IB Economics/International Economics/World Trade Organization (WTO)

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  • Since 1945 trade policy has tended to be set within an international institutional framework. Until 1995 this was the General Agreement on Tariffs and Trade (GATT) and since then it has been the WTO.
  • The WTO depends on a rule based multilateral trade cooperation which does not focus on outcomes such as market share or growth, but simply attempts to establish the general conditions for competition facing exporters.
  • The larger the country, the larger its inter-regional trade and the smaller its international trade.
  • In many smaller countries (Canada and the Netherlands), international trade can represent a very large proportion of total GDP.
  • For LDCs economic development often involves the production and export of basic commodity items usually involving natural resources in a sequence beginning with the ones with the greatest comparative advantage.
    • LDCs place tariffs on finished goods in order to encourage the creation of a manufacturing sector.
    • As these countries become more integrated into world trading systems, growth increases and employment opportunities increase because of the gains from trade.
  • Both industrialized countries and NICs have done well out of GATT regulated trade. This has not been the case for LDCs which are very poor or for those which have specialized in primary products.
  • The WTO predicts that by 2005 there may be as many as 250 regional trading agreements covering more than 50% of trade. Such regional arrangements could damage the rules based multi-lateral trading arrangement fostered by WTO.

Trade in Services

  • Future growth in trade will be dominated by services.
    • At most, trade in goods will double over the next century.
    • Trade in services is already larger than trade in goods, and growth will be much faster.
    • In order for there to be free trade in services, each country must extend the principle of right of establishment and national treatment to the other country's firms that sell services.
  • Firms selling services in one country have the right to establish in the other country and be treated the same as local service firms.
  • Negotiations continue in WTO to complete an international agreement on financial services which would move it to a rules based multi-lateral system as for trade in goods. An interim arrangements was reached in 1995 which covered banking securities and insurance.

Multilateral Trade vs. Free Trade Agreements

  • Under WTO (GATT), multilateral trade has increased enormously, but free trade agreements have reduced the impact of multilateral trade.
    • Free trade agreements remove the tariffs between states but leave in place each nation’s tariffs against foreign countries.
    • To prevent trans-shipping of imports through countries with low tariffs, there is usually a value added agreement in place.
    • For example, NAFTA does not permit any good to be imported from outside the group and re-exported to a member of the group unless 35% of the value has been added by the original importing country.
  • Under WTO average tariffs amongst member countries are less than 4%. Thus free trade agreements do very little to remove tariff barriers. Instead what they do is allow countries to specialize in producing those products where they can achieve minimum efficient scale (where full economies of scale are realized).
  • Most states in the agreement continue to produce most products, but there are fewer product lines.
    • Exports increase in certain product lines and imports increase in others.
  • There is an increase in intra-industry trade through this type of rationalization.
  • Competition from Japan and Europe has convinced the US of the need to protect against loss of competitiveness, hence their desire to form NAFTA.
  • Under multilateral trade there is no need for trade to be reciprocal, it does not matter who you export to or import from. But with free trade agreements, the scope for trade is narrowed considerably.

Successes and Failures

  • More than 140 countries are members and have agreed to several rounds of tariff cuts. It also has developed a code of conduct relating to unfair trade practices.
  • The Kennedy Round was completed in 1967, the Tokyo round in 1986, and the Uruguay round in 1995.
  • The Uruguay round: negotiations began in 1986, agreement was reached in 1996:
    • The agreement reduced non-tariff barriers, liberalized trade in services, reduced domestic subsidies to agriculture, created better dispute settlement mechanisms, and better copyright protection for intellectual property.
    • A current controversy surrounds the proposed Multilateral Agreement on Investment (MAI) which would take a great deal of power away from govts. and give it to companies investing in a country.
  • International protest groups oppose the work of the WTO, the World Bank and the IMF as they feel they are dominated by leading industrialized countries, particularly the US.
  • The most difficult areas facing the WTO in the future will be:
    • The reduction of agricultural subsidies in all industrialized countries which should open these markets to LDCs
    • The establishment of a trade in services agreement
    • The integration of China which will strain trading systems as well as impose new obligations on China to conform to WTO rules.
    • The development of a more equitable world trading system where the power of developed countries is not imposed on LDCs through various kinds of conditionality and trade-opening requirements.
  • Developed countries must operate a fairer system of access to their own markets for poorer countries.