The Future Scope of WTO - Issues as seen in the Sutherland Report

Date March 23, 2006
Speaker John H. JACKSON(University Professor, Georgetown University Law Center)
Moderator KAWASE Tsuyoshi(Faculty Fellow, RIETI / Associate Professor of Law, Graduate School of Law and Politics, Osaka University)


The "Sutherland Report" is a report of The Consultative Board that was composed two and a half years ago by the then WTO Director-General Supachai Panitchpakdi. I will begin with a little bit about the purpose of that Board according to Dr. Supachai and how it relates to some of the other things going on in the WTO.

The WTO, in its relatively short history of 11 years has become a central part of international economic institutions. Indeed there are many people in the world who say the WTO is now the most powerful and important of the international economic institutions. There are even some who say it is the most powerful international institution of all, suggesting some commentary about the problems of the United Nations recently. I do not share that view, but I do share the view that it is probably the most powerful and important of the economic institutions. But the WTO does have a number of problems. In this regard, some questions to pose are: where should the institution go in the future? Are we headed in the direction of an even more powerful institution? Is that necessary for the world? Is that kind of powerful institution dangerous for the world?

During our Consultative Board discussions, Dr. Supachai stressed two important things. One was that we were totally independent and not constrained in any way by him or his colleagues in the Secretariat of the WTO or its ambassadors. Secondly, our mandate was to look at the institutions of the WTO, and not at the substantive norms or rules. It was thus not our mandate to look at subsidies, agricultural policy, dumping, intellectual property or services. It was our mandate to look at the institutional structure of the WTO and flag for attention certain institutional issues that we thought needed more discussion. It was clear that Dr. Supachai intended this report to have an effect beyond his own term, and we all understood that. It was also clear that this report was not supposed to in any way cause problems for negotiation going forward. Indeed the original schedule was to have the Doha Round finished before this report came out. Of course, that did not happen. And because the report had to be completed before Dr. Supachai ended his term, it was decided by all parties that we would go ahead with the report and present it by its publishing date in January 2005.

Subsequent to that publication, the Consultative Board met twice with the assembled ambassadors of the WTO. Our first meeting was in January 2005 with more than 100 ambassadors in the auditorium of the WTO. Most ambassadors' opinions were favorable about the report or policies implied in it. Then we met another time in June 2005. This was a full day meeting held away from Geneva, with about 100 ambassadors present for a more elaborate session with small group "breakout" sessions. We had a chance to talk to the people who are at the frontline of the efforts of the WTO. For these discussions, we were entitled to draw upon the Secretariat for available facts, and their help was certainly useful to us.

Since the report's publication, there has not been a lot of attention paid to it, which was somewhat expected, because the Doha Round is still in progress. If there is going to be more discussion of the report, it will have to come later. We do not know what that discussion will be. In addition, we were not trying to set out a rigid outline of what needs to be done. We were instead trying to suggest a series of problems which need more thorough discussion.

Peter Sutherland, who chaired the report, was himself a director-general at the beginning of the WTO and at the end of the GATT, and he had some very important ideas about the WTO's institutional problems, which he had himself experienced. His general idea of the goal of the Consultative Board was that we should not be too theoretical or hypothetical. Instead, he thought we should focus on ideas for reform that could be accomplished. I do not often take that approach in my own writings, but I think for this group it was important that we look more for problems that need further reflection. That meant that some parts of the report are really quite timid. If you read commentaries on the published report, you will find some of them very negative, stating that the report did not go far enough. But I think some of the commentaries are by people who did not carefully read the mandate of the group. The purpose of the Consultative Board and its report was to be realistic.

Chapter one of the report is a reintroduction to the economic policies that are the basis of the whole GATT/WTO system. These policies are not accepted by the whole world. But we know from economists that when markets are liberal and enabled to operate correctly, markets can promote many objectives like promoting peace, enhancing welfare, increasing economic status for families to be able to pursue their life goals, and also reducing poverty. We know that liberalizing markets can promote those goals -- we know that empirically and through successful case studies. But we also know that sometimes there are losers to liberalizing policies. Some people in a society might gain overall from the markets, but some people will lose because there is an adjustment process. We discuss that process in chapter one of the report. Despite difference among members of the Consultative Board, we came to a consensus on these points.

However, one of the things we are seeing in careful studies done in recent years, is a clear statement that trade liberalization alone will not yield the results we seek. Liberalization must be set in a society with certain other attributes: an educated and innovative workforce, transport and communication infrastructure, reasonably efficient and non-corrupt government structures, and of course, civil internal peace. Without those things, trade liberalization will achieve much. One thing in chapter one that could be overlooked is the importance of adjustment mechanisms to help those who are harmed by trade liberalization in the short run. Generally speaking, in the history of trade liberalization, particularly since the beginning of GATT, the idea of adjustment has largely been left to the nation-state. Each state is responsible for mechanisms such as a social safety net for workers who lose jobs. But there has been an absence of attention to this problem by international institutions. We recommended that international institutions now begin to give explicit attention to the adjustment processes. That could mean implementing mechanisms as part of the existing trade policy review of the WTO which would focus on asking governments what they are doing to assist those who are harmed. In addition, there are problems of market failure because of monopolistic practices, lack of sufficient and adequate information for market participants (asymmetries of information), and problems of public goods and free riders. Those require certain kinds of governmental institutional structures for the market. My idea is that this institutional structure depends very heavily on the rule-based system, which I expand in a book due to be published by Cambridge University Press in April (2006).

Chapter two of the report addresses the problem of the "spaghetti bowl," or a vast proliferation of bilateral and small group regional free trade agreements. This poses a substantial challenge to the multilateral system. The report is not automatically negative about these associations. My own view is that they need to be reviewed case by case, because there are valuable reasons for some of them. But there is a risk inherent in their discriminatory nature. We suggest there be a mechanism for the small group regional organizations to report to the WTO similar to the current Trade Policy Review Mechanism (TPRM).

Chapter three is a more theoretical chapter in the report because it looks at the core concept of international law, namely the concept of nation-state sovereignty which has had a lot of discussion in recent years. Critics claim that the way states cling to sovereignty is more to confuse things rather than to analyze where the international system could go. A key and valid question is: how do we allocate power? At what level should certain issues be decided? What issues need to be made at the international level? For instance, should health issues like the risk of a pandemic, monopoly issues, consumer protection, or protection against fraud be moved to international attention when a single state can no longer regulate global issues for its citizens in a satisfactory way?

The report next, in chapter four, addresses the question of coherence between the trade system and financial institutional system of the world. That is an old issue going back to the 1950s when the World Bank and the IMF were set up. After many decades, we finally have the WTO, a new player which fills out the triad originally contemplated at the Bretton Woods Conference. There needs to be more attention to these issues. The crisis of 1998 showed how a financial crisis could deeply affect trade. Yet we also saw how financial institutions tended to ignore the trade organization in the process of trying to find remedies.

Chapter five considers the appropriate relationship between the governmental organization of the WTO and many non-government players in the world today. The non-government players have become very strong and some of them can be very constructive. There should be an appropriate relationship to utilize them. The Board found misguided those who are more negative and opposed to any directions of global institutions. These are very great problems which I personally think the WTO has not handled very well. It is significant that some of the international NGOs actually have budgets that are larger than the entire budget of the WTO. There looms the question of transparency however. Many of these organizations call for more transparency in the WTO and the Consultative Board agrees with that challenge. But the other side of the transparency question is that some of these organizations themselves are not transparent, and thus, we do not know where their funding is coming from or what particular interests they pursue.

The report discusses the WTO dispute settlement system (DSS) in chapter six. The DSS has turned out to be extraordinarily powerful. It is, today, the most powerful international tribunal for dispute settlement system that exists on the face of this earth. The Board's conclusion was that this DSS has been very well received. There are some strident opponents, but overall it has been accepted and viewed as working on behalf of poor or smaller countries as well as the large countries. There are some problems that need to be balanced more in favor of the weaker and poorer countries, and we have some institutions developing to assist them. But because of that, we suggest great caution about trying to reform that system now because those reforms may be premature. We may not yet fully understand what is needed. At the very least, any reforms should do no harm. Some of the reform proposals would undermine the credibility and the juridical nature of the dispute settlement system and that could do harm.

Chapter seven turns to the other side of the World Trade Organization, the political negotiation or diplomatic side, which has proven to be very weak in comparison to the dispute settlement side. Thus, a certain tension has developed between these two sides which have occasionally burst out in acrimonious discussion. The decision-making process leaves a lot to be desired, and can lead to paralysis in a time when globalization and economics are moving very fast. There are two dimensions to this paralysis. One is the consensus rule. We all agree consensus is very valuable; it forces the organization to touch base with all levels of societies and governments. But the consensus rule has been abused. There are times when governments have blocked consensus for reasons that have nothing to do with the immediate decision, but are just trying to get bargaining leverage. The Consultative Board makes a proposal not to do away with consensus, but to require a government which blocks a consensus to make a written report on why it is so important for that government to do so. That is an idea the European Community lawmakers have had in the past. We do not think this change will solve everything, but will be a small step in rethinking the consensus rule. The other aspect of addressing paralysis is variable geometry. This involves situating the organization in such a way that subgroups could do things in a farther-reaching and faster way.

Chapter eight looks at the relationship to nation-state policymaking of the WTO. On this subject, there needs to be more input from nation-state capitols. This is something that Peter Sutherland felt very strongly. We need to have certain inputs at the minister level between formal ministerial meetings. We also need to revise the rules for negotiation regarding the ministerial meetings, which must occur every two years.

Finally, chapter nine of the Consultative Board report looks at the role of the Director-General and of the Secretariat. Peter Sutherland had an enormous influence on that part of the report, due to his vast experience. But we also know from the experience of other recent Director-Generals, both in GATT and in the WTO, that there have been some very serious problems in how some of the members of the organizations treat both the Director-General and the Secretariat. There have been unhealthy situations in which the Director-General was unable to take initiatives or even to call a meeting. Since the report came out, we have had a new selection process for the Director-General which is quite good, and much better than the previous one. The previous process was quite defective. The process split the term between two Director-Generals allowing them only three years each. Now we are back to a four-year term, once renewable. And the selection process ended with a very good selection in Pascal Lamy, who I think wants to address some of these institutional problems. When the Consultative Board report was first made public, Pascal Lamy came out in favor of it, even before he was Director-General. That is a good sign. Likewise, there is a problem with how the Secretariat is treated. There have been situations where the Secretariat was prevented from doing important research or developing some suggested ideas. There has to be attention given to this problem and some higher status for the Secretariat, particularly in terms of pursuing impartial and well thought through proposals for members to decide.

I return now to a subject covered in chapter six of the Consultative Board report, and which I discussed briefly above. The history of the dispute settlement system has been remarkable. The GATT had very little in terms of treaty text for dispute settlement. Yet, quite a powerful system was developed by trial and error over the 47 years of the GATT. There are a number of specific decisions which were made along the way which strengthened the system and made it more rule-oriented. But there was one big defect: the consensus rule by which the then General Council of the GATT would be required to adopt by consensus a panel report. Any government could block it. That meant that the government that was losing in the report could block it from becoming a firm international law obligation.

During the Uruguay Round, the eighth and last GATT round from 1986-1994, the DSS was overhauled quite elaborately. Many of the practices of the GATT were picked up and placed in the Dispute Settlement Understanding (DSU) for the procedures of the process. A key change was the prevention of blocking. Now in the Dispute Settlement Understanding, when a panel reports, that report is almost always adopted automatically without even a vote. Part of that was to introduce an appellate process involving a body of seven persons who discuss the appeal and three of those are responsible for the decision. The report of that decision is also automatically adopted. The rules of the DSU provide that every member of the WTO is obligated by international law to use this procedure for any disputes concerning the WTO texts. From the Uruguay Round, there are 1,000 pages of fairly complex treaty text with many gaps and ambiguities, so there is potentially a lot for the dispute settlement system to do.

Thus, now there is automatic adoption of the report, and a mandatory jurisdiction for a very broad area of human endeavor: economic matters that cross borders. Almost all of these matters do cross borders today. With that many included transactions comes power. I think the DSS is the most powerful of all the economic organizations that exist. A tension has developed between this DSS and the rest of the organization.

The DSS has received 335 complaints resulting in 104 First Level Panel reports adopted and 64 Appellate Body reports adopted, amounting to about 30,000 pages of jurisprudence. That jurisprudence is very rich with elaborate and detailed analysis of a number of very important issues, including the question of the degree to which the international organization must defer to the nation-state decisions on economic regulations that affect international trade. Full deference would be disastrous. A key to the dispute settlement system as expressed in the DSU is predictability and security. This is for the benefit of millions of entrepreneurs who make strategic decisions about their businesses. So besides governments, millions benefit. This deference question becomes quite important. It is clear that while there should not be complete deference to the nation-state, there has to be some deference, because state decisions are closer to the opinions to the constituents who are affected.

Another key question is how to interpret a treaty. There are a couple of different techniques, but those expressed in the Vienna Convention on the Law of Treaties, which is not itself enforced in the WTO but represents customary international law, is probably not adequate for the WTO. Because when you have a large treaty of 150 members or more designed to create an organization intended to exist for a long period of time, you quickly find something I call "treaty rigidity," meaning it is virtually impossible to amend the treaty. The Vienna Convention seems to be more appropriate for bilateral and small group treaties in the way it emphasizes text, for instance. This means that for the large treaty that I mentioned you have something like a constitution. If it is more like a constitution than a contract or bilateral treaty, then different techniques of interpretation may be necessary, such as evolutionary, purposive, or teleological interpretation. The case known as the Shrimp-Turtle case is perhaps the most interesting in this regard to understand some of these tensions in the jurisprudence of the organization.

Questions and Answers

Q: I would like to ask you to elaborate more on the relationship or the potential developments in the balance between regional bilateral arrangements and the global system. Also, could you please comment on multinational or global corporations that have very little relationship to and different values than national sovereignty and their implications for the WTO?

A: Regarding the small group regional agreements. An interesting and probably expected reaction by the ambassadors to the Sutherland Report was they felt that the report was a little too negative. They said the WTO and Doha often seems to be going nowhere and they cannot wait. They must do something for our constituents in the meantime, so they have to pursue these small group and bilateral arrangements. A majority viewed those options as second best and basically a result of the decision-making problems of the WTO organization. That of course connects with the chapter of the report about decision making. If we cannot solve the decision-making process of the WTO, it is inevitable that we are going to splinter even more. It is clear that the multilateral system would be superior if it could work. I am reasonably optimistic about this because of the leadership of Pascal Lamy and because of the U.S. representative who has been appointed--a former member of Congress who has been working with his former colleagues towards multilateralism. That was absent in the previous case. I tend to think the Doha Round will be somewhat anemic but am not too worried as long as it can get through. We will have more rounds. One problem at the end of the Uruguay Round was a feeling that it would be the last round. I recall a decade and a half earlier at the end of the Tokyo Round I suggested maybe it was the last. I do not think we need to be unduly worried about the result of a round that is not heroic.

You are right about global corporations. They have lots of implications for the question of sovereignty. I personally would not throw out sovereignty. There are important questions about how we allocate power and I certainly do not want to put too much power in the international system until it is more capable of handling that power, which means checks and balances and prevention of corruption. We have to begin treating the international organizations like we treat nation-state constitutions. We have to think of separation of powers and control of undue power. That relates to a different concept of sovereignty than the original Westphalian sovereignty of 1648. Lastly, I never thought contract meant anything in terms of the GATT. I thought those who said it was just a contract really were antagonistic to the GATT. It was always a provisional protocol, but was binding international law in force, even though some high level U.S. officials said it was not binding.

Q: In 20 years time, what will happen in three aspects: 1) will decisions be made by a small group of people or will it still be by consensus? 2) will agriculture trade be fully liberalized? and 3) will human resources be free to move in a global world?

A: For the first question on governance of the organization, I think it is clear there has to be something other than 150 ambassadors in the same room. You cannot negotiate a treaty like that. I think it is also clear that the green room idea is out -- that a fluctuating group of insiders can be called together to construct a proposal to be sent to the whole body for approval. The Doha meeting was constructive in the way it pulled in important developing country diplomats and set up facilitators to the chair. That worked well, but still is not going to solve the major problems. Every time a smaller steering group is suggested, every government that will not be in that group is opposed. Now we have the idea of constituencies or groupings of nations, like the Caribbean nations or G-20 sometimes with one representative. My guess is constituencies are the way we will have to go. And we will need some kind of steering or consultative group to give policy guidance to the organization. I think we will figure something out. A key is to keep everybody informed and more use of electronic methods could help. Part of it will be the ingenuity of the Director-General. I think it will be a combination of these things and will take experimentation. In the process we will have to rethink the consensus rule.

Will agriculture be fully liberalized? No, nothing will be fully liberalized. We have a century of work to do on services, for example. Agriculture could be farther along, but it is a phasing question. Depending on what the community wants, we could establish phasing, like for textiles, and could progress far in a 15-year period. Economists say agriculture is a very small part of total economy, particularly in industrial economies, but it probably has the most potential for poverty alleviation in the Doha Round. So I think agriculture is very important. But like the rest in the history of GATT, it will not be pure liberal trade.

For human resources, we are facing deep problems mixed with the meanings of citizenship, immigration, and culture. So I do not see total freedom of human resource movement in the near future if at all. But I do think there are categories we could do, like sophisticated technical expertise. A key question will be about the laboring class, whether we can at least have short-term, guest worker ideas. But I think it is further down the road than Doha.

Q: How do you see the role of the WTO as an organization and of the Secretariat in particular in light of the clear point that the WTO cannot function if developing countries do not come up to speed with "soft infrastructure" which is not only ports and communication, but also customs services, regulations, and judiciary?

A: I think the role is potentially very prominent. Clearly in the customs area or trade facilitation area, there is a major role for the WTO. Anything that is a major role for the WTO ought to be available for study, analysis, and ideas of the Secretariat. The Secretariat is very short-handed, so maybe we will need some outside institutions like OECD or UNCTAD to help with some of the analysis. Part of trade facilitation (customs) problems is corruption problems. We are going to have to face that in the context of the WTO's role regarding corruption of sovereign nations. I am not one who thinks the WTO should be constrained in its subject matter. Constraints based on resources make sense, but not that subjects should be beyond the reach of WTO competence.

Q: In addition to stressing the evolutionary interpretation of the treaty, is it not also important to look at the negotiation history of the round? Because WTO agreements are not just legal processes, but political negotiation processes. Should we not be more faithful to negotiation history?

A: The theory of the Vienna Convention is not to give much help to negotiating history, but to downplay it. I am a critic of that. I think we ought to have more preparatory work involved, and that is one of my criticisms of the Vienna Convention. The negotiators in the last several rounds have decided not to have an official preparatory record, which I think has been a mistake. That means the preparatory record we have is muddled. The most serious case is that of the safeguards question, which is quite contrary to what I think is the negotiating history. The cotton and sugar cases are fascinating. They are going to affect the negotiation more than anything the negotiators do. The cotton case in particular, I think did the right thing because the economic analysts were able to show that the U.S. was wrong, that there was still an incentive effect for production. That is clearly going to affect the negotiation. Sugar is a follow-on case, using a similar intellectual framework as the cotton case. So I think those cases are appropriate and going in the right direction.

*This summary was compiled by RIETI Editorial staff.