To understand WTO we have to identify the basic four principles, which govern the mechanism of the organization. The four principles are
(1) Non-discrimination,
(2) Reciprocity,
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(3) Market access,
(4) Fair Competition.
1. Non-discrimination:
Non-discrimination is most guiding principle of W.T.O. Under this clause, MFN (Most Favoured Nation) status is given to all members, which requires equal treatment is to be offered to the products produced in the other Member Country. Suppose a specific product of a specific Country is offered at 5% tariff then on same products of all member countries tariff must be imposed at the same rate.
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The dimension of this clause is goods of foreign origin should not be treated less favourably than those produced in the country. Goods originated within the country should be subject to same taxes.
If a domestic production is specially taxed similar foreign, product cannot be taxed in the same way. It is restricted to taxing foreign products that enter the country; ensuring equivalence as far rates of tax is concerned.
2. Reciprocity:
It is the process of limiting the scope of free riding arising-out of the MFN rule. It enables to secure trade liberalization on a quid pro quo basis. In order to make MTN (Multilateral Trade Negotiation) successful there should be a balanced exchange of concessions.
Changes in the level of protective tariff and negotiation thereon are helpful in arriving at a successful trade agreement. For reciprocity a suitable choice of products are to be exempted from liberalization for the purpose of foreign trade.
3. Market Access:
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The MFN and national treatment of GATT, was intended to ensure market access. The schedules of concessions and elimination of quantitative restrictions (Q.R.) also lent support to this view (India has abolished Q.R. on more than 2000 items).
Market access is to be free or if it enjoys safeguard by W.T.O.’s rules or disciplines of GATT then respective government’s attention must be drawn. If satisfaction not generated then W.T.O.’s dispute settlement scheme may be invoked.
Market access is also facilitated by rules that increase the transparency of trade regimes of the merrier countries. The transparency mechanism requires that a trade partner should publish trade regulations establish and maintain institution allowing for review of administrative decisions affecting trade, respond to requests for information and notify subsidy practices to the W.T.O. Surveillance by GATT secretariat also fosters transparency.
4. Fair Competition:
Fair competition does not consider economics of competition or antitrust legislations. It tries to protect domestic industries from imperfect competitions of foreign products. Fair competition in the GATT is reflected in its various provisions. Government should subsidize exports for the sake of fair competition.
Dumping by exports it also prohibited. Government may impose anti dumping duty in that case. Government also has the right to intervene when competition from imports becomes extensively injurious to domestic industries, to safeguard the balance of payments, to protect public health or national security. The objective of fair competition is to ensure a level playing field for domestic industries.
The objective of fair competition is in direct conflict with market access as the instrument used by government to attain fairness is usually a trade barrier. Such barriers are legal and permitted.
A unique feature of W.T.O. is its dispute settlement mechanism and trade policy review mechanism. Under the later a trading partner conducts a regular and systematic review in the development of trading system. The review helps to understand the trade policies and their probable impact on trade. Each W.T.O. member is required to submit report periodically about its trade policies. Frequency of review depends upon share of each member. Largest 4 members viz. – U.S., EU., JAPAN and CANADA are reviewed by W.T.O. general council every 2 years, next 16 largest traders in 4 years remaining member are reviewed in every 6 years.
Reports through not much analytical enough to study economic impacts on various national policies and cannot serve as basis for dispute settlement, but yet it is an important element in strengthening the multilateral trading system.
The disputes arising out in the matters relating to W.T.O. agreement are dealt by dispute settlement body, which is authorized to establish panels, adopt panel reports, scrutinize the implementation of recommendations and adopt retaliatory measures if necessary.
The dispute settlement mechanism covers Intellectual Property Rights, trade in services. Settlement of disputes has various stages; first members will initially attempt to solve their disputes through bilateral consultation.
The mediation, good offices may be sought from W.T.O. Director General. If parties are not able to secure a solution to their dispute through consultations within 60 days, the dispute settlement body may require setting up a panel. The W.T.O. secretariat suggests names of these panelists, to solve the crisis then the dispute panel meets with countries, present facts and arguments, rebuttals, conducts additional meetings and submission if required.
After preparation of report the final report is submitted to parties and Dispute Settlement Body. The panel report must in principle to be adopted by D.S.B. within 60 days. A party, may appeal if it does not agree with an issue of legal interpretation of panel.
Then an appellate body, consisting of 7 members deal with appeals. Appeal proceedings must be completed within 90 days. Prompt compliance of recommendations or ruling is essential. If any country finds it is difficult to comply with the rulings or recommendations, a time frame is given.
If it fails to act then the country has to pay compensation. If no compensation is agreed upon then complainant may request authorization from D.S.B. to suspend concessions or obligations against offending country (i.e., to retaliate).
The W.T.O. mechanism wants to make the process of trade more transparent, open and barrier free. However, its provisions also provide some safeguards to the parties such as anti-dumping, imposition of countervailing duties, balance of payments, protect infant industry, achieving health, and safety related objectives, and maintain national security. Thus entire objective of W.T.O. is to ensure justice, unbiased ness in world trade system.
In the post Second World War period, there was a growing effort for integrating the national economies. This was mainly due to the realization of the limitations that were imposed by national frontiers and the expectation that benefits of increased trade, investment and economic efficiency could be achieved from a wider market consisting of several economies.