Introduction of WTO Rules

• It was several years later than he thought of the correct response: comparative advantage. “That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the Doctrine for themselves or to believe it after it was explained to them”.

• ——P. A. Samuelson (1969), “The Way of an Economist” in P. A. Samuelson, ed.

• Ⅰ.The Theory of Comparative Advantage • A. Absolute advantage refers to the ability of an

economic unit (a country, for example) to produce more of any given goods at a lower cost of production than another economic unit.

• In economics, the principle of comparative advantage explains how trade is beneficial for all parties involved (countries, regions, individuals and so on), as long as they produce goods with different relative costs. Usually attributed to the classical economist David Ricardo, comparative advantage is a key economic concept in the study of trade.

• Adam Smith had used the principle of absolute advantage to show how a country can benefit from trade if the country has the lowest absolute cost of production in a good (ie. it can produce more output per unit of input than any other country).

• B. Basics of the Theory

• Comparative advantage is said to be the single most powerful

insight into economics. “What is prudence in the conduct of

every private family, can scarce be folly in that of a great

kingdom. If a foreign country can supply us with a commodity

cheaper than we ourselves can make it, better buy it of them with

some part of the produce of our own industry, employed in a way

in which we have some advantage. The general industry of the

country, being always in proportion to the capital which employs

it, will not thereby be ‘diminished … but ‘only left to find out the

way in which it can be employed with the greatest advantage. ”

• What did David Ricardo mean when he coined the term comparative advantage? According to the principle of comparative advantage, the gains from trade follow from allowing an economy to specialize. If a country is relatively better at making wine than wool, it makes sense to put more resources into wine, and to export some of the wine to pay for imports of wool. This is even true if that country is the world’s best wool producer, since the country will have more of both wool and wine than it would have without trade.

• A country does not have to be best at anything to gain from trade. The gains follow from specializing in those activities which, at world prices, the country is relatively better at, even though it may not have an absolute advantage in them. Because it is relative advantage that matters, it is meaningless to say a country has a comparative advantage in nothing. The term is one of the most misunderstood ideas in economics, and is often wrongly assumed to mean an absolute advantage compared with other countries.

• Suppose country A is better than country B at making automobiles, and country B is better than country A at making bread. It is obvious ( the academics would say “trivial”) that both would benefit if A specialized in automobiles, B specialized in bread and they traded their products. That is a case of absolute advantage.

• But what if a country is bad at making everything? Will trade drive a11 producers out of business? The answer, according to Ricardo, is no. The reason is the principle of comparative advantage. It says, countries A and B still stand to benefit from trading with each other even if A is better than B at making everything. If A is much more superior at making automobiles and only slightly superior at making bread, then A should still invest resources in what it does best – producing automobiles – and export the product to B. B should still invest in what it does best – making bread – and export that product to A, even if it is not as efficient as A. Both would still benefit from the trade. A country does not have to be best at anything to gain from trade. That is comparative advantage.

• The theory dates back to classical economist David

Ricardo. It is one of the most widely accepted among

economists. It is also one of the most misunderstood

among non-economists because it is confused with

absolute advantage. It is often claimed, for example, that

some countries have no comparative advantage in

anything. That is virtually impossible. Comparative

advantage exists when a country has a margin of

superiority in the production of a good or service i.e.

where the opportunity cost of production is lower.

• Ⅱ.Dispute Settlement Mechanism

• A. Introduction to the DSM of the WTO

• The Integrated Dispute Settlement System

• The integrated dispute settlement system is an important

part of the multilateral trading system embodied in the

WTO. It is based on Articles XXII and XX of the ⅢGATT 1994, and the rules and procedures further

elaborated in the Understanding on Rules and

Procedures Governing the Settlement of Disputes (DSU)

contained in the WTO Agreement. The rules have

evolved on the basis of past practice in GATT 1947.

• B. Coverage: Goods, Services and intellectual Property

• The dispute settlement system covers all the multilateral trade agreements, that is, it is applicable to trade in goods, trade in services, and intellectual property issues arising from the TRIPs Agreement. It is also applicable to disputes arising under the plurilateral Government Procurement Agreement. Some of these agreements have dispute settlement provisions that apply only to disputes arising under that specific agreement that add to or change the rules of the DSU. The dispute settlement system is administered by the Dispute Settlement Body.

• C. Procedures: Strict Time-limits

• The dispute settlement process is initiated through a request for consultations made by one Member to another in respect of a specific issue. If consultations fail to resolve a dispute, a Member may ask the DSB to establish a panel, normally consisting of three independent trade experts, to rule on the issue. After hearing the parties, the panel issues a report to the DSB. For the panel, strict ： time-limits have been agreed so as to achieve the greatest efficiency possible under the system. A large degree of automaticity is involved in this process.

• D. Adoption of Panel Reports: the Reverse Consensus

• Under GATT practice, the report of a panel was submitted to the GATT Contracting Parties for adoption. Since the Contracting Parties normally took decisions by consensus, any Party (including the losing Party) could block adoption of a panel report. While this did not occur frequently, it happened from time to time. An innovative formula has been agreed upon in the DSU, whereby a consensus in the negative is required in order not to adopt a panel report. This formula allows for a smoother functioning of the system.

• E. Appellate Body Review

• The WTO dispute settlement mechanism gives the possibility of appeal to either party in a panel proceeding. However, any such appeal must be limited to issues of the law covered in the panel report and the legal interpretations developed by the panel. Appeals are heard by a standing Appellate Body consisting g of seven members appointed by the DSB for four-year terms. The report of the Appellate Body must be unconditionally accepted by the parties to the dispute, and the report is to be adopted by the DSB unless there is a negative consensus, that is a consensus against adoption.

• F. Non-compliance with Recommendations • The Dispute Settlement Body keeps under r

surveillance the implementation of adopted recommendations or rulings, and any outstanding issue remains in its agenda until its resolution. Time-limits are also established for compliance with recommendations of panel reports. When a party is unable to implement those recommendations within a reasonable period of time, it is obliged to enter into negotiations with the complainant in order to determine mutually acceptable compensation. If these negotiations fail, the Dispute Settlement Body may authorize the complainant party to suspend concessions or obligations against the other party. Compensation and suspension of concessions are, however, interim solutions until such time when the recommendations of the DSB are implemented by the member concerned.

• G. Practices of Dispute Settlement • Dispute settlement is the central pillar of the multilateral

trading system, and the WTO’s unique contribution to the stability of the global economy. Without a means of settling disputes, the rule-based system would be less effective because the rules could not be enforced. The WTO’s procedure underscores the rule of the law, and it makes the trading system more secure and predictable. The system is based on clearly-defined rules, with timetables for completing a case. First rulings are made by a panel and endorsed (or rejected) by the WTO’s full membership. Appeals based on the points of the law are possible.

• However, the point is not to pass judgment. The priority is to settle disputes, through consultations if possible. By July 2005, only about 130 0f nearly 332 cases had reached the full panel process. Most of the rest have either been notified as settled “Out of court” or remained in a prolonged consultation phase – some since 1995 ．

• H. Principles: Equitable, Fast, Effective, Mutually Acceptable

• Disputes in the WTO are essentially about broken promises. WTO members have agreed that if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally. That means abiding by the agreed procedures, and respecting judgments.

• A dispute arises when one country adopts a trade policy measure or takes some action that one or more fellow-WTO members consider to be breaking the WTO agreements, or to be a failure to live up to obligations. A third group of countries can declare that they have an interest in the case and enjoy some rights.

• A procedure for settling disputes existed under the old GATT, but it had no fixed timetables, rulings were easier to block, and many cases dragged on for a long time inconclusively. The Uruguay Round agreement introduced a more structured process with more clearly defined stages in the procedure. It introduced greater discipline for the length of time a case should take to be settled, with flexible deadlines set in various stages of the procedure. The agreement emphasizes that prompt settlement is essential if the WTO is to function effectively. It sets out in considerable detail the procedures and the timetable to be followed in resolving disputes. If a case runs its full course to a first ruling, it should not normally take more than about one year – 15 months if the case is appealed. The agreed time limits are flexible, and if the case is considered urgent (e.g., if perishable goods are involved), it is accelerated as much as possible.

• The Uruguay Round agreement also made it impossible for the country losing a case to block the adoption of the ruling. Under the previous GATT procedure, rulings could only be adopted by consensus, meaning that a single objection could block the ruling. Now, rulings are automatically adopted unless there is a consensus to reject a ruling – any country wanting to block a ruling has to persuade all other WTO members (including its adversary in the case) to share its view ．

• Although much of the procedure does resemble a court or tribunal, the preferred solution is for the countries concerned to discuss their problems and settle the dispute by themselves. The first stage is therefore consultations between the governments concerned, and even when the case has progressed to other stages, consultation and mediation are still always possible.

• I. How Long to Settle a Dispute? • These approximate periods for each stage of a

dispute settlement procedure are target figures – the agreement is flexible. In addition, the countries can settle their dispute themselves at any stage. Totals are also approximate

• 60 days Consultations, mediation, etc. • 45 days Panel set up and panelists appointed • 6 months Final panel report to parties • 3 weeks Final panel report to WTO members • 60 days . Dispute Settlement Body adopts report

(if no appeal) • Total = I year ( without appeal) • 60-90 days Appeals report • 30 days Dispute Settlement Body adopts appeals

report • Total = 1y 3m ( with appeal)

• J. How are Disputes Settled?

• Settling disputes is the responsibility of the

Dispute Settlement Body ( the General Council in

another guise), which consists of all WTO members.

The Dispute Settlement Body has the sole authority to

establish “panels” of experts to consider the case, and to

accept or reject the panels’ findings or the results of an

appeal. It monitors the implementation of the rulings and

recommendations, and has the power to authorize

retaliation when a country does not comply with a

ruling ．

• First stage: consultation (up to 60 days). Before taking any other actions the countries in dispute have to talk to each other to see if they can settle their differences by themselves. If that fails, they can also ask the WTO director-general to mediate or try to help in some other ways.

• Second stage: the panel (up t0 45 days for a panel to be appointed, plus 6 months for the panel to conclude). If consultations fail, the complaining country can ask for a panel to be appointed. The country “in the dock” can block the creation of a panel once, but when the Dispute Settlement Body meets for a second time, the appointment can no longer be blocked ( unless there is a consensus against appointing the panel) .

• Officially, the panel is helping the Dispute Settlement Body make rulings or recommendations. But because the panel’s report can only be rejected by consensus in the Dispute Settlement Body, its conclusions are difficult to overturn. The panel’s findings have to be based on the agreements cited.

• The panel’s final report should normally be given to the parties to the dispute within six months. In cases of urgency, including those concerning perishable goods, the deadline is shortened to three months.

• The agreement describes in some detail how the panels are to work. The main stages are ：

• Before the first hearing: each side in the dispute presents its case in writing to the panel.

• First hearing: the case for the complaining country and defence: the complaining country ( or countries) , the responding country, and those that have announced they have an interest in the dispute, make their case at the panel’s first hearing.

• Rebuttals: the countries involved submit written rebuttals and present oral arguments at the panel’s second meeting.

• Experts: if one side raises scientific or other technical matters, the panel may consult experts or appoint an expert review group to prepare an advisory report.

• First draft: the panel submits the descriptive (factual and argument) sections of its report to the two sides, giving them two weeks to comment. This report does not include findings and conclusions.

• Interim report: The panel then submits an interim report, including its findings and conclusions, to the two sides, giving them one week to ask for a review.

• Review: The period of review must not exceed two weeks. During that time, the panel may hold additional meetings with the two sides.

• Final report: A final report is submitted to the two sides and three weeks later, it is circulated to all WTO members. If the panel decides that the disputed trade measure does break a WTO agreement or an obligation, it recommends that the measure be made to conform with WTO rules. The panel may suggest how this could be done.

• The report becomes a ruling: The report becomes the Dispute Settlement Body’s ruling or recommendation within 60 days unless a consensus rejects it. Both sides can appeal the report (and in some cases both sides do).