World Trade Organization (WTO)

The Institutionalization of a Selfish, Wrongly Justified Trading Doctrine

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Welthandelsorganisation (WTO)

Table of Contents

  1. Abstract
  2. The WTO’s Set of Agreements
    > The GATT (General Agreement on Tariffs and Trade)
    > The GATS (General Agreement on Trade in Services)
    > The TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights)
  3. The Multilateralist Regime of the WTO
  4. The »Life-lie« of the WTO
  5. The Nature of »Absolute Advantage«
  6. The Nature of »Comparative Relative Advantage«
  7. The Impact of the WTO’s Policies
  8. The Limits of the WTO’s Multilateralism
  9. A Future-Oriented World Trade Organization

1. Abstract

The World Trade Organization justifies its policies with gains in prosperity that countries can supposedly achieve under its regime. As the criticism of the oligarchic structures of the WTO and the WTO provoked predatory competition increases, the protagonists try to back up the supposed gains with set pieces of economic theories. It’s time to unmask the indoctrinating public relations work of the WTO, and its »life-lie«, as deliberately untruthful and misleading.

2. The WTO’s Set of Agreements

WelthandelsorganisationJPG01The World Trade Organization was founded in 1995 as a special agency of the United Nations (UN) for the design of international trade relations. The WTO’s complementary set of agreements is based on the following three pillars:

The GATT (General Agreement on Tariffs and Trade)

GATT goes back to efforts of the United States made in the wake of the Bretton Woods Agreement (for details see the article Bretton Woods System (English)), and was initially put in force in 1948 by 23 countries, but not by the United States. Until 1994 it remained the only, but provisional agreement with a claim to establish an international world trade order. In 1995, when GATT had been signed by 111 countries, it was entrusted to the newly founded WTO, together with GATS and TRIPS (see below). Since then, the three agreements form the official, complementary set of agreements of the WTO.

The WTO continues to pursue the provisional trade policy of the GATT aimed (1) at the complete »liberalization« of world trade, (2) at extensive international specialization, and (3) at the global division of labor – with the alleged intention to generate worldwide prosperity, employment and growt. In taking action, the WTO does everything to stabilize the so-called process of liberalization and to make it irreversible through its maxims of non-discrimination and reciprocity, and the derived principles of most favored nation treatment (MFN), national treatment, transparency and information.

GATT’s trade policy has served to massively reduce import tariffs on manufactured goods and commodities. The prosperity gained by western countries during this time is generally attributed to GATT’s policy. However, this assessment may superficially be justified with respect to the first three postwar decades, which were marked by high growth rates. But it is misleading, when suggesting that the GATT principles were capable of meeting future challenges, and the process of radical »market liberalization« could continue indefinitely, even in times of saturated markets.

The GATS (General Agreement on Trade in Services)

GATS came into force in 1994 – following long-term efforts of the U.S. – and includes the trade in traditional services such as telephone exchange, tourism, cash grants and direct foreign investments for the establishment of business subsidiaries. GATS is also the first agreement to promote a limited labor migration and, in addition, urges WTO members to remove all existing national trade barriers for services.

The biggest threat posed by GATS is the prospective establishment of not yet existing global markets for trade in non-marketable general-interest public services such as water supply, education and health. If GATS is further implemented as planned, not only national borders will be opened for all kinds of services, but the boundaries between private and public goods, indispensable for social welfare, will be blurred and become indistinct.

The TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights)

TRIPS is part of GATT and came into force in 1995. It’s a long-term project, intended to harmonize different national legal systems regarding industrial property rights and copyright. Included is the protection of trademarks and geographical indications, industrial designs and models, patents and topographies of integrated circuits. Furthermore, TRIPS serves to monitor anti-competitive effects induced by licensing agreements.

It can’t be emphasized strongly enough that TRIPS is not aimed at the implementation of a separate, independent trade in licenses of property rights – which could replace much of the physical trade and boost global progress –, but is clearly intended to instrumentalize property rights and copyrights for the protection and expansion of the neoliberal free trade in goods and services, including the predatory competition as promoted by GATT and GATS.

While property rights and copyrights are used under neoliberal conditions almost exclusively to protect and boost physical global trade, their value increases by analogy to the value of worldwide sales of the related products. This overvaluation exposes the rightholders on »liberalized« global markets to the continuous threat of plagiarism, imposing high expenses on them to prevent imminent infringements of their rights and to pursue actual infringements worldwide by legal means. The overvaluation also tempts global players to file so-called blocking patents with the intent to occupy entire fields of technology, not to utilize the patents themselves, but to incur high development costs upon their competitors to keep them on distance.

3. The Multilateralist Regime of the WTO

Just like GATT, the WTO gives highest priority to the maxim of non-discrimination. Hidden behind this maxim are the principles of most-favoured nation (MFN) and national treatment. What at first seems to be a noble attitude, is in fact the most incisive tactical weapon of the WTO: Non-discrimination commits member countries to fully grant any special foreign trade condition already granted to existing trading partners to each and every future partner as well. In addition, members are committed to treat foreign and domestic market players absolutely in the same way. And so, the WTO succeeds in pressing the process of »liberalization« and deregulation of global trade ahead – making it irreversible.

At the same time, the WTO counts on multilateral negotiations for tactical reasons to enforce a widespread detachment of global trade from national government influences by means of strictly centralized control and disciplining. This approach, known as multilateralism, generates permanent pressure and gets the current 153 member countries (Russia has joined the WTO in Dec. 2011) to agree to incessant mutual concessions bringing all members, step by step, closer to the goal of unrestricted »market liberalization«. Once countries have embarked on the opening of their markets, they indefinitely lose control on the choice of their trading partners.

Especially less developed countries get into increasingly greater dependencies during the multilateralist negotiations, mainly because they are exposed to selective export pressure of developed countries leaving them no choice but to give up all economic activities in conflict with foreign interests. Examples for this threat are the EU and U.S. subsidies for their industrialized agricultural mass production, which are responsible for the flooding of developed countries with foreign agricultural products. It is obvious that enforced exports are to the disadvantage of importing countries.

The ongoing work of the WTO is dominated by government officials from industrial countries in conjunction with lobbyists of transnational corporations. This joint group is determined to cover up the decision-making process from the outside world. With its oligarchic process of negotiation, the WTO interferes with legislative powers of democratically elected parliaments undermining existing international and national regulations, which it declares illegal trade barriers in accordance with MFN and national treatment. The interferences not only provoke economic threats, but also serve the cost-cutting interests of global businesses, especially by marginalizing, delaying or completely preventing much-needed developments in the fields of human rights, global food security, workers rights and environmental and consumer protection.

While monitoring its processes, the WTO leaves nothing to chance and regularly assesses the national trade policies of its member countries with respect to the degree of implementation of the agreed »liberalization«. Reported violations are heard by a special arbitration tribunal, which can impose irrevocable penalties. A withdrawal from WTO treaties is – in principle – possible for member countries, but would require exit negotiations with all relevant trading partners. Only countries with an exceptional economic performance would be able to pay due monetary or physical compensations. This is particularly difficult, if not impossible, for countries having embarked on unbalanced specialization with resulting trade deficits. That’s why the process of market »liberalization« is practically a one-way street for most of the WTO members from which there is no going back.

Previous experience has shown that the WTO lacks the conditions to promote a welfare-oriented development, because its maxims and principles foster oligarchic decisions, economic concentration and monopolistic structures, and are directed against democratic self-determination and regional autonomy. This way, the WTO creates a platform that enables global economic players to achieve their expansion objectives in disregard of the common good of developing, newly industrialized and developed industrial countries likewise.

There should be no doubt that the trade policies of the WTO and its member countries are responsible for the world’s growing social and ecological crisis, a crisis that perpetuates itself since the nineties of the last century. For the first time in its history, mankind experiences a double existential threat, which has essentially to be imputed to an economic doctrine that is based on the short-sighted self-interest of a minority.

4. The »Life-lie« of the WTO

WelthandelsorganisationJPG02Faced with the obvious consequences of its doctrinaire trade policy, the WTO is anxious to justify its actions with set pieces of theoretical economics. As an example, I quote below from a speech delivered by the Director General of the WTO, Pascal Lamy, on November 17, 2008 at the Barcelona Graduate School of Economics[1]. The self-deception of the WTO is already reflected in the first paragraph of the speech, when Lamy wrongly claims David Ricardo’s theorem of Comparative Advantage to suggest that the WTO is committed to welfare gains from mutually balanced trade. Following the quotation, I’ll scrutinize the economic validity of his statement:

»… The case for open trade has a long and rich intellectual history. David Ricardo’s intuition that the gains from international trade are rooted in the law of comparative advantage has provided the backbone for 200 years of trade theory and practice.

Traditional theories taught us that countries – like people – gain from trade because they are different, and that it is relative rather than absolute differences in production costs that make trade profitable. This last insight provides the vital intellectual underpinning for the argument that all countries can gain from trade – you only have to be more competitive in relative, and not absolute, terms across production activities to gain from trade. Understanding this reality has been indispensable to the efforts of many over the last six decades and more to build a more open and inclusive multilateral trading system.

David Ricardo linked the comparative advantage of countries to technological differences. Later theorists, such as Heckscher and Ohlin, emphasized differences in factor endowments – such as labour, land and capital – as the driving force of comparative advantage and gains from trade. These differences in emphasis embody no contradiction. They merely emphasize the rich opportunities offered by diversity …«

Lamy’s assertion is frustrating in two senses: While he tries to play down the devastating consequences of WTO activities by monopolizing the theorem of Comparative Advantage, he not only lies to the world about the real intentions of the WTO, but also damages the reputation of the theorem which is one of the most brilliant economic discoveries with an undiminished significance to this day (see below for more details on the practical application of comparative advantages).

Lamy is wrong (or lies), because the predatory competition in »liberalized« global markets, as propagated by the WTO, is not at all decided on the basis of comparative, relative price advantages, but, for the purposes of the neoliberal doctrine, based on absolute price advantages in U.S. dollars or euros. Furthermore, Lamy promises balanced welfare gains worldwide and falsely and prematurely attributes them to the employment of Ricardo’s theorem by the WTO. The neoliberal reality itself gives evidence that balanced mutual gains are excluded in principle when competition is based on absolute price advantages.

5. The Nature of »Absolute Advantage«

The differences in regional productivities increase with the size of a monetary union so that more and more enterprises in poorly equipped regions will be monopolized or completely eliminated by enterprises from better-equipped regions. In other words, self-determined developments under given regional conditions are suppressed to a large extent when competition is inherently determined by absolute advantage, and if monopolizations and eliminations of enterprises are not counteracted by means of sufficient economic policy measures. The economic suppressions and subsequent structural and competitive distortions caused by predatory competition within the inhomogeneous euro zone give evidence of this effect (as a compliment see the articles EU: Federal Superstate or Confederation? and Undemocratic EU Institutions).

As a result of the WTO’s »market liberalization«, the suppressions and distortions mentioned have gained a global dimension.The world is virtually forced into a single monetary union with the U.S. dollar as the key currency. Current prices can be instantly compared for each product worldwide. At the same time, bilateral trade agreements and exchange rates lose their balancing effect, because exchange rates are affected or determined by speculative trading activities on »liberalized« foreign exchange markets, players experience additional incalculable risks through price fluctuations between their national currency and the dollar.

Under the regime of the WTO global competition in dollar prices turns into a fateful national question and leads governments and enterprises to reduce production costs with all conceivable methods of dumping to improve their competitive position. Meanwhile, dumping has been pursued to the point of self-destruction generating dangerously high social and ecological (externalized) costs. It should be noted that lasting general gains in trade are basically excluded in a global competition based on absolute advantages. This kind of competition is only reasonably justified within politically autonomous economic and monetary unions, where identical conditions prevail and regional differences are, as mentioned above, offset by economic policy.

6. The Nature of »Comparative Relative Advantage«

The use of comparative relative advantages in foreign trade and international competition guarantees both independent national developments and mutual gains in prosperity. To identify and use these advantages under today’s complex multi-bilateral conditions, trading partners have to bilaterally compile joint baskets of goods and services with current and potential trading products, then calculate the average price of all basket-products in each of the two national currencies, and finally fix the bilateral exchange rate exactly according to the ratio of the two average prices derived from the joint basket. That way, the exchange rate neutralizes the average difference in prices (and indirectly the average difference in productivities) between the trading partners – this being the original function of the exchange rate.

Subsequently, both countries can determine the relative price for each product in national currency by dividing each product price by the average price of the basket. The two relative prices resulting for each product, one for each national currency, can be compared, and the product with the lowest relative price is thus identified as a potential export product. Provided both countries agree, the country having this product at its disposal can specialize in producing that product and export it to the other country. The importing country achieves a profit (gain) from each imported product that results from the difference between the higher domestic price and the lower import price on the basis of the calculated exchange rate.

Decisive for the trade based on comparative relative price advantages is that profits can be achieved completely independent of the absolute price and productivity levels of trading partners. That is, poor and rich countries can trade profitably with each other – even in a globalized world.

And: profits can be maximized in complex multi-bilateral trading environments by comparing the multitude of relative prices offered for each product to be imported and by selecting imports according to absolute highest quality and lowest relative price.

For more details on Ricardo’s theorem of Comparative Advantage I recommend the article Comparative Advantage – Upgraded.

7. The Impact of the WTO’s Policies

Under the regime of the WTO world trade has degenerated to a cut-throat competition bringing about more and more foreign trade dependencies and subsequently weakening domestic economic cycles. Since export markets are governed by nothing but dollar prices, old industrial and newly industrialized countries get engaged in a relentless dumping and subsidy competition. They further heat up the struggle with economies of scope and economies of scale boosted by mergers, acquisitions and territorial specialization. Conversely, they make themselves dependent on imports and, all in all, drive world trade to an astronomical volume. In the absurd bustle developing countries are either entirely excluded or misused as raw materials suppliers and, in addition, flooded with subsidized agricultural and consumer products until they lose their self-sufficiency for basic provisions.

While the greatest benefits on »liberalized« global markets can be achieved through a combination of territorial specialization and supra-national diversification, increasingly large transnational corporations and conglomerates are formed. These giant formations are responsible for an out-of-touch world trade, and they bestow the power upon the WTO to declare democratically decided national and supranational regulations to be contrary to international economic laws – this being in accordance with the WTO’s insidious principles of MFN and national treatment (for more details see the article Transnational Corporations). The interventions not only pose economic threats, but also serve, in the interests of global enterprises, to marginalize or prevent the development of human rights, food security, workers rights and environmental as well as consumer protection.

It is not surprising that the WTO’s »achievements« are sobering: Its promise of prosperity and employment through growth and free trade has proved a delusion and self-deception. As compiled in the above figure, the policies of the WTO and its member countries are responsible for a cascade of social and environmental devastations.

8. The Limits of the WTO’s Multilateralism

The crucial contradiction of the WTO’s policies is reflected in the fact that each member country demands free market access for its own exports, while insisting to protect its citizens from the worst social and ecological impacts of cut-price imports. In addition, this contradiction is accompanied by mutual accusations of protectionism. The WTO’s policies thus produce a conflict between foreign and domestic economic interests, in particular between the interests of national exporters and national importers. While doing so, the conceptional boundaries between senseless protectionism and sensible protection are deliberately blurred (see the article Protection and Protectionism). Unwittingly, the WTO proves the absurdity of its own policies. However, in recent practice, the ongoing wrangling in the WTO has always been »solved« by the interests of developed countries prevailing over those of developing countries. During the so-called Doha Development Round, that started in Katar in 2001, the differences have led to the failure of the negotiations after six years of controversy. This was a novelty in the short history of the WTO:

In short, it started with the self-praise-supported Western initiative to cut EU and U.S. farm subsidies aimed to provide developing countries access to Western agricultural markets, accompanied by demands of the developing countries to open Western labor markets for their citizens. Conversely, the developing countries were requested by the industrial countries to open their service markets for Western enterprises, including sensitive areas such as health and education. And, on behalf of the Western countries, this request was also supported by the World Bank. At the follow-up conference in Cancun in 2003, the industrial countries were caught by surprise, as the developing countries spoke with one voice for the first time and could not be played off against each other any more. Since then, the WTO regime has made only symbolic progress.

It is possible and even likely that the WTO’s multilateralism will not recover from the failure of the Doha Round. But it would be premature, to see this as the beginning of overcoming the neoliberal doctrine, for the demands of the developing countries are as neoliberal as those of the industrial countries. Obviously, the poor and weak have merely freed themselves and formed an alliance within the system, and they have demonstrated their resoluteness not to let the rich and strong bamboozle them again.

9. A Future-Oriented World Trade Organization

For the future of mankind it is of existential importance that the international community agrees on socially and environmentally conducive conditions for international trade and international cooperation. If the present WTO can still contribute to a future-oriented system, then especially in that the bad experiences with its policies can benefit to outline the framework for a sustainable counter-model. With that in mind, the mandate for a new World Trade Organization is best described by contrasting essential restrictions and necessities:

Restrictions

  1. No permanent transfer of national and supranational powers to the new WTO
  2. No multilateralistic automatism, no multilateralistic pressure on member countries
  3. Particularly no multilateralistic pressure on developing countries
  4. No undemocratic, oligarchic and capitalistic decisions (against labor and natural resources)
  5. No top-down imposed regulations and »liberalizations« regarding international trade
  6. No support for predatory (cut-throat) competition based on absolute price advantages

Necessities

  1. Full respect for the autonomy of national economic policies
  2. Agreement on normative guidelines for international trade and cooperation
  3. Commitment to a socially and ecologically sustainable development, including prosperity and welfare
  4. Commitment to a social-ecological, non-capitalistic market economy
  5. Commitment to foreign aid designed as »helping people to help themselves«, initially always focused on the primary economic sector
  6. Commitment to functional regional structures as a foundation of international trade and economic globalization
  7. Commitment to global trade and competition based on comparative, relative price advantages

For a better understanding of the doctrinaire background of the neoliberal development I recommend the articles Neoliberal Economic Doctrine and Neoliberal Vicious Circle.

For a better understanding of a future-proof economic system I recommend the article Sustainable Social Welfare.

____________________________________________________________________________________

Click here for the German-language version: Welthandelsorganisation (WTO)

References

1. http://www.wto.org/english/news_e/sppl_e/sppl107_e.htm

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