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Professor Arthur A. Daemmrich prepared this note as the basis for class discussion. Copyright © 2010, 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1- 800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

A R T H U R A . D A E M M R I C H

Stalemate at the WTO: TRIPS, Agricultural Subsidies, and the Doha Round

A rare sense of calm prevailed as trade ministers and World Trade Organization (WTO) officials wrapped up a December 2011 ministerial meeting, the ninth negotiating session of the Doha round. Despite a major global economic crisis that continued to wreak havoc on government finances and employment, global trade was rebounding from its 2008 nadir. The recession led to tensions among countries and accusations of currency debasement. But few new trade barriers were instituted in the downturn, and tariff rates continued to converge internationally. WTO meetings in the 1990s and early 2000s had featured violent street protests and disagreements between developed and developing countries. Recent meetings in Geneva, by contrast, were widely characterized as “normal.” Writing in a blog, WTO director-general Pascal Lamy celebrated the calm: “There were no surprises. It was not a big jamboree, with thousands of journalists, hugely costly arrangements and sleepless nights. But a feeling of normality, a feeling that the WTO is a solid institution.”1

It was an open question whether the normality enjoyed by Lamy and trade ministers reflected success. The Doha round of WTO talks had made little progress in a decade of negotiations. Adding to the complexity, positions of developed and developing countries had reversed. Whereas developing countries were reluctant to launch the Doha round in 2001, by 2011 most had followed through with commitments to enact intellectual property (IP) regimes and had grown impatient for the United States and European Union to reform agricultural policies. Developed countries, however, were slow to eliminate agricultural subsidies and sought tariff reductions and the removal of other

trade barriers by developing economies, especially for chemicals, machinery, and electronics.2

Business leaders needed to understand the WTO in order to design strategy in relation to tariff and non-tariff barriers and to plan for global competition in light of tensions between developed and developing nations. IP had gained in strategic importance to many industries, but it also attracted the critical attention of non-governmental organizations (NGOs) and was a stumbling block to multilateral negotiations. This note updates the HBS case, “The World Trade Organization,” and offers perspective for managers when they analyze how WTO agreements will shape future

competitive dynamics in their industries.3

From GATT to the WTO

The WTO traced its roots to a July 1944 meeting of 44 allied nations in Bretton Woods, New Hampshire. Participants agreed to establish several new multilateral institutions that would govern

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international trade and finance, in an effort to avoid a return to competing nationalistic economic policies that had worsened the Great Depression and contributed to the outbreak of World War II. International trade had prospered from the 1840s through the 1870s when Britain and France negotiated deep tariff reductions. But in response to economic crises and rising nationalistic sentiments, tariffs were raised by most countries starting in the 1870s. After WWI, tariffs were lowered and international trade prospered. Responses to the 1929 stock market crash, however, included new tariffs and trade barriers starting with the Smoot-Hawley Act in the United States, which quadrupled tariffs on more than 3,200 imports. Other countries quickly followed suit, both deepening and prolonging the Great Depression as trade plummeted.4

Looking ahead to a post-war era, government representatives at Bretton Woods agreed to create the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD), and an International Trade Organization (ITO). While the IMF and the IBRD (later called the World Bank) were founded in 1947, the ITO never came into existence. The General Agreement on Tariffs and Trade (GATT), signed in 1947 as a transition to the ITO, instead became the institutional framework under which countries reciprocally reduced tariffs and sought to resolve trade disputes.

GATT in Action

GATT contained several principles that contributed to its endurance through four decades of negotiating rounds (see Exhibit 1a). First, the “most-favored-nation” (MFN) rule held that reductions in tariffs or non-tariff barriers that created “advantage, favour, privilege or immunity” between any

signatory countries applied to every member.5 Countries had incentives to work through GATT instead of negotiating separate bilateral agreements, although deals that moved in the direction of free trade were permitted. A second key principle concerned “national treatment,” under which GATT signatories pledged identical tax levels and regulatory standards for imported and domestic products. A third important principle prohibited dumping, defined as pricing exports below the domestic price in the origin country, or below the cost of production plus additions for transport and profit.6 Anti-dumping took center stage in GATT negotiations in the 1960s and became controversial when the United States and European countries brought claims against developing countries in the 1970s. Reflecting changes in global manufacturing, by the mid-1990s developing countries increasingly filed dumping suits against one another. Economists argued that anti-dumping measures protected entrenched firms without providing benefits to consumers or national

economies.7 Nevertheless, anti-dumping suits had populist appeal for governments worldwide.

Negotiation rounds started after participating countries agreed to discuss specific product categories. Although the U.S. Congress had scuttled the ITO in 1950, the country took a leading role in tariff reductions under GATT. Broadly, the post-war period saw tariffs fall across developed economies, while developing countries pursued a variety of strategies; some held tariffs high in an effort to protect nascent domestic industries (see Exhibit 2a). The Tokyo round, which started in 1973, was the first to consider non-tariff barriers to trade; however, final agreements in 1979 followed in the tradition of tariff reductions. Countries could file complaints in the event that trading partners failed to follow through on commitments to reduce tariffs or remove trade barriers. In many instances, reports identified changes needed to align national policies to GATT’s principles. But with no enforcement mechanism, countries felt little pressure to make speedy changes.8

Founding the WTO

The WTO was created in 1995 as part of a major Uruguay round accord. The eighth and final GATT negotiations started in 1986 at a meeting in Punta del Este, Uruguay. An ambitious agenda

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covered tariff reductions on goods; non-tariff barriers, including subsidies, import procedures, government procurement, and customs valuation methods; and new issues of intellectual property and international investment. Entering the Uruguay round, over 120 countries also agreed to discuss dispute settlement procedures. On April 15, 1994, the round was completed with pledges for significant tariff reductions, promises to remove non-tariff trade barriers, and agreement on dispute resolution and enforcement governed by a new organization, the WTO. In addition to existing GATT agreements, the WTO gained oversight of the new General Agreement on Trade in Services (GATS), Trade-related Aspects of Intellectual Property Rights (TRIPS), Trade-Related Investment Measures (TRIMs), and sector-specific accords, including the Agreement on Agriculture (AoA), the Agreement on Textiles and Clothing (ATC), and a revised agreement on Sanitary and Phytosanitary Measures (SPS). Broadly, the WTO now had mandates that impinged on national governments in politically sensitive areas of product safety, health, environment, innovation, and competition policies.

WTO officials took over existing GATT offices in Geneva and began scheduling “ministerial” conferences of trade ministers (typically every two years), occasional other negotiating sessions, and regular council meetings to carry out the work of dispute resolution and trade policy review.

While the Uruguay round agreements were hailed as a major breakthrough in the contentious history of trade negotiations, they also generated disputes between developed and developing countries and drew the attention of NGOs and activists. A group of developing countries sometimes called the “G-10 hardliners”—led by Brazil and India—initially opposed the inclusion of services, intellectual property rights, and investment measures in trade talks.9 Suffering from balance-of- payments crises in the early 1990s and under IMF and World Bank pressure, they agreed to the final WTO deal. The agreement ultimately hinged on a “grand bargain” that differed from the traditional reciprocity of opening markets and lowering tariffs between countries for the same class of goods. The new deal held that OECD countries would open their markets to agricultural and labor-intensive manufactured goods, including foodstuffs and clothing; in exchange, developing countries would enforce IP and open financial markets to outside investors.

But the grand bargain also reinforced divisions between developed and developing nations. Developing countries argued that the WTO negotiating process was biased in favor of rich countries, and they resented pressure brought to bear to sign the Uruguay deal. Subsequent WTO meetings grew acrimonious. The 1999 Seattle meeting featured thousands of protesters on the streets, violent clashes with police, and vociferous disputes in meeting rooms. It ended with a walkout by delegates from most developing countries.10

The Doha Round

Nevertheless, at the fourth Ministerial Conference in Doha, Qatar, in November 2001, WTO members agreed to launch a new negotiation round. Formally, the talks were called the “Doha Development Agenda” rather than a new “round.” Meetings took place under heavy security just two months after the 9/11 terrorist attacks in the United States. The irony of delegates gathering in a

tightly policed remote location to negotiate free trade was not lost on journalists.11 Participants explicitly sought to address a variety of development issues, including technology transfer and the affordability of treatments for AIDS, in addition to further reductions in tariffs and the removal of other trade barriers. Broadening the scope of trade negotiations was contested by some countries, and fundamental differences emerged over agricultural subsidies and IP rights. Talks at Doha concluded with a 10-page declaration that reaffirmed member states’ rights to regulate domestically, notably, environment, labor, and services. It also outlined technical assistance and capacity-building

initiatives for developing countries.12 Delegates announced a “work programme” of negotiations on

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agriculture, services, intellectual property, international investment, competition policy, government procurement, and WTO governance, all of which were to be completed by 2005. (See Exhibit 1b for meetings held since 2001.)

Negotiations in Cancún in September 2003 revealed a hardening of positions on agricultural subsidies, IP rights, and four “Singapore” issues (named for the first WTO ministerial conference held in Singapore in 1996): international investment, competition policy, government procurement, and trade facilitation. Capital flows and investment were particularly contentious in the wake of the 1997 Asian financial crisis, during which investors rapidly pulled money out of Thailand, Malaysia, Indonesia, Korea, and other countries, generating exchange rate depreciation, stock market crashes, and recessions. The Cancún meeting also featured a recalibration of North–South relations in WTO negotiations. Zimbabwe’s Ambassador Chidyausiku spoke for many developing countries when he observed: “In Doha, they created a process where ministers could go to the committee of the whole and discuss and raise issues, but nobody was taking into account what they said . . . In fact, there was a smaller group taking the decisions for the whole.”13 A WTO G-21 was forged among developing countries, led by Brazil, China, and India, which agreed to negotiate as a unified bloc. Representing 70% of the world’s rural population, the G-21 criticized efforts by the United States and the European Union to continue domestic farm subsidies and agricultural export supports. At the same time, some WTO G-21 members, notably India, objected to cutting tariffs on imported agricultural products, and four West African countries sought a specific agreement on ending cotton subsidies in the United States.14 The Cancún meeting ended in disarray. North–South tensions continued in follow-up meetings, despite an agreement to drop the Singapore issues.

In 2008, as the global economy slid into its most severe recession since the 1930s, economists worried that protectionist interventions could lead to another Great Depression (see Exhibits 2b and 2c). Russia imposed a variety of new tariffs, the United States included a controversial “buy American” provision in a major stimulus bill, and the number of WTO anti-dumping cases rose by

40%.15 An IMF study noted: “Gaps in WTO commitments leave ample scope to further restrict trade, so unless all countries vigorously resist protectionism this could threaten the economic recovery.”16 In the short term, such fears were not realized. A new G-20 of the world’s largest economies was formed to coordinate macroeconomic interventions; a September 2009 meeting concluded with the

statement: “we are committed to bringing the Doha round to a successful conclusion in 2010.”17 Negotiations continued, although meetings in Potsdam and Geneva failed to achieve consensus. Having implemented TRIPS, the WTO G-21 argued that it was time for the United States and European Union to phase out agricultural subsidies. Representatives from developed nations responded by citing weak IP enforcement and continued high tariffs on agricultural imports in developing countries. According to a 2008 study, 80% of software in China and 70% in India was pirated.18 Developed countries also sought to extend “safeguard measures” to protect their farmers. Any breakthrough would require compromise on IP issues and agricultural subsidies.

Intellectual Property and Development

Of the controversial agreements signed at the conclusion of the Uruguay round and inception of the WTO, TRIPS dominated subsequent negotiations. Developing countries decried the inclusion of intellectual property in negotiations on lowering trade barriers as “forum-shopping” by the United States after proposals for uniform patent laws failed to gain traction at the World Intellectual Property Organization (WIPO).19 WIPO operated registries for patents, copyright, and trademarks, but since new rules passed on a one-country, one-vote system, efforts to expand IP enforcement internationally were easily blocked by developing nations before the Uruguay round accords.

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Broadly, the relationship of IP to development was complex. Few economists or other social scientists contested that granting time-limited monopoly rights in exchange for published patent claims provided firms with incentives to invest in research and product development, and therefore

generated public benefits through greater innovation and lower prices once patent terms expired.20 However, empirical research had shown that strengthening IP rules reduced the number of domestic

patent filings while increasing foreign applications.21 Critics also noted that firms in IP-dependent industries, notably pharmaceuticals and electronics, found ways to extend patents on existing products and block competitors. Adding to the policy debate, developed countries had mixed histories of patent protection. While the United States opened one of the world’s first patent offices in 1790, the U.S. government seized German chemical patents at the outbreak of WWI and licensed them to domestic firms under favorable arrangements. Germany’s powerful advantage in chemicals from the 1880s onward stemmed from its late introduction of patent laws, which enabled a nascent

industry to copy synthetic dyes invented in Britain and France.22 Developed countries did not hesitate to violate IP in emergency situations; for example, in the fall of 2001 the United States threatened to license generic production of the antibiotic Ciproflaxin in the midst of anthrax attacks.

Developing countries had long received conflicting advice: introduce IP laws in order to develop, or develop first and then introduce IP. Newer studies of the relationship of intellectual property and development proposed a U-shaped relationship: at an early stage of economic development, countries benefited from strong intellectual property rights that attracted foreign investment; then, as capacity increased, weaker property rights enabled the domestic imitation of foreign technologies; finally, as the economy expanded, stronger intellectual property rights helped reward domestic

innovation.23 The pharmaceutical industry argued that global IP rights would encourage more private investment in therapies for “neglected diseases,” though critics worried that new medicines

would still be unaffordable for poorer patients.24 As developing countries introduced greater property protections, including IP, they also staked claims to domestic biodiversity, genetic

resources, and indigenous knowledge.25

Trade-related Aspects of Intellectual Property Rights (TRIPS)

Signed in 1994, TRIPS applied the MFN and national treatment principles to patents, trademarks, copyrights, and geographical indications (food names allowed only for products from a specific location). WTO member countries had to establish 20-year patent terms, administrative procedures to review and grant IP, and civil and criminal judicial procedures to enforce patents, trademarks, and copyrights. Developing countries had to implement TRIPS by 2005 if categorized as middle-income, or by 2016 if they were one of 49 least-developed nations. Countries seeking to join the WTO after 1994 had to implement domestic legislation aligned with TRIPS as part of their “accession package.”

Patentability TRIPS contained provisions for countries to exclude certain types of inventions from patents. These included products or processes that offended “ordre public or morality,” or in order to “protect human, animal, or plant life or health or to avoid serious prejudice to the environment.” Article 27 of TRIPS also listed optional specific exclusions, including: “diagnostic, therapeutic and surgical methods for the treatment of humans or animals; [and] plants and animals

other than micro-organisms.”26

Compulsory Licensing TRIPS also established a process under which member governments could supply a patented product (or process) domestically without the consent of the patent owner. With no explicit mention of health or other areas of national need, article 31 required members to apply to the patent holder for “reasonable commercial terms and conditions.” If unsuccessful, they could issue a non-exclusive and non-assignable compulsory license “predominantly” for the

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domestic market. The patent holder was to be paid based on the “economic value of the authorization;” no fee or percentage of sales was stated. To prevent permanent compulsory licenses, the article required their termination “if and when the circumstances which led to it cease to exist and

are unlikely to recur.”27

Compromise and Acrimony Actions taken by the U.S. government and the pharmaceutical industry in the late 1990s convinced many developing countries that TRIPS was against their interests, despite flexibility of the patentability and compulsory licensing clauses. Countries that violated patents were placed on a “priority watch list” by the United States and threatened with trade sanctions. Despite a growing AIDS crisis in Africa, South America, and parts of Asia, the pharmaceutical industry held that a strict interpretation of IP rights was necessary to provide incentives for research. Among other steps, firms threatened to sue when countries purchased

imported or domestically manufactured generic versions of drugs still under patent.28

Compulsory licensing, in particular, came to the fore starting in 1998 when the South African Pharmaceutical Manufacturer’s Association and 39 multinational firms filed suit against a new health act that amended South Africa’s Medicines and Related Substances Control Law. The South African act permitted the importation of generic drugs. It also authorized the health minister to carry out compulsory licensing of drugs during health emergencies. Of particular concern to the industry, it was unclear in the law’s text whether generics could be imported from countries not yet bound by

TRIPS or whether compulsory licenses would include royalties to the original patent holder. 29 In the wake of the suit and fearing trade sanctions from the United States, South Africa halted the Act’s implementation. With more than 4 million South Africans infected with HIV (in a population of 45 million), the case sparked outrage in the NGO community and attracted critical international media coverage. The suit was withdrawn in mid-2001.30

At the start of the Doha round in November 2001, representatives of developing countries demanded clarification of compulsory licensing in light of the AIDS crisis. By the end of the meeting, trade ministers from 144 countries agreed: “The TRIPS agreement does not and should not prevent members from taking measures to protect public health. We affirm . . . WTO members’ right to

protect public health and, in particular, to promote access to medicines for all.”31 Nevertheless, developing countries felt pressured to adhere to a strict interpretation of IP rights. Fearing a backlash from industry and the United States and European Union, few nations established compulsory licensing procedures even as they revised domestic patent laws to align with TRIPS. Actual compulsory license negotiations were very infrequent.

As dissatisfaction with compulsory licensing continued in subsequent Doha round negotiations, a specific agreement was reached for pharmaceuticals in late 2005. Clauses were added to TRIPS that clarified the steps necessary to issue a compulsory license, and allowed developed countries to export drugs under a compulsory license or permitted developing and least developed countries to re-

export pharmaceuticals for which they had issued a compulsory license.32 Developing countries unable to manufacture a drug could obtain generic versions through this mechanism. Nevertheless, of the 102 member countries that needed to sign the new agreement for it to take effect (two-thirds of

the full WTO membership), only 34 had done so by mid-2011.33

Furthermore, continued uneven international distribution of patents drew the criticism that TRIPS reinforced global imbalances. Overall, TRIPS appeared to be encouraging more patenting; in 2008, over 1.9 million new patent applications were filed worldwide, up from an average of 1 million per year in the decade between 1985 and 1995. But of 6.7 million unique patents in force worldwide, 60%

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were held by nationals of just four countries: the United States, Japan, Korea, and Germany. People from countries with a GDP per-capita below $12,000 filed only 25% of new patents.34

Agriculture and Trade

Tariffs on agricultural commodities and farm subsidies had a long history. In the United States, direct subsidies and counter-cyclical price supports were established during the Dust Bowl era, a period of drought from 1931–1939 that coincided with the Great Depression. By the early 2000s, a wide array of programs helped make agricultural exports a bright spot in the U.S. economy. The EU’s Common Agricultural Policy (CAP) originated in the 1957 Treaty of Rome, though it took years of negotiations to establish rural development grants and agricultural price stabilizing schemes.35 By the early 2000s, most agricultural products in Europe had target prices maintained through European Union purchases. Common EU tariffs and rules on product names protected farmers from outside competition, while a variety of programs supported agricultural land management. Other countries also maintained barriers on trade in agricultural products. For example, Japan especially protected domestic rice farmers, and India protected millions of small-holding farmers through high tariffs.

Some types of subsidies were anticipated to be permissible post-Doha, including ones for agricultural research, farm loans, government-backed crop insurance, and transfer payments not related to specific crops or production levels that stabilized income in bad years. Other direct or indirect subsidies that were on the block to be phased out included import tariffs, export subsidies, production-coupled payments, and government purchases of agricultural surpluses.

The Logic of Subsidies

The primary rationale for subsidies was to even out price fluctuations for commodities that experienced high price volatility caused by unpredictable shocks. Weather, insects, disease, and variation in the cost of inputs such as fertilizer all dramatically affected farm production. Lags of six months or more between planting and harvesting forced farmers to make decisions without knowledge of sale prices, and since it was expensive or impossible to store many foodstuffs, they were often sold at low points in the price cycle.

A second rationale was food security, which was increasingly connected to national security. Concerns were raised in the United States and Europe that absent subsidies, domestic farmers would fail, leaving the citizenry exposed to the exigencies of international trade. Frightening scenarios included shipping disruptions from terrorist attacks or fuel price spikes, hold-ups by foreign countries, or crop failures in other parts of the world. In poorer countries, by contrast, food security referred more fundamentally to the availability and affordability of food. The UN Food and Agriculture Organization estimated that 925 million people were undernourished worldwide,

primarily in developing countries.36 Economists studying food aid observed that donation programs often undermined local farmers, and advocated free trade in agriculture balanced by financial

assistance to the poor.37 Ironically, rising real prices for commodities in 2006–2007 and 2009–2010 encouraged American and European policymakers to use food security as a basis for continuing subsidies.

Third, citizens around the world supported sustaining agricultural landscapes. These had great variance, from small dairy farms in the Alpine foothills to enormous expanses of corn in the American Midwest, but shared deep historical roots and an important role in the national psyche. Models suggesting that Swiss dairy farms would be forced to shift to sheepherding or that U.S. cotton

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production would drop by 15% provoked concern that the WTO was interfering with domestic land management and national identity.38

An alternative explanation held that agribusiness had captured the policy process. Agricultural firms lobbied extensively in Washington, D.C. and Brussels. Tariffs and other trade-inhibiting policies remained in place despite longstanding observations that they raised prices for consumers and

imposed a burden on farmers in developing countries.39 OECD nations spent $280 billion in 2005 supporting agricultural producers; liberalizing trade, it was estimated, would generate real income

gains between $50 billion and $185 billion worldwide.40 Furthermore, some critics worried that industrialized agriculture harmed the environment and public health.41

Agriculture at the WTO

Under the 1947 GATT agreement, tariffs on industrial and agricultural products were to be lowered together. In practice, successive negotiations excluded agriculture to achieve consensus on other tariff reductions. A breakthrough came in the 1994 Agreement on Agriculture (AoA), part of the Uruguay round success. Under the AoA, countries negotiated “schedules” to follow when reducing subsidies and tariffs. At the launch of the Doha round, nations agreed export subsidies would be “phased out,” not just reduced. The United States and EU, and many other OECD countries, agreed to classify domestic support as three conceptual “boxes”: a permissible green box, a transitional blue

box, and an amber box, targeted for sharp reduction.42 Green box policies had minimal impact on production and trade; these included conservation programs, scientific research, and nutrition programs, such as food stamps. Amber box policies had direct effects on production and trade; they were to be reduced to below 5% of production value (10% for developing countries). Amber box policies varied by economic development level, but broadly included counter-cyclical payments, direct price supports by volume of harvested crop, and government-subsidized loans to farmers or crop purchasers. The blue box was believed by many developing countries to be a short-term transitional mechanism, but proved controversial when the European Union and United States sought to use it to postpone major changes.

The AoA included several articles intended to protect farmers and to ease the transition to a new regime of reduced tariffs. While some parties believed the AoA would eventually eliminate production and export subsidies, the agreement itself called only for their reduction. First, it gave countries six years from January 1, 1995 (10 years for developing countries) to implement the agreement. Second, “special safeguard” provisions allowed countries to raise tariffs temporarily if import volumes spiked or if the price of imports dropped suddenly.43 Third, in article 13, a nine-year “peace clause” in place through the end of 2003, countries agreed to exercise “restraint” from initiating WTO disputes or introducing countervailing duties based on other GATT or WTO agreements concerning tariffs, direct supports, or export subsidies.44 The United States and European Union interpreted this clause to provide immunity from dispute claims so long as they demonstrated progress overall toward AoA commitments. Rulings by the WTO Dispute Settlement Body, notably in the course of a dispute regarding U.S. cotton subsidies, held that article 13 was not a barrier to claims or punitive measures about specific commodities.

While the United States initially aligned policies with WTO commitments, notably through the 1996 Federal Agricultural Improvement and Reform Act, Congress subsequently passed emergency spending that cushioned farmers from a variety of crises. The 2002 farm bill grouped these with other counter-cyclical payments and established “production flexibility contracts” granting subsidies independent of the planted crops. The administration then categorized the revamped support as blue box, and pledged to limit it to 2.5% of the total annual value of agricultural production.

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The European Union likewise passed reforms in 2003 that decoupled farm payments from output, giving farmers greater flexibility in crop choice. At the same time, most domestic supports were restructured and categorized as blue box. Tariffs on imports remained high, and direct and indirect farm subsidies averaged over 40% of the EU budget during the decade starting in 2000.

These moves proved controversial in WTO meetings, and complex, shifting alliances were formed. The United States and G-21 countries requested that the European Union reduce tariffs by 50% or more. The European Union and the G-21 argued that the United States should put all “emergency” payments and production subsidies in the amber box for elimination. Developing countries proposed safeguard mechanisms under which they could impose tariffs if imports surged

by 10% or more, while the United States and European Union wanted the threshold set at 40%.45

The WTO in Action

Despite the Doha round stalemate, the WTO had developed formal procedures to resolve trade disputes and enforce decisions. Whereas GATT relied on the agreement of all members (including the offending party) to levy sanctions, the WTO established a Dispute Settlement Body (DSB) with real power to rule on trade disputes, monitor implementation, and authorize retaliation if countries failed to comply.46

Dispute resolution at the WTO followed a four-stage sequence of consultation, panel proceedings, appellate review, and implementation (see Exhibit 3). The first step was for parties to meet in an attempt to settle differences directly. If negotiations failed after 60 days, the DSB formed a panel of three (in rare cases, five) experts to hear the case. The panel, whose members had to be selected within 45 days and in consultation with the claimants, accepted written arguments from both sides, held a series of hearings to allow oral argument and rebuttals, and then delivered an interim report of findings and conclusions. Once each side reviewed and commented on the interim report, the panel issued a final report explaining whether a disputed measure violated WTO agreements. Unless a consensus at the DSB rejected the report, it became an official ruling within 60 days. Appeals, which could come from either side, were heard by three members of a permanent seven-member appellate body drawn from the WTO membership. Members of panels and the appellate body served “in their individual capacities,” without instructions from home governments. In theory, the full process was supposed to take no longer than 15 months. In practice, some disputes dragged on for years.

Countries that failed to comply with panel or appellate body rulings within a “reasonable period of time” had to re-enter direct negotiations with the complainants to determine compensation. Payments for prohibited policies took the form of new tariffs by the complainant or tariff reductions by the losing party that were of particular benefit to the complainants. If no agreement was reached, complainants could ask the DSB for permission to impose trade sanctions, typically in the same sector as the dispute, although the WTO sometimes authorized cross-sector retaliation.

In the DSB’s early years, the United States and European countries filed most claims, both against one another and against developing countries. In the latter half of the 2000s, the pool of complainants broadened, yet critics continued to attack the WTO as lacking democratic legitimacy (see Exhibit 4).

Multilateralism, Bilateralism, and the Future of Free Trade

Neither WTO officials nor most trade ministers expected a Doha round resolution before the next ministerial meetings in 2013. With global trade recovering from the 2008 crisis and the DSB process

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gradually building credibility, some observers held that protracted negotiations posed little economic or political risk. A great deal of world trade was duty-free, and tariffs on manufactured goods averaged below 5% across industrialized economies. Developed countries nevertheless sought greater access to high-growth markets in middle-income countries for financial services, medicines, entertainment, and agricultural goods. Poorer nations had limited options for agricultural and manufactured exports, and were commonly dependent on a small number of purchasers locked in through bilateral agreements. A Doha round compromise could expand trade for both sides.

In the absence of progress at the WTO, bilateral and other preferential trade agreements had proliferated, with over 200 new deals signed since 2001.47 The Association of Southeast Asian Nations (ASEAN) and the Union of South American Nations (UNASUR) were negotiating free-trade zones and possible currency unions. The United States had signed free trade accords with Colombia (in 2006), Panama (in 2007), and South Korea (in 2010), although all three awaited congressional approval. Trade negotiations were also underway between the United States and Malaysia, Thailand, the United Arab Emirates, and the Southern African Customs Union, which included Botswana, Lesotho, Namibia, South Africa, and Swaziland.

Some proponents of global free trade considered bilateral agreements a necessary precondition to multilateral solutions at the WTO. Others worried that a thicket of competing bilateral treaties would undermine momentum for the compromises needed to complete the Doha round.48 Bilateral treaties inevitably imposed externalities on other non-member countries, borne disproportionally by smaller nations. Academic economists noted that such treaties distorted trade and were more subject to capture by industries than WTO agreements. In some instances, bilateral free trade agreements had even fewer workplace or environmental controls than were found in WTO agreements. Furthermore, bilateral negotiations put smaller and poorer countries at a disadvantage relative to the United States and European Union in terms of technical expertise and staffing at meetings.

Multinational companies were leery of public engagement with free trade issues, particularly in light of the charged atmosphere surrounding the Doha round. Nevertheless, the WTO stalemate did not let corporate leaders off the hook. International trade agreements directly affected firm-level management of supply chains, strategies for differentiation from present and anticipated competitors, and research and product innovation. In most cases, the solution appeared to be a contingency model in which tariff costs and other barriers were built into existing product-line strategies, while alternative pricing and new product development scenarios planned for greater openness and competition from new entrants in a post-Doha round business climate. Business leaders also had the opportunity to articulate the public benefits of greater trade at a historical moment when many government policies remained biased against free trade.

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711-043 Stalemate at the WTO: TRIPS, Agricultural Subsidies, and the Doha Round

12

Exhibit 2a Import Tariffs (percentage)

Non-agricultural Agricultural

1915 1925 1933 1950 1960 1981 1990 2000 2005 2009 2005 2009

USA 44.0 37.0 45.0 14.6 16.5 7.0 6.1 4.0 3.3 3.3 5.3 4.7

EU 11.0 15.3 21.8 22.5 14.8 8.9 8.4 4.3 4.0 4.0 15.1 13.5

Japan 17.2 12.5 21.0 3.7 19.3 4.3 3.9 2.9 2.7 2.5 24.3 21.0

Brazil 60.0 21.0 30.0 9.0 99.0 49.0 34.8 16.6 15.0 14.1 10.2 10.2

India 4.0 16.0 n/a n/a 25.7 74.3 83.7 31.6 16.0 10.1 37.6 31.8

Notes: Data represent the most-favored nation (MFN) unweighted applied tariff rates, averaged across non-agricultural or agricultural goods as indicated. The European Union common customs tariff started in 1968; previous years were calculated as a simple average of France, (West) Germany, and the United Kingdom. Japan’s tariff rates are for both agricultural and manufactured goods prior to 1990. The tariff rate listed for India in 1960 is from 1962.

Sources: Adapted from WTO, World Tariff Profiles (Geneva: WTO, various years); R. Finlay and K. O'Rourke, Power and Plenty (Princeton: Princeton University Press, 2007), 494-5; Japan, Ministry of Finance, “Finance Statistics Monthly Report,” (various years). J. Bhagwati, India: Planning for Industrialization (London: OUP, 1970); The World Bank, “Trends in Average MFN Applied Tariff Rates,” http://econ.worldbank.org.

Exhibit 2b Global Export Volumes and World GDP (1950 = 100)

World GDP Manufactured Goods Fuels and Mining Agricultural Products

1950 100 100 100 100

1960 155 231 217 162

1970 265 625 435 238

1980 396 1,244 513 336

1990 543 2,132 566 389

2000 682 4,262 818 575

2008 818 6,809 1,040 784

2009 798 5,754 994 762

Source: Adapted from WTO, International Trade Statistics 2010 (Geneva: WTO, 2010).

Exhibit 2c Value of World Exports

Source: Adapted from WTO, Statistics Database, various years, www.wto.org, accessed May 2011.

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Stalemate at the WTO: TRIPS, Agricultural Subsidies, and the Doha Round 711-043

13

Exhibit 3 WTO Dispute Settlement Process

Source: Adapted from WTO, “The Process—Stages in a Typical WTO Dispute Settlement Case,” www.wto.org, accessed December 2010.

Timeline Process

60 days Consultations



by 2nd DSB meeting Panel established by DSB

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0 – 20 days Terms of reference

Panel composition

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20 days (+10 if WTO Director-General composes panel)

Panel examination (normally 2 meetings with parties,

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Interim Report issued to parties for

comment (review meeting with panel upon request)

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6 months from panel’s composition, 3 months if urgent

Panel Report issued to parties

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Up to 9 months from panel’s founding

Panel report issued to DSB 

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60 days for panel report unless

appealed

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

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If report is disputed, proceedings possible,

including referral to implementation panel



In cases of non-implementation,

parties negotiate compensation (pending full implementation)



Retaliation If no agreement on compensation,

DSB authorizes retaliation (pending full implementation)

 Possibility of arbitration on retaliatory tariffs or cross-sector retaliation

This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.

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This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.

Stalemate at the WTO: TRIPS, Agricultural Subsidies, and the Doha Round 711-043

15

Notes

1 P. Lamy, “Ministerial Conferences: Pascal Lamy’s Ministerial Conference Blog,” World Trade Organization, accessed December 2010.

2 WTO, “Trade Negotiations Committee: Members Confront Doha Round Deadlock,” April 29, 2011,

www.wto.org, accessed May 2011.

3 This note draws extensively on D. Moss and N. Bartlett, “The World Trade Organization,” HBS No. 703- 015 (Boston: Harvard Business School Publishing, 2002).

4 J. Madsen, “Trade Barriers and the Collapse of World Trade during the Great Depression,” Southern Economic Journal 67 (2001): 848–868.

5 WTO, “The General Agreement on Tariffs and Trade (GATT 1947),” 4, www.wto.org, accessed December 2010.

6 WTO, “The General Agreement on Tariffs and Trade,” 9.

7 I. Neufeld, “Anti-Dumping and Countervailing Procedures: Use or Abuse?” United National Policy Issues in International Trade and Commodities, Number 9 (2001).

8 E. Reinhardt, “Adjudication without Enforcement in GATT Disputes,” Journal of Conflict Resolution 45 (2001), 174-195.

9 C. Bown, Self-enforcing Trade: Developing Countries and WTO Dispute Settlement (Washington, D.C.: Brookings Institution Press, 2009), 22-44.

10 S. Ostry, “The World Trading System: In the Fog of Uncertainty,” The Review of International Organizations 1 (2006), 139-152.

11 R. Stevenson, “Measuring Success: At Least the Talks Didn’t Collapse,” The New York Times (November 15, 2001).

12 WTO, “Ministerial Declaration,” November 14, 2001, www.wto.org, accessed December 2010.

13 A. Kwa, Power Politics in the WTO (Bangkok: Focus on the Global South, 2003), 26.

14 “The WTO Under Fire,” Economist (September 20, 2003), 26-28.

15 J. Miller, “Nations Rush to Establish New Barriers to Trade,” The Wall Street Journal (February 6, 2009), A1.

16 R. Gregory, et al., “Trade and the Crisis: Protect or Recover,” IMF Staff Position Note (April 16, 2010), 4, www.imf.org, accessed December 2010.

17 G-20, “Leader’s Statement: The Pittsburgh Summit,” www.pittsburghsummit.gov, accessed September 2010.

18 International Data Corporation, “Global Software Piracy Study,” http://portal.bsa.org, accessed December 2010.

19 J. Braithwaite and P. Drahos, Global Business Regulation (Cambridge: Cambridge University Press, 2000), 79-87.

20 On the need for patents to stimulate private investments in innovation, see K. Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in National Bureau of Economic Research (ed.), The Rate and Direction of Inventive Activity (Princeton: Princeton University Press, 1962), 609-626.

21 J. Lerner, “The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and Clues,” American Economic Review Papers & Proceedings 99 (2009), 343-348.

22 A. Arora and N. Rosenberg, “Chemicals: A U.S. Success Story,” in A. Arora, R. Landau, and N. Rosenberg (eds.), Chemicals and Long-Term Economic Growth (New York: John Wiley & Sons, 1998), 71-102; J. Beer, Emergence of the German Dye Industry (Urbana: University of Illinois Press, 1959), 54-56.

23 Y. Chen and T. Puttitanun, “Intellectual Property Rights and Innovation in Developing Countries,” Journal of Development Economics 78 (2005), 474-493.

24 J. Lanjouw, “Intellectual Property and the Availability of Pharmaceuticals in Poor Countries,” Innovation Policy and the Economy 3 (2003), 91-130.

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711-043 Stalemate at the WTO: TRIPS, Agricultural Subsidies, and the Doha Round

16

25 I. Mgbeoji, Global Biopiracy: Patents, Plants, and Indigenous Knowledge (Ithaca: Cornell University Press, 2006).

26 WTO, “Marrakesh Declaration of 15 April 1994, Final Act, Annex 1C: Agreement on Trade-Related Aspects of Intellectual Property Rights,” Article 27, p. 331, www.wto.org, accessed October 2010.

27 WTO, “Marrakesh Declaration,” Article 31, p. 333.

28 A. Curti, “The WTO Dispute Settlement Understanding: An Unlikely Weapon in the Fight against AIDS,” American Journal of Law & Medicine 27 (2001), 469-485.

29 P. Marc, “Compulsory Licensing and the South African Medicine Act of 1997,” New York Law School Journal of International and Comparative Law 21 (2001), 109-125.

30 J. Barton, “TRIPS and the Global Pharmaceutical Market,” Health Affairs 23 (2004), 146-154.

31 WTO, “Declaration on the TRIPS Agreement and Public Health,” Doha Ministerial Declaration (November 20, 2001), www.wto.org, accessed October 2010.

32 Canada took the lead in implementing legislation allowing for the export of a drug under compulsory license, and the generic manufacturer Apotex supplied the AIDS drug Apo-TriAvir to Rwanda in 2008 and 2009. See Apotex, “About Apo-TriAvir,” www.apotex.com/apotriavir, accessed May 2011.

33 WTO, “Amendment of the TRIPS Agreement: Decision of 6 December 2005,” www.wto.org, accessed May 2011.

34 World Intellectual Property Organization, World Intellectual Property Indicators (Geneva: WIPO, 2010), 33-48.

35 G. Trumbull, V. Dessain, and E. Corsi, “Common Agricultural Policy and the Future of French Farming,” HBS No. 707-027 (Boston: Harvard Business School Publishing, 2007); B. Gardner, American Agriculture in the Twentieth Century (Cambridge: Harvard University Press, 2002).

36 Food and Agriculture Organization, The State of Food Insecurity in the World (Rome: FAO, 2010).

37 J. Staatz, D. Boughton, and C. Donovan, “Food Security in Developing Countries,” in L. Phoenix and L. Walter (eds.), Critical Food Issues (Santa Barbara: Greenwood Publishing, 2009), 157-175.

38 R. Huber and B. Lehmann, “WTO Agreement on Agriculture: Potential Consequences for Agricultural Production and Land-use Patterns in the Swiss Lowlands,” Danish Journal of Geography 109 (2009), 131-145; M. Jales, “Potential Impacts of Alternative Policy Reform Scenarios on the World Cotton Market,” Trade Negotiations Insights 9 (March 2010), 8-10.

39 D. Rodrik, “Political Economy of Trade Policy,” in G. Grossman and K. Rogoff (eds.), Handbook of International Economics v. 3 (New York: Elsevier, 1995), 1457-1494.

40 S. Tokarick, “Dispelling Some Misconceptions about Agricultural Trade Liberalization,” Journal of Economic Perspectives 22 (2008), 199-216.

41 M. Pollan, The Omnivore’s Dilemma: A Natural History of Four Meals (New York: Penguin Press, 2006).

42 These boxes varied slightly from other WTO subsidies, which were classified as green box (permitted), amber box (to be reduced), and red box (forbidden).

43 WTO, “Agriculture Negotiations: The Peace Clause,” www.wto.org, accessed May 2011.

44 WTO, “Marrakesh Declaration of 15 April 1994, Agreement on Agriculture,” Article 13, 53-54.

45 WTO, “WTO Agricultural Negotiations: The Issues, and Where We Are Now,” December 1, 2004, www.wto.org, accessed December 2010; R. Schnepf and C. Hanrahan, “WTO Doha Round: Implications for U.S. Agriculture,” Congressional Research Service, Report RS 22927, January 4, 2010.

46 WTO, “Understanding the WTO: Settling Disputes,” www.wto.org, accessed October 2010.

47 WTO, “Regional Trade Agreements Information System,” www.wto.org, accessed December 2010.

48 J. Bhagwati, “Regionalism and Multilateralism: An Overview,” in J. de Melo and A. Panagariya (eds.), New Dimensions in Regional Integration (Cambridge: Cambridge University Press, 1993), 22-50; J. Schott, Free Trade Agreements: U.S. Strategies and Priorities (Washington, D.C.: Institute for International Economics, 2004).

This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.