariffs exhibit substantial heterogeneity across countries. High-income economies apply much lower tariffs than middle income countries. Furthermore, poor countries apply tariffs that are even higher than the middle income countries.

The MFN tariff rates that countries apply are not necessarily the same as the tariffs that countries have legally committed to under the WTO as they can be lower. The third column in Table 1 lists the share of imported products over which the country has agreed to take on a tariff commitment. The United States, the EU, Saudi Arabia, Argentina, Brazil, China, Mexico, Russia, Democratic Republic of Congo, and Vietnam have agreed to bind tariffs for 100% of their imported products. For countries that have not agreed to bind all of their products at some upper limit, the remaining products have tariff upper limits that are “unbound,” ie, potentially infinite. For example, India and Turkey have 25% and 50% of their imported products with MFN tariffs that are unbound, respectively.k Finally, the lower third of the table reveals that poorer countries like Bangladesh, Burma, Kenya, Nigeria and Tanzania have more than 80% of their imported products with tariffs that remain unbound.

The second column in Table 1 reveals that even for the economies that have agreed to bind the vast majority of their tariffs under the WTO, there is wide variation in the average upper limit that the country has agreed to take on. For example, while the first column identifies 14 different economies that applied their MFN tariffs at rates that average less than 10%, only Canada, China, the EU, Japan, Russia, Ukraine, and the United States have undertaken WTO legal commitments to keep those tariffs at an average of 10% or less. And while average applied and WTO binding rates are almost identical for China, the EU, Japan, Russia, and the United States, most emerging economies and developing countries have average WTO binding rates that are significantly higher than their average applied MFN rates.l Within the G20 emerging economies, the existence of this binding overhang is particularly prominent, as average bindings may be 2–5 times higher than applied rates. For other developing countries listed in Table 1, such as Bangladesh and Nigeria, the average binding commitment is more than 100 percentage points higher than the MFN applied rate in 2013.

Average import tariff bindings exhibit even more variation across countries than applied tariffs. High-income economies have comprehensive tariff binding coverage for their products, low legally binding tariff commitments, low applied rates, and little tariff overhang. Poorer countries have many more products with import tariffs that are unbound, and their binding tariff commitments are significantly higher than their applied rates. For middle income and poor countries under the WTO, although many are currently applying a fairly liberal tariff regime, they are not legally committed to maintaining this liberal regime under the WTO.

For countries with low tariffs on average, are tariffs set at universally low levels across products? The last three columns in Table 1 provide a summary answer to this question by reporting the share of products covered by tariffs of 15% or more, or “tariff peaks.” For example, even though the United States has an applied MFN tariff that averages 3.4%, 2.7% of its imported products in 2013 faced MFN applied tariffs of 15% or more. The peak US tariff was 350%. Canada had nearly 7% of its imported products with tariffs of over 15%, with a peak rate of 484%. For emerging and developing countries, even larger shares of imported products are subject to these tariff peaks. Most every country has some sensitive products over which it retains very high tariffs.

We conclude this section with a brief discussion of our first broad finding, which is that there can be surprisingly large differences across countries in the average level of tariffs. Overall, both applied tariffs and tariff binding levels are negatively correlated with GDP per capita.

A first important research question is thus why tariffs are so much higher for lower income countries in particular. One long-standing explanation for why developing countries set higher tariffs is that collecting government revenue at the border may be more efficient administratively than other forms of taxation. For example, Keen (2008) reports import tariffs account for 20% or more of tax revenues in many developing countries, and Baunsgaard and Keen (2010) find that low-income countries undergoing trade reforms have been only partly successful (20–25%) at recovering lost tariff revenue by switching to other sources of taxation.m Country-level differences are likely explained not only by fiscal concerns, but also by the transparency of the country's government, its form of governance, and its responsiveness to public welfare (Gawande et al., 2006, 2009; Mitra et al., 2002).

A second important research question involves the potential implications of lower-income country decisions to retain sizeable differences between binding and applied tariff rates. A nascent research literature suggests that such differences may affect a country's ability to reduce the sort of trade policy uncertainty that leads to inefficient levels of firm investment, output, and exporting (Handley and Limão, 2014, 2015; Handley, 2014; Crowley et al., 2016).

3.4 Litigation Before the AB

The AB is a WTO novelty and provides the second instance of adjudication of disputes. Unlike panels, AB members serve a term of 4 years, renewable once for an additional 4-year term. A Committee comprising the Director General of the WTO and Chairs of the most important WTO bodies selects the AB members. All WTO members can propose candidates for selection to the AB. Geographic distribution emerges as the key criterion, and the EU and United States are the only two WTO members nationals of which have always enjoyed a seat in the AB. The overwhelming majority of AB members have studied law (only a couple of AB members so far have had some economics background), and recently the majority of appointments are former government officials. They are better remunerated than panelists, since they receive a lump sum on top of ad hoc payments for work done on specific cases, and are assisted by a group of lawyers acting as clerks.vvv

5 CONCLUSION

China’s WTO accession is one of the most important catalysts in its economic reform process. In the past three decades, China’s market oriented economic reform proved to be very successful. With the main changes occurring in the price determination mechanism and the structure of ownership, the market is functioning like most of the market economies of developing countries. Reform of the foreign trade sector and the foreign exchange regime made the economy of China highly internationalized. The main contents of the economic reform - marketization, privatization and internationalization - are, to a considerable extent, followed by the reform in tertiary education. Although, as a quasi-public good, tertiary education in China still remains relatively centralized, its potential as a part of the service industry has already been partially realized. China is in a good condition to continue its market oriented economic reform, which will further improve its market mechanism and make China’s tertiary education more and more market-oriented and internationalized. This will bring even more opportunities in the trade of education services for its trading partners.

Higher education internationalization

With China entering into WTO, it promises to open the education market including higher education. Higher education in China is faced with deep-level and multi-angle opening up. International competition in higher education is becoming more and more intense. China is beginning to consider higher education internationalization more and more seriously. More frequent international exchanges bring about a lot of international cooperative programs. At the same time, with its ongoing process of economic reform, the market economy is on its way to perfection. More and more importance is attached to the internationalization of higher education.