The 3 Pillars of the WTO: How Law, Economics, and Politics Shaped Global Trade
Introduction
The purpose of this content is to provide an overview of the legal, economic, and political foundations that led to the creation of the World Trade Organization (WTO). It will analyze these foundations, explore the challenges currently facing the WTO, and connect the historical themes to the present day.
Three major developments were required before a multilateral trading order could be created:
- The emergence of the idea of national sovereignty
- The notion that countries can gain from freer trade
- The resolution of the paradox of power dynamics between nations
The analysis will proceed in three steps:
- Examine the legal, economic, and political foundations that led to the WTO’s creation
- Review the current legal, economic, and political challenges facing the WTO
- Connect the historical themes to the WTO’s situation today
Legal Foundations
Law provides greater certainty in relations between states and constrains what might otherwise be a chaotic and self-defeating pursuit of national interest. A country’s decision-makers should not be in doubt regarding either their own commitments or those made by their trading partners.
The Creation of International Organizations
Kant’s proposal envisioned his ideal institution would be narrowly aimed at securing peace, and the league would not have “any dominion over the power” of the member states and there would be no “need for them to submit to civil laws and their compulsion.” It was not until the middle of the 19 th century that states would begin to establish formal and permanent international organizations.
The ITO and GATT
The ITO was the first casualty of the post-war political environment, with the US Congress refusing to approve the Havana Charter to this institution. Countries instead fell back on the supposedly temporary GATT, which became the centerpiece of the trading system.
International Organizations After the Cold War
The establishment of the WTO coincided with the end of the Cold War. One perspective sees it as an opportunity to cash in the “peace dividend” and reduce the burdens of leadership. Idealists see it as an “end of history” and an opportunity to devise a more cooperative world system. Others view international organizations as deliverers of “global public goods.”
Economic Foundations: Classical Thinking
Adam Smith’s arguments for free trade were based on specialization and the absolute advantage that individuals or countries may enjoy in the production of goods. By extending the scope of the market to reach across borders, we may exploit an international division of labor, allowing each country to specialize in those industries to which it is best suited and to trade these products with other countries specializing in their own areas.
The Economic Rationale for Open Markets
David Ricardo’s concept of comparative advantage explains why even countries that are the best at nothing can still gain by exporting those things in which they are comparatively more productive and importing those things that they produce least efficiently. Ricardo demonstrated how trade could improve welfare in both countries.
Objections to Materialism and the Market
Critics question whether these exchanges should be conducted on a market basis. Groups that oppose the inclusion of new issues or sectors within the scope of market disciplines will typically urge that the item not be treated as a commodity. These concerns are among the principal motivations for anti-globalization activists. The range and intensity of these critiques rose with the establishment of the WTO and the expansion in the scope of trade rules.
Trade, Development, and Discrimination
Questions concerning the proper role of the state are also a key part of the recurring controversy over the application of free-trade doctrine to developing countries - import-substitution industrialization and a New International Economic Order, import protection, and a guiding role for the state.
The Desire to Create a World
The distribution of power as a critical variable in the international system often attributes the very existence of international organizations such as the WTO, as well as the rules they enforce and the outcomes that they promote, to the interests and objectives of the most powerful states in the system.
Power dominates political relations within countries and between them. The creation and operation of an international organization that is intended to open markets can be seen as an exercise of power as much as it is a manifestation of international law and the embodiment of an economic idea.
The most powerful countries shape the international system to serve their interests and preferences. International organizations like the WTO provide a means for the leading powers to establish rules and norms that will govern international relations in a way that reinforces their position.
Weaker states may comply with the system not necessarily because they view it as inherently fair or optimal, but because they have little choice when confronted with the combined power of the major players. From this perspective, the WTO represents the institutionalization of power politics, encoding the prevailing balance of power into an international regime that works primarily for the benefit of dominant states.
The Political Foundations
Power may be defined as the capacity of one actor (whether that’s a person, party, or country) to compel another actor to do something it otherwise wouldn’t do. Power is also notable for its zero-sum distribution - when one actor gains power, others lose it in equal measure.
Power dominates political relations both within countries and between them. From this perspective, the creation and operation of an international organization intended to open markets, like the WTO, is as much an exercise of power as it is a manifestation of international law or economic theory.
Trade, Power, and Independence
Countries have long used trade as a means of gaining power and independence. By reducing reliance on imports, a country can limit the influence and leverage of its trading partners. By building up exports, it can exert economic influence over others.
At the same time, trade partnerships can be used to build political alliances and mutual dependence between nations. The complex interplay between trade, power, and independence continues to shape the modern system of global trade and organizations like the WTO.
Challenges for the WTO
The WTO faces challenges in the legal, economic, and political spheres that shape its foundation and operations.
Legal Challenges
On the legal front, the WTO must balance respecting the sovereignty of member states with enforcing trade rules and resolving disputes. There is an inherent tension between countries wanting autonomy over their domestic policies and laws versus agreeing to be bound by WTO commitments and rulings. Ongoing debates occur over the appropriate scope and strength of WTO rules.
Another legal challenge is adapting the rules and procedures to new issues like digital trade, environmental regulations, and intellectual property rights. Updating WTO agreements is difficult given the consensus-based approach to decision making among 164 diverse members. Slow progress in negotiations put strains on the dispute settlement system.
Economic Challenges
Key economic tests facing the WTO include promoting trade liberalization versus allowing protectionist policies, balancing developed and developing country interests, and expanding trade in services. There are disagreements over how to liberalize agricultural trade and reduce subsidies. Developing countries seek more favorable treatment to protect vulnerable sectors and support development.
Services trade involves regulating domestic laws and regulations. Approaches like the GATS positive list of commitments allow more flexibility but are complex to negotiate. There are also challenges in assessing the trade and welfare impacts of services liberalization.
Political Challenges
The WTO must maintain political support from major economies like the US, EU, China, and India to remain relevant. But domestic politics in these members can turn against trade. There is an inherent difficulty between thinking globally for the collective benefit versus nationalistic tendencies. The WTO’s perceived lack of transparency and accountability to civil society has sparked protests.
With growing multipolarity in the world economy, forging consensus and compromise solutions will only get harder. Questions remain whether the WTO can adapt its 20 th century roots to 21 st century realities.
Themes Explored
This content will explore how law, economics, and politics have shaped the World Trade Organization (WTO) and the multilateral trading system it oversees. It will examine the foundational ideas behind the WTO in each of these domains and how they have enabled and constrained countries working together under a rules-based trade regime.
The analysis will look at key developments behind the creation of international organizations like the WTO as well as seminal concepts underpinning free trade such as comparative advantage. It will also discuss how debates over the proper role of the state and markets have presented challenges in reconciling different economic worldviews.
In reviewing the political foundations, the distribution of power will be analyzed as a pivotal factor affecting not just the establishment of the WTO but also the rules it enforces. The paradox of using power to create a system intended to reduce trade barriers will be explored.
Throughout, the aim is to provide insight into how law, economics, and politics have interacted to shape both the potential and the limits of the multilateral trading system under the WTO. By exploring these themes, readers will gain a deeper understanding of the diverse ideas and forces that came together to enable countries to cooperate through the WTO while also constraining what it can achieve.
Law and the WTO
Law provides the foundation for international trade and the operation of the World Trade Organization (WTO). By establishing rules that members agree to follow, law enables greater certainty and predictability in trade relations. This allows countries to pursue national interests while avoiding chaotic or destructive policies.
International trade law emerged from principles of sovereignty and non-interference between states. Over time, countries recognized potential mutual benefits from cooperation on trade, leading to organizations like the WTO. Its dispute settlement system reinforces commitments, and trade agreements create shared expectations.
However, critics argue the WTO legal system overly constrains regulatory autonomy and policy space. Challenges include balancing member rights and obligations, and handling emerging areas like digital trade. Proposals for WTO reform often center on improving the rule of law.
Overall, the development of international trade law enabled the WTO’s creation. Ongoing evolution of the legal framework shapes how the institution upholds security and predictability for the multilateral trading system. Law provides stability but also faces new complexities in a rapidly changing global economy.
Economics and the WTO
The economic foundations of the WTO are based on classical economic thinking and the principles of free trade and open markets. Key concepts that underpin the WTO’s approach include:
- Comparative Advantage - This concept developed by David Ricardo shows how countries can benefit from trade even if they do not have an absolute advantage in producing any goods. By specializing in goods where they have a comparative advantage, countries can maximize productivity and gain from trade.
- Eliminating Trade Barriers - Removing tariffs, quotas, and other restrictions to trade allows countries to exploit comparative advantages. This enables greater efficiency and productivity.
- Consumer Welfare - Free trade enhances consumer welfare by allowing access to a greater variety of goods at lower prices. Competition also incentivizes improved quality and innovation.
- Economic Development - Integrating into the global economy provides opportunities for developing nations to grow industries, attract investment, and create jobs. However, some argue protection is needed.
- Market Disciplines - Applying market principles through trade rules aims to optimize resource allocation and efficiency. But critics argue some sectors should not be commodified.
The WTO promotes classical liberal economic principles. But it faces challenges balancing free trade with other societal goals and addressing critiques of globalization. The economic ideas underlying the WTO have greatly shaped its mission and approach.
Politics and the WTO
The creation and operation of the WTO reflects the distribution of power among nations. Powerful countries use international organizations like the WTO to exert influence and advance their interests.
The WTO serves as a venue where powerful countries bargain and negotiate trade rules. The bargaining leverage of each country depends on its economic and political might. Larger economies like the US, EU, and China have greater ability to shape WTO policies and outcomes. Smaller, developing countries have less influence.
Power imbalances allow powerful countries to use trade as a geopolitical tool. For example, the US has leveraged its position to compel trading partners like China to reform policies on intellectual property, investment, and regulatory practices. Powerful countries can also use the WTO dispute settlement system to challenge policies of weaker trading partners.
At the same time, developing countries have leveraged their collective power through coalitions. Alliances like the G20, the Cairns Group, and the African Group increase the voice of poorer countries in WTO negotiations. Still, striking an equitable balance between powerful and developing countries remains an ongoing challenge.
The distribution of power affects nearly all aspects of WTO operations, from agenda-setting to rulemaking to compliance mechanisms. Managing power dynamics is central to the efficacy and legitimacy of the multilateral trading system. The WTO’s capacity to promote open and inclusive trade depends on addressing imbalances and finding compromise between competing national interests.