Introduction To The WTO

Online Course Of
Introduction to the WTO
e- WTO E-Learning
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M1: The WTO and the Multilateral Trading System (MTS) |

Module 1
The WTO and the Multilateral Trading System
(MTS)
What is the WTO? How to join the WTO?

Trade Negotiations Who can apply for WTO Membership?
WTO Agreements The Process of Accession
Monitoring and Surveillance Technical Assistance for acceding
governments
Settling Disputes
Capacity Building
Cooperating with other international What are the WTO Agreements?
organizations The basic structure of the WTO Agreements
Multilateral Agreements
Why do governments join the WTO?
History matters: International trade Summary
cooperation and the creation of the WTO
Get your economics right: Basic
international trade theory
Main features of the MTS
How does the WTO work?

The institutional structure of the WTO
Decision-making
M1: The WTO and the Multilateral Trading System (MTS) | 2

What is the WTO?
The WTO is an inter-governmental organization for

progressively liberalizing trade. Trade liberalization is
the main approach that WTO Member governments
have adopted to promote economic growth and
Monitoring
development. The WTO has almost a global Trade WTO and
Negotiations Agreements
Membership. More than 160 governments are Surveillance
Members of the WTO.
There are a number of ways of looking at the WTO. It

is an organization for governments to negotiate
global trade agreements. The WTO operates a Settling Capacity Cooperating
Disputes Building with other IOs
system of trade rules that apply to all its Members.
The WTO is also a place for Member governments to
settle their trade disputes. In this module, we will
explain what the WTO is and what it does (including
its objectives and main functions), the reasons why
governments join the WTO and how the WTO is
organized.
M1: The WTO and the Multilateral Trading System (MTS) | What is the WTO? 3
Objectives of the WTO
Objectives of the WTO Background information and materials
In the preamble to the WTO Agreement, the parties to the Agreement Legal documents:
recognize the objectives they wish to attain through the multilateral • The Preamble of the Marrakesh
trading system: Agreement Establishing the WTO:
http://www.wto.org/english/docs_e/l
 raise living standards; egal_e/04-wto_e.htm
 ensure full employment;
Introductory videos:
 ensure a large and steadily growing volume of real income and • A virtual tour of the WTO (video):
effective demand; and https://www.youtube.com/watch?v=-
 expand the production of and trade in, goods and services, while ACWHSQxqMc
allowing for the optimal use of the world's resources in accordance
with the objective of sustainable development. Supplementary information:
• 20th anniversary of the WTO:
The Agreement also recognizes the need for "positive efforts to ensure https://www.wto.org/english/thewto
_e/20y_e/20y_e.htm
that developing countries, and especially the least-developed among • The WTO in brief :
them, secure a share in the growth in international trade commensurate http://www.wto.org/english/thewto_
with … their economic development". e/whatis_e/inbrief_e/inbr00_e.htm
• In brief - The WTO: past, present and
future:
http://www.wto.org/english/thewto_
e/whatis_e/inbrief_e/inbr01_e.htm
• Understanding the WTO – Basics:
http://www.wto.org/english/thewto_
e/whatis_e/tif_e/fact1_e.htm
WTO Members
WTO Member governments are generally grouped as

“developed Members” or “developing Members”, according to WTO FACT FILE
their level of development. More than two thirds of the WTO
Members are developing countries. Location : Geneva, Switzerland
Established : 1 January 1995
There is no agreed definition of what is a “developed” or a Membership : More than 160 Member governments
Secretariat staff : Around 700
“developing” Member in the WTO. It is up to each Member to Official languages : English, French and Spanish
decide if it is to be considered “developing Member” (this is
known as the principle of self-selection). This being said, other
Members can challenge the decision of a Member to be
considered as a developing Member.
Background information and materials
The distinction between “developed” and “developing”
Members is important insofar as developing Members enjoy • See list of WTO Members:
special rights in the WTO. Some developing countries are http://www.wto.org/english/thewto_e/whatis_e/tif_e
considered least developed countries (LDCs). The United /org6_e.htm
Nations Economic and Social Council (ECOSOC) maintains a list • Who are the developing countries in the WTO?:
of the countries that are considered LDCs. Least-developed http://www.wto.org/english/tratop_e/devel_e/d1wh
country Members (LDCs) enjoy additional rights in the WTO. o_e.htm
• Link to Understanding the WTO – developing
countries:
In this course you will also find references to other groups of http://www.wto.org/english/thewto_e/whatis_e/tif_e
Members that receive special attention in the WTO according /dev1_e.htm
to their particular situation. That is the case, for example, of • List of LDC Members:
"small economies". These groups do not create a sub-category http://www.wto.org/english/thewto_e/whatis_e/tif_e
of WTO Members. /org7_e.htm
• Work programme on small economies:
http://www.wto.org/english/tratop_e/devel_e/dev_w
kprog_smalleco_e.htm
The WTO provides a forum for trade negotiations
The WTO provides to its Member governments a forum Background information and materials
for negotiating global trade rules. When countries have
faced trade barriers and wanted them lowered, the Legal documents:
• The Marrakesh Agreement Establishing the WTO (Article
negotiations have helped them to open markets for trade. III:2): http://www.wto.org/english/docs_e/legal_e/04-
wto_e.htm#articleIII
Negotiations in the WTO are conducted directly and
Supplementary information:
exclusively by the Member governments. The WTO was
• Understanding the WTO – Basics:
born out of negotiations and everything it does is the http://www.wto.org/english/thewto_e/whatis_e/tif_e/fac
result of negotiations among its Members. The purpose t1_e.htm
is to reduce trade barriers for the benefit of producers, • Understanding the WTO:
exporters, importers and consumers, while allowing http://www.wto.org/english/thewto_e/whatis_e/tif_e/do
governments to meet legitimate policy objectives. ha1_e.htm
The bulk of the WTO's current work comes from the

1986-94 negotiations called the Uruguay Round and
earlier negotiations under the General Agreement on
Tariffs and Trade (GATT).
The WTO is a system of international trade rules:
The WTO Agreements
International trade rules, concluded as a result of WTO Background information and materials
negotiations, are contained in the WTO Agreements. They are
essentially contracts binding Member governments to keep their Supplementary information:
trade policies within agreed limits. The WTO Agreements contain • See video - What do countries negotiate at the
the global rules for trade in goods, services and trade-related WTO:
aspects of intellectual property rights. http://www.wto.org/english/forums_e/studen
ts_e/students_e.htm
• To find out more about the WTO main
The WTO Agreements recognise that, in certain circumstances, principles:
Members may need to apply trade restrictions to meet certain http://www.wto.org/english/thewto_e/whatis
policy objectives, such as the protection of human health or the _e/tif_e/fact2_e.htm
environment. In those cases, Members are allowed to depart
from the basic principles, but subject to specific conditions.
The WTO Agreements are based on a number of simple and fundamental principles:
Non-discrimination: Members shall not discriminate between their trading partners (most-favoured nation principle);
or between national and foreign like products, services or nationals (national treatment principle).
More open trade: reducing or eliminating obstacles to trade.
Transparency and predictability: traders and Members need to know what are the trade rules around the world
(transparency) and that trade measures will not be raised arbitrarily (predictability).
Special treatment for less developed Members: least developed Members face particular challenges when benefiting
from trade liberalization therefore, they have more time to adjust to the rules, greater flexibility and other special
rights.
The WTO administers and monitors the WTO Agreements
The WTO facilitates the administration of the WTO Background information and materials
Agreements. To this end, WTO Member governments
meet regularly in the various WTO councils and Legal documents:
committees to monitor the implementation of the • The Marrakesh Agreement Establishing the WTO (Article
Agreements. III:1, III:4):
http://www.wto.org/english/docs_e/legal_e/04-
Monitoring is one of the most intense areas of work in the
WTO. WTO councils and committees consider information Supplementary information:
provided by the Members regarding their trade • Understanding the WTO – Basics:
regulations and measures. http://www.wto.org/english/thewto_e/whatis_e/tif_e/fa
ct1_e.htm
They also serve as a forum for discussions on various • The WTO in brief – Part 3: The WTO Agreements:
WTO-related issues. http://www.wto.org/english/thewto_e/whatis_e/inbrief_
e/inbr03_e.htm
• Understanding the WTO: The Agreements:
WTO Members also review periodically each Member's http://www.wto.org/english/thewto_e/whatis_e/tif_e/ag
trade policies and practices under the Trade Policy Review rm1_e.htm
Mechanism (TPRM). These reviews allow the evaluation of
individual Members' trade policies and practices and their
impact on the multilateral trading system (MTS).
The WTO is a place for settling trade disputes
The WTO is also a place for Member governments to Background information and materials
settle their trade disputes. The WTO's procedure for
settling disputes is vital for enforcing the rules. Legal documents:
• The Marrakesh Agreement Establishing the WTO (Article
A dispute commonly arises when a Member adopts a III:3): http://www.wto.org/english/docs_e/legal_e/04-
trade measure that one or more Members consider to be
• The Understanding on Rules and Procedures Governing the
contrary to the obligations under the WTO Agreements. Settlement of Disputes:
When Members are unable to agree on a solution, they http://www.wto.org/english/docs_e/legal_e/28-
can request a panel of independent experts to rule on dsu_e.htm
the dispute.
The procedure for settling disputes is based on the rules Link to Understanding the WTO – Settling disputes:
• Understanding the WTO – The WTO dispute settlement
contained in the Understanding on Rules and Procedures
system: a unique contribution
Governing the Settlement of Disputes (DSU). http://www.wto.org/english/thewto_e/whatis_e/tif_e/dis
p1_e.htm
• More on dispute settlement:
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.ht
m
• The WTO dispute settlement system training module:
http://www.wto.org/english/tratop_e/dispu_e/disp_settle
ment_cbt_e/signin_e.htm
• Map of disputes between WTO Members:
http://www.wto.org/english/tratop_e/dispu_e/dispu_map
s_e.htm
The WTO builds trade capacity in developing countries
Technical assistance and capacity building are core elements

of WTO's work. More than two thirds of WTO Members are
developing countries. The WTO helps these Members to fully Legal documents:
benefit of the multilateral trading system (MTS) in various • Doha Declaration (para.38):
ways. http://www.wto.org/english/thewto_e/minist_e/min0
1_e/mindecl_e.htm#cooperation
The WTO Agreements contain special provisions for
developing countries, including longer periods to implement
• More on building trade capacity:
their obligations and measures to increase their trading http://www.wto.org/english/tratop_e/devel_e/build_
opportunities. The WTO also organizes hundreds of technical tr_capa_e.htm
assistance activities to help developing Members to better • WTO technical assistance and training:
understand and implement WTO rules, as well as to https://www.wto.org/english/tratop_e/devel_e/tecco
participate more effectively in its work. Capacity building also p_e/tct_e.htm
involves providing assistance to build the supply-side capacity • More on trade and development :
http://www.wto.org/english/tratop_e/devel_e/devel_
and infrastructure needed in these countries to expand their
e.htm
trade.
The WTO cooperates with other international institutions
The WTO cooperates with other international institutions Background information and materials
to achieve greater coherence in global economic policy-
making. The WTO is only one part of a broader set of Legal documents:
international organizations. Coherence is essential for • The Marrakesh Agreement Establishing the WTO (Article
Members to design a harmonious international III:5): http://www.wto.org/english/docs_e/legal_e/04-
regulatory framework and in increasing the effectiveness wto_e.htm#articleIII
• Decision on achieving greater coherence in global
of their policies at the national level.
economic policy-making:
The WTO cooperates with the International Monetary dchor_e.htm
Fund and the World Bank to achieve more coherent and
complementary international economic policies. The Supplementary information:
WTO also maintains institutional relations with other • More on the WTO and other organizations:
organizations in diverse trade-related matters. Although http://www.wto.org/english/thewto_e/coher_e/coher_e.
htm
the extent of such cooperation varies, coordination
• More on the "coherence mandate":
between the work of the WTO and that of other http://www.swisslearn.org/wto/module10/e/start.htm
international organizations continues to evolve so as to • More on the Decision on achieving greater coherence in
assist Members in the operation of their economic global economic policy-making:
policies. http://www.wto.org/english/docs_e/legal_e/ursum_e.htm
#Achieving
Why governments join the WTO?
Governments pursue international trade cooperation

driven by diverse political economy considerations,
including both external and internal, such as the promotion
of peace and stability, avoiding protectionism, increasing
market size and insurance against unfavourable trade
policies in other countries. Get your
History
economics
matters
right

Main features of
Supplementary information: the MTS
• 10 benefits of the WTO trading system
https://www.wto.org/english/thewto_e/whatis_e/10ben_e/
10b00_e.htm
• The WTO in brief (video):
http://www.wto.org/english/thewto_e/whatis_e/inbrief_e/i
nbr00_e.htm
M1: The WTO and the Multilateral Trading System (MTS) | Why governments join the WTO? 12
History matters: International trade cooperation and the creation
of the WTO
Governments pursue international trade cooperation driven by

diverse political economy considerations, including both
external and internal, such as the promotion of peace and Introductory videos:
stability, avoiding protectionism, increasing market size and • The WTO in brief (video):
insurance against unfavourable trade policies in other http://www.wto.org/english/thewto_e/whatis_e/inbri
countries. ef_e/inbr00_e.htm
The period between the World Wars was characterized by

instability with respect to trade policy, deteriorating economic
conditions and flagging cooperation, which created the
conditions for war. Trade policy remained in disorderly limbo
until the post-War birth of the modern multilateral trading
system (MTS). A lesson from the first half of the 20th century
is surely that effective and sustainable international trade
cooperation requires a predictable and rule-based institutional
framework. This section constitutes a brief historical journey
from the birth of the GATT to the establishment of the WTO.
From GATT to WTO: the building of an institution
THE GENERAL AGREEMENT ON TARIFFS AND

TRADE (GATT)
The history of the WTO begins with the signing of the General
Agreement on Tariffs and Trade (GATT) in 1947. From 1948 to Background information and materials
1994, before the WTO was created, the GATT provided the
rules for the bulk of world trade and presided over periods that • From GATT to WTO:
saw some of the highest growth rates in international trade. http://www.wto.org/library/flashvideo/video_e.ht
The initial objective was to create an International Trade m?id=6
Organization (ITO) to handle the trade side of international
economic cooperation, joining the two “Bretton Woods” Supplementary information:
institutions, the World Bank and the International Monetary • Link to Understanding the DDA – the GATT years:
http://www.wto.org/english/thewto_e/whatis_e/
Fund.
tif_e/fact4_e.htm
The efforts to establish the ITO failed and the GATT served for
several years as an organization, taking some of the functions
originally intended for the ITO.
THE GATT ROUNDS OF NEGOTIATIONS
The GATT developed rules for the MTS through eight Background information and materials
rounds of trade negotiations. In the early years, the
GATT trade rounds focused on reducing tariffs. Introductory videos:
Following GATT trade rounds covered not only tariffs, • From GATT to WTO:
but also other trade barriers. http://www.wto.org/english/res_e/webcas_e/web
cas_e.htm#video
During the GATT rounds, substantial liberalization for
international trade in goods was achieved and • Link to Understanding the DDA – the GATT years:
fundamental rules were established on the basis of an http://www.wto.org/english/thewto_e/whatis_e/ti
open and non-discriminatory trading system. The f_e/fact4_e.htm
arrival of new Members, in particular developing
countries, during the last years of the GATT, shows that
the MTS was recognized as an instrument for economic
and trade reform. The eighth round, known as the
Uruguay Round, was the most comprehensive round
and led to the creation of the WTO and a new set of
agreements (the current WTO Agreements).
GATT rounds
GATT rounds of trade negotiations
Year Name Subjects Covered Parties
1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960-1961 Dillon Round Tariffs 26
1964-1967 Kennedy Round Tariffs and anti-dumping measures. Section on trade and 62
development.
1973-1979 Tokyo Round Tariffs and non-tariff measures, "framework" agreements. Enabling 102
Clause (development).
1986-1994 Uruguay Round Creation of WTO. Tariffs, non-tariff measures, rules, services, 123
intellectual property, dispute settlement, textiles, agriculture, etc.
• From GATT to WTO: http://www.wto.org/english/res_e/webcas_e/webcas_e.htm#video
• Link to Understanding the DDA – the GATT years: http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm
THE URUGUAY ROUND AND THE CREATION OF THE WTO
The WTO’s creation on 1 January 1995, as a result of the

Uruguay Round, marked the biggest reform of international
trade since after the World War II. Introductory videos:
• From GATT to WTO:
The GATT seemed well established, but it was a provisional http://www.wto.org/english/res_e/webcas_e/we
agreement and organization. Instead, the WTO constitutes an bcas_e.htm#video
international organization with a more comprehensive mandate
and a solid institutional base. The WTO has also expanded both
• Link to Understanding the DDA- the Uruguay
in terms of Membership and substantive coverage. Round:
http://www.wto.org/english/thewto_e/whatis_e/
The WTO Agreements cover not only trade in goods, but also tif_e/fact5_e.htm
trade in services and trade-related aspects of intellectual • The WTO in brief - history:
property rights. The original GATT still exists as the WTO’s http://www.wto.org/english/thewto_e/whatis_e/
general agreement on trade in goods. inbrief_e/inbr01_e.htm
The common goal of multilateral trade liberalization in the

context of a rules-based system resulted in the continuous
accession of new countries to the organization, adding to the
heterogeneity of the Membership. The ability of the GATT/WTO
system to accommodate the different needs of its Members has
been an important factor in its success.
Get your economics right: Basic international trade theory
The economic case for an open trading system based on globally Background information and materials
agreed rules is simple enough and rests largely on commercial
common sense. But it is also supported by evidence: the experience of Supplementary information:
world trade and economic growth since the Second World War. During • Did you know there is a WTO E-Learning course
the first 25 years after the War, world economic growth averaged on economic underpinning?
about 5% per year, a high rate that was partly the result of lower trade https://wtolearning.csod.com
• Understanding the WTO: the case for open
barriers.
trade
http://www.wto.org/english/thewto_e/whatis
The data show a definite link between freer trade and economic _e/tif_e/fact3_e.htm
growth. Economic theory points to strong reasons for the link. All • Interested in the latest World Trade Report?
countries, including the poorest, have assets - human, natural, https://www.wto.org/english/res_e/reser_e/w
financial - which they can employ to produce goods and services for tr_e.htm
their domestic markets or to compete overseas. Economics tells us
that countries can benefit when these goods and services are traded.
This Module will introduce basic international trade theory, including

what are the gains from trade, how trade can be driven by differences
among countries and how trade allows countries to gain from
specialization. It will also introduce the link between trade and
economic growth.
Why do countries trade?
Countries trade because they are different. They have different technologies or have a different amount of capital and
labour, or they trade because they produce different varieties of the same good.
In the first case, trade generates gains because it allows countries to specialize in the production of the good they can
produce relatively more efficiently or that uses intensively the factor that they are more endowed with.
In the second case, trade generates gains because consumers like variety and trade provides access to different varieties of
goods produced all over the world. By increasing the variety of goods consumers can access and buy, trade makes
consumers better off.
What are the gains from trade?

Economic theory has identified several sources of gains from trade:
Gains from access to a
Gains from better utilization Gains from increased Gains from innovation and
broader variety of goods
of resources competition technology transfer
and services
Gains from specialization Foreign competition has an Consumers benefit from the Trade enhances the
and from exploitation of effect on firms' pricing access to a broader variety incentive to innovate. The
economies of scale decisions. Overall, the of goods and services. They larger size of the market and
(producing on a larger scale. opening up to trade reduces have available not only the competition from abroad
mark-ups of price over costs varieties of goods produced increase the incentive of a
(the difference between the in their own country, but firm to invest in research
cost of production of a good also those produced abroad. and development. Trade
and its selling price). also favours technology
transfer.
The next section will introduce the gains from specialization and, to a lesser extent, the gains from exploitation of
economies of scale.
Gains from specialization
Specialization is the most important source of gains from trade.

How does it work?
Trade allows countries to specialize in the production of the

goods that they can produce relatively MORE efficiently and
Country A Country B
import the goods that they produce relatively LESS efficiently.
The exchange of these goods benefits both countries.
This is known in economic theory as absolute advantage.

Adam Smith described how absolute advantage applies in the
context of international trade. To illustrate this, let’s look at the
following example:
Suppose country A is better than country B in producing roses,

and country B is better than country A in producing computers.
This is because country A can produce more roses than
Country B with the same number of employees per hour, while
country B can produce more computers than country A under
the same conditions. Then, it will be an obvious case that each
country will specialize in the product that it can produce most
efficiently and then trade their products: country A will export
roses and import computers from B, while country B will export
computers and import roses from A.
Can a country with no absolute advantage gain from trade?
The answer is YES. There are potential gains from trade for all trading partners, regardless how countries compare
absolutely.
A country does not have to be better at producing something than its trading partners to benefit from trade (absolute
advantage). It is sufficient that it is relatively more efficient than its trading partners (comparative advantage).
The theory of comparative advantage states that when two countries specialize in producing the good in which they have
a comparative advantage, BOTH economies gain from trade, even if one country is more efficient in producing both goods.
Each country will export the good for which it has a comparative advantage.
A model of comparative advantage based on differences in labour productivity, which results from differences in
technology, was first introduced in the early 19th century by the economist David Ricardo.
But first:
What does "comparative advantage“ mean? What is "opportunity cost"?
The opportunity cost of a certain good, e.g. roses, in terms of

A country has a comparative advantage in producing a certain another goods, e.g. computers, is the number of roses that
good, if the opportunity costs of producing that good in terms could have been produced with the resources used to produce
of other goods, is lower in that country than it is in another a given number of computers (see also Example 1 – below).
country (see also Example 1 – below). Opportunities costs differ across countries because of
differences in technologies.
SPECIALIZATION FROM DIFFERENCES IN TECHNOLOGIES: THE RICARDIAN MODEL
The Ricardian Model shows how there is scope for mutual gains when FACT FILE
each country specializes its production towards products for which it has
Name : David Ricardo
low opportunity costs relative to other products. It is based on Born : 19 April 1772
differences in technologies among countries. Died : 11 September 1823
Nationality : British
In the Ricardian Model there is only one factor of production: labour.
Therefore, comparative advantages only arise because of differences in
labour productivity, which result from differences in technology.
Example 1 – comparative advantage and opportunity costs
Suppose that there are only 2 countries in the world, What about comparative advantage?
Country A and Country B – and 2 sectors – roses and
computers. A worker employed in the roses sector would For Country B the opportunity costs, in terms of roses, of
produce 5 million roses in Country A, and eight million producing one thousand computers less, is 8 million
roses in Country B. Another worker employed in the roses. What about Country A? If Country A had to
computer sector would produce 200 computers in produce one thousand computers, it would have to
Country A and one thousand computers in Country B. employ 5 people in the computer sector (5 workers x 200
computers), because each employee produces only two
One worker's output: hundred computers in Country A. In terms of roses, this
would imply a cost of 25 million roses (5 workers x 5
Roses Computers
million).
Country A 5 million 200
Country B 8 million 1,000 To sum up, while in Country B the opportunity costs of
1000 computers is 8 million roses, in Country A the
opportunity costs of 1000 computers is 25 million roses.
In this case, Country B has an absolute advantage in the
Since the opportunity costs, in terms of roses, of
production of both goods (whatever the sector, one
producing computers are lower in Country B, Country B
worker would produce more units of each good when
has a comparative advantage in computers, while Country
employed in Country B).
A has a comparative advantage in roses. The theory of
comparative advantage tells us that if Country A and B
open up to trade, then Country A will specialize in the
production of roses and Country B will specialize in the
production of computers.
Example 2 – specialization from differences in technology
Overall the global production of roses will increase by 2

Suppose now that in Country A 2 workers are moved
million units. This is because there will be an increase of
from the production of computers to the production of
10 million roses in Country A and a reduction of 8 million
roses. This implies that Country A would produce four
in Country B. In the computer sector there would be 600
hundred computers less (each worker in A produces 200
computers more produced globally. 1000 computers
computers), and will produce 10 million roses more (each
more produced by Country B and four hundred computers
worker in A produced 5 million roses). Suppose also that
less produced by Country A. Since specialization increases
at the same time, Country B will move one worker from
the global production of both goods (i.e. trade makes
the production of roses to the production of computers.
available to each country a higher quantity of each of the
Therefore, Country B would produce eight million roses
goods), all countries can gain from trade.
less (each worker in B produces 8 million roses) and one
thousand computers more (each worker in B produces
1000 computers).
Roses Computers
Country A + 10 million - 400
Country B - 8 million + 1,000
Total + 2 million + 600
SPECIALIZATION FROM DIFFERENCES IN ENDOWMENTS: FACTOR PROPORTION THEORY - THE
HECKSCHER-OHLIN MODEL
In reality, trade is not just determined by technological differences, but it also

FACT FILE
reflects differences in factor endowments across countries. For example, Canada
exports forestry products to the United States not because its workers are more Name : Eli Heckscher
Born : 24 November 1879
efficient in forestry, but because Canada is more endowed with forests. Died : 23 December 1952
Nationality : Swedish
To explain the importance of resources in trade two economists, Heckscher and
Ohlin, have developed a theory known as the "factor proportion theory". This
theory essentially says that countries will export products that use their
abundant and low-cost factors of production, and import products that use the
countries' scarce factors.
FACT FILE
For example, in a capital abundant country, the cost of capital will tend to be Name : Bertil Gotthard Ohlin
relatively low. As a consequence, the cost of production of the capital intensive Born : 23 April 1899
Died : 3 August 1979
product, and its price, will tend to be relatively low. The opposite will occur in a Nationality : Swedish
labour abundant country – wages will tend to be relatively low and the cost of
the labour intensive products will be relatively low. Differences in relative prices
of the two goods will lead to trade.
Both countries will produce more of the good on which they have a comparative
advantage. The capital abundant country will tend to specialize in the production
of the capital intensive goods and export this product, while the labour abundant
country will tend to specialize in the labour intensive good and export that
product.
Like in the case of the Ricardian Model, also in the Heckscher and Ohlin model, it
is possible that the global production of both goods may increase with trade. It is
therefore possible for both trading economies to consume more of both goods
than in the absence of trade and therefore, both countries gain from trade.
TRADE BETWEEN SIMILAR COUNTRIES - GAINS FROM ECONOMIES OF SCALE
An important point to bear in mind is that the Ricardian Model and the FACT FILE
Heckscher-Ohlin Model explain trade between different countries and
Economies of scale
different goods. In both models countries trade because they are different Is a term that refers to the reduction
– they are different in terms of their technological level or in terms of of per-unit costs through an increase
factor endowments. Countries specialize in the production of the good for in production volume.
which they have a comparative advantage and export that product.
However, in reality most of trade occurs between similar countries.
Furthermore, between one quarter and one half of world trade is intra-
industry trade, that is, trade between goods that fall in the same industrial
classification. The Heckscher-Ohlin and the Ricardian Model do not
explain intra-industry trade.
Intra-industry trade relies on economies of scale. In many industries, the

larger the scale of production, the more efficient the production.
Example - Gains from economies of scale
Because of economies of scales, the use of twice as

Suppose there are 2 countries: Country A and Country B,
many workers as before in the production of video
and 2 goods: video cameras and bicycles. Suppose that
cameras will more than double the output of video
both the production of video cameras and the production
cameras produced in Country A. For example, the
of bicycles are subject to economies of scale, so that
production of video cameras in Country A will
doubling the number of workers employed in each sector,
increases to 25. Similarly, in Country B, the
more than doubles the output of the sector. Assume that
production of bicycles will rise to 15. Since all
the 2 countries are identical, that is, they have the same
workers have been moved to the other sector, no
technologies and same endowment of resources, and that
bicycles will be produced in Country A, and no video
labour is the only endowment.
cameras will be produced in Country B.
Without trade With trade
A B World A B World WHAT HAPPENS TO WORLD PRODUCTION?
Video-cameras 10 10 20 25 0 25
Bicycles 5 5 10 0 15 15 Overall the world will gain. There will be 25 video
cameras available and 15 bicycles available.
Country A employs 10 workers in the video camera sector, Therefore, the potential exists for both countries to
and produces 10 video cameras, and employs 10 workers in be better off with trade than without trade.
the production of bicycles and produces 5 bicycles. The
situation is identical in Country B – so that overall the world
will produce 20 video cameras and 10 bicycles. Suppose
now that all production of video cameras gets concentrated
in Country A, while that of bicycles concentrates in Country
B. Then, Country A will employ 20 workers in the
production of video cameras and Country B will employ 20
workers in the production of bicycles.
Summary – Gains from trade
Between different countries – gains stem from specialization based on:
• Differences in technologies among countries (The Ricardian Model).

• Differences in relative endowments of factors of production (The Heckscher-Ohlin Model).
Between similar countries:
• The existence of economies of scale.
Who gains from trade?
Example - Income distribution effects of trade:
In a capital abundant country, trade induces a Even though each country gains overall, trade generates
reallocation of resources towards the capital intensive income distribution effects, so there will be groups in a
goods – therefore more capital will be demanded and country who will gain and groups who will lose.
this will increase the domestic price of capital. Owners of
the capital will therefore gain more because returns to The Stolper-Samuelson Theorem helps us to identify
capital increase. What will happen to the demand of winners and losers. Two economists, Stopler and
labour in this country? – This is the relatively scarce Samuelson, showed that free trade raises the earnings of
factor, where the country has not got a comparative the country's relatively abundant factor and lowers the
advantage. The demand for labour will go down and earnings of the relatively scarce factor.
wages will go down. To sum up, in the capital abundant
country, owners of capital will gain and owners of labour
will lose.
A consequence of these redistributive effects is likely to

be that owners of the relatively abundant factor
(exporters) will support trade, while owners of the
relatively scarce factor will oppose free trade.
It is important to bear in mind that despite income

distribution effects, the country overall gains – that is
gains outweigh losses. In other words, the gains from
better utilization of resources (specialization), access to a
broader variety of goods and increased competition, are
higher than the costs derived from the redistributive
effects of trade.
Trade liberalization and adjustment Free trade vs. Protectionist policies
costs
Understanding the potential distributive effects of trade International trade theory asserts the benefits of free trade.
may help to anticipate and minimize the adjustment In reality, however, many countries adopt protectionist
costs derived from trade liberalization. Adjustment costs policies.
are the costs incurred, for example, by displaced workers
(e.g in the import-competing sector) that have to look for As explained above, when a country liberalizes trade, some
another job. Adjustment costs are also the costs of a firm people gain and others lose. In particular, the export sector is
that needs to invest in order to adjust to the new market likely to gain from opening up to trade, while the import
conditions. competing sector is likely to lose. Therefore, in most cases
protectionist policies are the consequence of the lobbying
Although these costs are unavoidable, as they are a activity of industries in the import-competing sectors that
direct consequence of the reallocation effect of trade wish to be protected against competition from the rest of the
liberalization, the size of these costs depends on a world.
number of characteristics of the domestic market (e.g.
functioning of credit and labour markets, quality of There are theoretical arguments aimed at justifying the use
infrastructure and quality of domestic institutions). of protection, such as the infant industry argument for
protection. The argument is that the country may have a
The fact that there is additional income as a result of potential comparative advantage in the manufacturing sector,
trade means that resources are available for but the industry is too young and too little developed to
governments to redistribute the benefits from those who compete at the international level. Although at first sight
gain from trade to those who lose (e.g. supplying social reasonable, this theory is not without drawbacks.
safety nets or through appropriate redistributive tax The evidence shows that even when the protected sector did
systems). develop, it needed continued government intervention to
stay in the market. In other words, infant industry protection
did not led to the development of a competitive industry that
eventually could face its competition in the international
market. That is because the expected results would be
dependent on the ability of a government to identify which
industries have a potential comparative advantage.
Trade liberalization and development
So far, we have been looking at the reasons why countries trade, and at Background information and materials
the gains and the costs associated with trade liberalization. But, what is
the linkage between trade and development? Supplementary information:
• Did you know there is a WTO E-Learning
Development is a process in which people through their work – investing course on economic underpinning?
and trading with other countries are able to secure their basic needs – https://wtolearning.csod.com
• Understanding the WTO: the case for open
for example food, education, health, comfortable living standards and
trade
freedom. In order to obtain all this, people need an adequate level of http://www.wto.org/english/thewto_e/wh
income. atis_e/tif_e/fact3_e.htm
• Interested in the latest World Trade
Trade liberalization can help countries to better utilize their resources Report?
through specialization. It is a more efficient use of resources that https://www.wto.org/english/res_e/reser_
provides the potential for a higher level of income and therefore, a e/wtr_e.htm
higher level of development. The impact of trade on growth, however, is
conditional upon other policies being sound.
There is generally a positive relationship between openness to trade and

economic performance, which – depending on the pace and pattern of
growth – is important for achieving economic growth, employment and
poverty reduction. This is shown by the experience of developing
countries that have succeeded in benefiting from the expansion of
global markets.
Main features of the WTO
This section highlights some of the main features of the WTO’s trading system. It also explains some of the reasons
why governments join the WTO.
As you will study in this course, the WTO provides to its Member governments, amongst others:
 Predictable and transparent rules for the trade of goods and services;
 Enhanced market access opportunities and equal treatment;
 It helps to promote peace, by avoiding trade wars and retaliation ;
 An opportunity to participate in the shaping of global trade rules ;
 To deal with pressures for protectionism.
Predictable and transparent rules for the trade of goods and services
Member governments and more particularly, private Background information and materials
economic operators, need to have a stable and transparent
framework of rules for their commercial activities. The WTO Supplementary information:
provides a predictable system of multilateral trade rules, • See video - What do countries negotiate at the
which are contained in the WTO Agreements. This system is WTO:
based on a number of basic and fundamental principles that http://www.wto.org/english/forums_e/students_e
/students_e.htm
apply to all Members: non-discrimination, more open trade,
• To find out more about the WTO main principles:
transparency and predictability, and special treatment for http://www.wto.org/english/thewto_e/whatis_e/ti
developing countries. f_e/fact2_e.htm
At the same time, the WTO Agreements give policy space to

the Members in order to protect legitimate policy objectives,
such as the protection of consumers or to prevent the spread
of diseases. In those cases, Members are allowed to depart
from the basic principles, but subject to certain conditions.
The aim is to strike a balance between trade liberalization
and the flexibility Members need to pursue their policy
objectives.
Enhanced market access opportunities and equal treatment
When a Member lowers a trade barrier or opens up a market at the multilateral level, at the same time, it accesses
more freely the markets of other Members. The reduction of trade barriers allows Members to gain from increased
market access opportunities in other Members' markets and therefore, to improve welfare by expanding export
volumes and revenues.
Furthermore, the most-favoured nation (MFN) principle ensures that every time a WTO Member lowers a trade barrier
or opens up a market, it has to do so for the similar goods or services from all Members. That means that all WTO
Members - regardless their economic size or level of development - benefit from the best possible treatment given by
each WTO Member.
Dealing with domestic pressures for Avoid trade wars and retaliation
protectionism
As explained in the previous section, trade liberalization The WTO promotes peace by providing a stable and
generates income distribution effects, so there will be predictable system of rules and an efficient mechanism for
groups who will gain and groups who will lose. The dealing with trade disputes among its Members. If trade
import competing sector is likely to lose from opening up flows smoothly and countries enjoy a healthy commercial
to trade, while the export sector is likely to gain. relationship, conflicts are less likely. Moreover, smoothly-
flowing trade stimulates economic growth, which in turn
The outcome of a trade negotiation has to be a balance reduces the possibility of conflicts.
of interests. Governments can counterbalance the
lobbying pressure of the import-competing sector against
liberalization by arguing that the overall package goes in The trade wars in the 1930s are proof of how
the interests of the country as a whole. protectionism can easily plunge countries into a situation
where no one wins and everyone loses. By coordinating
Furthermore, by "tying the hands" of a government, an multilateral trade rules with other countries, Members are
international trade agreement may help to make credible able to avoid tit-for-tat trade restrictions or trade
policy commitments affecting the private sector that it retaliation.
would not be able to maintain without the agreement.
The WTO dispute settlement system plays a key role in
avoiding trade conflicts and unilateral retaliation. It
provides a system where trade conflicts among Members
are solved on the basis of rules rather than wars.
Participate in the shaping of global trade rules
The WTO Agreements are the result of negotiations among all Background information and materials
Members and therefore, Membership means a balance of rights
and obligations. Supplementary information:
• Understanding the WTO – the WTO,
Without a multilateral trading system such as the WTO, smaller Membership, alliances
http://www.wto.org/english/thewto_e/what
countries would have to deal with each of the major economic
is_e/tif_e/org3_e.htm
powers individually. The more powerful countries would be free to
impose their trade policies on their small trading partners.
Furthermore, multilateral trade negotiations provide Members with

an opportunity to increase their bargaining power by forming
alliances or coalitions with other countries that have common
interests and, in that way, participate more effectively in the
shaping of global trade rules.
EXAMPLE: THE LDC CONSULTATIVE GROUP
The WTO’s LDC Consultative Group was established in 2001 to coordinate LDC issues across the WTO. It provides a
forum for LDC delegations to articulate their positions and to pursue common interests. The group, which brings
together all LDC Members and observers in the WTO, has a coordinator elected on a rotating basis from among its
Members. The coordinator advances LDC interests in the negotiations as well as in the regular work of the WTO and
also represents the group in key negotiating processes.
Today the LDC Group is one of the more active groups in the WTO. Most of the LDC proposals submitted in the
negotiations have emerged from the work of this group, which also plays a leading role in preparing the LDC trade
ministers meetings that set out the broad parameters for LDCs’ participation in the WTO. This increased level of
participation of the LDCs in the WTO bodes well for further integration of LDCs into the multilateral trading system.
How does the WTO work?
The WTO is a Member-driven international organization. All

decisions in the WTO are taken by its Member governments,
normally by consensus of all the Members. Therefore, WTO
rules imposing disciplines on Members’ policies are the
outcome of negotiations among WTO Members.
Institutional
Decision-making
In the WTO, the Members take decisions through various structure
councils and committees integrated by the whole WTO
Membership. WTO committees meet regularly to administer
and monitor the implementation and functioning of the
WTO Agreements. The WTO has also a Secretariat
composed of international officers who provide support to
the WTO bodies.
M1: The WTO and the Multilateral Trading System (MTS) | How does the WTO work? 38
The institutional structure of the WTO
To see a more detailed WTO organizational chart: http://www.wto.org/english/thewto_e/whatis_e/tif_e/org2_e.htm
Ministerial Conference
General Council (also DSB and TPRB)
Councils (Goods, Services and Intellectual Property)
Committees
Subsidiary Bodies
Secretariat
Ministerial Conference - Top most decision making body
The Ministerial Conference is integrated by Background information and materials

representatives of all WTO Members, and shall meet at
least once every two years. It can take decisions on all Supplementary information:
matters under any of the multilateral trade agreements, • Legal basis – Marrakesh Agreement Establishing the WTO
in accordance with the decision-making procedures (Article IV.1):
contained in the WTO Agreement Establishing the WTO. http://www.wto.org/english/docs_e/legal_e/04-
wto_e.htm#articleIV
• To find more about WTO Ministerial Conferences:
The following table contains information about each http://www.wto.org/english/thewto_e/minist_e/minist_e.
Ministerial Conference. htm
• Ministerial declarations and decisions:
http://www.wto.org/english/thewto_e/minist_e/min_decl
aration_e.htm
Month/Year Place/Name Main Decisions/Declarations
December 1996 Singapore Singapore Ministerial Declaration (WT/MIN(96)/DEC)
Ministerial Declaration on Trade in Information Technology Products aimed at eliminating all duties in six
categories of IT products (referred to as the "ITA initiative") - WT/MIN(96)/16)
May 1998 Geneva Ministerial Declaration (WT/MIN(98)/DEC), that underlined the importance of the multilateral rule-based
trading system, celebrated the 50th Anniversary of the GATT and reaffirmed the commitments and
assessments made in Singapore
Declaration on Global Electronic Commerce (WT/MIN(98)/DEC/2)

November- Seattle Ministers did not reach an agreement to adopt any Decision or Declaration
December 1999
November 2001 Doha Ministerial Declaration (WT/MIN(01)/DEC/1 ''Doha Declaration''), which launched the "Doha Development
Agenda" (DDA).
Decision on Implementation-Related Issues and Concerns (WT/MIN(01)/17).
Declaration on the Agreement on Trade-Related Aspects of Intellectual Property Rights and Public Health
(WT/MIN(01)/DEC/2).
September 2003 Cancun Ministers adopted a statement in which they reaffirmed their commitments to complete the negotiations
under the DDA.
December 2005 Hong Kong Ministerial Declaration (WT/MIN(05)/DEC "Hong Kong Declaration") reaffirming the Ministerial Declarations
and Decisions adopted at Doha and the General Council Decision of 1 August 2004 - the ''July 2004
Framework''- WT/L/579).
Ministers agreed to create a new WTO work programme on Aid-for-Trade (Hong Kong Declaration,
paragraph 57).
November- Geneva The general theme for discussion was the WTO, the MTS and the global economic environment. Ministers
December 2009 reviewed the functioning of the WTO, including the Doha Round of negotiations.
Month/Year Place/Name Main Decisions/Declarations
December 2011 Geneva In parallel to the Plenary Session, 3 Working Sessions took place with the following themes: “Importance of the
Multilateral Trading System and the WTO”, “Trade and Development” and “Doha Development Agenda”. The
Conference approved the accessions of Russia, Samoa and Montenegro. Ministers also adopted a number of
decisions. For more information, please refer to:
http://www.wto.org/english/thewto_e/minist_e/min11_e/min11_e.htm
December 2013 Bali Ministers adopted the “Bali Package” which comprises a series of decisions aimed at streamlining trade,
allowing developing countries more options for providing food security, boosting least-developed countries’
trade and helping development more generally. They also adopted a number of routine decisions and
accepted Yemen as a new Member of the WTO. For more information, please refer to: https://mc9.wto.org/
December 2015 Nairobi The "Nairobi Package" contains a series of 6 Ministerial Decisions on agriculture, cotton and issues related to
least-developed countries. Trade Ministers on 16 December welcomed the conclusion of negotiations on the
accessions of Liberia and Afghanistan at the Tenth Ministerial Conference. For more information, please
refer to:
https://www.wto.org/english/thewto_e/minist_e/mc10_e/mc10_e.htm
December 2017 Buenos Aires The Eleventh Ministerial Conference (MC11) took place from 10 to 13 December 2017 in Buenos Aires,
Argentina. The Conference ended with a number of ministerial decisions, including on fisheries subsidies and
e-commerce duties, and a commitment to continue negotiations in all areas. For more information, please
refer to: https://www.wto.org/english/thewto_e/minist_e/mc11_e/mc11_e.htm.
General Council - Second tier in WTO structure
The General Council is also formed by representatives of Background information and materials
all WTO Members, usually Ambassadors or Permanent
Representatives, based in Geneva. It acts on behalf of the Supplementary information:
Ministerial Conference on all WTO affairs, when the • Legal basis – Marrakesh Agreement Establishing the WTO
Conference is not in sessions. (Articles IV.2, IV.3 and IV.4):
The General Council meets regularly to carry out all the wto_e.htm#articleIV
• To find out more about the General Council:
functions of the WTO. It has a Chairperson (a Member's http://www.wto.org/english/thewto_e/gcounc_e/gcounc_
representative, normally an Ambassador), who is elected e.htm
by all the Members, every year, to organise the work of
the General Council.
The General Council also meets as the Dispute

Settlement Body (DSB) and as the Trade Policy Review
Body (TPRB).
AS THE DISPUTE SETTLEMENT BODY (DSB)
As introduced above, the WTO acts as a forum for settling Background information and materials
trade disputes among its Members in accordance to the
procedures elaborated in the Understanding on Rules and Supplementary information:
Procedures Governing the Settlement of Disputes (DSU). • More on WTO dispute settlement:
http://www.wto.org/english/tratop_e/dispu_e/disp
u_e.htm
The settlement of disputes in the WTO is administered by the
• Map of WTO disputes among Members:
Dispute Settlement Body (DSB). The DSB, among others, http://www.wto.org/english/tratop_e/dispu_e/disp
establishes panels of independent experts to resolve the u_maps_e.htm
disputes, adopts the rulings of the panels, and oversees the
implementation of those rulings.
AS THE TRADE POLICY REVIEW BODY (TPRB)
WTO Members meet regularly to review each Member's

Background and supplementary information:
national trade policies under the Trade Policy Review
Mechanism (TPRM). The TPRM is administered by the Trade • Doha Ministerial Declaration (paragraph 46):
Policy Review Body (TPRB). The surveillance of national trade http://www.wto.org/english/thewto_e/minist_e/m
policies through the TPRB provides a means of encouraging in01_e/mindecl_e.htm
transparency both domestically and at the multilateral level.
TRADE NEGOTIATIONS COMMITTEE (TNC)
The Trade Negotiations Committee (TNC) was set up by the Doha Ministerial Declaration to oversee the negotiations
mandated under the Doha Development Agenda (DDA). The TNC is chaired by the Director-General of the WTO.
The TNC created a number of subsidiary negotiating bodies to handle different subjects that form part of the DDA,
including the Special Sessions of various Committees or Councils that have a mandate to negotiate.
Councils for Goods, Services and Subsidiary Bodies
Intellectual Property
The three Councils operate under the guidance of the Several other subsidiary bodies, which focus on horizontal
General Council and are also open to all WTO issues, report to the General Council directly. They cover
Members. issues such as trade and environment, trade and
development, regional trading arrangements and accessions
 Council for Trade in Goods: it oversees all the issues of new Members. They are open to all WTO Members. The
related to the WTO Agreements on trade in goods. bodies that are of a permanent nature are normally called
It supervises the work of Committees responsible "Committees" or "Working Groups", while those established
for specific subjects (e.g. agriculture, market access, on a temporary basis are called "Working Parties".
customs valuations, rules of origin, sanitary and
phytosanitary measures, etc).
 Council for Trade in Services: it oversees all issues Background information and materials
related to the General Agreement on Trade in
Services (GATS). It has also subsidiary bodies.
• Legal basis – Marrakesh Agreement Establishing the WTO
 Council for Trade - Related Aspects of Intellectual (Articles IV.7): http://www.wto.org/english/docs_e/legal_e/04-
Property Rights (TRIPS): it oversees all issues related wto_e.htm#articleIV_7
to the TRIPS Agreement.
• Legal basis – Marrakesh Agreement Establishing the
WTO (Articles IV.5):
wto_e.htm#articleIV_5
WTO Secretariat
The Secretariat is headed by a Director-General,

appointed by the Ministerial Conference. Since decisions WTO FACT FILE
are taken by Members only, the Secretariat has no
decision-making powers. Location : Geneva, Switzerland
Established : 1 January 1995
Membership : More than 160 Member governments
The Secretariat is located in Geneva and has around 700 Secretariat staff : Around 700
staff who are nationals from WTO Members and cannot Official languages : English, French and Spanish
seek or accept instructions from any government or any
other authority external to the WTO in the discharge of
their duties. Its main duties include supplying technical
support for the various councils and committees,
providing technical assistance for developing countries,
and proving information to the public. The Secretariat
also provides legal assistance in the dispute settlement
process and advises governments wishing to become
Members of the WTO.
Decision-making
The WTO continues GATT’s tradition of making decisions not by voting Background information and materials
but by consensus (*). Where consensus is not possible, the WTO
agreement allows for voting - a vote being won with a majority of the Supplementary information:
votes cast, unless otherwise provided in the WTO Agreement. At • Legal basis – Marrakesh Agreement
meetings of the Ministerial Conference and the General Council, each Establishing the WTO (Articles IX):
WTO Member shall have one vote. http://www.wto.org/english/docs_e/legal_e
/04-wto_e.htm#articleIX
Decisions in the WTO are taken through its councils and committees,
whose Membership consist of all WTO Members. As explained above,
the top-most decision making body is the Ministerial Conference.
(*) Note: The body concerned shall be deemed to have decided by consensus on
a matter submitted for its consideration, if no Member, present at the meeting
when the decision is taken, formally objects to the proposed decision.
Informal consultations play a vital role
Since generally decisions are made by consensus, without voting, informal consultations within the WTO play a vital
role in bringing a diverse Membership to an agreement. More difficult issues may be addressed in smaller groups. A
common recent practice is for the chairperson of a negotiating group to attempt to forge a compromise by holding
consultations with delegations individually, in twos or threes, or in groups of 20-30 of the most interested delegations.
These smaller meetings have to be handled with sensitivity. The key is to ensure that everyone is kept informed about
what is going on (the process must be “transparent”) even if they are not in a particular consultation or meeting, and
that they have an opportunity to participate or provide input (it must be “inclusive”).
Informal consultations in various forms play a vital role in allowing consensus to be reached. At the end, decisions are
taken by all Members and by consensus.
How to join the WTO?
Before we said that the WTO has almost a global

Membership. More than 160 governments are Members of
the WTO. Since the WTO came into force on 1 January 1995,
around 36 governments have joined the organization .
Who can apply
The Process of
Any government wishing to become a Member of the WTO for WTO
Accession
has to go through an accession process, which involves Membership?
negotiating with the WTO Members. The accession process
is one of learning and preparation for WTO Membership.
Each accession is unique and negotiated on a case-by-case Technical
basis, taking into account the particular situation of the Assistance for
acceding
acceding country. governments
• More on accessions:
http://www.wto.org/english/thewto_e/acc_e/acc_e.htm
• Summary table of on-going accessions:
http://www.wto.org/english/thewto_e/acc_e/status_e.htm
M1: The WTO and the Multilateral Trading System (MTS) | How to join the WTO? 49
Who can apply for WTO Membership?
Intergovernmental organizations, such as the WTO, are Background information and materials
normally made up of states. The vast majority of WTO
Members are states. However, besides states, also a Legal documents:
separate customs territory which possesses full autonomy • The Marrakesh Agreement Establishing the WTO
in the conduct of its external commercial relations can (Article XII):
become Member of the WTO. Examples of separate http://www.wto.org/english/docs_e/legal_e/04-
wto_e.htm#articleXII
customs territories that became WTO Members are
• More on who can be a Member of the WTO:
Macao, China and Hong Kong, China. http://www.wto.org/english/tratop_e/devel_e/d1wh
o_e.htm
The Process of Accession
The process of accession starts with a written request from the

acceding government indicating its wish to join the organization. This
request is considered by the General Council, which establishes a
working party - open to all interested WTO Members - to examine the
application. After the working party is established, the government
negotiating accession becomes an observer to the General Council.
The government applying for Membership has to submit a

memorandum covering all aspects of its trade regime, which is
examined by the working party. The acceding government has to
engage in multilateral negotiations on the general terms and
conditions of accession including transitional periods to implement its
commitments. At the same time, the applicant government engages in
bilateral negotiations with interested Members on concessions and
commitments on market access for goods and services. The results of
both multilateral and bilateral negotiations are consolidated into a
document which is part of the final “accession package”. Since 1995
decisions on accessions are taken by consensus in accordance with
WTO practice.
Technical Assistance for acceding governments
Acceding governments benefit from WTO technical Background information and materials
assistance, which plays a key role in helping them face
the challenges of the accession process. Legal documents:
• The Marrakesh Agreement Establishing the WTO (Article XII):
The special position of LDCs is acknowledged. WTO http://www.wto.org/english/docs_e/legal_e/04-
Members have adopted guidelines for the accession wto_e.htm#articleXII
• Relevant WTO provisions:
of LDCs in order to facilitate their accession. The
http://www.wto.org/english/thewto_e/acc_e/acc7_3_e.htm
implementation of the guidelines is reviewed on a
regular basis. Supplementary information:
• WTO website:
WTO website - includes basic information, news, list http://www.wto.org/english/thewto_e/acc_e/acc_e.htm
of Members in process of accession and case studies • Accessions: Expanding world trade and strengthening WTO rules:
of Members that successfully acceded to the WTO. • http://www.wto.org/english/thewto_e/20y_e/acc_brochure2015_
e.pdf
• How to become a Member of the WTO (incl. a technical note):
https://www.wto.org/english/thewto_e/acc_e/acces_e.htm
• Guidelines – LDCs:
http://www.wto.org/english/thewto_e/acc_e/cbt_course_e/annex
4_e.doc
• Handbook on accessions:
http://www.wto.org/english/thewto_e/acc_e/cbt_course_e/signin
_e.htm
E-Learning course:
• Did you know there is a WTO E-Learning course on Accessions?
https://wtolearning.csod.com/
What are the WTO Agreements?
In previous pages you have seen references to the WTO

Agreements. What are these agreements?
Most of the WTO Agreements were negotiated during

the Uruguay Round. This "package" includes about 60 The basic
agreements and Decisions totalling 550 pages, as well as structure of Multilateral
the original GATT 1947. Since 1994, negotiations have the WTO Agreements
produced additional legal texts which have focused on Agreements
market access commitments (*).
The conceptual structure is reflected in the way the legal

texts are organized. The short Marrakesh Agreement
Establishing the WTO, which serves as an "umbrella
agreement", sets up the legal and institutional
foundations of the WTO.
(*) Note: They include decisions on financial services, basic

telecommunications, and maritime transport (under GATS), and
information technology products (under GATT).
M1: The WTO and the Multilateral Trading System (MTS) | What are the WTO Agreements? 53
The basic structure of the WTO Agreements
The Marrakesh Agreement Establishing the WTO (called in this course "Agreement Establishing the WTO") includes 4
Annexes:
Annex 1 is divided into three sections

• Annex 1A, containing the revised General Agreement on Tariffs and Trade (GATT), the other agreements governing
trade in goods, and a protocol which ties in individual countries’ concessions on goods (schedules on goods).
• Annex 1B, the General Agreement on Trade in Services (GATS), texts on specific services sectors, and individual
countries’ specific commitments (schedules on services) and exemptions.
• Annex 1C, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).
Annex 2
• Sets the rules and procedures for dispute settlement contained in the "Understanding on Rules and Procedures
Governing the Settlement of Disputes" (DSU).
Annex 3
• Provides for regular reviews of developments and trends in national and international trade policy under the "Trade
Policy Review Mechanism" (TPRM).
Annex 4
• Covers the Plurilateral Trade Agreements which are within the WTO framework but have a limited Membership (i.e.
they only apply to those WTO Members that have accepted them).
Multilateral Agreements
Collectively, the agreements included in Annexes 1, 2 and 3 are Background information and materials
referred to as the "Multilateral Trade Agreements", since they
comprise the substantive trade policy obligations which ALL the • WTO Legal Text:
Members of the WTO have accepted. They form part of the "single http://www.wto.org/english/docs_e/legal_
undertaking" applied in the Uruguay Round. That is, all agreements e/legal_e.htm
form part of a single package that was accepted by the Members as a
whole (or as negotiators like to say "noting is agreed until everything is
agreed").
Finally, the Marrakesh texts include a number of decisions and

declarations on a wide variety of matters that were adopted at the
same time as the WTO Agreement itself.
In a nutshell: the basic structure of the WTO Agreements
Umbrella The Agreement establishing the WTO

Goods (Annex 1A) Services (Annex 1B) Intellectual
Multilateral trade Property
agreements (Annex 1C)
apply to all Members
(part of "single undertaking")
Multilateral Trade Agreements
(part of "single undertaking")

apply to all Members
Agreements GATT 1994 GATS TRIPS

(basic principles)
Additional details Other goods Agreements Services annexes

and annexes
Market Access commitments Members' schedules of Members' schedules of

concessions commitments (and MFN
exemptions)
Dispute Settlement Dispute settlement understanding – DSU (Annex 2)
Transparency Trade Policy Review Mechanism – TPRM (Annex 3)
Plurilateral Commitments Plurilateral Trade Agreements (Annex 4)
Summary
The WTO is an international organization for progressively liberalizing trade. The objective of the WTO is to improve the
welfare of the peoples of its Members by expanding the production of, and trade in, goods and services; in accordance with
the objective of sustainable development in a manner consistent with the different levels of economic development.
The main functions of the WTO include:
• to serve as a forum for Members to negotiate the global rules of trade;

• to facilitate the implementation and administration of the WTO Agreements through its bodies and committees;
• to serve as a forum for Members to settle their trade disputes;
• to provide technical assistance to developing and LDC Members; and,
• to cooperate with other international organizations.
The current WTO Agreements
• The current WTO Agreements are a result of the Uruguay Round of negotiations. They provide the legal ground-rules
for international trade in goods, trade in services and trade-related aspects of intellectual property rights. In that way,
the WTO provides to its Members a predictable and transparent framework of international trade rules, as well as
enhanced and equal market access opportunities.
The WTO has an institutional structure
• The WTO has an institutional structure of its own integrated by various bodies and organs composed by
representatives of its Members. In the WTO, all decisions are taken by its Members normally on the basis of
consensus.
M1: The WTO and the Multilateral Trading System (MTS) | Summary 57

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Introduction to the WTO

M1: The WTO and the Multilateral Trading System (MTS) |

What is the WTO? How to join the WTO?

How does the WTO work?

M1: The WTO and the Multilateral Trading System (MTS) | 2

The WTO is an inter-governmental organization for

There are a number of ways of looking at the WTO. It

Objectives of the WTO Background information and materials

WTO Member governments are generally grouped as

The bulk of the WTO's current work comes from the

Technical assistance and capacity building are core elements

Governments pursue international trade cooperation

Background information and materials

Governments pursue international trade cooperation driven by

The period between the World Wars was characterized by

THE GENERAL AGREEMENT ON TARIFFS AND

Year Name Subjects Covered Parties

1947 Geneva Tariffs 23

1949 Annecy Tariffs 13

1951 Torquay Tariffs 38

1956 Geneva Tariffs 26

1960-1961 Dillon Round Tariffs 26

Background information and materials

The WTO’s creation on 1 January 1995, as a result of the

The common goal of multilateral trade liberalization in the

This Module will introduce basic international trade theory, including

What are the gains from trade?

Specialization is the most important source of gains from trade.

Trade allows countries to specialize in the production of the

This is known in economic theory as absolute advantage.

Suppose country A is better than country B in producing roses,

What does "comparative advantage“ mean? What is "opportunity cost"?

The opportunity cost of a certain good, e.g. roses, in terms of

Overall the global production of roses will increase by 2

In reality, trade is not just determined by technological differences, but it also

Intra-industry trade relies on economies of scale. In many industries, the

Because of economies of scales, the use of twice as

Between different countries – gains stem from specialization based on:

• Differences in technologies among countries (The Ricardian Model).

Between similar countries:

• The existence of economies of scale.

Example - Income distribution effects of trade:

A consequence of these redistributive effects is likely to

It is important to bear in mind that despite income

There is generally a positive relationship between openness to trade and

At the same time, the WTO Agreements give policy space to

Furthermore, multilateral trade negotiations provide Members with

The WTO is a Member-driven international organization. All

To see a more detailed WTO organizational chart: http://www.wto.org/english/thewto_e/whatis_e/tif_e/org2_e.htm

General Council (also DSB and TPRB)

Councils (Goods, Services and Intellectual Property)

The Ministerial Conference is integrated by Background information and materials

Declaration on Global Electronic Commerce (WT/MIN(98)/DEC/2)

Decision on Implementation-Related Issues and Concerns (WT/MIN(01)/17).

The General Council also meets as the Dispute

AS THE TRADE POLICY REVIEW BODY (TPRB)

WTO Members meet regularly to review each Member's

TRADE NEGOTIATIONS COMMITTEE (TNC)