What is WTO (World Trade Organization) and its importance in international trade.
Introduction to WTO
The World Trade Organization (WTO) is a global body that deals with the rules of trade between nations. The WTO strives to ensure trade flows as freely and predictably as possible.
The WTO (World Trade Organization) came into force on Jan, 1995. It replaced the GATT.
GATT was a legal agreement signed by 23 countries in 1947 to promote the world trade. The objective was to reduce tariffs and trade restrictions to promote free and fair trade. Arguments against GATT: Rise of Japan and declining US dominance. Long processes to settle disputes. ‘National Treatment’ or ‘Most Favored Nation’ status.
While GATT was only a legal agreement, WTO is an international organization set up as a permanent body to keep a watch on trade in goods and services, foreign investments, intellectual property rights, anti-dumping laws etc. with the objective of promoting free and fair trade. India is one of its founder members.
WTO is the only global international organization dealing with rules of trade between nations.
General council:
- Dispute settlement body
- Trade Review Body
Councils:
- Council for Trade in Goods
- Council for trade in services
- Council for TRIPS
Objectives of WTO
- To improve the standard of living of member countries and ensure full employment.
- To enhance the production of goods and services by ensuring optimal use of world resources.
- To promote sustainable development and environment protection.
- Assisting developing countries in getting better share in international trade.
Major Successes of WTO
- 1948-2016: Membership increase from 19 to163 countries
- 90% of world trade and tariff reduction from 40% to 5%
- 1995-2015: 500 disputes brought to WTO (9 of 10 settled)
- 1997: Liberalization of telecommunication (68 countries) and financial services (102 countries)
- 2016- 34 out of 48 LDCs now members
(Daniels, Radebaugh & Sullivan, 2015; Hill, 2011; WTO, 2016)
Major Challenges Faced by WTO
Inequalities: Some member countries violate WTO agreements
Anti-globalisation movements: trade in agriculture and services
Protests by Human rights groups, Trade unions and Environmentalists led to a breakdown of WTO talks in the Seatle (no agreement was reached).
Settling Disputes
- How is a trade dispute settled?
- What does the Dispute Settlement Body do?
Read: WTO explains their role in settling trade disputes
Principles of WTO
1. Non Discrimination: The principle of non-discrimination is related to the most favoured nation (MFN) and the national treatment.
A) Most-favoured Nation: MFN means that each member should treat all the other members equally as the most favoured partner. Thus it eliminates the discrimination among countries.
B) National Treatment: It means treating foreigners and locals equally. Each member should be treated equally with respect to copyrights, patents, trademarks etc. The foreign products should not be treated less favorably than identical domestic products.
2. Freer Trade: Lowering trade barriers is one of the most important methods to encourage trade. The WTO agreements allow countries to introduce changes gradually, through “ progressive liberalization”. Developing countries are usually given longer time to fulfill their obligations.
3. Predictability: The multilateral trading system is an attempt by the government to make the business environment stable and predictable. The system tries to improve predictability and stability by discouraging the use of quotas and other measures used to set limits on quantities of imports, and also by making countries trading rules as clear and transparent as possible.
4. Fair competition: The WTO sometimes described as a free trade institutions, but is not entirely true because the system allows tariffs and in limited circumstances other forms of protection to ensure fair competition. Many of the WTO agreements in agriculture, intellectual property, services etc aim to support fair competition. The rules on non-discrimination are designed to secure fair trade.
5. Encouraging Development and Economic Reform: WTO system contributes to development and economic reform in the developing countries. The WTO has special concern for developing countries, especially least developed countries. They have been given special assistance, trade concessions, more time to adjust and greater flexibility.
WTO Agreements
1. Agreement on Agriculture: The agreement seeks to deal with the non-tariff measures affecting global competition. All member countries have to transform their non-tariff barriers like quotas into equivalent tariff measures. The agreement aims to reduce domestic and export subsidies on agricultural goods.2. Agreement on Textile and clothing: this agreement provides that all import quotas on textiles and clothing (Multi Fiber Arrangement) which has been in force since 1974 should be phased out within 10 years ie by January 2005.
3. Agreement on manufactured Goods: The developed countries agreed to reduce tariffs on manufactured goods other than textiles.
4. General agreement on Trade in Services(GATS) : GATS is the first multilateral agreement on trade in services such as banking, insurance, travel, transportation, education etc. The main objective of GATS is the progressive liberalization of trade in services. It provides for secure and more open market in services. All member nations are bound to open their service sector to private and foreign competition.
5. TRIPS (Trade related Intellectual Property Rights): Intellectual Property Rights seek to protect the interest of inventors and developers of products and processes from being copied by others. TRIPs covers following areas: Copyright and related rights, Trade mark, Industrial design, Patents, Layout design of integrated circuits, Trade secrets etc.
6. TRIMs (Trade related Investment Measures): These are aimed at removing all quantitative restrictions on foreign investment and for introducing the national treatment of foreign investments. Some investment measures that discriminate against foreign investments were identified as inconsistent with WTO
These are: obligation on foreign investors to use local inputs, to produce for exports as a condition to obtain imported inputs, employment of local people, remittance restrictions on the profit of foreign firms, use of specific production technology. These measures are considered as deterrents for investment by the foreign firms.
7. Agreement on subsidies and Countervailing Measures: subsidies given to domestic producers by national government reduce the cost of production. This enables producers to sell products at low prices in the international market.
As a result these producers have an advantage over the other producers who don’t get much subsidy from their Govts. This tends to distort international trade. SCM agreement prohibits some subsidies and these supports are actionable by WTO.
Role of WTO in world trade and international business
Over the years, WTO has played an important role in ensuring smooth slow of international trade through its trade agreements, and by reducing trade barriers in general. The rules of engagement are clearly known to the member states and the penalties for breaking the rules are also known to all the members.
WTO discourages trade protectionism and encourages member states to treat other members equally by granting each member Most Favored Nation (MFN) status. WTO also provides a forum for trade negotiations between member countries, while mediating on disputes as they arise.
Benefits of WTO to businesses:
Stimulates economic growth, Freer trade cuts the costs of living and raises incomes.
Trade stimulates economic growth, creates more jobs and helps people earn more wages due to increase in trade, and make products cheaper lowering the overall costs of living. It also helps reduce inequalities to some extent by providing the smaller countries more voice and opportunities to expand trade.
It provides more choice of products and qualities. Thanks to trade, today people have access to a variety of products, many of which is imported from different parts of the world. We all have a wide range of products and services to choose from. Even the quality of locally produced goods has become better due to competition from imports.
Rules make life easier for all; disputes are handled constructively. As trade volumes increase and more products are traded, there are more chances of trade disputes to arise. The WTO system helps resolve these disputes peacefully and constructively.
Increase in trade promotes economic growth over long term, more jobs are created & people earn more wages, costs of products are reduced, and the costs of living usually comes down. Business in smaller countries get a form to air their voice and get opportunities to access bigger markets.
In the last few years however, the US has been moving away from the WTO and has been looking for alternate means to resolve its trade disputes with other countries; it believes that the WTO dispute settlement mechanism has outgrown its bounds and now threatens US sovereignty.
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