To what extent do politics of the WTO, limit (or increase) developing countries' ability to realize the gains from specializat - Assignment Example

Download file to see previous pages... Using postulates from the theory, it is clear that the best combination of trade at the international front should be guided by profitability analysis. The Theory of Comparative Advantage The theory of comparative advantage states that a party enjoys a margin of superiority in producing services or goods. This means that the party enjoys comparative over another country due the opportunity cost that exists due to lower production cost Chang (2008). Better said, two parties can each enjoy from trade if they produce the same goods or services at relative costs that are not equal. This theory also applies even if one party happens to have absolute advantage over another country as it enjoys the capacity to gain when it trades with another that is less efficient provided that the relative efficiencies are unequal. The law of comparative advantage is based on a number of vital assumptions. One of the main assumptions is that the parties involved incur no transportation costs in their dealings. It is further assumed that costs do not vary and no party enjoys economies of scale. Furthermore, it is taken for granted that no trade barriers and tariffs apply to the parties in their engagement in trade. The assumption that factors of production are perfectly mobile also applies for comparative advantage to apply. Yet another assumption is that the goods or services being traded are identical or homogeneous. The final assumption is that the parties involved in trade have perfect knowledge of the goods being traded and therefore buyers and sellers are able to tell where the cheapest products exist. The theory of comparative advantage normally applies in international trade, countries being the parties involved. In its perfect sense, the theory elements responsible for the realization of the theory is very difficult to achieve since international trade often involves transportation, tariffs and trade barriers, the immobility of production factors and imperfect knowledge. According to classical theories related to international trade, countries are bound to gain mutual benefits when they specialize in making goods or producing services with lower opportunity costs. The theory of comparative advantage advocates for free trade and specialization in production rather that pursuit for self sufficiency. The World trade organization has played an important role in the liberation of trade especially beyond national borders Chang (2008). Three major features of the World Trade Organization negotiating environment are the abidance to the most favored nation (MFN) principle, the occurrence of negotiations among few countries, and the extent in times of time of the negotiations with economically significant nations joining the equation on a continuous basis (Bagwell and Staiger, 2001). Under the MFN negotiating environment, there are two major hindrances to multilateral efficiency that come into effect according to Bagwell and Staiger (2001). For one, every market access concession that a country makes to another country automatically is enjoyed by partners who enter the negotiation later. In order to reduce the free-riding potential a nation may end up offering a little to early negotiator so as to maintain bargaining power in latter times. The second hindrance to ...Download file to see next pagesRead More