Principles of the trading system.
The WTO agreements are lengthy and complex because they are legal texts covering a wide range of activities. They deal with: agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property, and much more. But a number of simple, fundamental principles run throughout all of these documents. These principles are the foundation of the multilateral trading system.
A closer look at these principles:
More introductory information.
Trade without discrimination.
1. Most-favoured-nation (MFN): treating other people equally Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.
This principle is known as most-favoured-nation (MFN) treatment ( see box ). It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO.
Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group — discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.
2. National treatment: Treating foreigners and locals equally Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of “national treatment” (giving others the same treatment as one’s own nationals) is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), although once again the principle is handled slightly differently in each of these.
National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.
Freer trade: gradually, through negotiation.
Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed.
Since GATT’s creation in 1947-48 there have been eight rounds of trade negotiations. A ninth round, under the Doha Development Agenda, is now underway. At first these focused on lowering tariffs (customs duties) on imported goods. As a result of the negotiations, by the mid-1990s industrial countries’ tariff rates on industrial goods had fallen steadily to less than 4%.
But by the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to the new areas such as services and intellectual property.
Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through “progressive liberalization”. Developing countries are usually given longer to fulfil their obligations.
Predictability: through binding and transparency.
Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition — choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable.
The Uruguay Round increased bindings.
Percentages of tariffs bound before and after the 1986-94 talks.
(These are tariff lines, so percentages are not weighted according to trade volume or value)
In the WTO, when countries agree to open their markets for goods or services, they “bind” their commitments. For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports at rates that are lower than the bound rates. Frequently this is the case in developing countries. In developed countries the rates actually charged and the bound rates tend to be the same.
A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. One of the achievements of the Uruguay Round of multilateral trade talks was to increase the amount of trade under binding commitments ( see table ). In agriculture, 100% of products now have bound tariffs. The result of all this: a substantially higher degree of market security for traders and investors.
The system tries to improve predictability and stability in other ways as well. One way is to discourage the use of quotas and other measures used to set limits on quantities of imports — administering quotas can lead to more red-tape and accusations of unfair play. Another is to make countries’ trade rules as clear and public (“transparent”) as possible. Many WTO agreements require governments to disclose their policies and practices publicly within the country or by notifying the WTO. The regular surveillance of national trade policies through the Trade Policy Review Mechanism provides a further means of encouraging transparency both domestically and at the multilateral level.
Promoting fair competition.
The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition.
The rules on non-discrimination — MFN and national treatment — are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. The issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade.
Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual property, services, for example. The agreement on government procurement (a “plurilateral” agreement because it is signed by only a few WTO members) extends competition rules to purchases by thousands of government entities in many countries. And so on.
Encouraging development and economic reform.
The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements. And the agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries.
Over three quarters of WTO members are developing countries and countries in transition to market economies. During the seven and a half years of the Uruguay Round, over 60 of these countries implemented trade liberalization programmes autonomously. At the same time, developing countries and transition economies were much more active and influential in the Uruguay Round negotiations than in any previous round, and they are even more so in the current Doha Development Agenda.
At the end of the Uruguay Round, developing countries were prepared to take on most of the obligations that are required of developed countries. But the agreements did give them transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions — particularly so for the poorest, “least-developed” countries. A ministerial decision adopted at the end of the round says better-off countries should accelerate implementing market access commitments on goods exported by the least-developed countries, and it seeks increased technical assistance for them. More recently, developed countries have started to allow duty-free and quota-free imports for almost all products from least-developed countries. On all of this, the WTO and its members are still going through a learning process. The current Doha Development Agenda includes developing countries’ concerns about the difficulties they face in implementing the Uruguay Round agreements.
The trading system should be .
without discrimination — a country should not discriminate between its trading partners (giving them equally “most-favoured-nation” or MFN status); and it should not discriminate between its own and foreign products, services or nationals (giving them “national treatment”); freer — barriers coming down through negotiation; predictable — foreign companies, investors and governments should be confident that trade barriers (including tariffs and non-tariff barriers) should not be raised arbitrarily; tariff rates and market-opening commitments are “bound” in the WTO; more competitive — discouraging “unfair” practices such as export subsidies and dumping products at below cost to gain market share; more beneficial for less developed countries — giving them more time to adjust, greater flexibility, and special privileges.
This sounds like a contradiction. It suggests special treatment, but in the WTO it actually means non-discrimination — treating virtually everyone equally.
This is what happens. Each member treats all the other members equally as “most-favoured” trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same “best” treatment to all the other WTO members so that they all remain “most-favoured”.
Most-favoured nation (MFN) status did not always mean equal treatment. The first bilateral MFN treaties set up exclusive clubs among a country’s “most-favoured” trading partners. Under GATT and now the WTO, the MFN club is no longer exclusive. The MFN principle ensures that each country treats its over—140 fellow-members equally.

Developing countries in the world trading system

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The World Trading System.
All countries have much more to gain than to lose from opening up their markets. As a new round of trade talks begins, the international community should make a commitment to pursue further trade reforms.
Even though many aspects of globalization—capital flows, migration, and environmental problems—have captured worldwide attention in the 1990s, for more than a century the driving force behind global integration has been growing trade in goods and services. At the close of the twentieth century, however, the global trading system is at a crossroads. Will the momentum of trade reform be sustained in the agriculture and services sectors, which are critical to the future economic prospects of developing countries? Or will nations succumb to a growing backlash against reforms, retreating behind their borders and squandering opportunities for growth?
Benefits of trade.
Traditionally, trade liberalization has benefited developing countries through two important channels. First, when tariffs are lowered, relative prices change and resources are reallocated to production activities that raise national incomes. The tariff reductions implemented after the Uruguay Round of trade talks was concluded in 1994 raised national incomes by an estimated 0.3-0.4 percent. Second, much larger long-run benefits accrue as economies adjust to technological innovation, new production structures, and changing patterns of competition. These benefits will be as important in the future as they have been in the past.
In addition, new empirical research indicates that trade liberalization has powerful effects on the performance of firms:
Increased imports were found to discipline domestic firms in CпїЅte d'Ivoire, India, and Turkey, forcing them to bring prices closer to marginal costs, thereby reducing distortions created by monopoly power.
Trade liberalization can permanently raise a firm's productivity, as the firm gains access to up-to-date capital equipment and high-quality intermediate inputs at lower prices. Some firms in Korea and Taiwan Province of China, for instance, increased productivity by diversifying their use of intermediate inputs.
Productivity rises when businesses are exposed to demanding international clients and the "best practices" of overseas competitors. Domestic firms may also benefit from the opportunity to reengineer foreign firms' products. Indeed, differences in the productivity of exporting and nonexporting firms often diminish once the latter begin selling products abroad, as studies from Colombia, Mexico, Morocco, and Taiwan Province of China show.
Promoting liberal trade regimes.
World trade owes its robust development to the international institutions that have encouraged countries to remove or lower trade barriers. The General Agreement on Tariffs and Trade (GATT) carried out this role for five decades, until its successor, the World Trade Organization (WTO), was established in 1995. The WTO, which has its headquarters in Geneva, serves the developing countries' interests by facilitating trade reform, providing a mechanism for settling disputes, strengthening the credibility of trade reforms, and promoting transparent trade regimes that lower transaction costs.
These benefits explain why developing countries have joined the WTO in increasing numbers. In 1987, 65 developing countries were GATT members. In 1999, WTO includes among its members 110 developing and transition countries whose exports account for approximately 20 percent of world exports.
The growing number and complexity of the issues negotiated at the WTO have prompted questions about the adequacy of the technical expertise available to developing countries in their national capitals and at their missions in Geneva, however. In 1997, industrial countries sent an average of 6.8 officials to follow WTO activities in Geneva; developing countries sent an average of 3.5. Because they are not as well represented in Geneva, developing countries have difficulties negotiating favorable trade agreements and using the dispute-settlement mechanism effectively. To tackle this problem, the World Bank, in conjunction with other multilateral institutions, has developed the Integrated Framework for Trade and Development in the Least-Developed Countries, which is described in the World Bank's World Development Report 1999/2000.
Sustaining reform momentum.
Policymakers now confront the task of maintaining the momentum toward trade reform created by the completion of the Uruguay Round trade negotiations and of many high-profile regional trading initiatives. Concerns about the effect of trade—particularly on income inequality, poverty, and the environment—and about financing social safety nets have received much attention in recent years. Some observers fear that increased competition from imports is hurting domestic labor—and, in fact, may be the cause of the widening income inequality observed in some industrial economies—and are calling for trade liberalization to be slowed, halted, or even reversed. If this were to happen, the number and size of export markets open to developing countries would shrink.
The idea that increased imports are linked to rising income inequality is highly controversial. With a few exceptions, empirical research has found that imports from developing countries have minor effects on wages and employment in industrial countries. This research does not deny that income inequality is increasing, but it does suggest that erecting new trade barriers is unlikely to solve this pressing problem. Furthermore, there is little economic justification for treating workers affected by trade competition in a different way from workers affected by domestic competition, macroeconomic shocks, the adoption of new technology, or any other economic change that necessitates adjustment. Economic adjustment policies should aim to reduce the adverse impact of all shocks, whatever their source.
Although heightened competitive pressures—stimulated by trade reform—enhance national welfare, they are poorly received by import-competing firms. These firms are leading a backlash against trade liberalization in both developing and industrial countries. In addition to lobbying policymakers, import-competing firms use antidumping laws—which are still permitted by WTO rules—to allege injury from products dumped by foreign competitors (a good is said to be dumped if its export price is less than either the price in its home market or the average cost of production). Antidumping laws enable countries to impose duties on foreign products that are found to have been dumped and to have caused "material injury" to a domestic industry.
Until the early 1990s, the main users of these laws were Australia, Canada, the European Community, New Zealand, and the United States. Recently, however, a number of developing economies, such as Argentina, Brazil, India, Korea, Mexico, and South Africa, have also begun to use them. In the late 1980s, developing countries initiated less than 20 percent of all antidumping actions; by the late 1990s, that figure had climbed to about 50 percent (see chart). Developing countries have also become the targets of antidumping actions at close to the rate of industrial countries.
The growing use of antidumping actions against foreign firms threatens to undermine one of the key benefits of global trade rules: stable and predictable access to foreign markets. Even though there is no economic rationale for doing so, antidumping laws treat competition from foreign firms differently than competition from domestic firms. The parity between foreign and domestic firms could be restored by an international agreement to eliminate antidumping laws and to apply national policies governing domestic competition to competition from imports. In other words, if an antitrust issue exists, it must be dealt with; otherwise, pricing decisions should be left to individual firms.
The next 25 years.
Should the global trading system succeed in overcoming these challenges, how can further reform stimulate growth? In the early decades of the twenty-first century, trade reform in two areas—agricultural products and services—in combination with the growth of international production networks and urban development, will transform global commerce.
Trade in agricultural products. Rising consumer incomes are shifting demand toward high-value-added agricultural products and away from frozen, canned, and processed homogeneous goods. Falling transportation costs enable firms to supply new markets with fresh products. Furthermore, by increasing the variety of agricultural products available, advances in biotechnology may have an important impact on developing countries whose climates sustain only a narrow range of basic agricultural crops. But exports can be constrained if a country's domestic infrastructure and trade regulations do not permit speedy delivery. Fears about product safety that lead to calls for banning imports of certain foods can also constrain export growth. The debate over agricultural trade policy is likely to encompass not just market access but also methods of production.
The Uruguay Round agreement on trade in agricultural products laid the foundation for future liberalization. Countries agreed to convert nontariff agricultural barriers into tariffs and to set the latter at or below a certain level (the "bound" tariff rate). Similar ceilings were agreed upon for export and domestic subsidies. The advantage of this approach is that it converts a wide range of trade distortions into three observable trade policies, with maximum levels that can be negotiated down over time. Unfortunately, many countries took advantage of this opportunity to convert their nontariff barriers into extremely high bound tariffs. For three widely traded commodities—rice, coarse grains, and sugar—many governments set the maximum tariffs well above the actual tariffs collected in 1986-88.
These tariffs are highly damaging. First, by raising domestic prices above world prices, they make food more expensive for consumers. Second, they increase the costs of domestic food-processing firms, making them less competitive in export markets. Third, the artificial expansion of the domestic agricultural sector boosts the demand for resources, making the latter more expensive for the rest of the economy. These economic costs must be added to those created by export subsidies for agriculture and the taxes that finance these subsidies. The next round of multilateral trade negotiations should seek substantial reductions of both agricultural trade barriers and market barriers created by state-owned monopolies that trade in agricultural products.
Advances in biotechnology have introduced a new factor into agricultural trade policy—sanitary and phytosanitary regulations. Sometimes these regulations are particularly blunt instruments, imposing restrictions on imports that go well beyond what is needed to protect human health. However, governments have legitimate concerns about protecting the well-being of their citizens. The Agreement on Sanitary and Phytosanitary Measures, negotiated during the Uruguay Round, strikes a balance between these concerns and unnecessary restrictions by ensuring that regulations do not deliberately discriminate against foreign suppliers. A core requirement is that domestic standards be based on scientific evidence, and nothing prevents those standards from being higher than international norms. But even seemingly unobjectionable regulations based on scientific evidence can be disputed, and the implementation of this agreement will place further burdens on the WTO's dispute-settlement mechanism. The experts hearing the cases brought before the WTO may well have to assess each protagonist's scientific case as well as the implications for international trade.
Trade and foreign investment in services. Changes in technology, demand, and economic structure will make the exchange of services an increasingly important form of trade in the twenty-first century. Falling communication costs and the use of common international standards for some professional services contributed to the 25 percent jump in trade in services in 1994-97. The stakes in liberalizing trade in services are high because most industries use services as inputs to production. Manufacturing industries need cheap and reliable access to global communication and transportation networks to maintain export performance. With products becoming increasingly time-sensitive—the result of shorter product lives and "just-in-time" production—foreign buyers must be assured that a supplier can deliver needed goods on time. Inefficient transportation systems can prevent domestic industries from joining global production networks.
The same core principles underlie trade policy reforms in services and goods. Measures that give foreign firms increased access to domestic markets will enhance competition, lower prices, improve quality, and boost national welfare. But trade policy for services must take into account important issues that do not arise in goods trade. Trade in services generally involves the movement of people or capital across national boundaries, particularly when new subsidiaries are established. As a result, opening services to international competition may require changes in policies governing foreign direct investment and migration, both temporary and permanent.
The Uruguay Round produced the General Agreement on Trade in Services (GATS), whose principal contribution was to establish a framework of trade rules across service sectors. Its coverage of service sectors and supply modes is limited, however. Under GATS, only 25 percent of the service sectors in industrial countries and a paltry 7 percent in developing countries will be fully exposed to international competition.
Restrictions in industrial nations on the temporary migration of people and the establishment of businesses currently impede the supply of certain labor-intensive services, such as construction services, in which developing countries have a comparative advantage. Looking forward, there is substantial room for the further liberalization of many service sectors in both developing and industrial economies. Because the competitiveness of these sectors differs across countries, negotiations that encompass a wide range of sectors, rather than just a few sectors in which one country (or group of countries) has an advantage, offer the most room for mutually beneficial agreements.
Smoothing the path.
The impressive trade reforms developing countries have undertaken in recent years have yielded substantial economic benefits. But sustaining the momentum of trade reform will be a key challenge for the next 25 years. The continued liberalization of the agricultural and service sectors, in particular, will deliver considerable benefits to developing economies.
The social consequences of the new openness to trade have been associated with a series of economic adjustments, such as regional and sectoral disparities and internal migration to cities. Labor market institutions, including schemes to enhance labor mobility and improve skills, need to be strengthened to smooth the adjustment to trade reform. Policymakers must ensure that the considerable gains from trade reform are widely shared by all segments of the population, reassuring those who suffer initially from the launch of reforms that their long-term welfare will be secure.
Maximizing the opportunities for development offered by expanding international trade will require a stable and predictable framework of institutions. Codifying the rights, responsibilities, and policies of all parties in broad-based institutions will smooth the path of trade liberalization and development reform over the next 25 years. The next round of trade negotiations provides an excellent opportunity to pursue such a wide-ranging approach to trade policy reform.
This article is based on Chapter 2 of the World Bank's World Development Report 1999/2000: Entering the 21st Century (New York: Oxford University Press for the World Bank).

Developing Countries in the World Trading System: From GATT, 1947, to the Third Ministerial Meeting of WTO, 1999.
T. N. Srinivasan.
Professor of Economics, Yale University. Search for more papers by this author.
First published: November 1999 Full publication history DOI: 10.1111/1467-9701.00247 View/save citation Cited by (CrossRef): 7 articles Check for updates.
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1 Nuno Limão , Kamal Saggi , Size inequality, coordination externalities and international trade agreements, European Economic Review , 2013 , 63 , 10 CrossRef 2 Daniel Yuichi Kono , Alliances, Trade Discrimination, and the Global Trade Regime, International Interactions , 2012 , 38 , 5, 647 CrossRef 3 Daniel Yuichi Kono , Democracy and Trade Discrimination, The Journal of Politics , 2008 , 70 , 4, 942 CrossRef 4 Nuno Limão , Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?, The Review of Economic Studies , 2007 , 74 , 3, 821 CrossRef 5 Brigit Joseph , K. J. Joseph , Commercial Agriculture in Kerala after the WTO, South Asia Economic Journal , 2005 , 6 , 1, 37 CrossRef 6 A. J. Oskam , M. H.C. Komen , P. Wobst , A. Yalew , Trade policies and development of less-favoured areas: evidence from the literature, Food Policy , 2004 , 29 , 4, 445 CrossRef 7 Victor Murinde , Cillian Ryan , The Implications of WTO and GATS for the Banking Sector in Africa, The World Economy , 2003 , 26 , 2, 181 Wiley Online Library.
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Developing Countries in the World Trading System.
The Uruguay Round and Beyond.
Edited by Ramesh Adhikari and Prema-chandra Athukorala.
Monograph Book.
Chapter 1: Developing countries in the world trading system: an overview.
Ramesh Adhikari and Prema-chandra Athukorala.
Monograph Chapter.
Ramesh Adhikari and Prema-chandra Athukorala The Uruguay Round (UR) of multilateral trade talks, which formally concluded on 15 August 1994 in Marrakesh, Morocco, after eight years of intense and often contentious negotiations, was a landmark in the evolution of the global trading system. The Uruguay Round Agreement signed at Marrakesh embodied three key outcomes, which were crucial for laying the foundation for an effective, rules-based trading system, namely: (a) providing for the establishment of the World Trade Organization (WTO) as the successor to the General Agreement on Tariffs and Trade (GATT); (b) laying down provisions to ensure participation by developing countries as equal partners in the world trading system; and (c) broadening the coverage of international trade rules to encompass virtually all economic activities relevant to economic interaction. For almost fifty years following World War II the global trading system functioned without a fully fledged organization with well-defined rules of decisionmaking and enforcement to deal with trade issues among countries. The GATT, which came into being in 1947 on the basis of the Protocol of Provisional Application signed at the United Nations Conference on Trade and Employment in Havana, Cuba, on 21 November in that year,1 did not have the international standing of the International Monetary Fund (IMF) or the World Bank, both of which were international organizations. Instead the GATT, as its name implied, was a multilateral agreement among its contracting parties rather than a treaty among sovereign nations (Jackson 1989). By contrast, the WTO, which came into.
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