BY DAVIDE PINI
Davide Pini is a first-year MA candidate from Parma, Italy, concentrating in International Law with a double specialization in international finance and emerging markets. He is part of the five-year BA/MA Program at the Johns Hopkins University undergraduate program in International Studies. Over the Summer Davide worked at JP Morgan Chase in the Credit Risk division at the New York office, where he helped analyze the asset management and hedge fund industry. He is returning to JP Morgan's Country Risk Division this upcoming summer. Davide is about to receive his Bachelor of Arts in economics and international studies from the Johns Hopkins University.
Since its foundation the World Trade Organization has received much criticism. The inefficient and undemocratic voting process, the current stall of the Doha Round of negotiations, and the shortcomings of its Dispute Settling Understanding have tarnished the organization’s previous achievements (Lester, Mercurio & Davies, 2012 and Breuss, 2001). Founded in 1995, the WTO is a multi-lateral international body that regulates trade among nations. The organization provides a forum for its current 160 members to discuss and agree on progressive tariff reductions in order to achieve overall sustainable economic development and improved standards of living. However, the current policy of non-discrimination on traded goods based on their likeness compromises these goals. In particular, the currently used definition of “like goods” undermines the competitiveness of products manufactured with sustainable and environmentally friendly techniques. These products can’t compete with equally tariffed output of large-scale industrial companies, which often exploit cheap human labor in order to keep their costs of production low. Although this would imply a distortion of the free market economy, a more active role of the WTO in protecting corporate responsible products would help the organization achieve its declared goal of higher standards of livings through sustainable development.
The WTO was formed following the 1986-1994 Uruguay Round of tariffs negotiations, thereby giving an institutional dimension to the General Agreement on Tariffs and Trade (GATT), the legal principles which have regulated trade since 1947. The preamble of the Agreement Establishing the World Trade Organization clearly states the objectives of this international body, which include “raising standard of living, ensuring full employment […], expanding the production of and trade in goods and services” (WTO, 1994). In order to achieve these objectives, the WTO relies on the same principles laid out by the GATT: non-discrimination of traded goods and the Most Favored Nation treatment. The non-discrimination principle states that “the products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favorable than that accorded to like products of national origin” (GATT). In simple terms, no country can charge higher tariffs on two identical goods based on their origin. This is one of the key principles on which the global post-WWII trade system rests. Not surprisingly, the definition of like products is highly debated, as this pivotal element has sparked numerous legal controversies. Usually, four principles are considered when assessing whether two products are “like goods” or not: the physical appearance of the products, the extent to which they serve similar end-uses, extent to which consumers see them as alternatives to satisfy particular wants, and the international classification for tariff purposes (Porges & Meltzer, 2014). Furthermore, if two distinct products were deemed directly competitive and substitutable, they would fall under the same non-discriminatory rule.
This rule was well intended, as it prevents domestic countries from putting imported goods at a disadvantage by charging higher tariffs. A clear example of a country attempting to disobey this regulation can be seen in the WTO case “Japan-Alcohol”, in which Japan was found guilty of charging a differential taxation on imported Russian vodka over the domestic shochu. The judicial panel deemed the two alcoholic beverages “like goods” for all tariff purposes (Lester, Mercurio & Davies, 2012). In a similar case, Chile was held responsible for the de facto discrimination against imported liquor in order to protect the domestic wine industry. Regardless of its good intentions, however, this likeness definition ignores the methods of production, penalizing goods manufactured in fair and respectable ways when they are forced to compete with multi-national corporations’ (MNC) efforts to cut costs regardless of the social impacts. The Chinese company Foxconn for example, one of Apple’s major suppliers, was brought to the media attention due to its detrimental working conditions; the lack of safety norms and unsustainable hours were so unbearable that in 2010 18 workers either killed themselves or attempted to (Blanchard, 2012). Child laborers are still widely used in the coffee industry (Banjo, 2014 and Rice, 2003). These and other intolerable business practices are not discriminated by the GATT, which tends to disproportionately reward low costs of production without taking into any account how corporations achieved such efficiency.
Fair Trade is a social movement that predicates a direct relationship between the producers and the final consumers. Through the elimination of the intermediaries, producers receive a higher, pre-determined price for their output, which allows them to increase their efficiency in an environmentally conscious and sustainable manner (Wielechowski & Roman, 2012). This movement shares the WTO’s objective of achieving fairer redistribution of wealth, with a particular focus on developing countries. Nonetheless, the producers adhering to the Fair Trade philosophy are at a great disadvantage against MNCs and their unethical practices. Their smaller scale of production as well as their commitment to ethical business practices necessarily implies higher marginal costs, which MNC can overcome through the recruitment of labor in countries with weak rule of law and low average wages. As of right now, the current version of the non-discriminatory rule offers David no defense against Goliath.
Proponents of free market efficiency would always look upon any institutional intervention on prices as detrimental to society’s welfare. On the other hand, the inherent cost disadvantage incurred by Fair Trade producers represents an inefficiency of the market as well. In fact, the societal benefits of these ethical methods of production are often not observed by consumers, who are usually charged inevitably higher prices. Due to these higher prices, Fair Trade products have maintained low market shares. By allowing countries to raise differential taxation on “like goods” based on different methods of production, the WTO could create a level playing field, which would allow consumers to make informed decisions between industrially produced goods and Fair Trade products on a more equal price basis. The negative externality of unethical business practices would be internalized by the MNCs’ higher tariffs.
Numerous trade economists like Yale’s T.N. Srinivasan and Columbia’s Jagdish Bhagwati have argued that “level playing fields constitute a precondition for Free Trade” (Bhagwati & Srinivasan, 1995). In order to achieve these level playing fields, the WTO should create a panel of experts to identify a list of producers constantly facing a cost disadvantage due to their ethical business models. By allowing countries to offer advantageous tariffs to such producers, the WTO would actually improve, rather than hurt, market efficiency. In its effort to achieve this, the organization should partner up with the United Nations. In 2000, the UN tried to promote corporate responsibility by launching the United Nations Global Compact, a campaign aiming to promote sustainable business conduct respectful of the environment and workers’ rights. So far the only significant accomplishment of the initiative has been the Ten Principles, a non-enforceable list of commitments companies should follow (United Nations, 2003). These principles include codes regarding human rights, labor standards, the environment and anti-corruption, but the vagueness and flexibility of the stated requirements have made the document ineffective and unobserved. By joining the WTO in its effort to protect companies that are already abiding by these ethical business models, the UN could achieve its goal of a greater global corporate responsibility in a faster and more impactful way.
Protecting ethical companies would increase their profitability, allowing them to expand and eventually lead the way toward a more globally accepted business model that would comply with the UN Global Compact’s Ten Principles. This would also aid in achieving the WTO’s goal of attaining higher standards of living in an environmentally friendly way rather than enforcing equal taxation on “like goods” without taking into account their production methods. The unified action of these two international bodies could bring great benefits to society, while giving up on them in the name of free market efficiency would deprive future generations of an equitable alternative to unethical business practices.
Banjo, Shelly, Inside Nike's Struggle to Balance Cost and Worker Safety in Bangladesh, The Wall Street Journal Online, published online on April 21st, 2014. Accessed on 10/14/14 at: http://online.wsj.com/news/articles/SB10001424052702303873604579493502231397942
Bhagwati, Jagdish and Srinivasan, T.N., Trade and the Environment: Does Environmental Diversity Detract from the Case for Free Trade?, Discussion Paper Series No. 718 (January 1995). Accessed on 10/14/14 at: http://academiccommons.columbia.edu/catalog/ac%3A100101. The reference in the essay is taken from page 3.
Blanchard Ben, Apple, Foxconn Scandal Highlights Exploitation of Chinese Workers by Foreign Firms, published by the Huffington Post on 03/07/2012. Accessed on 05/01/15 at: http://www.huffingtonpost.com/2012/03/07/apple-foxconn-scandal_n_1325930.html
Breuss, Fritz, WTO Dispute Settlement from an Economic Perspective – More Failure than Success?, IEF Working Paper Nr. 39 (October 2001). Accessed on 10/14/14 at: http://epub.wu.ac.at/1046/1/document.pdf
GATT, The General Agreement on Tariffs and Trade (GATT 1947), Article III: 4. Accessed on 10/14/14 at: http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf
Lester, Simon, Mercurio, Bryan and Davies, Arwel, World Trade Law – Text, Materials and Commentary, Hart Publishing (2012), Oxford and Portland, Oregon. References in the essay are from page 76, 269, 282.
Porges, Amelia and Meltzer, Joshua, National Treatment and Non-Discrimination, Lecture notes provided to students on 09/18/14 in the class International Trade Law, offered at SAIS in the Fall 2014. The reference in the text is from slide number 9.
Rice, Robert, Coffee Production in a Time of Crisis: Social and Environmental Connections, Published on SAIS Review vol. XXIII no. 1 (Winter–Spring 2003). Accessed on 10/14/14 at: http://muse.jhu.edu/journals/sais_review/v023/23.1rice.pdf. Reference in the essay is taken from page 231.
United Nation, UN Global Compact – 10 Principles, 2003. Accessed on 10/14/14 at: http://www.ohlzs.cz/fileadmin/user_upload/spolecnost/10_UN_Global_Compact_Principles.pdf
Wielechowski, Michał and Roman, Michał, The Essence of Fair Trade and Its Importance in the World Economy, Published on Acta Scientiarum Polonorum - Oeconomia, (Sep. 2012), Volume 11, Issue 4, p.47-57. Accessed on 10/14/14 at: http://eds.a.ebscohost.com.proxy1.library.jhu.edu/ehost/pdfviewer/pdfviewer?sid=c26c7d2a-e4d9-438b-9683-9af334dd8208%40sessionmgr4004&vid=2&hid=4202
WTO, Agreement Establishing the World Trade Organization, Marrakesh (1994), Accessed on 10/14/14 at: http://www.wto.org/english/docs_e/legal_e/04-wto.pdf