Financial Definition of WTO
What It Is
The World Trade Organization (WTO) establishes rules of trade among its member nations. To this end, the WTO also handles trade disputes, monitors trade policies, provides technical assistance for developing countries and cooperates with other international trade organizations.
The WTO was created on January 1, 1995, and is headquartered in Geneva, Switzerland. The WTO replaced the General Agreement on Tariffs and Trade (GATT), which was created in 1948. GATT primarily regulated the trade of goods; the WTO regulates the trade of services and intellectual property as well. GATT still exists as the WTO's umbrella treaty for trade in goods.
How It Works
More than 140 countries belong to the WTO, and membership is voluntary. Some countries hold observer status with the WTO, which enables the country to follow discussions and matters of particular interest. Some WTO committees are for members only, however, and do not allow observers.
WTO decisions are made by consensus rather than by delegation to a board of directors or leader. The WTO's highest authority is the Ministerial Conference, whose members meet at least once every two years. The WTO General Council, with the Dispute Settlement Body and the Trade Policy Review Body, handles the WTO's day-to-day duties. These day-to-day entities, which are collectively referred to as the General Council, act on behalf of the Ministerial Conference and are composed of several subcouncils, including the Council for Trade in Goods, the Council for Trade in Services and the Council for Trade-Related Aspects of Intellectual Property Rights. Each subcouncil has several committees.
WTO members negotiate World Trade Agreements, which are later ratified by the participating nations' parliaments or congresses. WTO agreements involve five principles:
1. With some exceptions, members must provide equal trade-agreement terms to all fellow WTO countries. This equal treatment is known as most-favored-nation status. Members also must offer "national treatment," meaning a WTO member may not discriminate against products from other WTO countries once the products have entered the member's market.
2. WTO agreements must work to lower trade barriers such as customs duties, tariffs, import bans and quotas.
3. WTO agreements must help provide a stable and predictable business environment by including commitments about future trade policies.
4. WTO agreements must define fair and unfair trade practices.
5. WTO agreements must consider the special needs developing countries may have in implementing WTO requirements.
Dispute settlement processes are written into WTO agreements, which are legally binding. WTO members enforce agreements according to predetermined procedures, but there is some concern that economically strong countries may be able to ignore complaints brought by poorer countries, whose sanctions or other penalties may not hurt the offending country enough to stimulate compliance.
Why It Matters
The WTO is one of the most powerful and controversial legislative bodies in the world. Ideally, the purpose of the WTO is to facilitate free trade while helping governments meet social and environmental goals.
Whether free trade and the WTO accomplish these goals is the subject of considerable debate. Some question whether free trade benefits wealthy nations and multinational corporations rather than communities and the environment. Further, approximately two thirds of WTO members are developing countries, and some of these countries are concerned that poor domestic infrastructure, political instability, and certain tariff arrangements disproportionately inhibit their abilities to engage in profitable trade. Critics also point out that a country's choice not to join the WTO may effectively place an embargo on the goods and services of that country.
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