Logistics and Operations Management: World Trade Organization - Case Study Example

WORLD TRADE ORGANIZATION (WTO) WORLD TRADE ORGANIZATION (WTO) The world trade organization was founded in 1995 to administer and regulate trade agreements spitting together member countries, with reference to General Agreement on Tariffs and Trade (GATT), Trade-Related Aspects of Intellectual Property Rights (TRIPS), and General Agreement on Trade in Services (GATS). These policies and trade agreements are contained in the ‘Applied Trade Policy; CD-ROM’ (Bacchetta et al., 2002; Bossche, 2008). WTO focuses on building organization and trade structure under the GATT auspices of the 1990’s. General Agreement on Tariffs and Trade (GATT) are traced back in abortive negotiations tailored towards creating International Trade Organizations (ITO) after the World War II. The negotiations were not successful until 1948 in Havana Conference. The GATT agreements were established and formalized by a 23 member team in 1947. Since then, GATT and ITO have been the industrial points in establishing trade blocks and restrictions. Although initially meant to negotiate traffic agreements alone, following a fall tariff levels, GATT advanced its roles and extended to non-tariff trade agreements and policies. It also covered for the domestic trade policies which had an impact on the nature of global trades. The success of this trade policy (GATT) was evidenced by the expansion in the contracting capacities of the interested states. Come 1994 (marking the end of Uruguay Round), more than 128 states had signed agreements to join the GATT. By 2001, after teaming up with the WTO, the membership grew to 144 countries (Bossche, 2008). There are a number of significant differences between the GATT and WTO. GATT is a flexible institution originally established to bargain and deal-make transactional and trade agreements as its core objective with an ‘opt out’ option. On the contrary, WTO policies are applicable to all member states and are mainly subjected to settlement of disputes. Besides, WTO was a multilateral disciplines approach to regulations covering from environment, labor standards, and investment policies to rights. However, the concern about multilateral trade regulations was its inability to solve the divergent domestic market failures. Similarly, the implementation of those global regulations was feared for their ability to detrimentally interfere with the domestic trade regulations. WTO is therefore charged with the responsibility of creating codes of ethics and conduct to guide the member states. Such codes emerged during the periodic negotiations as a result of exchanging domestic policies on trade and commerce (Bacchetta et al., 2002). WTO is a seen as a market as it brings all member countries together in an exchange and commitments systems on a reciprocal foundation. Therefore, WTO is in itself a barter market. Contrary to the city markets, in the WTO members states lacks access a common medium of exchange, neither do they use money as an agent of financial exchange for goods and services. Instead, the trading partners use traffic regulations as a way of enforcing trade partnership, making these policies less effective compared to the monetary policies. As a result, WTO developed code of conduct applicable to all trading partners. WTO enacted a set of legal obligations to regulate trade policies within its members. These policies are specified in the GATS, GATT, and TRIPS agreement (Bossche, 2008). Basic Principles The WTO outlines the trading policy framework with no definite outcomes. The WTO is therefore only concerned with setting trade policies and regulations and has nothing to do with the results. The WTO and the pre-1994 are founded on five fundamental principles: nondiscrimination, reciprocity, transparency, enforceable commitments, and safety valves. Nondiscrimination Nondiscrimination is divided into two major components: national treatment principle and the MFN rule (most-favored-nation). These two principles are embedded into the main components of the WTO policies on goods and services, and intellectual property. However, the scope of their application differs across the regions. Such variations are frequently observed with the national/domestic treatment principles, which are more specific when it comes to trading in services (David & Stewart, 2010). The MFN policy dictates that all the products produced by any member state should be treated equally without any favor or discrimination. Thus, for instance, if any best treatment policy granted trading rights to a partner to supply a given product or service at 5% tariff, then it implies that the same rate be unconditionally and immediately applied to importation of this commodity within the WTO member states. Given the small membership of the GATT, MFN benchmark is perfectly treated to all the states including no-members of the GATT. According to Article III of the GATT, the national treatment policy outlines that once foreign goods are certified and found to meet the domestic market quality standards (Bacchetta et al., 2002), then, such goods must be accorded equal treatment as the domestic products both in taxation and competitiveness. This implies that goods imported into the domestic market having met the important standards must therefore be subjected to taxes, regulations and charges which are “no less favorable” (Shrybman & Shrybman, 2001) as it applies to the domestically produced commodities. The MFN policy unconditionally applies to all members. Although there are exceptions in the applicability of the MFN with respect to free trade areas, custom unions or preferential trade agreements in the developing economies, this policy acts as the pillar to WTO. This is based on economic reasoning which states, “if policy does not discriminate between foreign suppliers, importers and consumers will have an incentive to use the lowest-cost foreign supplier” (Bacchetta et al., 2002). MFN is an essential tool to the developing economies at it serves to protect the young countries from being exploited by the developed countries. This policy guarantee smaller countries by ensuring that larger economic power countries do not raise tariffs as a way of exploiting smaller markets in hard economic times when the domestic industries clamor for protection (Selivanova, 2011). MFN plays a fundamental role in enforcing multilateral rules through increasing the costs to countries withdrawing from the treaty which it had earlier committed herself to in the multinational trade negotiation. It one country intends to raise its trade tariffs or trade barriers; the proposed regime must be applied to all members of the WTO. This fuels the political and social cost of failing to uphold to the set trade policies. Finally, MFN is an essential body as it reduces the cost of negotiation as the results of any agreeable negotiation with any country extends to all members. Other states need not to engage in the same negotiation in order to get similar treatment; but instead, the negotiations would be restricted to principal suppliers only. On the other hand, national treatment serves as a critical tool for liberalization. This policy assures that liberalized commitments are not counterbalanced through the implementation of the domestic taxes or similar measures. The national treatment policy explains that “The requirement that foreign products be treated no less favorably than competing domestically produced products gives foreign suppliers greater certainty regarding the regulatory environment in which they must operate” (Bacchetta et al., 2002). The national treatment policies have quite often been invoked by the GATT while resolving disputes cases brought before the committee. It is a wide-ranging rule which covers from taxes to general trade barriers and is nondiscriminatory fashioned to both domestic and foreign products alike. Whether the policy hurts exporters or not is irrelevant. The core issue is nondiscrimination in trade. Reciprocity Reciprocity is one of the fundamental elements of trade negotiation process. It is the reflection of the need to limit or eliminate the problem of free-riding which arise because of the implementation of the MFN and the desire to get ‘payments’ (Shrybman & Shrybman, 2001) from liberalized trade through better and unlimited access to international markets. The rationale for reciprocity is founded on political-economy literature. As noted, the higher proportion of the liberalization expenses is met by a small section of the industry which organizes themselves to oppose protectionism. From the cost-benefit analysis, it is found that the benefits surpass the costs, especially for greater countries with little interest in organizing political liberalization. Given the nature of exports and political liberalization in such larger settings, reciprocation is never an easy task. According to reciprocity policy, “Obtaining a reduction in foreign import barriers as a quid pro quo for a reduction in domestic trade restrictions gives specific export-oriented domestic interests that will gain from liberalization an incentive to support it in domestic political markets” (Bossche, 2008). Reciprocity principle ensures that more gains are realized from any unilateral liberalization treaty. Binding and Enforceable Commitments Liberalization agreements and commitments have no value unless they are enforced. The nondiscriminatory principles, MFN treatment of the GATT, are significant in ensuring that market access commitments and policies are maintained and implemented. Tariff agreements formulated by the WTO member states in the multinational trade accessions and negotiations are constantly enumerated in concessional schedules. It is in such lists of schedules that “ceiling bindings” are arrived at. Such bindings states that “member concerned cannot raise tariffs above bound levels without negotiating compensation with the principal suppliers of the products concerned” (Bossche, 2008). The implementation of policies reached on is supervised by the MFN which is charged with the responsibility of ensuring that the negotiated compensations (commonly tariff reductions) are extended to all members of the WTO, thus raising the reneging cost. Once committed, tariff policies withholds and no resort to any nontariff measures with the ability of impairing or nullifying the tariff concession is acceptable. This position is protected by a series of articles and clause of the GATT which includes, customs valuation (Art.VII), quota systems (XI) and the subsidies or countervailing acts, which prohibits export subsidies especially in the manufacturing sectors of the economy but allows for countervailing production subsidies for import on products which injure domestic competitors (Shrybman & Shrybman, 2001). If any country feels that an action taken by another country threatens the negotiated market commitments, then, it is justifiable for the injured economy to bring the concern to the attention of the WTO for a disciplinary action and change of policy. This is attainable through the invocation of the WTO dispute resolution procedures. Being an intergovernmental commitment, private identities have no legal capacity or standing the committee set by the WTO to settle rising disputes. Recourse to a unilateral body is critical for small countries as multilateral actions may not be effective or may lack the needed credibility (Selivanova, 2011). This would be beneficial for these young economies to avoid bilateral pressure put by dominant trading partners who are interested in attaining self-benefits at the expense of the growing economies by advocating for policy changes in their favor. Transparency The process of enforcing and implementing trade commitments requires uniforms and equal access to valuable information on the trade policies or regimes which are practiced by WTO members. The treaties supervised by the World Trade Organization require comprehensive mechanisms designed to foster symmetrical communication among WTO members. The frequent meeting in Geneva by specialized committees increases the rate of interaction and allows for exchange of information, ideas, concepts, and views, thus permitting efficient diffusion of rising conflicts. Transparency is one of the basic and primary pillars of the WTO, legally embedded in the GATT statutes (Article X) and also reinforced by GATS policies spelt out in the Article III (Shrybman & Shrybman, 2001). As a way of ensuring transparency and fair trade, WTO demands of all the members to publish their internal trade policies, formulated and maintain bodies allowing for review of domestic administration policies which affects international trade partnerships, and promptly respond to members’ requests, such policy change notifications (David & Stewart, 2010). WTO through its regulatory commissions deploys external surveillance committees to supervise transparency rules. Transparency limits the scope for member states to circumvent internal obligations, therefore reducing uncertainties on the prevailing trade and exchange policy stances. Transparency also reduces dispute solving pressure. It is also an institution ownership tool in WTO. From an economic view point, transparency reduces trading uncertainties which lowers the level of domestic investments and retarded economic growth, which further shifts economic resources towards non-tradable. Safety Valves The final principle of the WTO is founded on safety values, which states that “in specific circumstances, governments should be able to restrict trade”. This obligation is provided for in three provisions: (a) clauses permitting use of trade mechanisms to achieve noneconomic objectives; (b) articles aiming at ensuring “free and fair competition” (Bacchetta et al., 2002) in the goods market; and (c) requirements allowing for an intervention into trading activities for economic reasons. Clause (a) provides for policies and accords mainly interested in protecting nationality security and public health as well as protection infant industries from fierce competition. Although not explicitly cited in the WTO agreements, the underlying rationale behind intervention is unrests social and political unrests which comes with protectionism (Selivanova, 2011). Conclusion The 1994 Uruguay Round (GATT) and the formation of the WTO immensely changed the operations of the global trading systems. The GATT was more of market access–oriented policies: its main function was to yoke the dynamics of the reciprocity for the interest of the world with the final outcome being economically beneficial to all the contracting parties. However, the proposed trade dynamic did not favor developing economies as the liberalization burden rested more on the political good will of the government. Secondly, the scope of developing and young countries to adjourn GATT trade agreements were limited as exporters had limited incentives with less powers as was the case in developed economies. References Bacchetta, M., English, P., Hoekman, B., Mattoo, A., Melo, J. D., Nicita, A., & Olarreaga, M. (2002). Development, trade, and the WTO: a handbook. Washington, DC, The World Bank. Bossche, P. V. D. (2008). The law and policy of the World Trade Organization: text, cases, and materials. Cambridge, Cambridge University Press. David, P. A., & Stewart, R. D. (2010). International logistics: the management of international trade operations. Mason, OH, Cengage Learning. Flynn, B. B., Morita, M., & Machuca, J. (2011). Managing global supply chain relationships: operations, strategies and practices. Hershey Pa, Business Science Reference. Mukherjee, P. N., & Kachwala, T. T. (2009). Operations management and productivity techniques. New Delhi, PHI Learning. Rushton, A., & Walker, S. (2007). International logistics supply chain outsourcing: from local to global. London, Kogan Page. Selivanova, J. (2011). Regulation of energy in international trade law: WTO, NAFTA, and Energy Charter. Alphen aan den Rijn, The Netherlands, Kluwer Law International. Shrybman, S., & Shrybman, S. (2001). The World Trade Organization: a citizens guide. [Ottawa, Ont.], Canadian Centre for Policy Alternatives. Straube, F., Ma, S., & Bohn, M. (2008). Internationalisation of logistics systems: how Chinese and German companies enter foreign markets. Berlin, Springer. Read More