The Role of WTO in the Liberalization of Trade - Literature review Example

The Role of WTO in the liberalisation of trade The World Trade Organization, WTO, was established in 1995 in order to regulate the trade agreementsnegotiated by its member states, such as the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).WTO is founded on the organizational structure that was developed under GATT patronage in early 1990s(Hoekman, 2001, p.41).GATT originated in post World War II era from the ineffective negotiations to establish an International Trade Organization(ITO).However, ITO dream could never be realized and GATT proved to be the only substantial outcome of the negotiations. Since 1947, GATT has been the central point for participant industrial country governments looking for reduced trade barriers. The success of GATT was evident from continuous increase in the number of contracting parties. In 1994, at the end of Uruguay Round, 128 countries were its members. While entering into the force of WTO in 2001, the number reached to 144(Hoekman, 2001, p.41). WTO is characteristically different from GATT. GATT was flexible enough for bargaining and provided ample opportunities to select from particular disciplines. On the other hand, WTO rules are applied to all participant countries that are subject to obligatory dispute resolution procedures. It is appealing for specific groups that are seeking to initiate multilateral disciplines on various subjects which range from labour standards and environment to competition and investment policy to animal rights. On the other hand, some groups have reservations about the appropriateness of its adoption because multilateral terms and conditions are likely to affect the ability of governments to deal with market failure and to regulate domestic activities in a negative way. Central role of the WTO as a platform for international cooperation on policies associated with trade is formulating the code of conduct for participant countries. These codes materialize during the exchange of trade policy engagements in alternate negotiations.WTO is like a market where participant countries gather to swap market access commitments reciprocally. In fact, it resembles a barter market (Hoekman, 2001, pp.41-42). The principle fundamental to most WTO agreements is more trade (that implies trade liberalization) is comparatively better than less trade or no trade. If a member country has trade restrictions, it should usually stick to tariffs and there should be no increase in trade restrictions except in some specific conditions. It is evident that most countries recognize the trade benefits in growth and development of economic sector. Second, the political forces on domestic level that support trade restrictions are powerful and difficult for governments to confront. Finally, a global trading system facilitates governments to beat the political resistance for trade liberalization and to get the gains from trade. At this point, value of the WTO system becomes quite clear (Albert, 2004, p.39). Albert (2004) further observes: “Opposite of free trade (can be considered) “restricted trade” rather than “protectionism,” since the latter term carries negative and insulting connotations for some anti-WTO groups. Protectionism implies in some people’s minds craven self-interest, as when a tariff is motivated merely by the desire to raise import prices to boost profits or wages in a particular protected domestic industry. In contrast, these same observers might define “trade with a human face” or “trade rules to protect the environment (workers’ rights, human rights, and so on)”as a set of policies that restricts trade for some higher purpose”. (p.39) Albert (2004) argues in favour of trade liberalization that incorporates both political and economic constituents. Trade policy and its association with WTO is not only an element of economic policy but of foreign policy and domestic political strategy. Actual purpose behind founding WTO has not always been pure and altruistic, however, economic analysis enable us to draw three major aspects regarding the benefits from trade and motivation for establishing WTO. Firstly, the fundamental argument in support of trade is the economic gains participant countries achieve. Secondly, the political benefits associated with economic gains not only at domestic level but also with respect to other countries that promotes the establishment of a stable global environment. In addition, countries are free to increase gains from trade and conclude reciprocal trade agreements in order to accelerate the whole process. Therefore, a global system that is dedicated to trade is systematically beneficial which would facilitate governments to negotiate trade liberalization terms and conditions multilateral (p.39). Albert (2004,p.41) observes, while formulating trade policies, usually governments find them in perplexing situations .In order to acquire gains from trade, the right choice is to agree on lower tariffs, irrespective other participant countries do opt it or not. On the other hand, domestic industries will oppose such policy strongly when they consider the likelihood of increased import competition. It is often quite hard to congregate the required political support in favour of trade liberalization that can overcome the opposition. Governments understand the similar limitations of their foreign counterparts; therefore, it becomes hard to be the first. Here come the role of GATT/WTO, the system suggests to governments, not only a politically ingenious but effective way out of this dilemma. Multilateral trade policy terms and conditions for negotiations are based on these principles as Albert (2004, p.41) states: “Non-discrimination among members (“most-favoured nation” treatment), So that any country lowering its tariff on goods from one country must extend the same tariff cut to all members of the agreements; national treatment of imported goods, so that member countries must treat imported items the same as domestically produced items; tariff binding, which required countries to fix their tariffs at the negotiated rates with no possibility of unilateral increases above the bound level, and reciprocity in trade negotiations, which requires that all countries come to the table ready to offer improved terms of market access to the others”. The rules of WTO, such as non-discrimination, tariff binding, national treatment and a relation of mutual dependence in negotiations provided governments with the framework that was essential in order to turn the trade gains into policy. Most importantly, these rules allowed each participant country to play the most valuable pro-trade card at domestic level by ensuring their exporters about market access. At the same time, price for this access was to offer concessions in the form of reciprocal access to markets for imports and all other participant countries are bound to do the same. Usually, a government is enabled to proclaim on her success of targeting open foreign market while playing down the “concession” of domestic tariffs that are lowered. WTO provisions such as, national treatment, non-discrimination and tariff binding abstain participant countries from cheating or reverting from their commitments with trade liberalization policy (Albert, 2004, p.41). WTO provides a global trading system with the features of classic public good which rise above political failure in comparison to traditional idea of economic market failure. The system and gains from its associated outcome would be next to impossible if they relied on individual member and by being active in their own political limitations. An individual participants’ gain does not diminish the benefits of other participants; in fact, mutual benefit is estimated to rise with increasing participation and expanding trade liberalization. When every member follows rules, all participant countries become better off (cited in Albert, 2004, p.46). Trade benefits are achieved by fundamental value proposition of WTO. In order to understand the value of WTO membership, one must realize the lower tariffs lock and guaranteed terms of market access via trade policy pledge. Due to these limitations on government action, private economic players are enabled to reduce the threats of international trade and gain benefits from their investments in assets which are trade specific. This practice is crucial as trade gains depend on making such private transactions possible. Irrespective of the evident significance of the role WTO plays as an institution urging for trade liberalization, benefits of international trade itself raise the question about WTO’s importance (Albert, 2004, p.46).In a provoking article, Andrew Rose(2000) as cited in (Albert, 2004, p.46) provides statistical evidence that suggests: “...trade patterns and trade policies have not been affected by the existence of GATT or the WTO. The logic of the underlying hypothesis is that countries will want to trade anyway and the geography, income, and other economic factors ultimately determine trade patterns. According to this theory, if there were not a WTO, countries would have found a way to open trade anyway, which means that the current WTO system is just an irrelevant, empty shell within which fundamental economic factors drive international trade”. Albert (2004) explains that this hypothesis cannot be tested for validity because it is impossible to go back and reconstruct the world since 1947 in order to judge how trade would have been without the role played by WTO and GATT. However, it would be too positive an assumption that trade policy without such institutional construction would have followed similar rational economic path. After global trade collapse and fall into protectionism in 1930s challenged market-driven consistency and imposed huge costs on world economy (p.46). Albert (2004) further states: “Institutional arrangements such as the WTO may in the end serve primarily to overcome the human foibles, suspicions, and mercantilist reflexes of governments conducting trade policy unilaterally, so that the market-driven factors can have a chance to work. Maybe governments would have found some way to get to the same outcome, but those who make trade policy, perhaps even more than academic economists, are likely to shudder at the prospect for global trade without the WTO”(p.46). Therefore, WTO proposes a simple offer to its all member, be the member of trading club, follow the rules and all participant countries benefit from it. The idea is so simple that either countries are already its members or want to be. The simplicity of the idea behind this framework is the key to continued success and progress it is making towards the goal of establishing global economic foundation in order to achieve other goals among the community of nations(Albert,2004,p.47). WTO provisions play a very important role when it comes to giving flexible terms for regulating trade-related adjustments as Bacchetta and Jansen (2003, p.43) state: “WTO members have two principle options for liberalizing their trade regimes in non-preferential way —unilateral liberalization, and reciprocal liberalization in the context of a multilateral round of trade negotiations. The first option is generally limited to reductions in import barriers, and almost never involves the binding of tariffs at the new lower levels. Liberalization in the context of a multilateral round often involves, in addition to reductions in import barriers, the binding of many or all tariffs at new lower levels, and the acceptance of new rules, procedures and disciplines...but they also impose certain constraints on governments’ trade and trade-related policies”. According to Bacchetta and Jansen (2003) WTO provisions for participant countries in order to manage adjustments are classified at three levels. Initially, the transition periods for introducing liberalization gradually, working on domestic legislation and establishing new institutions. Secondly, safeguard measures are taken in specific cases when imports of a certain product increases to the extent that inflict serious harm to domestic industry, and ultimately, some specific subsidies in order to facilitate the adjustment process. All of these provisions have to offer flexibility in different situations. Transition periods provide flexibility for issues after liberalization and effective for dealing with anticipated adjustment problems while safeguard and subsidies provisions provide flexibility for adjustments for unanticipated issues after trade-related shocks. In addition to that, WTO offers two other tools for regulating adjustment process. These rules are quite straightforward: first, in selected circumstances, participant countries have the option to either exempt from liberalization of a particular sector or product that is considered to be problematic or to liberalize lesser in one sector by swapping more liberalization in other sector. Simplicity of these options makes them quite popular which is evident from the fact that liberalization under GATT was ongoing and from several tariff peaks, it continued to characterize trade regimes worldwide (p.43). International monetary affairs and trade are interlinked due to the fact that monetary and fiscal areas are also associated with exports and productivity growths. Integration of evolving economies into international economy facilitates the competition for capital and aid. It is evident from capital flow from expanding markets by commercial banks, private investors and multinational enterprises. Recent financial crisis has highlighted the risks involved in this process. Therefore, IMF and World Bank actively play their roles as financer or as watchdog.WTO plays a critical role in drawing funds through trade and foreign investment liberalization. International trade is imperative for economic growth; therefore, it is essential for emerging economies to accelerate economic reforms (Hoogmartens, 2004, p.9). The fundamental objectives of WTO as well as its predecessor GATT, as Hoogmartens (2004) observes are to serve as a forum to negotiate trade liberalization, to monitor and develop better measures for transparency and to work for resolve issues between trade participants. In addition to that, the fundamental objective includes raising living standards, working towards providing full employment, production and trade expansion, and ultimately, optimal utilization of world’s resources. In order to achieve these objectives, WTO/GATT work towards fixing or limiting the impact of trade barriers, for instance, quotas, customs process, tariffs, state trading and subsidies in addition to pave the way for trade liberalization(p.10). Hoogmartens (2004) further states, “Tariffs are generally believed to distort competition and to attribute monopoly rents to producers in countries that uphold them. Quotas are also believed to distort competition, but usually do not yield more profit for domestic producers. Furthermore, their administration may yield corruption, just as discriminatory licensing may”. (p.10) According to Sampson (2005) relationship between trade liberalization and sustainable development cannot be denied. Principally, WTO facilitates and ensures the mutual support between the two areas and implementing the association in many ways, the raison d’être of Doha Development Agenda that developed in 2001 from Doha Ministerial Meeting of Qatar. According to the World Bank estimate, liberalization of merchandize trade and favourable domestic policy environment can not only generate five percent income in developing countries but 300 million people can rise above poverty level by 2015.The estimate and statistics seem very promising, however, there are some concerns about the idea that trade liberalization automatically promotes sustainable developments. In fact, from social and environmental perspective, trade liberalization is considered to be threatening for sustainable development. It is considered to be anti social and anti environment that is initiated in order to gain increased profits, jobs, consumption and production. Despite consensus on poverty alleviation, there is no way to ensure it in the presence of strict trading rules. It is considered to be unfortunate as these concerns about trade liberalization are not addressed in Ministerial Declarations.WTO attribute these concerns as mismanagement or bad governance regarding environmental, trade, social and income distribution policies. According to its definition, WTO is neither responsible for negotiated trade liberalization and for setting environmental or social standards for enforcement nor it is responsible to reallocate the gains from trade expansion or to protect those who are negatively affected by it.WTO considers it undue interference in national affairs of member countries(pp.54-56). It may seem logical but in order to take trade liberalization to the right conclusion, WTO, as an international organization work for the collective good by realizing the need to address the liberalization-induced concerns. Work cited Bacchetta, Marc. & Jansen, Maarion, 2003.Adjusting to trade liberalization: the role of policy, institutions and WTO disciplines. [Online]Geneva: WTO Publication. Available at: http://www.wto.org/english/res_e/publications_e/special_studies7_e.htm [August 1, 2010]. Hoekman, Bernard.2001.The WTO: Functions and basic principles. In Hoekman, Bernard, Aaditya Mattoo, & Philip English eds.2002.Development, Trade and the WTO: a hand book. Washington, DC: The International Bank for Reconstruction and Development/the World Bank.Ch.6. Hoogmartens, Jan. 2004.EC trade Law following China’s accession to the WTO. Netherlands: Kluwer Law International. Sampson, Gary.2005. The WTO and sustainable development. New Delhi: TERI Press. Jones, Kent Albert, 2004.Who is afraid of the WTO? New York: Oxford University Press. Read More