The Role of World Trade Organization in the World Trading System - Term Paper Example

WTO INTRODUCTION It is widely accepted that the General Agreements on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), play an important role in the world trading system. Through GATT/WTO multilateral and bilateral trade negotiation rounds tariff barriers have been removed substantially, which is expected to encourage international trade. However, Rose (2004a, 2004b) surprisingly shows that there is no strong empirical evidence that the GATT/WTO has systematically played a strong role in stimulating trade. In contrast, Subramanian and Wei (2007) and Balding (2008) find robust evidence that the GATT/WTO has had the strong positive impact on international trade. The impact has, however, been uneven. Developed WTO members have enjoyed expanded imports under GATT/WTO while there has been little impact of WTO membership on imports in developing WTO members. The role of WTO stimulating international trade is paramount, however, from the perspective of empirical evidence and economic models, WTO's role seems to be controversial in some aspects. BACKGROUND The transition from the GATT to the WTO was a significant event, though it did not occur abruptly but as a gradual response to evolutionary changes that have occurred since the original agreement was signed in 1947 and have continued even after the transition in 1995 (Barton et al. 2006). The first evolutionary change such change involved the gradual expansion of the membership in the GATT and the WTO. The original 1947 agreement was signed by twenty-three member states. The number grew over the next decades, with the Dillon Round involving 26 states, 62 states in the Kennedy Round, and 123 in the Uruguay Round (Bagwell and Staiger, 2002). The major consequence of this growth has been a shift away from dominance of the trade system by the United States and a rise in dominancy by other states, notably those of the Europe (Barton et al. 2006). The second evolutionary change includes the expanding scope of the GATT and the WTO. Tariff reductions were the subject of negotiations during the first rounds, from 1947 to 1961, where the focus was on product-by-product tariff reductions among the member states (O'Brien et al. 2000). By the Uruguay Round, from 1986 to 1994, the subjects included tariffs, non-tariff barriers, agriculture, textiles and clothing, intellectual property, as well as ten other topics (O'Brien et al. 2000). ANALYSIS The WTO requires participants to decrease import barriers but there are important reasons to expect membership to influence exports in the same manner. Members participate in the WTO and motivate their join with their comparative advantages and disadvantages (Kelly, 2009). Participants choose industries and economies, to which they provide protection and simultaneously they aim to obtain access for their competitive industries, preferably those having political support (Feenstra, 2004). If members only eased import controls and did not receive broader market access, only few countries would actively pursue membership (Feenstra, 2004). Second, members produce an extensive amount of work, attempt various strategies as well as apply litigation procedures to secure their rights to foreign markets (Kelly, 2009). Practically, WTO's dispute resolution mechanism represents one of the major advantages of the WTO. For many members it provides legitimate procedures to file costly and, what is more important, time consuming litigation that their import/export products are not being given their rights under WTO legislation (Bagwell and Staiger, 2002). Third, countries that participate in the WTO have unique opportunity to export to other states while conducting domestic protection (Feenstra, 2004). Practically, this give an opportunity to enjoy the benefits of free trade, and simultaneously adjusting national economies to global trading regime. It is well-accepted that the GATT/WTO's achievements are outstanding, especially in tariff liberalization (Bagwell and Staiger, 2002; Kelly, 2009). Through multilateral and bilateral trade negotiation rounds tariff barriers have been removed substantially. For instance, since negotiations began in 1947 unweighted average applied tariffs in developed countries have fallen from high double-digit levels to 6.3 percent in 1995 and around 3.5 percent in 2005. For developing countries, tariff reductions were more modest: 16.6 percent in 1995 and 10.6 percent in 2005 (Kelly, 2009). Developed countries increased the number of imports whose tariff rates are "bound" from 78 percent of product lines to 99 percent after the Uruguay Round while the increase in developing countries was still considerable: from 21 percent to 73 percent (WTO, n.d.). However, these data point out that although the fundamental principle of the GATT/WTO is that all rights and obligations should be applied uniformly it seems that developed countries actively participated in reciprocal MFN tariff-cut negotiations while developing countries were allowed to slowly undertake their obligations (Kelly, 2009; Feenstra, 2004). According to Michalopoulos (2000), it is because developing countries requested exemptions which stem from their unique development problems and challenges they have faced in the trade liberalization process. First, developing countries believes that sustained economic growth could be obtained through industrialization. However, they do not believe that liberal trade policies would promote industrialization and development because of the patterns of international specialization: developing countries mainly produce and export raw materials and primary commodities which are characterized by low price, income elasticities of demand, and considerable price volatility; while they are dependent on imports for manufactures, especially capital goods and intermediate inputs needed for investment and industrialization (Michalopoulos, 2000). Second, they further feel that liberal trade policies will harm domestic infant industries resulting in volatile export earning and deteriorating terms of trade. Finally, it is thought that the development process is associated with balance of payments difficulties which could be addressed in the short term through trade controls (Bagwell and Staiger, 2002). Therefore, in 1954 and 1955 developing countries received changes in the multilateral trading system in four main areas: (1) improved market access for developing country exports of manufactures to developed markets, through the provision of trade preferences (Bagwell and Staiger, 2002); (2) non-reciprocity, or less than full reciprocity, in trade relations between developing and developed countries, in order to permit developing countries to maintain protection (Bagwell and Staiger, 2002); (3) flexibility in the application by developing countries members of GATT/WTO disciplines (Bagwell and Staiger, 2002); (4) stabilization of world commodity markets (Bagwell and Staiger, 2002). RECOMMENDATIONS The WTO is considered to be a controversial organization. Supporters of the WTO argue that it will promote growth and prosperity through increased international trade. Critics of the WTO argue that is has systematically favored rich countries while failing to increase trade. No systematic evidence of its impact existed until Andrew Rose produced research demonstrating that the WTO had no economically or statistically significant impact on international trade (Rose 2004a 2004b). Using an extensive bilateral gravity trading model covering most countries and years from 1950 to 1999, the Rose results fail to find any WTO impact on trade. These findings prompted additional research by others. Subramanian and Wei (2007), using a variation of the Rose data, but making some key methodological changes and definitional changes, find that the WTO increases trade, but unevenly across countries. Balding (2008) provided additional detail into the impact of the WTO on how trade flows. Balding (2008) found the WTO has an uneven impact on imports and exports potentially causing the lack of significance in total real trade results found by Rose. Balding (2008) revealed that while exports increase when joining the WTO, imports either remained steady or declined. Though counterintuitive, due to long phase out periods for import restrictions but near instantaneous export access, the WTO can have a divergent impact on total trade in the short and near term. Moreover, Balding results found that countries that benefit from WTO membership also undertake additional economic reforms designed to support openness and economic growth (Balding, 2008). Balding (2008) indicated numerous examples of countries that joined the WTO and saw no impact on their trading levels. Conversely, countries such as Ireland, studied most closely, joined the WTO and undertook a series of economic reforms benefited substantially from WTO membership. While the exact economic causes remain difficult to disentangle, the impact of additional economic reforms cannot be under estimated. CONCLUSIONS The WTO's achievements in trade liberalization are remarkable, especially tariff liberalization. Under GATT/WTO tariff barriers have been removed substantially in both developed and developing countries, which is supposed to stimulate international trade in these countries. However, due to the fact that developing countries have more slowly participated in reciprocal trade liberalization than developed countries, therefore, empirical studies using aggregate trade data are more likely to find positive trade effects of the GATT/WTO on international trade in developed countries (). However, since developing countries are usually more serious in tariff liberalization for products of their primary interest, therefore, a positive effect of the GATT/WTO is expected to be found on international trade in these goods in developing countries. Therefore, further examinations and future studies on effects of the GATT/WTO on international trade in different types of goods in developing country members are needed . Empirical findings from these studies hopefully will provide deeper understanding on the tradepromoting role of the WTO globally and particularly in developing country members. REFERENCES Balding, C. 2008. Joining the WTO: What is the Impact Working Paper Series, HSBC School of Business, Retrieved Oct 9, 2010 from Bagwell, K. and Staiger, R. W. 2002. The Economics of the World Trading System, MIT Press, Cambrige Massachussetts and London, England. Barton, John H., Judith L. Goldstein, Timothy E. Josling, and Richard H. Steinberg. 2006. The Evolution of the Trade Regime: Politics, Law, and Economics of the GATT and the WTO. Princeton, NJ: Princeton University Press. Feenstra, R. 2004. Advanced International Trade: Theory and Evidence, Princeton University Press, Princeton. Kelly, T. 2009. The Impact of the WTO: The Environment, Public Health and Sovereignty. Edward Elgar Publishing Michalopoulos, C. (2000) "The Role of Special and Differential Treatment for Developing Countries in GATT and the World Trade Organization" World Bank Policy Working Paper 2388. Retrieved Oct 9, 2010, from < http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2000/08/26/000094946_00081505321046/Rendered/PDF/multi_page.pdf> O'Brien, Robert, Anne Marie Goetz, Jan Aart Scholte, and Marc Williams. 2000. Contesting Global Governance: Multilateral Economic Institutions and Global Social Movements. New York: Cambridge University Press. Rose, Andrew, 2004a. Do We Really Know the WTO Increases Trade, The American Economic Review, Vol. 94 No.l, March 2004 Rose, Andrew, 2004b. Does the WTO Make Trade More Stable, Open Economies Review, Volume 16, Number 1, January 2005 Subramanian, Arvind and Wei, Shang-Jin, 2003, The WTO Promotes Trade, Strongly But Unevenly, Journal of International Economics, Elsevier, vol. 72(1), pages 151-175, May. WTO. nd. Tariffs: more bindings and closer to zero. 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