What Is the World Trade Organization (WTO)? Purpose and Functions

What Is the World Trade Organization (WTO)?

The World Trade Organization (WTO) is a global organization that deals with the rules of trade between nations. It is made up of 164 member countries, and its goal is to ensure that trade flows as smoothly and predictably as possible.

If a trade dispute occurs, the WTO works to resolve it. For example, if a country erects a trade barrier in the form of a customs duty against a particular country or a particular good, the WTO may issue trade sanctions against the violating country. The WTO will also work to resolve the conflict through negotiations.

As an international body that negotiates and regulates matters of global commerce among sovereign nations, the WTO has both supporters and detractors. Its detractors often raise concerns about transparency, sovereignty, and the inadvertent impacts of free trade on local economies and regimes,

Understanding the World Trade Organization (WTO)

The purpose of the WTO is to ensure global trade commences smoothly, freely, and predictably. The WTO creates and embodies the ground rules for global trade among member nations, offering a system for international commerce. The WTO aims to create economic peace and stability in the world through a multilateral system based on consenting member states.

The WTO has 164 members that have ratified the rules of the WTO in their individual countries as well. This means WTO rules become part of a country’s domestic legal system. The rules thus apply to local companies conducting business in the international arena.

If a company decides to invest in a foreign country by, for example, setting up an office in that country, the rules of the WTO (and hence, a country’s local laws) will govern how that can be done. Theoretically, if a country is a member of the WTO, its local laws cannot contradict WTO rules and regulations, which govern approximately 98% of all world trade as of 2024.

The director-general of the World Trade Organization since March 2021 is Ngozi Okonjo-Iweala from Nigeria. Decisions are made by consensus, though a majority vote may also rule (this is very rare). Based in Geneva, Switzerland, the Ministerial Conference holds meetings at least every two years to make the top decisions.

There is also a goods council, services council, and intellectual property rights council, which all report to a general council, in addition to many working groups and committees.

History of the World Trade Organization

The World Trade Organization (WTO) was born out of the General Agreement on Tariffs and Trade (GATT), which was established in 1947. GATT was part of the Bretton Woods-inspired family, including the International Monetary Fund (IMF) and World Bank. A series of trade negotiations around GATT began at the end of World War II and were aimed at reducing tariffs for the facilitation of global trade.

The rationale for GATT was based on the most-favored-nation (MFN) clause, which, when assigned to one country by another, gives the selected country privileged trading rights. As such, GATT aimed to help all countries obtain MFN-like status so no single country would hold a trading advantage over others.

The WTO replaced GATT as the world’s global trading body in 1995, and the current set of governing rules stems from the Uruguay Round of GATT negotiations, which took place from 1986 to 1994. GATT trading regulations established between 1947 and 1994 (and in particular those negotiated during the Uruguay Round) remain the primary rule book for multilateral trade in goods. Specific sectors such as agriculture have been addressed, as well as issues dealing with anti-dumping.

Trade Measures Introduced By Countries

The Uruguay Round also laid the foundations for regulating trade in services. The General Agreement on Trade in Services (GATS) is the guideline directing multilateral trade in services. Intellectual property rights were addressed in the establishment of regulations protecting the trade and investment of ideas, concepts, designs, patents, and so forth.

WTO Trade Remedy Trends

Controversies Around the WTO

As part of his broader attempts to renegotiate the United States’ global trade deals, former President Donald Trump threatened to withdraw from the WTO in August 2018, calling it a “disaster.” If the U.S. had moved to withdraw from the organization, trillions of dollars in global trade would have been disrupted. Under the Biden Administration, the United States committed to WTO but stressed that reforms were still needed.

The controversy during the Trump Administration was not the first time the WTO had come under scrutiny. In 1999, protests at the doors of the World Trade Organization’s third Ministerial Conference, held in Seattle, Washington in 1999 were later dubbed the “battle of Seattle.” Similar demonstrations against the WTO have also occurred in Canada and Switzerland throughout the 2000s and 2010s.

Anti-WTO protests are a response to the consequences of establishing a multilateral trading system. Critics say the aftereffects of WTO policies are undemocratic because of the lack of transparency during negotiations.

Opponents also argue since the WTO functions as a global authority on trade and it’s within its rights to review a country’s domestic trade policies, national sovereignty is compromised. For example, regulations a country may wish to establish to protect its industry, workers, or environment could be considered barriers to the WTO’s aim to facilitate free trade.

A country may have to sacrifice its interests to avoid violating WTO agreements. Thus, a country becomes limited in its choices. Moreover, brutal regimes that are pernicious to their own countries may inadvertently be receiving concealed support from foreign governments who continue, in the name of free trade, to do business with these regimes. Unfavorable governments in favor of big business, therefore, remain in power at the cost of a representative government.

One high-profile WTO controversy has to do with intellectual property rights and a government’s duty to its citizens versus a global authority. One well-known example is HIV/AIDS treatments and the cost of patented medicines. Poor countries, such as those in South America and sub-Saharan Africa, simply cannot afford to buy these patented drugs. If they were to buy or manufacture these same drugs under an affordable generic label, which would save thousands of lives, these countries would, as members of the WTO, be in violation of intellectual property rights agreements and subject to possible trade sanctions.

The Bottom Line

Free trade fosters investment into other countries, which can help boost the economy and eventually the standard of living of all countries involved. As most investment flows from the developed and economically powerful countries into the developing and less-influential economies, there is, however, a tendency for the system to give the investor an advantage.

Regulations that facilitate the investment process are in the investor’s interest because these regulations help foreign investors maintain an edge over local competition. As several countries, including the United States, strengthen their protectionist stance on trade, the future of the World Trade Organization remains complex and unclear.